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Czech Republic

Executive Summary

The Czech Republic is a medium-sized, open economy with 78 percent of its GDP based on exports, mostly from the automotive and engineering industries.  According to the Czech Statistical Office, most of the country’s exports go to the European Union (EU), with 31.8 percent going to Germany alone.  The United States is the Czech Republic’s largest non-EU export partner.  In 2019, the Czech banking sector remained healthy and the economy had a stable growth of 2.4 percent of GDP.  Due to COVID-19, the Czech government predicts a 2020 GDP decline of 5.6 percent, while the International Monetary Fund predicts a 6.5 percent contraction.

The COVID-19 outbreak and resulting economic shutdown caused the Czech crown (CZK) to significantly depreciate in Q1 2020 from CZK25 to CZK27.3 per EUR and from CZK22.9 to CZK24.9 per USD from February to March 31.  The crown is fully convertible, and all international transfers of investment-related profits and royalties can be carried out freely.  While the Czech Republic meets the Maastricht criteria for adoption of the euro and agreed to join the Eurozone under the country’s EU accession agreement in 2004, the Czech government has said it will not seek to join the common currency in the next few years, a position that has broad political and public support.

The government has taken great strides since the fall of communism to open the market to competition and privatization, but the Czech Republic still lacks robust enforcement of anti-trust violations.  The Czech Republic is committed to improving transparency and reducing corruption, and protects and enforces intellectual property rights.

The government amended the bankruptcy law June 1, 2019 and again March 31, 2020.  The June 2019 amendment expanded the categories of debtors qualified for debt discharge.  The latest amendment put a moratorium on filing of bankruptcy against all companies by creditors until the end of August 2020.  The government passed the amendment to protect from bankruptcy businesses affected by COVID-19.  The amendment also suspended companies’ obligations to file for bankruptcy until February 2021 if they are not able to meet their liabilities.  The Czech Republic ranked 16th in the 2020 edition of the World Bank’s Doing Business Report for ease of resolving insolvency.

There are few restrictions on foreign investment except in certain sectors that require access to sensitive information.  The Czech government supports legislation formalizing a procedure to review foreign investments that risk compromising national security.  The bill is pending debate and approval by both houses of Parliament.  If passed as drafted, the law would allow the government to screen inbound foreign direct investment (FDI) from non-EU entities.  The Czech Republic has taken strides to diversify its traditional investments in engineering into new fields of research and development (R&D) and innovative technologies.  EU structural funding has enabled the country to open a number of world-class scientific and high-tech centers.  EU member states are the largest investors in the Czech Republic.

The Czech Republic fully complies with EU and the Organization for Economic Cooperation and Development (OECD) standards for labor laws and equal treatment of foreign and domestic investors.  While wages continue to trail those in neighboring Western European countries (Czech wages are roughly one-third of comparable German wages), they have risen about 7 to 8 percent annually over the past two years, according to the Czech Statistical Office.  Some experts believe the economic decline from the COVID-19 pandemic will dampen wage growth.  The country was facing labor shortages in 2019 with the unemployment rate hovering below 3 percent – the lowest in the EU.  However, due to the economic impact of COVID-19, the Czech Ministry of Finance predicts a rise in unemployment to 3.3 percent in 2020.  The 1992 U.S.-Czech Bilateral Investment Treaty, signed with the former Czechoslovakia, provides for international arbitration of investor–state disputes for foreign investors.

Table 1:  Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 44 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 41 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 26 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 6,737 http://apps.bea.gov/
international/factsheet/
World Bank GNI per capita 2018 20,240 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Czech government actively seeks to attract foreign investment via policies that make the country a competitive destination for companies to locate, operate, and expand.  In 2019, the government made significant changes to the investment incentives law, eliminating incentives for investments targeting low-skilled labor growth.  The amended legislation (amended Act No. 72/2000 Coll.), which went into effect September 6, 2019, restricted incentive payments to primarily high value-added investments that focus on R&D and create jobs for university graduates.  The new statue also established more favorable rules for technological investments in sectors such as aerospace, information and communication technology, life sciences, nanotechnology, and advanced segments of the automotive industry.  Through these changes the government seeks to raise the country’s standard of living.

CzechInvest, the government investment promotion agency that operates under the Ministry of Industry and Trade (MOIT), negotiates on behalf of the Czech government with foreign investors.  In addition, CzechInvest provides assistance during implementation of investment projects, consulting services for foreign investors entering the Czech market, support for suppliers, and assistance for the development of innovative start-up firms.  There are no laws or practices that discriminate against foreign investors.

The Czech Republic is a recipient of substantial FDI.  Total foreign investment in the Czech Republic (equity capital + reinvested earnings + other capital) equaled USD164 billion at the end of 2018, compared to USD156 billion in 2017.   CzechInvest negotiated 82 new investment projects by foreign investors in 2018, worth USD1.4 billion.

As a medium-sized, open, export-driven economy, the Czech market is strongly dependent on foreign demand, especially from EU partners.  In 2019, 83.6 percent of Czech exports went to fellow EU member states, with 51.8 percent of this volume shipped to the EU and 32.4 percent to the Czech Republic’s largest trading partner, Germany, according to the Czech Statistical Office.  Since emerging from recession in 2013, the economy had enjoyed some of the highest GDP growth rates of the European Union until the recent COIVD-19 outbreak.  GDP growth reached 3 percent in 2018 and 2.4 percent in 2019.  Due to the economic impact of COVID-19, the government predicts a 2020 GDP decline of 5.6 percent, while the International Monetary Fund predicts a 6.5 percent contraction.

The Czech Republic has no plans to adopt the euro as it believes having its own currency and independent monetary policy is helpful to manage an economic crisis like the current one caused by the COVID-19 pandemic.

The slow pace of legislative and judicial reforms has posed obstacles to investment, competitiveness, and company restructuring.  The Czech government has harmonized its laws with EU legislation and the acquis communautaire.  This effort involved positive reforms of the judicial system, civil administration, financial markets regulation, protection and enforcement of intellectual property rights, and in many other areas important to investors.

While there have been many success stories involving American and other foreign investors, a handful have experienced problems, mainly in heavily regulated sectors of the economy, such as media.   Both foreign and domestic businesses voice concerns about corruption.

Long-term economic challenges include dealing with an aging population and diversifying the economy away from an over-reliance on manufacturing and shared services toward a more high-tech, services-based, knowledge economy.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign individuals or entities can operate a business under the same conditions as Czechs.  Some areas, such as banking, financial services, insurance, or defense equipment have certain limitations or registration requirements, and foreign entities need to register their permanent branches in the Czech Commercial Register.  Some professionals, such as architects, physicians, lawyers, auditors, and tax advisors, must register for membership in the appropriate professional chamber.  In general, licensing and membership requirements apply equally to foreign and domestic professionals.

As of early 2012, U.S. and other non-EU nationals can purchase real property, including agricultural land, in the Czech Republic without restrictions.  Czech legal entities, including 100 percent foreign-owned subsidiaries, may own real estate without any limitations.  The right of foreign and domestic private entities to establish and own business enterprises is guaranteed by law.  Enterprises are permitted to engage in any legal activity with the previously noted limitations in sensitive sectors.  Laws on auditing, accounting, and bankruptcy are in force, including the use of international accounting standards (IAS).

In response to the European Commission’s September 2017 investment screening directive, the Czech government has prepared foreign investment screening legislation.  The bill is pending debate and approval by both houses of Parliament.  If passed as drafted, the law would allow the government to screen inbound foreign direct investment from non-EU entities to protect national security.

The proposed law introduces two regimes for screening investments.  The first regime applies to “critical sectors” and requires government approval prior to investment.  “Critical sector” investments include entities that carry out manufacturing, R&D, or maintain military equipment; entities that manage or administer critical infrastructure information systems, communication systems, or other core services; and entities that develop or manufacture goods in Annex IV of Council Regulation (EC) No. 428/2009, which sets up a regime for the control of exporting, transferring, brokering, and transiting dual-use items.  The second regime applies to remaining sectors and does not require advance government approval.  However, investments within the second regime can still be subject to screening if the government determines they pose a potential security risk.  The government has the authority to review transactions prior to and up to five years after investment.  Additionally, entities that hold a nation-wide radio or television broadcasting license or periodical publishers with a minimum average print circulation of 100,000 print copies per day require prior consultation with the government.

Other Investment Policy Reviews

The OECD last conducted an economic survey of  the government in 2018.

Business Facilitation

Individuals must complete a number of bureaucratic requirements to set up a business or operate as a freelancer or contractor.  The MOIT provides an electronic guide on obtaining a business license, presenting step-by-step assistance, including links to related legislation and statistical data, and specifying authorities with whom to work (such as business registration, tax administration, social security, and municipal authorities), available at: https://www.mpo.cz/en/business/licensed-trades/guide-to-licensed-trades/ .  MOIT has also established regional information points to provide consultancy services related to doing business in the Czech Republic and EU.  A list of contact points is available at:  https://www.businessinfo.cz/en/starting-a-business/starting-up-points-of-single-contact-psc/addresses-points-of-single-contact-psc/ .

The average time required to start a business is25 days accprdomg tp the World Bank’s ‘Doing Business’ Index.  The Czech Republic’s Business Register is publicly accessible and provides details on business entities like legal addresses and major executives.  An application for an entry into the Business Register can be submitted in a hard copy, via a direct entry by a public notary, or electronically, subject to meeting online registration criteria requirements.  The Business Register is publicly available at:  https://or.justice.cz/ias/ui/rejstrik .  The Czech Republic’s Trade Register is an online information system that collects and provides information on entities facilitating small trade and craft-oriented business activities, as specifically determined by related legislation.  It is available online at:  http://www.rzp.cz/eng/index.html .

Outward Investment

The volume of outward investment is lower than incoming FDI.  According to the latest data from the Czech National Bank, Czech outward investments amounted only to USD41 billion in 2018, compared to inward investments of USD164 billion.  However, according to the Export Guarantee and Insurance Corporation (EGAP), Czech companies increasingly invest abroad to get closer to their customers, save on transport costs, and shorten delivery times.  The Czech government does not incentivize outward investment.  As part of EU sanctions, there is a total ban on EU investment in North Korea as of 2017.

3. Legal Regime

Transparency of the Regulatory System

Tax, labor, environment, health and safety, and other laws generally do not distort or impede investment.  Policy frameworks are consistent with a market economy.  Fair market competition is overseen by the Office for the Protection of Competition (UOHS) (http://www.uohs.cz/en/homepage.html ).  UOHS is a central administrative body entirely independent in its decision-making practice.  The office is mandated to create conditions for support and protection of competition and to supervise public procurement and state aid.

All laws and regulations in the Czech Republic are published before they enter into force.  Opportunities for prior consultation on pending regulations exist, and all interested parties, including foreign entities, can participate.  A biannual governmental plan of legislative and non-legislative work is available online, along with information on draft laws and regulations (often only in the Czech language).  Business associations, consumer groups, and other non-governmental organizations, including the American Chamber of Commerce, can submit comments on laws and regulations.  Laws on auditing, accounting, and bankruptcy are in force.  These laws include the use of international accounting standards (IAS) for consolidated corporate groups.  Public finances are transparent.  The government’s budget and information on debt obligations are publicly available and published online.

International Regulatory Considerations

Membership in the EU requires the Czech Republic to adopt EU laws and regulations, including rulings by the European Court of Justice (ECJ).

Czechoslovakia was a founding member of the GATT in 1947 and a member of the World Trade Organization (WTO).  Since the Czech Republic’s entry into the EU in 2004, the European Commission – an independent body representing all EU members – oversees Czech equities in the WTO and in trade negotiations.

Legal System and Judicial Independence

The Czech Commercial Code and Civil Code are largely based on the German legal approach, which follows a continental legal system where the principle areas of law and procedures are codified.  The commercial code details rules pertaining to legal entities and is analogous to corporate law in the United States.  The civil code deals primarily with contractual relationships among parties.

The Czech Civil Code, Act. No. 89/2012 Coll. and the Act on Business Corporations, Act No. 90/2012 Coll. (Corporations Act) govern business and investment activities.  The Act on Business Corporations introduced substantial changes to Czech corporate law such as supervision over the performance of a company’s management team, decision-making process, and remuneration and damage liability.  Detailed provisions for mergers and time limits on decisions by the authorities on registration of companies are covered, as well as protection of creditors and minority shareholders.

The judiciary is independent of the executive branch.  Regulations and enforcement actions are appealable, and the judicial process is procedurally competent, fair, and reliable.

Laws and Regulations on Foreign Direct Investment

The Foreign Direct Investment agenda is governed by the Civil Code and by the Act on Business Corporations.

The Czech Ministry of Industry and Trade maintains a “doing business” website available in Czech only at https://www.businessinfo.cz/  which aids foreign companies in establishing and managing a foreign-owned business in the Czech Republic, including navigating the legal requirements, licensing, and operating in the EU market.

Competition and Anti-Trust Laws

The Office for the Protection of Competition (UOHS) is the central authority responsible for creating conditions that favor and protect competition.  UOHS also supervises public procurement and monitors state aid (subsidy) programs.  UOHS is led by a chairperson who is appointed by the president of the Czech Republic for a six-year term.

Expropriation and Compensation

Government acquisition of property is done only for public purposes in a non-discriminatory manner and in full compliance with international law.  The process of tracing the history of property and land acquisition can be complex and time-consuming, but it is necessary to ensure clear title.  Investors participating in privatization of state-owned companies are protected from restitution claims through a binding contract with the government.

Dispute Settlement

ICSID Convention and New York Convention

The Czech Republic is a signatory and contracting state to the Convention on the Settlement of Investment Disputes between States and Nations of Other States (ICSID Convention).  It also has ratified the convention on the Recognition and Enforcement of Arbitral Awards (New York Convention of 1958), which obligates local courts to enforce a foreign arbitral award if it meets the legal criteria.

Investor-State Dispute Settlement

In 1993, the Czech Republic became a member state to the ICSID Convention.  The 1993 U.S.-Czech Bilateral Investment Treaty contains provisions regarding the settling of disputes through international arbitration.  In the past 10 years the Czech Republic has been involved in 21 known arbitral disputes with foreign investors.

International Commercial Arbitration and Foreign Courts

Mediation is an option in nearly every area of law including family, commercial, and criminal.  Mediators can be contracted between the parties to the dispute and found through such sources as the Czech Mediators Association, the Czech Bar Association, or the Union for Arbitration and Mediation Procedures of the Czech Republic.  A number of other non-governmental organizations (NGOs) and entities work in the area of mediation.  Directive 2008/52/EC allows those involved in a dispute to request that a written agreement arising from mediation be made enforceable.  The results of mediation may be taken into account by the public prosecutor and the court in their decision in a given case.  The local courts recognize and enforce foreign arbitral awards issued against the government.

Bankruptcy Regulations

The government amended the bankruptcy law June 1, 2019 and again March 31, 2020.  The June 2019 amendment expanded the categories of debtors qualified for debt discharge.  The latest amendment put a moratorium on filing of bankruptcy against all companies by creditors until the end of August 2020.  The government passed the amendment to protect from bankruptcy businesses affected by COVID-19.  The amendment also suspended companies’ obligations to file for bankruptcy until February 2021 if they are not able to meet their liabilities.  The Czech Republic ranked 16th in the 2020 edition of the World Bank’s Doing Business Report for ease of resolving insolvency.

5. Protection of Property Rights

Real Property

Real estate (land and buildings) located in the Czech Republic must be registered in the national Cadastral Register under the Cadastral Office.  The Cadastral Register contains information on plots of land and buildings, housing units and non-residential premises, liens, and other information and is publicly available online in Czech only at:  https://nahlizenidokn.cuzk.cz/ .  Transfer of ownership title to real estate (e.g., sale and purchase agreement) is effective from the date of execution of a written agreement and registration of the transfer of the ownership title in the Cadastral Register.  The Czech Republic ranked 32nd for ease of registering property in the 2020 World Bank’s Doing Business Index.

There is a negligible proportion of land that does not have clear title.  If property legally purchased is unoccupied, property ownership does not revert to squatters.

Intellectual Property Rights

The Czech Republic is a member of the World Intellectual Property Organization (WIPO) and party to the Berne Convention, the Paris Convention, the Patent Cooperation Treaty (PCT), the WIPO Copyright Treaty, and the WIPO  Performances and Phonograms Treaty.  Domestic legislation protects all intellectual property rights (IPR), including patents, copyrights, trademarks, industrial designs, and utility models.  Amendments to the trademark law and the copyright law have brought Czech law into compliance with relevant EU directives and the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).  The Criminal Code sets the maximum penalty of eight years of imprisonment for trademark, industrial rights, and copyright violations.  The Customs Administration of the Czech Republic and the Czech Commercial Inspection have legal authority to seize counterfeit goods.  Information on seizures of counterfeit goods and cases of IPR infringement are tracked by the Customs Administration.  Information is available in Czech at https://www.celnisprava.cz/cz/statistiky/Stranky/dusevni-vlastnictvi.aspx .

The Czech Republic was removed from the Watch List of the U.S. Trade Representative Special 301 Report in 2011.  While online piracy is a growing concern, the legal framework for protecting and enforcing IPR has been tested and proven successful in punishing infringers.  The Czech Republic is not listed in the Notorious Markets Report.

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

9. Corruption

Current law criminalizes both payment and receipt of bribes, regardless of the perpetrator’s nationality.  Prison sentences for bribery or abuse of power can be as high as 12 years for officials.  There have been several successful cases prosecuting corruption, though some experts have noted proceedings can be lengthy and subject to delays.  A 2016 police reform merged the special Organized Crime Police Unit (UOOZ) and the Unit for Combating Corruption and Serious Financial Criminality (UOKFK) into a new body called the National Center for Organized Crime (NCOZ).  NCOZ is now primarily responsible for investigating high-level corruption cases, however some experts have raised concerns about cumbersome procedural requirements.  Anti-corruption laws authorize seizures of proceeds or instruments of crime and apply equally to Czech and foreign investors.

Czech law obliges legislators, members of the cabinet, and other selected public officials to declare their assets annually.  Summarized declarations are available online and complete declarations are available upon request from the Ministry of Justice.  The Ministry of Justice can impose penalties of up to CZK50,000 (approximately USD2,000) for non-compliance.  The law also requires judges, prosecutors and directors of research institutions to disclose their assets, however their declarations are not publicly available for security reasons.

In addition to the financial disclosure law, Czech laws regulate political parties financing, public procurements, and the register of public contracts.  The law on the register of public contracts requires all national, regional, and local authorities as well as private companies to make publicly available all newly concluded contracts (including subsidies and repayable financial assistance) valued at CZK50,000 (USD2,400) or more within 30 days; noncompliance renders contracts null and void.  Additionally, as of November 2019, major state-owned companies are required to publish all contracts, except in limited circumstances.  The Registry of Contracts has a website in Czech only at:  https://smlouvy.gov.cz/ .

Public procurement law requires every contracting authority to post winning contracts on its website within 15 working days of signing.  Subject to limited exceptions, the law mandates more than one bidder for all public procurements and requires bidders to disclose their ownership structure prior to bidding.  The public procurement law also addresses conflict-of-interest issues related to government procurements, however the European Commission and the latest Council of Europe GRECO evaluation report have criticized the Czech conflict-of-interest legislation.  In a 2019 interim report, GRECO deemed Czech anti-corruption efforts as globally unsatisfactory, noting the government had only implemented one out of 14 recommendations.  In addition to conflict-of-interest concerns, the report underscored the Czech government must still regulate lobbying, transparency in the work of parliamentary committees and subcommittees, and selection and dismissal procedures for judicial officials.

New legislation went into effect in January 2020 prohibiting political candidates or close acquaintances from filling supervisory board positions in state-owned companies.  The law stipulates that candidates for these positions must be selected in a clear, transparent process that prioritizes technical expertise and is reviewed by an advisory committee.  Separately, the government recommends companies maintain internal codes of conduct that, among other things, prohibit bribery of public officials.  Many companies have adopted such codes.

The government ratified the OECD Anti-Bribery Convention in 2000 and the UN Convention against Corruption in 2014.  According to the 2017 OECD Phase 4 Evaluation Report, the Czech Republic should take steps to improve enforcement of its foreign bribery laws, enhance efforts to detect, investigate, and prosecute foreign bribes, increase protections for whistleblowers, and better implement the criminal liability of the legal entities law.

Several NGOs such as Frank Bold, Transparency International, and Anticorruption Endowment receive corruption reports online.  The reports most frequently involve minor offenses, such as attempts to bribe police officers or other public officials to receive benefits or avoid liability.  While there is not a specific law to protect NGOs involved in investigating corruption, NGO activities are protected under the Charter of Fundamental Rights and Freedom that protects civil society and free speech.  .

Resources to Report Corruption

Contact at government agency responsible for combating corruption:

Conflict of Interest and Anti-Corruption Department
Anti-Corruption Unit
Ministry of Justice of the Czech Republic
Vyšehradská 16
12800 Prague 2
www.justice.cz
+420 221 997 595
korupce@msp.justice.cz

Contact at “watchdog” organizations:

David Ondracka
Director
Transparency International Czech Republic
Sokolovska 260/143
+420-224 240 895-7
ondracka@transparency.cz
www.transparency.cz

Frank Bold
Udolni 33, Brno
tel: +420 545 231 975
info@frankbold.org
www.frankbold.org

Anticorruption Endowment
Nadacni Fond Proti Korupci
Revoluční 8, building A, 5th floor, 110 00 Praha 1
+420 226 209 047
info@nfpk.cz
www.nfpk.cz

Ireland

Executive Summary

The COVID-19 crisis has already had a serious impact on Ireland’s economy in 2020 and will continue to do so in 2021.  An economy bustling with activity with a forecasted budget surplus turned by mid-March to an economy with surging unemployment with a virtual shut-down.  Ireland’s government introduced emergency wage measures for out-of-work employees as the unemployment rate surged from 5 to 22 percent.  This sudden unexpected expenditure, the need for additional sovereign borrowing, and lack of economic activity will push Ireland to a budget deficit in 2020 and 2021.  The government is hopeful its emergency measures will help businesses and its once-sound economy to quickly return from its COVID-19 enforced hibernation.

The Irish government actively promotes foreign direct investment (FDI) and has had considerable success in attracting U.S. investment, in particular.  There are over 700 U.S. subsidiaries in Ireland operating primarily in the following sectors: chemicals, bio-pharmaceuticals and medical devices, computer hardware and software, internet and digital media; electronics, and financial services.

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

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

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

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

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

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

The United States and Ireland do not have a Bilateral Investment Treaty, but since 1950 have shared a Friendship, Commerce, and Navigation Treaty, which provides for national treatment of U.S. investors.  The two countries have also shared a Tax Treaty since 1998, supplemented in December 2012 with an agreement to improve international tax compliance and to implement the U.S. Foreign Account Tax Compliance Act (FATCA).

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 18 of 175 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 24 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 12 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 $442,167 http://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2018 US$ 61,390 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

The Irish government’s actions have achieved considerable success in attracting U.S. investment in particular.  The stock of American FDI in Ireland stood at USD 442 billion in 2018, more than the U.S. total for China, India, Russia, Brazil, and South Africa (the so-called BRICS countries) combined.  There are approximately 700 U.S. subsidiaries currently in Ireland employing roughly 160,000 people and supporting work for another 128,000.  This figure represents a significant proportion of the 2.36 million people employed in Ireland.  U.S. firms operate primarily in the following sectors:  chemicals, bio-pharmaceuticals and medical devices, computer hardware and software, internet and digital media; electronics, and financial services.

U.S. investment has been particularly important to the growth and modernization of Irish industry over the past 25 years, providing new technology, export capabilities, management and manufacturing best practices, and employment opportunities.  The activities of U.S. firms in Ireland span from the manufacturing of high-tech electronics, computer products, medical devices, and pharmaceuticals to retailing, banking, finance, and other services.  More recently, Ireland has also become an important R&D center for U.S. firms in Europe, and a magnet for U.S. internet and digital media investment.  Industry leaders like Google, Amazon, eBay, PayPal, Facebook, Twitter, LinkedIn, Electronic Arts and cybersecurity firms like Tenable, Forcepoint, AT&T Cybersecurity, McAfee use Ireland as the hub or important part of their respective European, and sometimes Middle Eastern, African, and/or Indian operations.

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

Conversely, factors that negatively affect Ireland’s ability to attract investment include high labor and operating costs (such as for energy); sporadic skilled-labor shortages; the fall-out from the COVID-19 pandemic; and sometimes-deficient infrastructure (such as in transportation, energy and broadband quality).  Ireland also suffers from housing and high-quality office space shortages; uncertainty in EU policies on some regulatory matters; and absolute price levels that are among the highest in Europe.  Some Irish government agencies have in the past expressed concern that energy costs and the reliability of energy supply could also undermine Ireland’s attractiveness as a FDI destination.  The American Chamber of Commerce in Ireland has called for greater attention to a “skills gap” in the supply of Irish graduates to the high technology sector.  It also has asserted that high personal income tax rates can make attracting talent from abroad difficult.

In 2013, Ireland became the first country in the Eurozone to exit a financial bailout program from the EU, European Central Bank, and International Monetary Fund (EU/ECB/IMF, or so-called Troika).  Compliance with the terms of the Troika program came at a substantial economic cost with gross domestic product (GDP) stagnation and austerity measures, while dealing with high unemployment (which hit 15 percent).  Strong economic progress followed through government-backed initiatives to attract investment and stimulate job creation and employment.  This aided economic recovery and Ireland’s economy was the one of the fastest growing economies in the Eurozone area annually to 2019.  The high unemployment levels fell dramatically and by the end of 2019 reached 4.7 percent.  In addition, the Irish government has successfully returned to international sovereign debt markets and successful treasury bonds sales, at low interest rates, exemplify renewed international confidence in Ireland’s economic progress.

Brexit and its Implications for Ireland

The UK’s exit from the EU leaves Ireland as the only remaining English-speaking country in the bloc.  Ireland is the only EU country to share a land border with the UK.  The future trading relationship between the UK and the EU will affect Ireland’s economic performance.  A significance trade risk includes the imposition of trade tariffs following the transition period due to end December 31, 2020.  Ireland will also lose a close EU ally on policy matters, particularly free trade and business friendly open markets.  Ireland is heavily dependent on the UK as an export market, especially for food products, and sectors such as food and agri-business may be hardest hit.  Ireland also sources many imports from the UK and cost rises are likely if supply chains are disrupted.  Irish trade with its EU colleagues may also be impacted as Irish trade to the EU often uses the UK as a land-bridge for trucking products.  A number of UK-based firms (including US firms) have moved headquarters or opened subsidiary offices in Ireland to facilitate ease of business with other EU countries. Initial econometric models from the Irish Department of Finance and the Central Bank of Ireland (CBI) in 2019 suggested Brexit would cut Ireland’s economic growth modestly in the near term.  Revised modelling is anticipated post COVID-19.

Industrial Promotion

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

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

Limits on Foreign Control and Right to Private Ownership and Establishment

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

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

Citizens of countries other than Ireland and EU member states can acquire land for private residential or industrial purposes.  Under Section 45 of the Land Act, 1965, all non-EU nationals must obtain the written consent of the Land Commission before acquiring an interest in land zoned for agricultural use.  There are many equine stud farms and racing facilities owned by foreign nationals.  No restrictions exist on the acquisition of urban land.

Ireland does not yet have formal investment screening legislation but is in the process of developing it.  As an EU member, Ireland will have to implement any future common EU investment screening regulations or directives.

Other Investment Policy Reviews

The Economist Intelligence Unit and World Bank’s Doing Business 2019 provide current information on Ireland’s investment policies.

Business Facilitation

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

Outward Investment

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

3. Legal Regime

Transparency of the Regulatory System

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

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

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

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

International Regulatory Considerations

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

Legal System and Judicial Independence

Ireland’s legal system is common law.  Justice is administered in courts established by the law, and are presided over by judges appointed by the President of Ireland (on the advice of the government).  The Commercial Court is a designated court of the High Court which deals with commercial disagreements between businesses where the value of the claim is at least €1 ($1.1) million.  The Commercial Court also oversees cases on intellectual property rights, including trademarks and trade secrets.

Laws and Regulations on Foreign Direct Investment

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

One of Ireland’s most attractive features as an FDI destination is its low corporate tax rate.  Since 2003, the headline corporate tax rate for all firms, foreign and domestic, is 12.5 percent.  Ireland’s headline corporate tax rate is among the lowest in the EU.  The Irish government continues to claim sovereignty over setting its own taxation system and strongly opposes any EU proposals to harmonize corporate taxes at a common EU rate.  In 2014, the government announced firms would no longer be able to incorporate in Ireland without also being tax resident.  Firms could, prior to this change, incorporate in Ireland and be tax resident elsewhere, making use of a tax avoidance arrangement colloquially known as the “Double Irish” to reduce tax liabilities.

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

Competition and Anti-Trust Laws

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

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

The Irish Takeover Panel Act of 1997 governs company takeovers.  Under the Act, the Takeover Panel issues guidelines, or Takeover Rules, which regulate commercial behavior in mergers and acquisitions.  According to minority squeeze-out provisions in the legislation, a bidder who holds 80 percent of the shares of the target firm (or 90 percent for firms with securities on a regulated market) can compel the remaining minority shareholders to sell their shares.  There are no reports that the Irish Takeover Panel Act has prevented foreign takeovers, and, in fact, there have been several high-profile foreign takeovers of Irish companies in the banking and telecommunications sectors in the past.  Babcock & Brown (an Australian investment firm) acquired the former national telephone company, Eircom in 2006 which it subsequently sold to Singapore Technologies Telemedia in 2009.  The EU Directive on Takeovers provides a framework of common principles for cross-border takeover bids, creates a level playing field for shareholders, and establishes disclosure obligations throughout the EU.  Irish legislation fully implemented the Directive in 2006, though the Irish Takeover Panel Act 1997 had already incorporated many of its principles.

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

Expropriation and Compensation

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

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

Dispute Settlement

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

ICSID Convention and New York Convention

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

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

Bankruptcy Regulations

The Companies Act 2014 is the most important body of law dealing with commercial and bankruptcy law, which Irish courts consistently apply.  Irish company bankruptcy legislation gives creditors a strong degree of protection.

5. Protection of Property Rights

Real Property

The government recognizes and enforces secured interests in property, both chattel and real estate.  The Department of Justice and Equality administers a reliable system of recording such security interests through the Property Registration Authority (PRA) and Registry of Deeds.  The PRA registers a person’s interest in property on a public register. All property buyers must since 2010 register their acquisition with the PRA.  Ireland also operates a document registration system through the Registry of Deeds in which deeds (as distinct from titles) may be registered, priority obtained, and third parties placed on notice of the existence of documents of title.  An efficient, non-discriminatory legal system is accessible to foreign investors to protect and facilitate acquisition and disposition of all property rights.

Intellectual Property Rights

Ireland is a member of the World Intellectual Property Organization (WIPO) and party to many of its treaties, including the Berne Convention, the Paris Convention, the Patent Cooperation Treaty, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty .  Legislation enacted in 2000 brought Irish intellectual property rights (IPR) law into compliance with Ireland’s obligations under the WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement.  The legislation gave Ireland one of the most comprehensive legal frameworks for IPR protection in Europe.  It also addressed several TRIPs inconsistencies in prior Irish copyright law that had concerned foreign investors, including the absence of a rental right for sound recordings, the lack of an anti-bootlegging provision, and low criminal penalties that failed to deter piracy.  The legislation provides for stronger penalties on both the civil and criminal sides, but it does not include minimum mandatory sentencing for IPR violations.  As part of this comprehensive legislation, revisions were also made to non-TRIPS conforming sections of Irish patent law.  Specifically, the IPR legislation addressed two outstanding concerns of many foreign investors in the previous legislation:

– The compulsory licensing provisions of the previous 1992 Patent Law were inconsistent with the “working” requirement prohibition of TRIPs Articles 27.1 and the general compulsory licensing provisions of Article 31; and,

– Applications processed after December 20, 1991 did not previously conform to the non-discrimination requirement of TRIPs Article 27.1.

The government continues to crack down on the sale of illegal cigarettes smuggled into the country by international and local organized criminal groups.  High taxation on tobacco products makes illegal trade in counterfeit and untaxed cigarettes highly lucrative.  Ireland became the first European country, and fourth globally, to enact legislation on plain packaging for tobacco products via The Public Health (Standardized Packaging of Tobacco) Act in 2015.  In practice, all tobacco packaging is devoid of branding, and health warnings cover nearly the entire box with only the producer/product name otherwise visible.  The legislation has been in force since September 2018.

The Irish government has transcribed the 2012 EU Copyright and Related Rights Regulations into law.  This legislation makes it possible for copyright holders to seek court injunctions against firms, such as internet service providers (ISPs) or social networks, whose systems host copyright-infringing material.  Irish courts ensure any remedy provided will uphold the freedom of ISPs to conduct their business.  The legislation ensures that the government cannot mandate any ISP to carry out monitoring of information.  The legislation also ensures that measures implemented are “fair and proportionate” and not “unnecessarily complicated or costly.”  The law also states that the Courts must respect the fundamental rights of ISP customers, including the customers’ right to protection of personal data and the freedom to receive or impart information.

The government enacted the Copyright and Other Intellectual Property Law Provisions Act in 2019.  The legislation improves provision for copyright and other IPR protection in the digital era, and its enables rights holders to better enforce their IPR in the courts.

Ireland is not included on the U.S. Trade Representative (USTR) Special 301 Report or the Notorious Markets List.

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

Kazakhstan

Executive Summary

Since its independence in 1991, Kazakhstan has made significant progress toward creating a market economy and has achieved considerable results in its efforts to attract foreign investment. As of January 1, 2020, the stock of foreign direct investment in Kazakhstan totaled USD 161.2 billion, including USD 36.5 billion from the United States, according to official statistics from the Kazakhstani government.

While Kazakhstan’s vast hydrocarbon and mineral reserves remain the backbone of the economy, the government continues to make incremental progress toward its goal of diversifying the country’s economy by improving the investment climate.  Kazakhstan’s efforts to remove bureaucratic barriers have been moderately successful, and in 2020 Kazakhstan ranked 25 out of 190 in the World Bank’s annual Doing Business Report.

The government maintains an active dialogue with foreign investors, through the President’s Foreign Investors Council and the Prime Minister’s Council for Improvement of the Investment Climate.

Kazakhstan joined the World Trade Organization (WTO) in 2015.  In June 2017 Kazakhstan joined the Organization for Economic Co-operation and Development (OECD) Declaration on International Investment and Multinational Enterprises and became an associated member of the OECD Investment Committee.

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

In July 2018 the government of Kazakhstan officially opened the Astana International Financial Center (AIFC), an ambitious project modelled on the Dubai International Financial Center, which aims to offer foreign investors an alternative jurisdiction for operations, with tax holidays, flexible labor rules, a Common Law-based legal system, a separate court and arbitration center, and flexibility to carry out transactions in any currency.  In April 2019 the government announced its intention to use the AIFC as a regional investment hub to attract foreign investment to Kazakhstan.  The government recommended foreign investors use the law of the AIFC as applicable law for contracts with Kazakhstan.

Table 1 : Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 113 of 180 https://www.transparency.org/cpi2019
World Bank’s Doing Business Report “Ease of Doing Business” 2020 25 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2019 79 of 129 https://www.globalinnovationindex.org/
U.S. FDI in partner country (M USD, stock positions) 2012 $12,512 http://apps.bea.gov/
international/factsheet/
World Bank GNI per capita 2018 $8,070 https://data.worldbank.org/
indicator/ny.gnp.pcap.cd

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Kazakhstan has attracted significant foreign investment since independence.  According to official statistics, as of January 1, 2020, the total stock of foreign direct investment (by the directional principle) in Kazakhstan totaled USD 161.2 billion, primarily in the oil and gas sector.  International financial institutions consider Kazakhstan to be an attractive destination for their operations, and international firms have established regional headquarters in Kazakhstan.

In June 2017 Kazakhstan joined the OECD Declaration on International Investment and Multinational Enterprises and became an associate member of the OECD Investment Committee.

In its Strategic Plan of Development for the current period (through 2025), the government stated that raising the living standards of Kazakhstan’s citizens to the level of OECD countries is one of the plan’s strategic goals.

In August 2017 the government adopted a new 2018-2022 National Investment Strategy, developed in cooperation with the World Bank, which outlined new coordinating measures on investment climate improvements, privatization plans, and economic diversification policies.  The strategy aims to increase annual FDI inflows as a percentage of GDP from 13.2 percent in 2018 to 19 percent in 2022.

The government of Kazakhstan has incrementally improved the business climate for foreign investors, and national legislation does not discriminate against foreign investors.  Corruption, lack of rule of law and excessive bureaucracy, however, do remain serious obstacles to foreign investment.

Over the last couple of years, the government has undertaken a number of structural changes aimed at improving how the government attracts foreign investment.  In April 2019 the Prime Minister announced the creation of the Coordination Council for Attracting Foreign Investment, which the Prime Minister will chair.  He will also act as Investment Ombudsman.  In December 2018 the Investment Committee was transferred to the Ministry of Foreign Affairs, which is now in charge of attracting and facilitating activities of foreign investors.  The Investment Committee at the Ministry of Foreign Affairs takes responsibility for investment climate policy issues and works with potential and current investors, while the Ministry of National Economy interacts on investment climate matters with international organizations like the OECD, WTO, and the United Nations Conference on Trade and Development (UNCTAD).  Each regional municipality designates a representative to work with investors, and Kazakhstani foreign diplomatic missions are charged with attracting foreign investments.  Specially designated front offices in Kazakhstan’s overseas embassies promote Kazakhstan as a destination for foreign investment.  In addition, the Astana International Financial Center (AIFC, see details in Section 3) operates as a regional investment hub, with tax, legal, and other benefits.  In 2019, the government founded Kazakhstan’s Direct Investment Fund, which is located at the AIFC and expected to attract private investments for diversifying Kazakhstan’s economy.  The state company KazakhInvest is also located in the AIFC and offers investors a single-window for government services.

The government maintains a dialogue with foreign investors through the Foreign Investors’ Council chaired by the President, as well as through the Council for Improving the Investment Climate chaired by the Prime Minister.

The COVID-19 pandemic and unprecedented low oil prices changed the country’s economic development plans.  In March 2020, the government approved a USD 13.7 billion stimulus package, mostly oriented at  income smoothing, supporting local businesses and implementing an import-substitution policy.

Limits on Foreign Control and Right to Private Ownership and Establishment

By law, foreign and domestic private firms may establish and own business enterprises.

While no sectors of the economy are legally closed to investors, restrictions on foreign ownership exist, including a 20 percent ceiling on foreign ownership of media outlets, a 49 percent limit on domestic and international air transportation services, and a 49 percent limit on telecommunication services.  The December 2017 Code on Subsoil and Subsoil Use (the Code) mandates the share of the national company Kazatomprom be no less than 51 percent in new uranium producing joint ventures.

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

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

Foreign Investment in the Energy & Mining Industries

Despite substantial investment in Kazakhstan’s energy sector, companies remain concerned about the risk of the government legislating or otherwise advocating for preferences for domestic companies, and creating mechanisms for government intervention in foreign companies’ operations, particularly in procurement decisions.  Recent developments range from a major reduction to a full annulment of work permits for some categories of foreign workforce.  (For more details, please see Part 5,  Performance and Data Localization Requirements.)

In April 2008 Kazakhstan introduced a customs duty on crude oil and gas condensate exports.  In general, oil-related revenue in Kazakhstan goes to the National Fund, a sovereign wealth fund that is financed by direct taxes paid by petroleum industry companies, other fees paid by the oil industry, revenues from privatization of mining and manufacturing assets and from the disposal of agricultural land.  In contrast, the customs duty on crude oil and gas condensate exports is an indirect tax that goes to the government’s budget.  Companies that pay taxes on mineral and crude oil exports are exempt from that export duty.  The government adopted a 2016 resolution that pegged the export customs duty to global oil prices – as the global oil price drops and approaches USD 25 per barrel, the duty rate approaches zero.

The Code defines “strategic deposits and areas” and restricts the government’s preemptive right to acquire exploration and production contracts to these areas, which helps to reduce significantly the approvals required for non-strategic objects.  The government approves and publishes the list of strategic deposits on its website.  The list has not changed since its approval on June 28, 2018: http://www.government.kz/ru/postanovleniya/postanovleniya-pravitelstva-rk-za-iyun-2018-goda/1015356-ob-utverzhdenii-perechnya-strategicheskikh-uchastkov-nedr.html.

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

The Ministry of Energy announced in April 2018 that Kazakhstan is ready to launch a CO2 emissions trading system.  It is unclear, however, when actual quota trading will begin.  In January 2018, the government adopted a National Allocation Plan for 2018-2020, and in February 2018 the Ministry of Energy announced the creation of an online CO2 emissions reporting and monitoring system.  The system is not operational, and it is likely to be launched after the new Environmental Code is passed into law; the draft Code is currently in the lower chamber of parliament.  Some companies have expressed concern that Kazakhstan’s trading system will suffer from insufficient liquidity, particularly as power consumption and oil and commodity production levels increase.  The successor of the Energy Ministry for environmental issues, the Ministry of Ecology, Geology, and Natural Resources, started drafting the 2050 National Low Carbon Development Strategy in October 2019.

Other Investment Policy Reviews

Kazakhstan announced in 2011 its desire to join the Organization for Economic Co-operation and Development.  To meet OECD requirements, the government will need to continue to reform its institutions and amend its investment legislation.  The OECD presented its second Investment Policy Review of Kazakhstan in June 2017, available at:  https://www.oecd.org/countries/kazakhstan/oecd-investment-policy-reviews-kazakhstan-2017-9789264269606-en.htm 

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

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

Business Facilitation

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

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

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

In 2019-2020, the government undertook some measures facilitating business operations for investors.  The General Prosecutor’s Office adopted an order in January 2020 that would decriminalize the tax errors of prompt taxpayers.  In July 2019 the government adopted the Road Map for further attraction of foreign investments.  In order to facilitate the work of foreign investors, the government recommended using the law of the Astana International Financial Center (AIFC) as the applicable law for investment contracts with Kazakhstan and planned other measures to showcase the AIFC as an investment hub, including tax preferences, liberalization of visa and migration rules, and the creation of additional international transportation and media links.

Outward Investment

The government neither incentivizes nor restricts outward investment.

3. Legal Regime

Transparency of the Regulatory System

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

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

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

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

Many foreign companies say they must defend investments from frequent decrees and legislative changes, most of which do not “grandfather in” existing investments.  Penalties are often assessed for periods prior to the change in policy.  For example, foreign companies report that local and national authorities arbitrarily impose high environmental fines, saying the fines are assessed to generate revenue for local and national authorities rather than for environmental protection.  Government officials have acknowledged the system of environmental fines requires reform.  In response, the government submitted a draft of a new Environmental Code (Eco Code) to Parliament, where it is currently under review in the lower chamber.  Oil companies complain that the emission payment rates for pollutants when emitted from gas flaring are at least 20 times higher than when the same pollutants are emitted from other stationary sources.  In February 2020, the Ecology Minister reported that fines for unauthorized emissions of hazardous substances would be raised tenfold.

In 2015, President Nazarbayev announced five presidential reforms and the implementation of the “100 Steps” Modernization program.  The program calls for the formation of a results-oriented public administration system, a new system of audit and performance evaluation for government agencies, and introduction of an open government system with better public access to information held by state bodies.  Initial implementation of this plan has already improved accountability.  For example, in addition to the Audit Committee that monitors government agencies’ performance, ministers and regional governors now hold annual meetings with local communities.

President Tokayev, elected in June 2019, has affirmed his commitment to the reforms initiated by former President Nazarbayev.

Public financial reporting, including debt obligations, explicit liabilities, are published by the Ministry of Finance on their site: http://www.minfin.gov.kz/ .  However, authorities have indicated that contingent liabilities, such as exposures to state-owned enterprises, their cross -holdings, and exposures to banks, are not fully captured there.

International Regulatory Considerations

Kazakhstan is part of the Eurasian Economic Union, and EAEU regulations and decisions supersede the national regulatory system.  In its economic policy Kazakhstan declares its adherence to both WTO and OECD standards.  Kazakhstan became a member of the WTO in 2015.  It notifies the WTO Committee on Technical Barriers to Trade about drafts of national technical regulations (although lapses have been noted).  Kazakhstan ratified the WTO Trade Facilitation Agreement (TFA) in May 2016, notified its Category A requirements in March 2016, and requested a five-year transition period for its Category B and C requirements.  Early in 2018, the government established an intra-agency Trade Facilitation Committee to implement its TFA commitments.  By the end of 2018, Kazakhstan notified the WTO Trade Facilitation Committee that it has fulfilled its implementation commitments for Category A at 57 percent, for Category B at 19 percent, and for Category C at 24 percent.

Legal System and Judicial Independence

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

Parties of commercial contracts, including foreign investors, can seek dispute settlement in Kazakhstan’s courts or international arbitration, and Kazakhstani courts will enforce arbitration clauses in contracts.  Any court of original jurisdiction can consider disputes between private firms as well as bankruptcy cases.

The Astana International Financial Center, which opened in July 2018, includes its own arbitration center and court based on British Common Law and is independent of the Kazakhstani judiciary.  The court is led by former Chief Justice of England and Wales, Lord Harry Woolf, and several other Commonwealth judges have been appointed.  The government advises foreign investors to use the capacities of the AIFC arbitration center and the AIFC court more actively.  Provisions on using the AIFC law as applicable law are recommended for model investment contracts between a foreign investor and the government.

Laws and Regulations on Foreign Direct Investment

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

The Entrepreneurial Code outlines basic principles of doing business in Kazakhstan and the government’s relations with entrepreneurs.  The Code reinstates a single investment regime for domestic and foreign investors, in principal, codifies non-discrimination for foreign investors.  The Code contains incentives and preferences for government-determined priority sectors, providing customs duty exemptions and in-kind grants detailed in Part 4, Industrial Policies.  The Code also provides for dispute settlement through negotiation, use of Kazakhstan’s judicial process, and international arbitration.  U.S. investors have expressed concern about the Code’s narrow definition of investment disputes and its lack of clear provisions for access to international arbitration.  The government’s single window for foreign investors, providing information to potential investors, business registration, and links to relevant legislation, can be found here: https://invest.gov.kz/invest-guide/ 

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

The legal and regulatory framework offered by the AIFC to businesses registering on that territory differs substantially from that of Kazakhstan, although the Center is quite new, and experience is limited.  A more detailed analysis of the legal and regulatory implications of operating within AIFC can be found here: https://aifc.kz/annual-report/  and http://www.ftseglobalmarkets.com/news/astana-international-financial-center-can-it-become-a-regional-finance-hub.html 

Competition and Anti-Trust Laws

The Entrepreneurial Code regulates competition-related issues such as cartel agreements and unfair competition.  The Committees for Regulating Natural Monopolies and Protection of Competition under the Ministry of National Economy are responsible for reviewing transactions for competition-related concerns.

Expropriation and Compensation

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

Post is aware of cases when owners of developed businesses had to sell their businesses to companies affiliated with high-ranking and powerful individuals.

Dispute Settlement

ICSID Convention and New York Convention

Kazakhstan has been a member of the International Center for the Settlement of Investment Disputes (ICSID) since December 2001 and ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1995.  By law, any international award rendered by the ICSID, a tribunal applying the rules of the UN Commission on International Trade Law Arbitration, Stockholm Chamber of Commerce, London Court of International Arbitration, or Arbitration Commission at the Kazakhstan Chamber of Commerce and Industry is enforceable in Kazakhstan.

Investor-State Dispute Settlement

The government is a signatory to bilateral investment agreements with 47 countries and 1 multilateral investment agreement with EAEU partners.  These agreements recognize international arbitration of investment disputes.  The United States and Kazakhstan signed a Bilateral Investment Treaty in 1994.

In July 2017, a U.S. investor initiated arbitration proceedings against Kazakhstan under the BIT, accusing the government of indirectly expropriating its ownership stake to explore and develop three hydrocarbon fields.

Kazakhstan does recognize arbitral awards by law.  Four cases against Kazakhstan have been under review by ICSID as of March 2, 2020.  In October 2018, ICSID ordered Kazakhstan to compensate a foreign company for USD 30 million in investments in oil transshipment and storage facilities.  In 2015, this company appealed to ICSID for Kazakhstan’s breach of its bilateral investment treaty and Energy Charter Treaty.  In March 2016, a foreign gold explorer and producer sought compensation for breaches of its BIT and the 1994 Foreign Investment Law of Kazakhstan.  The Entrepreneurial Code defines an investment dispute as “a dispute ensuing from the contractual obligations between investors and state bodies in connection with investment activities of the investor,” and states such disputes may be settled by negotiation, litigation or international arbitration.

Investment disputes between the government and investors fall to the Nur-Sultan City Court; disputes between the government and large investors fall under the competence of a special investment panel at the Supreme Court of Kazakhstan.  The Supreme Court is currently preparing changes to regulation so that any disputes between the government and investors, including large ones, will be in hands of the Nur-Sultan City Court, while the Supreme Court will be a cassational instance.  A number of investment disputes involving foreign companies have arisen in the past several years linked to alleged violations of environmental regulations, tax laws, transfer pricing laws, and investment clauses.  Some disputes relate to alleged illegal extensions of exploration schedules by subsurface users, as production-sharing agreements with the government usually make costs incurred during this period fully reimbursable.  Some disputes involve hundreds of millions of dollars.  Problems arise in the enforcement of judgments, and ample opportunity exists for influencing judicial outcomes given the relative lack of judicial independence.

To encourage foreign investment, the government has developed dispute resolution mechanisms aimed at enabling aggrieved investors to seek redress without requiring them to litigate their claims.  The government established an Investment Ombudsman in 2013, billed as being able to resolve foreign investors’ grievances by intervening in inter-governmental disagreements that affect investors.

Kazakhstani law provides for government compensation for violations of contracts guaranteed by the government.  Yet, where the government has merely approved or confirmed a foreign contract, the government’s responsibility is limited to the performance of administrative acts necessary to facilitate an investment activity (e.g., the issuance of a license or granting of a land plot).  The resolution of disputes arising from such cases may require litigation or arbitration.

International Commercial Arbitration and Foreign Courts

The Law on Mediation offers alternative (non-litigated) dispute resolutions for two private parties.  The Law on Arbitration defines rules and principles of domestic arbitration.  As of April 2020, Kazakhstan had 17 local arbitration bodies unified under the Arbitration Chamber of Kazakhstan.  Please see: https://palata.org/about/ .  The government noted that the Law on Arbitration brought the national arbitration legislation into compliance with the United Nations Commission on International Trade Law (UNCITRAL) Model Law, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and the European Convention on International Commercial Arbitration.  Judgements of foreign arbitrations are recognized and enforceable under local courts.  Local courts recognize and enforce court rulings of CIS countries.  Judgement of other foreign state courts are recognized and enforceable by local courts when Kazakhstan has a bilateral agreement on mutual judicial assistance with the respective country or applies a principle of reciprocity.

When SOEs are involved in investment disputes, domestic courts usually find in the SOE’s favor.  By law, investment disputes with private commercial entities, employees, or SOEs are in the jurisdiction of local courts.  According to the European Bank for Reconstruction and Development’s 2014 Judicial Decision Assessment, judges in local courts lacked experience with commercial law and tended to apply general principles of laws and Civil Code provisions with which they are more familiar, rather than the relevant provisions of commercial legislation.

Even when investment disputes are resolved in accordance with contractual conditions, the resolution process can be slow and require considerable time and resources.  Many investors therefore elect to handle investment disputes privately, in an extrajudicial way.  In February 2018, a U.S. company initiated arbitration against the Kazakhstani government for failure to pay approximately USD 75 million for the return of two hydropower plants, operated under a 20-year concession agreement.  In April 2018 the government responded by denying liability and seeking over USD 480 million in counterclaims.  The final evidentiary hearing took place July 22-26, 2019.  As of June, 2020, the parties continue to await the arbitrator’s decision.

Bankruptcy Regulations

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

5. Protection of Property Rights

Real Property

Private entities, both foreign and domestic, have the right to establish and own business enterprises, buy and sell business interests, and engage in all forms of commercial activity.

Secured interests in property (fixed and non-fixed) are recognized under the Civil Code and the Land Code.  All property and lease rights for real estate must be registered with the Ministry of Justice through its local service centers.  According to the World Bank’s Doing Business Report, Kazakhstan ranks 24 out of 190 countries in ease of registering property.

Under Kazakhstan’s constitution, land and other natural resources may be owned or leased by Kazakhstani citizens.  The Land Code: (a) allows citizens and Kazakhstani companies to own agricultural and urban land, including commercial and non-commercial buildings, complexes, and dwellings; (b) permits foreigners to own land to build industrial and non-industrial facilities, including dwellings, with the exception of land located in border zones; (c) authorizes the government to monitor proper use of leased agricultural lands, the results of which may affect the status of land-lease contracts; (d) forbids private ownership of: land used for national defense and national security purposes, specially protected nature reserves, forests, reservoirs, glaciers, swamps, designated public areas within urban or rural settlements, except land plots occupied by private building and premises, main railways and public roads, land reserved for future national parks, subsoil use and power facilities, and social infrastructure.  The government maintains the land inventory and constantly updates its electronic data base, though the inventory data is not exhaustive.  The government has also set up rules for withdrawing land plots that have been improperly or never used.

In 2015, the government proposed Land Code amendments that would allow foreigners to rent agricultural lands for up to 25 years.  Mass protests in the spring of 2016 led the government to introduce a moratorium on these provisions until December 31, 2021.  The moratorium is also effective on other related articles of the Land Code that regulate private ownership rights on agricultural lands.

Intellectual Property Rights

The legal structure for intellectual property rights (IPR) protection is relatively strong; however, enforcement needs further improvement.  Kazakhstan was not  included in the United States Trade Representative (USTR)  Special 301 Report or the  Notorious Markets List.  To facilitate its accession to the World Trade Organization (WTO) and attract foreign investment, Kazakhstan continues to improve its legal regime for protecting IPR.  The Civil Code and various laws protect U.S. IPR.  Kazakhstan has ratified 18 of the 24 treaties endorsed by the World Intellectual Property Organization (WIPO): http://www.wipo.int/members/en/details.jsp?country_id=97 .

The Criminal Code sets out punishments for violations of copyright, rights for inventions, useful models, industrial patterns, select inventions, and integrated circuits topographies.  The law authorizes the government to target internet piracy and shut down websites unlawfully sharing copyrighted material, provided that rights holders had registered their copyrighted material with Kazakhstan’s IPR Committee.  Despite these efforts, U.S. companies and associated business groups have alleged that 73 percent of software used in Kazakhstan is pirated, including in government ministries, and have criticized the government’s enforcement efforts.

To comply with OECD IPR standards, in 2018 Kazakhstan accepted amendments to its IPR legislation that would streamline IPR registration and enforcement.  The law set up a more convenient, one-tier system of IPR registration and provided rights holders the opportunity for pre-trial dispute settlement through the Appeals Council at the Ministry of Justice.  In addition, the law included IPR protection as one of the government procurement principles that should be strictly followed by government organizations.  The Ministry of Justice is working with the World Bank on developing new IPR legislation based on OECD norms, including patent protection of IT products.

Kazakhstani authorities conduct nationwide campaigns called “Counterfeit”, “Hi-Tech” and “Anti-Fraud” that are aimed at detecting and ceasing IPR infringements and increasing public awareness about IP issues.  The Ministry of Justice and law enforcement agencies regularly report the results of their inspections.  In 2019, they conducted 276 inspections and initiated 236 cases on violations of trade mark use, resulting in USD 32,900 in penalties.  In addition, authorities reportedly seized over 44,000 units of counterfeit goods worth around USD 52,570.  Customs officials seized counterfeited goods at border crossing worth around USD 14.4 million.  IPR violations are prosecuted regularly. The Ministry of Internal Affairs reported 31 criminal copyright violations in 2019.  Of these 31 cases, three cases were closed, five were resolved by the conciliation of parties, and the rest remain in litigation.

Although Kazakhstan continues to make progress to comply with WTO requirements and OECD standards, foreign companies complain about inadequate IPR protection.  Judges, customs officials, and police officers also lack IPR expertise, which exacerbates weak IPR enforcement.

9. Corruption

Kazakhstan’s rating in Transparency International’s (TI) 2019 Corruption Perceptions Index is 34/100, ranking Kazakhstan 113 out of 180 countries rated – a relatively weak score, but the best in Central Asia.  According to the report, corruption remains a serious challenge for Kazakhstan, amplified by the instability of the economy.  In its March 2019 report on the fourth round of monitoring under the Istanbul Action Plan, OECD stated a lack of progress on 9 of 29 recommendations, including: implementation of a holistic anti-corruption policy in the private sector, ensuring independence of the anti-corruption agency, detailed integrity rules for political officials, independence of the judiciary and judges, mandatory anti-corruption screening of all draft laws, bringing the Law on Access to Information in line with international standards, effective and dissuasive liability of legal entities for corruption crimes; and ensuring the effectiveness of investigative and prosecutorial practices to combat corruption crimes.

The 2015-2025 Anti-Corruption Strategy focuses on measures to prevent the conditions that foster corruption, rather than fighting the consequences of corruption.  The Criminal Code imposes tough criminal liability and punishment for corruption, eliminates suspension of sentences for corruption-related crimes, and introduces a lifetime ban on employment in the civil service with mandatory forfeiture of title, rank, grade and state awards.  The Law on Countering Corruption introduces broader definitions of corruption and risks, anticorruption monitoring and analysis, and stronger financial accountability measures.  The Law on Government Procurement prohibits companies, the managers of which are directly related to decision makers of contracting government agencies, from participation in tenders.  The Law on Countering Corruption states that private companies should undertake measures to prevent corruption, while business associations can develop codes of conduct for specific industries.

The Agency for Countering Corruption presents its report on countering corruption annually. Kazakhstan ratified the UN Convention against Corruption in 2008.  It has been a participant of the Istanbul Anti-Corruption Action Plan of the OECD Anti-Corruption Network since 2004, the International Association of Anti-Corruption Agencies since 2009, and the International Counter-Corruption Council of CIS member-states since 2013.  Kazakhstan became a member of the Group of States against Corruption (GRECO) in January 2020.  The government and local business entities are aware of the legal restrictions placed on business abroad, such as the Foreign Corrupt Practices Act and the UK Bribery Act.

Despite provisions in laws, however, corruption allegations are noted in nearly all sectors, including extractive industries, infrastructure projects, state procurements, and the banking sector.  The International Finance Corporation’s Enterprise Survey that gathers responses from thousands of small and medium-sized enterprises in each of more than 100 countries, finds that respondents indicate corruption as the most severe obstacle to doing business in Kazakhstan.  For more information, please see: http://www.enterprisesurveys.org/data/exploreeconomies/2013/kazakhstan#corruption 

Transparency International Kazakhstan conducted a survey in 2019 to assess the corruption perception of 1,824 representatives of small businesses and individual entrepreneurs.  A total of 76.1 percent of respondents reported that they can develop their business without corruption.

The legal framework controlling corruption has been eased and loopholes exist.  In 2018 the president signed into law a set of criminal legislation amendments  mitigating punishment for acts of corruption by officials, including decriminalizing official inaction, hindrance to business activity, and falsification of documents; significantly reducing the amounts of fines for taking bribes; and reinstituting a statute of limitation for corruption crimes.  The largest loophole surrounds the first president and his family.  The Law on the First President of the Republic of Kazakhstan—Leader of the Nation establishes blanket immunity for First President Nazarbayev and members of his family from arrest, detention, search or interrogation.  Journalists and advocates for fiscal transparency are reported to have faced frequent harassment, administrative pressure, and there are reports of disappearances and unaccounted deaths.

Resources to Report Corruption

Under the Law On Countering Corruption, all government, quasi-government entities, and officials are responsible for countering corruption.  Along with the Anti-Corruption Agency, prosecutors, national security agencies, police, tax inspectors, military police, and border guard service members are responsible for the detection, termination, disclosure, investigation, and prevention of corruption crimes, and for holding the perpetrators liable within their competence.

Transparency International maintains a national chapter in Kazakhstan.

Contact at the government agency responsible for combating corruption:

Alik Shpekbayev
Chairman
Agency for Civil Service Affairs and Countering Corruption
37 Seyfullin Street, Astana
+7 (7172) 909002
a.shpekbaev@kyzmet.gov.kz

Contact at a “watchdog” organization:

Olga Shiyan
Executive Director
Civic Foundation “Transparency Kazakhstan”
Office 308/2
89 Dosmuhamedov str,
Business Center Caspi
Almaty 050012
+7 (727) 292 0970; +7 771 589 4507
oshiyantikaz@gmail.com

Lithuania

Executive Summary

Lithuania is strategically situated at the crossroads of Europe and Eurasia. It offers investors a diversified economy, EU rules and norms, a well-educated multilingual workforce, advanced IT infrastructure, low inflation, and a stable democratic government. The Lithuanian economy has been growing steadily since the 2009 economic crisis but will contract in 2020 due to economic fallout from the COVID-19 pandemic. However, most economists currently predict a relatively rapid recovery in 2021 thanks to budget surpluses and accumulated financial reserves prior to the crisis, as well as a well-diversified economy. The country joined the Eurozone in January 2015 and completed the accession process for the Organization for Economic Cooperation and Development (OECD) in May 2018. Lithuania’s income levels are lower than in most of the EU. Based on the average net monthly wage, Lithuania is 23rd of 28 EU member states. According to Bank of Lithuania statistics, at the end of 2019, the United States was Lithuania’s 16th largest investor, with cumulative investments totaling $245.4 million (1.2 percent of total FDI).

Following its election at the end of 2016, the current Lithuanian government focused on lowering barriers to investment, partnering with the private sector, and offering financial incentives for investors. In 2013, the government passed legislation which streamlined land-use planning, saving investors both time and money, and in July 2017, the government introduced the new Labor Code which is believed to better balance the interests of both employees and employers.

The government provides equal treatment to foreign and domestic investors, and sets few limitations on their activities. Foreign investors have the right to repatriate or reinvest profits without restriction, and can bring disputes to the International Center for the Settlement of Investment Disputes. Lithuania offers special incentives, such as tax concessions, to both small companies and strategic investors. Incentives are also available in seven Special Economic Zones located throughout the country.

U.S. executives report burdensome procedures to obtain business and residence permits, as well as some instances of low-level corruption in government. Transportation barriers, especially insufficient air links with European cities, remain a hindrance to investment, as does the lack of access to open, transparent information on tax collection and government procurement. Energy costs in Lithuania are declining as a result of energy source diversification upgrades and lower global oil prices.

Lithuania offers many investment opportunities in most of its economy sectors. The sectors which attracted most investment include Information and Communication Technology, Biotech, Metal Processing, Machinery and Electrical Equipment, Plastics, Furniture, Wood Processing and Paper Industry, Textiles and Clothing. Lithuania also offers opportunities for investment in the growing sectors of Real Estate and Construction, Business Process Outsourcing (BPO), Shared Services, Financial Technologies, Biotech and Lasers.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 35 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 11 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 38 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2018 $ 154 http://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2018 $ 17,430 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Lithuania’s laws assure equal protection for both foreign and domestic investors. No special permit is required from government authorities to invest foreign capital in Lithuania. State institutions have no right to interfere with the legal possession of foreign investors’ property. In the event of justified expropriation, investors are entitled to compensation equivalent to the market value of the property expropriated. The law obligates state institutions and officials to keep commercial secrets confidential and requires compensation for any loss or damage caused by illegal disclosure. As a member of European Union, Lithuania is subject to WTO investment requirements. Invest Lithuania is the government’s principal institution dedicated to attracting foreign investment. It serves as a one-stop-shop to: provide information on business costs, labor, tax and legal considerations, and other business concerns; facilitate the set up and launch of a company; provide help in accessing government financial support; and, advocate on behalf of investors for more business friendly laws. In addition to its offices in Vilnius and major Lithuanian cities, Invest Lithuania has representative offices in Belgium, Kazakhstan, and the United States (Chicago). Every year the government holds a conference with foreign investors to discuss their concerns and ways to improve investment climate in Lithuania.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investors have the right to repatriate profits, income, or dividends, in cash or otherwise, or to reinvest the same without any limitation, after paying taxes. The law establishes no limits on foreign ownership or control. Foreign investors have free access to all sectors of the economy with some limited exceptions:

The Law on Investment prohibits investment of foreign capital in sectors related to the security and defense of the State.

The Law on Investment also requires government permission and licensing for commercial activities that may pose risks to human life, health, or the environment, including the manufacturing of, or trade in, weapons.

As of May 2014, foreign citizens are allowed to buy agricultural or forest land.

The Law on Investment specifically permits the following forms of investment in Lithuania: establishment of an enterprise or acquisition of a part, or the whole, of the authorized capital of an operating enterprise registered in Lithuania;

  • establishment of an enterprise or acquisition of a part, or the whole, of the authorized capital of an operating enterprise registered in Lithuania;
  • acquisition of securities of any type;
  • creation, acquisition, and increase in the value of long-term assets;
  • lending of funds or other assets to business entities in which the investor owns a stake, allowing control or considerable influence over the company; and
  • performance of concession or leasing agreements.

Foreign entities are allowed to establish branches or representative offices. There are no limits on foreign ownership or control. Foreign investors can contribute capital in the form of money, assets, or intellectual or industrial property rights. The State Property Bank screens the performance record and size of companies bidding on state or municipal property and has halted privatizations when it determined that the bidders were not suitable, i.e., for criminal or other reasons.

In 2018, the Lithuanian parliament passed a new edition of the law on the Protection of Objects Important to National Security. The law is aimed at enforcing additional safeguards to avoid threats related to investments into companies of strategic national importance, thus requiring a special government commission to screen investments in identified strategic sectors.

Other Investment Policy Reviews http://www.oecd.org/countries/lithuania/economic-survey-lithuania.htm 

http://www.oecd.org/countries/lithuania/economic-survey-lithuania.htm 

Business Facilitation

The process of company registration in Lithuania involves the following steps that can be accomplished online at http://www.registrucentras.lt/en/ :

1. Check and reserve the name of the company (limited liability company). It takes about one day and costs approximately $18.

2. Register at the Company Register, including registration with State Tax Inspectorate (the Lithuanian Revenue Authority) for corporate tax, VAT, and State Social Insurance Fund Board (SODRA). It takes one day and costs approximately $64.

3. Complete VAT registration. It takes three days to complete at no charge.

Outward Investment

The Lithuanian government neither incentivizes nor restricts outward investment.

3. Legal Regime

Transparency of the Regulatory System

The regulatory system remains a challenge for some investors. Local business leaders report that bureaucratic procedures often are not user-friendly and that the interpretation of regulations is inconsistent and unclear. Businesses and private individuals complain of low-level corruption, including in the process of awarding government contracts and the granting of licenses and permits. Businesses also note that they would like to have more opportunity to consult with lawmakers regarding new legislation and that new legislation sometimes appears with little advance notice.

However, the government is making efforts to improve transparency using technology. For example, the parliament’s website contains all draft legislation, and public tenders must be published electronically in a central database. Ministries also post many, but not all, draft laws under consideration. All government procurement tenders are required to be posted on-line in a centralized database. In March 2014, Transparency International released a report recommending new laws aimed at protecting whistle-blowers, encouraging lobbying transparency, preventing and controlling conflicts of interest, and increasing transparency in political party funding. Some of the recommendations have already been addressed by introducing a whistleblower protection law and a new law on lobbying in 2017. The World Bank’s Doing Business Report ranked Lithuania 11th out of 190 in 2020. Lithuania scored especially high in the categories of Registering Property (4rd), Enforcing contracts (7th) Dealing with Construction Permits (10th) and Starting a Business (34st). It did less well in the categories of Resolving Insolvency (89th) and Getting Credit (48th).

International Regulatory Considerations

Since May 1, 2004, in accordance with its European Union membership, Lithuania has applied European Union trade policies, such as antidumping or anti-subsidy measures. The European Union import regime applies to Lithuania. The country is a member of the WTO and it notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

The Lithuanian legal system stems from the legal traditions of continental Europe and complies with the EU’s acquis communautaire. New laws enter into force upon promulgation by the President (or in some cases the Speaker of the parliament) and publication in the official gazette, Valstybes Zinios (State News). Several possibilities exist for commercial dispute resolution. Parties can settle disputes in local courts or in the increasingly popular independent, i.e., non-governmental, Commercial Court of Arbitration. Lithuania also recognizes arbitration judgments by foreign courts. Domestic courts generally operate independently of government influence. Lithuania’s EU membership has given foreign firms the additional right to appeal adverse court rulings to the European Court of Justice.

The Lithuanian court system consists of courts of general jurisdiction that deal with civil and criminal matters, and includes the Supreme Court, the Court of Appeals, District Courts, and local courts. In 1999, Lithuania established a system of administrative courts to adjudicate administrative cases, which generally involve disputes between government regulatory agencies and individuals or organizations. The administrative court system consists of the High

Administrative Court and District Administrative Courts.

The Constitutional Court of Lithuania is a separate, independent judicial body that determines whether laws and legal acts adopted by the parliament, president, and the government violate the Constitution.

Laws and Regulations on Foreign Direct Investment

Lithuanian law provides that foreign entities may establish branches or representatives offices, and there are no limits on foreign ownership or control. A foreigner may hold a majority interest in a local company in Lithuania. However, there are some areas of the economy where investment is limited, such as in sectors related to national security and defense of the State, and licensing is necessary for activities related to human life and health, or which are deemed potentially risky. The national investment promotion agency Invest Lithuania provides a detailed overview of the relevant laws and regulations on foreign investment. http://www.investlithuania.com 

Competition and Anti-Trust Laws

There is a domestic Competition Council, which is responsible for the prevention of competition law violations. For more information:

Expropriation and Compensation

Lithuanian law permits expropriation on the basis of public need, but requires compensation at fair market value in a convertible currency. The law requires payment of compensation within three months of the date of expropriation in the currency the foreign investor requests. The compensation must include interest calculated from the date of publication of the notice of expropriation until the payment of compensation. The recipient may transfer this compensation abroad without any restrictions. There have been no cases of expropriation of private property by the Lithuanian government since 1991. There is an ongoing process to restitute property expropriated during World War II and the Soviet occupation. While the Lithuanian government returned most of this property, including Jewish communal property, in 2011, private property restitution remains incomplete.

Dispute Settlement

ICSID Convention and New York Convention

Lithuania is a member state to the International Centre for the Settlement of Investment Disputes (ICSID) Convention. It is also a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). Lithuania law recognizes and enforces arbitral body decisions.

Investor-State Dispute Settlement

According to Lithuanian law, State owned enterprises (SOE) have no privileges in conducting business, competing for supply, and/or in implementing projects, enforcing contracts, and accessing finance. While Baltic Institute for Corporate Governance (BICG) reports suggest that there have been cases of SOE executives extracting benefits for their own personal gain by way of guided tenders, exercising favoritism when selecting providers of goods or services, or giving business to friends and family members, the Embassy has no records of complaints from either foreign or domestic companies regarding the outcome of dispute settlement cases with state companies.

International Commercial Arbitration and Foreign Courts

According to the Lithuanian Arbitration Court, the arbitration process should be completed within six months, but depending on the complexity of a dispute and with the agreement of both parties, this period can be extended. Also, before a process starts, the Arbitration Court has 30 days to decide if it will accept the dispute and three months to prepare all the needed materials for the arbitration process. Decisions of the Lithuanian Arbitration Court may be appealed to international institutions, such as the International Court of Arbitration.

Bankruptcy Regulations

Lithuania passed the current Enterprise Bankruptcy Law in 2001 This law applies to all enterprises, public establishments, commercial banks, and other credit institutions registered in Lithuania. The law provides a mechanism to override the provisions of other laws regulating enterprise activities, assuring protection of creditors’ rights, recovery of debts, and payment of taxes and other mandatory contributions to the State. This law establishes the following order of creditors’ claims: claims by creditors that are secured by a mortgage/pledge of debtor; claims related to employment; tax, social insurance, and state medical insurance claims; claims arising from loans guaranteed or issued on behalf of the Republic of Lithuania or its government; and other claims. Bankruptcy can be criminalized in cases of intentional bankruptcy. The Law on the Bankruptcy of Natural Persons was introduced in Lithuania in 2013. The World Bank’s Ease of Doing Business survey ranks Lithuania 89th in the category of “resolving insolvency”.

5. Protection of Property Rights

Real Property

Lithuanian law protects foreign investments and the rights of investors in several ways:

  • The Constitution and the Law on Foreign Capital Investment protect all forms of private
  • International agreements, such as the 1958 New York Convention on the recognition and enforcement of foreign arbitral awards, offer protection.
  • Bilateral agreements with the United States and other western countries on the mutual
  • The Law on Capital Investment in Lithuania and other acts regulate customs duties, taxes, and relationships with financial and inspection authorities. This law also establishes dispute settlement procedures.
  • In the event of justified expropriation, applicable law entitles investors to compensation
  • Foreign investors may defend their rights under the Washington Convention of 1965 by
  • State institutions and officials are obligated to keep commercial secrets confidential and must pay compensation for any loss or damage caused by illegal disclosure. Lithuania legalized the possibility of hiring private bailiffs to enforce court judgments in 2003.

Lithuania’s commercial laws conform to EU requirements, and include the principles of the free establishment of companies, protection of shareholders’ and creditors’ rights, free access to establishment of companies, protection of shareholders’ and creditors’ rights, free access to information, and registration procedures. Relevant laws include: the Company Law and Law on Partnerships (2004), the Law on Personal Enterprises (2004), the Law on Investments (1999), the Law on Bankruptcy of Enterprises (2001), and the Law on Restructuring of Enterprises (2001). The Civil Code of 2000 governs commercial guarantees and security instruments. It provides for the following types of guarantee and security instruments to secure fulfillment of contractual obligations: forfeiture, surety, guarantee, earnest money, pledge, and mortgage.

Intellectual Property Rights

Lithuania has significantly improved intellectual property rights (IPR) protection in recent years, and members of the innovation community report that IPR infringement and theft is infrequent. Lithuania joined the World Intellectual Property Organization (WIPO) in 2002 and it party to many of its treaties, including the Berne Convention, the Paris Convention, the Patent Cooperation Treaty, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty. Lithuania joined the World Trade Organization in 2001 and so is party to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

Following EU accession, Lithuania extended protection to member states’ trademarks, designs, and applications. Lithuania brought its national law protecting biological inventions into compliance with EU Directive 98/44 in June 2005.

In 2008, Lithuania was removed from USTR’s Special 301 Watch List and is not currently included in the Notorious Markets List.

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

The State Patent Bureau provides a list of patent attorneys at the following link: https://vpb.lrv.lt/en/ 

9. Corruption

A Eurobarometer survey on corruption conducted in 2017 showed that Lithuania lags behind other EU countries on scores concerning both perceptions and actual experience of corruption. Among the survey results: 93 percent of Lithuanian respondents said they think that corruption is widespread in Lithuania; 17 percent indicated that they were asked or expected to pay a bribe in the past 12 months; and 29 percent believe that the only way to succeed in business is to have political connections.

More than 50 governmental institutions regulate commerce in one way or another, creating opportunities for corrupt practices. Large foreign investors report few problems with corruption. On the contrary, most large investors report that high-level officials are often very helpful in solving problems fairly. In general, foreign investors say that corruption is not a significant obstacle to doing business in Lithuania and describe most of the bureaucrats they deal with in Lithuania as reasonable and fair. Small and medium enterprises (SMEs) perceive themselves as more vulnerable to petty bureaucrats and commonly complain about extortion. SMEs often complain that excessive red tape virtually requires the payment of “grease money” to obtain permits promptly. Business owners maintain that some government officials, on the other hand, view SMEs as likely tax-cheats and smugglers, and treat the owners and managers accordingly.

Paying or accepting a bribe is a criminal act. Lithuania established in 1997 the Special Investigation Service (Specialiuju Tyrimu Tarnyba) specifically to fight public sector corruption. The agency investigates approximately 100 cases of alleged corruption every year, but has yet to bring charges against high-level officials for corrupt practices. Lithuania ratified the UN Convention Against Corruption in December 2006. Transparency International (TI) also has a national chapter in Lithuania. TI ranked Lithuania 35th out of 180 in its 2019 Perceptions of Corruption Index with a score of 60 out of 100 (TI considers countries with a score below 50 to have serious problems with corruption.). Medical personnel, local government officials, among others, were cited by TI as prone to corruption.

Lithuania ratified the UN Anticorruption Convention in 2006 and acceded to the OECD Anti-Bribery Convention in 2017.

Resources to Report Corruption

Special Investigation Service
Jakšto g. 6, 01105 Vilnius, Lithuania
Tel: 370-5266333
Fax: 370-70663307
Email: pranesk@stt.lt

Transparency Internationa
Sergejus Muravjovas, Executive Director
Transparency International
Didžioji st. 5, LT–01128, Vilnius, Lithuania
Tel: 370 5 212 69 51
info@transparency.lt | skype: ti_lithuania

Poland

Executive Summary

Until the outbreak of COVID-19, Poland’s economy had been experiencing a long period of uninterrupted economic expansion since 1992.  During this time, Poland’s investment climate has continued to grow in attractiveness to foreign investors, including U.S. investors.  Foreign capital has been drawn by strong economic fundamentals:  Poland’s GDP growth reached 4.1 percent in 2019, driven by persistently strong domestic consumption and higher-than-expected investments.  Household expenditures continued to grow, fueled by an expansion of the Family 500+ program, additional pension payments, and a strong labor market.  Proposed economic legislation dampened optimism in some sectors (e.g., retail, media, energy, digital services, and beverages).  Investors have also pointed to lower predictability and the outsized role of state-owned and state-controlled companies in the Polish economy as an impediment to long-term balanced growth.  In 2020, as a result of the COVID-19 pandemic, Poland’s economy is likely to experience the first recession in 30 years, but it is likely to weather the crisis better than almost any other European Union (EU) member state. The contraction in the Polish economy will be the mildest in the EU, according to the European Commission (EC).  Despite a polarized political environment following the conclusion of a series of national elections and a number of less business-friendly sector specific policies, the broad structures of the Polish economy are solid.

Prospects for future growth, driven by domestic demand and inflows of EU funds from the 2014-2020 and future financial frameworks, as well as COVID-19 related government aid programs, are likely to continue to attract investors seeking access to Poland’s market of over 38 million people, and to the broader EU market of over 500 million.  As throughout the rest of the world, the COVID-19 epidemic will have significant macroeconomic effects in Poland, including a weakening of economic activity, deterioration of the labor market and public finances, and a change in economic behavior of households and enterprises.  In May 2020, the Polish government passed a 1.5 percent tax on revenues from video-on-demand services as a part of its COVID-19 economic stimulus plan, dubbed the “Anti-Crisis Shield.”  The tax revenue will go to the Polish Film Institute to help support the film industry which has been hit hard by the pandemic.

Poland’s well-diversified economy reduces its vulnerability to external shocks, although it depends heavily on the EU as an export market.  Foreign investors also cite Poland’s well-educated work force as a major reason to invest, as well as its proximity to major markets such as Germany.  U.S. firms represent one of the largest groups of foreign investors in Poland.  The volume of U.S. investment in Poland is estimated at around USD 5 billion by the National Bank of Poland in 2018 and around USD 25 billion by the Warsaw-based American Chamber of Commerce (AmCham).  With the inclusion of indirect investment flows through subsidiaries, it may reach as high as USD 62.7 billion, according to AmCham.  Historically, foreign direct investment (FDI) was largest in the automotive and food processing industries, followed by machinery and other metal products and petrochemicals.  “Shared office” services such as accounting, legal, and information technology services, including research and development (R&D), is Poland’s fastest-growing sector for foreign investment.  The government seeks to promote domestic production and technology transfer opportunities in awarding defense-related tenders.  There are also some investment and export opportunities in the energy sector—both immediate (natural gas), and longer term (nuclear, energy grid upgrades, photovoltaics, and offshore wind)—as Poland seeks to diversify its energy mix and reduce air pollution.  Biotechnology, pharmaceutical, and health care industries might open wider to investments and exports as a result of the COVID-19 experience.

Defense is another promising sector for U.S. exports. The Polish government is actively modernizing its military inventory, presenting good opportunities for the U.S. defense industry.  In 2018, Poland signed its largest-ever defense contract when committing to purchase the PATRIOT missile defense system, and in 2019 it signed a contract to buy the High Mobility Artillery Rocket System (HIMARS).  In February 2019, the Defense Ministry announced its updated technical modernization plan listing its top programmatic priorities, with defense modernization budgets forecasted to increase from approximately USD 3.3 billion in 2019 to approximately USD 7.75 billion in 2025.  In January 2020, Poland signed a contract worth $4.6 billion under which the country will acquire 32 F-35A Lightning II fighter jets from the United States.  Information technology and cybersecurity along with infrastructure also show promise, as Poland’s municipalities focus on smart city networks.  A USD 10 billion central airport project may present opportunities for U.S. companies in project management, consulting, communications, and construction.  The government seeks to expand the economy by supporting high-tech investments, increasing productivity and foreign trade, and supporting entrepreneurship, scientific research, and innovation through the use of domestic and EU funding.

In 2018, Poland saw significant increases in wholesale electricity prices due largely to an increase in the price of coal and EU emissions permits.  An amendment to the act regulating energy prices, adopted in mid-2019, allowed for freezing electricity prices throughout 2019 for households, micro and small businesses, hospitals and public sector finance units including local government offices.  For medium and large enterprises, the bill introduced the possibility of applying for partial compensation for electricity consumed, within the EU framework. A major EU project is to synchronize the Baltic States’ electricity grid with that of Poland and the wider European network by 2025.

A government strategy aims for a commercial fifth generation (5G) network to become operational by the end of 2020 in at least one city and in all cities by 2025, although planned spectrum auctions have been delayed.

Some organizations, notably private business associations and labor unions, have raised concerns that policy changes have been introduced quickly and without broad consultation, increasing uncertainty about the stability and predictability of Poland’s business environment.  For example, the government announced a “sugar tax” on beverages with only a few months warning after firms had already prepared budgets for the coming year.  Previous proposals to introduce legislation on media de-concentration raised concern among foreign investors in the sector; however, these proposals seem to be stalled for the time being.

The Polish tax system underwent many changes over the last four years with the aim of increasing budget revenues, including more effective tax auditing and collection.  The November 2018 tax bill included a number of changes important for foreign investors, such as penalties for aggressive tax planning, changes to the withholding tax, incentives for R&D, and an exit tax on corporations and individuals.  In 2019, a new mechanism for withholding tax (WHT) was introduced as well as individual tax account numbers.

As the largest recipient of EU funds (which contribute an estimated 1 percentage point to Poland’s GDP growth per year), any significant decrease in EU cohesion spending would have a large negative impact on Poland’s economy.  Draft EU budgets foresee a considerable decrease in Poland’s cohesion funds in the next cycle, part of which could be attributed to Poland’s conflict with the European Union over reforms to the judiciary.  The Polish government has supported taxing the income of Internet companies, proposed by the European Commission in 2018, and considers it a possible new source of financing for the post-COVID-19 economic recovery.  Observers are closely watching the European Commission’s proceedings under Article 7 of the Lisbon Treaty, initiated in December 2017, regarding rule of law and judicial reforms. These include the introduction of an extraordinary appeal mechanism in the enacted Supreme Court Law, which could potentially affect economic interests, in that final judgments issued since 1997 can now be challenged and overturned in whole or in part, including some long-standing judgments on which economic actors have relied.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 41 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2020 40 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 39 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 12,977 http://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2018 14,100 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Poland welcomes foreign investment as a source of capital, growth, and jobs, and as a vehicle for technology transfer, research and development (R&D), and integration into global supply chains.  The government’s Strategy for Responsible Development identifies key goals for attracting investment, including improving the investment climate, a stable macroeconomic and regulatory environment, and high-quality corporate governance, including in state-controlled companies.  By the end of 2018, according to IMF and National Bank of Poland data, Poland attracted around USD 228.5 billion (cumulative) in foreign direct investment (FDI), principally from Western Europe and the United States.  In 2018, reinvested profits again dominated the net inflow of FDI to Poland.  The greatest reinvestment of profits occurred in services and manufacturing, reflecting the change of Poland’s economy to a more service-oriented and less capital-intensive structure.

Foreign companies generally enjoy unrestricted access to the Polish market.  However, Polish law limits foreign ownership of companies in selected strategic sectors, and limits acquisition of real estate, especially agricultural and forest land.  Additionally, the current government has expressed a desire to increase the percentage of domestic ownership in some industries such as banking and retail which have large holdings by foreign companies and has employed sectoral taxes and other measures to advance this aim.  In March 2018, Sunday trading ban legislation went into effect, which is gradually phasing out Sunday retail commerce in Poland, especially for large retailers.  In 2019, stores operated an average of one Sunday a month, and in 2020 a total ban will be in effect (with the exception of seven Sundays).  In 2019, the government introduced a draft bill requiring producers and importers of sugary and sweetened beverages to pay a fee.  Polish authorities have also publicly favored introducing a digital services tax.  Because no draft has been released, the details of such a tax are unknown, but it would presumably affect mainly foreign digital companies.

There is a variety of agencies involved in investment promotion:

  • The Ministry of Development has two departments involved in investment promotion and facilitation: the Investment Development and the Trade and International Relations Departments.  The Deputy Minister supervising the Investment Development Department was appointed in 2019 to be ombudsman for foreign investors.   https://www.gov.pl/web/przedsiebiorczosc-technologia/ 
  • The Ministry of Foreign Affairs (MFA) promotes Poland’s foreign relations including economic relations, and along with the Polish Chamber of Commerce (KIG), organizes missions of Polish firms abroad and hosts foreign trade missions to Poland.   https://www.msz.gov.pl/ ; https://kig.pl/ 
  • The Polish Investment and Trade Agency (PAIH) is the main institution responsible for promotion and facilitation of foreign investment. The agency is responsible for promoting Polish exports, for inward foreign investment and for Polish investments abroad.  The agency operates as part of the Polish Development Fund, which integrates government development agencies.  PAIH coordinates all operational instruments, such as commercial diplomatic missions, commercial fairs and programs dedicated to specific markets and sectors.  The Agency has opened offices abroad including in the United States (San Francisco and Washington, D.C, Los Angeles, Chicago, Houston and New York).  PAIH’s services are available to all investors.  https://www.paih.gov.pl/en 
  • The American Chamber of Commerce has established the American Investor Desk – an investor-dedicated know-how gateway providing comprehensive information on investing in Poland and investing in the USA https://amcham.pl/american-investor-desk 

Limits on Foreign Control and Right to Private Ownership and Establishment

Poland allows both foreign and domestic entities to establish and own business enterprises and engage in most forms of remunerative activity per the Entrepreneurs’ Law which went into effect on April 30, 2018.  Forms of business activity are described in the Commercial Companies Code.  Poland does place limits on foreign ownership and foreign equity for a limited number of sectors.  Polish law limits non-EU citizens to 49 percent ownership of a company’s capital shares in the air transport, radio and television broadcasting, and airport and seaport operations sectors.  Licenses and concessions for defense production and management of seaports are granted on the basis of national treatment for investors from OECD countries.

Pursuant to the Broadcasting Law, a television broadcasting company may only receive a license if the voting share of foreign owners does not exceed 49 percent and if the majority of the members of the management and supervisory boards are Polish citizens and hold permanent residence in Poland.  In 2017, a team comprised of officials from the Ministry of Culture and National Heritage, the National Broadcasting Council (KRRiT) and the Office of Competition and Consumer Protection (UOKiK) was created in order to review and tighten restrictions on large media, and limit foreign ownership of the media.  While no legislation has been introduced, there is concern that possible future proposals may limit foreign ownership of media sector as suggested by governing party politicians.

In the insurance sector, at least two management board members, including the chair, must speak Polish.  The Law on Freedom of Economic Activity (LFEA) requires companies to obtain government concessions, licenses, or permits to conduct business in certain sectors, such as broadcasting, aviation, energy, weapons/military equipment, mining, and private security services.  The LFEA also requires a permit from the Ministry of Development for certain major capital transactions (i.e., to establish a company when a wholly or partially Polish-owned enterprise has contributed in-kind to a company with foreign ownership by incorporating liabilities in equity, contributing assets, receivables, etc.).  A detailed description of business activities that require concessions and licenses can be found here:  https://www.paih.gov.pl/publications/how_to_do_business_in_Poland 

Polish law restricts foreign investment in certain land and real estate.  Land usage types such as technology and industrial parks, business and logistic centers, transport, housing plots, farmland in special economic zones, household gardens and plots up to two hectares are exempt from agricultural land purchase restrictions.  Since May 2016, foreign citizens from European Economic Area member states, Iceland, Liechtenstein, and Norway, as well as Switzerland, do not need permission to purchase any type of real estate including agricultural land.  Investors from outside of the EEA or Switzerland need to obtain a permit from the Ministry of Internal Affairs and Administration (with the consent of the Defense and Agriculture Ministries), pursuant to the Act on Acquisition of Real Estate by Foreigners, prior to the acquisition of real estate or shares which give control of a company holding or leasing real estate.  The permit is valid for two years from the day of issuance, and the ministry can issue a preliminary document valid for one year.  Permits may be refused for reasons of social policy or public security.  The exceptions to this rule include purchases of an apartment or garage, up to 0.4 hectares of undeveloped urban land, and “other cases provided for by law” (generally: proving a particularly close connection with Poland).  Laws to restrict farmland and forest purchases (with subsequent amendments) came into force April 30, 2016 and are addressed in more detail in Section 6: Real Property.

Since September 2015, the Act on the Control of Certain Investments has provided for the national security-related screening of acquisitions in high-risk sectors including: energy generation and distribution; petroleum production, processing and distribution; telecommunications; media and mining; and manufacturing and trade of explosives, weapons and ammunition.  Poland maintains a list of strategic companies which can be amended at any time, but is updated at least once a year, usually in late December.  The national security review mechanism does not appear to constitute a de facto barrier for investment and does not unduly target U.S. investment.  According to the Act, prior to the acquisition of shares of strategic companies (including the acquisition of proprietary interests in entities and/or their enterprises) the purchaser (foreign or local) must notify the controlling government body and receive approval.  The obligation to inform the controlling government body applies to transactions involving the acquisition of a “material stake” in companies subject to special protection.  The Act stipulates that failure to notify carries a fine of up to PLN 100,000,000 (approx. USD 25,000,000) or a penalty of imprisonment between six months and five years (or both penalties together) for a person acting on behalf of a legal person or organizational unit that acquires a material stake without prior notification.

The governing Law and Justice party formed a new treasury ministry to consolidate the government’s control over state-owned enterprises.  The government dissolved Poland’s energy ministry, transferring that agency’s mandate to the new State Assets Ministry.  The Deputy Prime Minister and Minister of State Assets announced that he would seek to consolidate state-owned companies with similar profiles, including merging Poland’s largest state-owned firm Orlen with state-owned Energa.  At the same time, the government is working on changing the rules of governing state-owned companies to have better control over the firms’ activities.  A new government plenipotentiary for the reform of ownership oversight will be appointed.

As part of the COVID-19 anti-crisis shield, the Ministry of Development plans to offer two-year takeover protection for Polish firms with a minimum of EUR 10 million (almost $10 million) in turnover.  The bill creates “a temporary complex framework of control over actions which could threaten the safety, order, and public health by entities from outside the EU and EEA,” according to authors of an impact study.  Qualifications are extended for public firms, or firms from a variety of specified fields.  The State Assets Ministry is preparing similar and more permanent measures.

Other Investment Policy Reviews

The 2018 OECD Economic Survey of Poland can be found here:

http://www.oecd.org/eco/surveys/economic-survey-poland.htm 

Additionally, the OECD Working Group on Bribery has provided recommendations on the implementation of the OECD Anti-Bribery Convention in Poland:  http://www.oecd.org/daf/anti-bribery/poland-oecdanti-briberyconvention.htm 

In March 2018, the OECD published a Rural Policy Review on Poland.  According to this review, Poland has seen impressive growth in recent years, and yet regional disparities in economic and social outcomes remain large by OECD standards.  The review is available at: http://www.oecd.org/poland/oecd-rural-policy-reviews-poland-2018-9789264289925-en.htm 

Business Facilitation

The Polish government has continued to implement reforms aimed at improving the investment climate with a special focus on the SME sector and innovations.  Poland reformed its R&D tax incentives with new regulations and changes encouraging wider use of the R&D tax breaks.  As of January 1, 2019, a new mechanism reducing the tax rate on income derived from intellectual property rights (IP Box) was introduced.  Please see Section 5 of this report for more information.

A package of five laws referred to as the “Business Constitution”—intended to facilitate the operation of small domestic enterprises—was gradually introduced in 2018.  The main principle of the Business Constitution is the presumption of innocence of business owners in dealings with the government.

Poland made enforcing contracts easier by introducing an automated system to assign cases to judges randomly.  Despite these reforms and others, some investors have expressed serious concerns regarding over-regulation, over-burdened courts and prosecutors, and overly burdensome bureaucratic processes.  The way tax audits are performed has changed considerably.  For instance, in many cases the appeal against the findings of an audit now must be lodged with the authority that issued the initial finding rather than a higher authority or third party.  Poland also enabled businesses to get electricity service faster by implementing a new customer service platform that allows the utility to better track applications for new commercial connections.

In Poland, business activity may be conducted in the forms of a sole proprietor, civil law partnership, as well as commercial partnerships and companies regulated in provisions of the Commercial Partnerships and Companies Code.  Sole proprietor and civil law partnerships are registered in the Central Registration and Information on Business (CEIDG), which is housed by the Ministry of Development:

https://prod.ceidg.gov.pl/CEIDG.CMS.ENGINE/?D;f124ce8a-3e72-4588-8380-63e8ad33621f 

Commercial companies are classified as partnerships (registered partnership, professional partnership, limited partnership, and limited joint-stock partnership) and companies (limited liability company and joint-stock company).  A partnership or company is registered in the National Court Register (KRS) and kept by the competent district court for the registered office of the established partnership or company.  Local corporate lawyers report that starting a business remains costly in terms of time and money, though KRS registration in the National Court Register averages less than two weeks according to the Ministry of Justice and four weeks according to the World Bank’s 2020 Doing Business Report.  A 2018 law introduced a new type of company—PSA (Prosta Spółka Akcyjna – Simple Joint Stock Company).  PSAs are meant to facilitate start-ups with simpler and cheaper registration procedures.  The minimum initial capitalization is 1 PLN (approx. USD 0.26) while other types of registration require 5,000 PLN (approx. USD 1,315) or 50,000 PLN (approx. USD 13,158).  A PSA has a board of directors, which merges the responsibilities of a management board and a supervisory board.  The provision for PSAs will enter into force in March 2021.

New provisions of the Public Procurement Law (“PPL”) transposing provisions of EU directives coordinating the rules of public procurement came into force on October 18, 2018.  These regulations apply to proceedings concerning contracts with a value equal to or exceeding the EU thresholds.

Polish lawmakers are gradually digitalizing the services of the KRS.   The first change, which entered into force on March 15, 2018, was the obligation to file financial statements with the Repository of Financial Documents via the Ministry of Finance website.  There is also a new requirement for representatives and shareholders of companies to submit statements on their addresses.  A requirement to file financial statements exclusively in electronic form entered into force on October 1, 2018, and, beginning in March 2021, all applications will have to be filed with the commercial register electronically.  A certified e-signature may be obtained from one of the commercial e-signature providers listed on the following website: https://www.nccert.pl/ 

Agencies with which a business will need to file in order to register in the KRS: Central Statistical Office to obtain a business identification number (REGON) for civil-law partnership http://bip.stat.gov.pl/en/regon/subjects-and-data-included-in-the-register/ 

ZUS – Social Insurance Agency http://www.zus.pl/pl/pue/rejestracja 

Ministry of Finance http://www.mf.gov.pl/web/bip/wyniki-wyszukiwania/?q=business percent20registration 

Both registers are available in English and foreign companies may use them.

Poland’s Single Point of Contact site for business registration and information is:  https://www.biznes.gov.pl/en/ 

and an online guide to choose a type of business registration is: https://www.biznes.gov.pl/poradnik/-/scenariusz/REJESTRACJA_DZIALALNOSCI_GOSPODARCZEJ 

Outward Investment

The Polish Agency for Investment and Trade (PAIH), under the umbrella of the Polish Development Fund (PFR), plays a key role in promoting Polish investment abroad.  More information on PFR can be found in Section 7 and at its website: https://pfr.pl/ 

The Minister of Foreign Affairs and the Minister of Development (formerly called the Minister of Entrepreneurship and Technology) have significantly reformed Poland’s economic diplomacy.  The Polish Information and Foreign Investment Agency (PAIiIZ) was reformed in February 2017 to become the Polish Agency for Investment and Trade (PAIH).  Trade and Investment Promotion Sections in embassies and consulates around the world have been replaced by PAIH offices.  These 70 offices worldwide constitute a global network and include six in the United States.

PAIH assists entrepreneurs with administrative and legal procedures related to specific projects as well as helps develop legal solutions and find suitable locations, and reliable partners and suppliers.

The Agency implements pro-export projects such as “the Polish Tech Bridges” dedicated to expansion of innovative Polish SMEs.

Poland is a founding member of the Asian Infrastructure Investment Bank (AIIB).  Poland co-founded and actively supports the Three Seas Initiative, which seeks to improve north-south connections in road, energy, and telecom infrastructure in 12 countries on NATO’s and the EU’s eastern flank.

Under the Government Financial Support for Exports Program, the national development bank BGK (Bank Gospodarstwa Krajowego) grants foreign buyers financing for the purchase of Polish goods and services.  The program provides the following financing instruments:  credit for buyers granted through the buyers’ bank; credit for buyers granted directly from BGK; the purchase of receivables on credit from the supplier under an export contract; documentary letters of credit post-financing; the discounting of receivables from documentary letters of credit; confirmation of documentary letters of credit; and export pre-financing.  In May 2019, BGK and the Romanian development bank EximBank founded the Three Seas Fund, a commercial initiative to support the development of transport, energy and digital infrastructure in Central and Eastern Europe.  In July 2019, BGK, the European Investment Bank, and four other development banks (French Deposits and Consignments Fund, Italian Deposits and Loans Fund, the Spanish Official Credit Institute and German Credit Institute for Reconstruction), began the implementation of the “Joint Initiative on Circular Economy” (JICE), the goal of which is to eliminate waste, prevent its generation and increase the efficiency of resource management.  BGK also opened two international offices in 2019:  London and Frankfurt.

PFR TFI S.A, an entity under the umbrella of the state-owned financial group PFR, supports Polish investors planning to or already operating abroad. PFR TFI also manages the Foreign Expansion Fund (FEZ), which provides loans, on market terms, to foreign entities owned by Polish entrepreneurs.  https://www.pfrtfi.pl/  and https://pfr.pl/en/offer/foreign-expansion-fund.html 

3. Legal Regime

Transparency of the Regulatory System

The Polish Constitution contains a number of provisions related to administrative law and procedures.  It states administrative bodies have a duty to observe and comply with the law of Poland.  The Code of Administrative Procedures (CAP) states rules and principles concerning participation and involvement of citizens in processes affecting them, the giving of reasons for decisions, and forms of appeal and review.

As a member of the EU, Poland complies with EU directives by harmonizing rules or translating them into national legislation.  Rule-making and regulatory authority exists at the central, regional, and municipal levels.  Various ministries are engaged in rule-making that affects foreign business, such as pharmaceutical reimbursement at the Ministry of Health or incentives for R&D at the Ministry of Development.  Regional and municipal level governments can levy certain taxes and affect foreign investors through permitting and zoning.

Polish accounting standards do not differ significantly from international standards.  Major international accounting firms provide services in Poland.  In cases where there is no national accounting standard, the appropriate International Accounting Standard may be applied.  However, investors have complained of regulatory unpredictability and high levels of administrative red tape.  Foreign and domestic investors must comply with a variety of laws concerning taxation, labor practices, health and safety, and the environment.  Complaints about these laws, especially the tax system, center on frequent changes, lack of clarity, and strict penalties for minor errors.

Poland has improved its regulatory policy system over the last several years.  The government introduced a central online system to provide access for the general public to regulatory impact assessments (RIA) and other documents sent for consultation to selected groups such as trade unions and business.  Proposed laws and regulations are published in draft form for public comment, and ministries must conduct public consultations.  Poland follows OECD recognized good regulatory practices, but investors say the lack of regulations governing the role of stakeholders in the legislative process is a problem.  Participation in public consultations and the window for comments are often limited.

New guidelines for RIA, consultation and ex post evaluation were adopted under the Better Regulation Program in 2015, providing more detailed guidance and stronger emphasis on public consultation.  Like many countries, Poland faces challenges to fully implement its regulatory policy requirements and to ensure that RIA and consultation comments are used to improve decision making.  The OECD suggests Poland extend its online public consultation system and consider using instruments such as green papers more systematically for early-stage consultation to identify options for addressing a policy problem.  OECD considers steps taken to introduce ex post evaluation of regulations encouraging.

Bills can be submitted to the parliament for debate as “citizen’s bills” if authors collect 100,000 signatures.  NGOs and private sector associations most often take advantage of this avenue.  Parliamentary bills can also be submitted by a group of parliamentarians, a mechanism that bypasses public consultation and which both domestic and foreign investors have criticized.  Changes to the government’s rules of procedure introduced in June 2016 reduced the requirements for RIA for preparations of new legislation.

Administrative authorities are subject to oversight by courts and other bodies (e.g., the Supreme Audit Chamber – NIK), the Office of the Human Rights Ombudsman, special commissions and agencies, inspectorates, the Prosecutor and parliamentary committees.  Polish parliamentary committees utilize a distinct system to examine and instruct ministries and administrative agency heads.  Committees’ oversight of administrative matters consists of: reports on state budgets implementation and preparation of new budgets, citizens’ complaints, and reports from the NIK.  In addition, courts and prosecutors’ offices sometimes bring cases to parliament’s attention.  The Ombudsman’s institution works relatively well in Poland.  Polish citizens have a right to complain and to put forward grievances before administrative bodies.  Proposed legislation can be tracked on the Prime Minister’s webpage, https://legislacja.rcl.gov.pl/  and the parliament’s webpage: https://www.sejm.gov.pl/sejm9.nsf/proces.xsp 

Poland has consistently met or exceeded the Department of State’s minimum requirements for fiscal transparency: https://www.state.gov/e/eb/ifd/oma/fiscaltransparency/273700.htm.  Poland’s budget and information on debt obligations were widely and easily accessible to the general public, including online.  The budget was substantially complete and considered generally reliable.  NIK audited the government’s accounts and made its reports publicly available, including online.  The budget structure and classifications are complex and the Polish authorities agree more work is needed to address deficiencies in the process of budgetary planning and procedures.  State budgets encompass only part of the public finances sector.

The European Commission regularly assesses the public finance sustainability of Member States based on fiscal gap ratios.  In 2020, Poland’s public finances will be exposed to a high general government deficit, uncertainty in financial markets resulting primarily from the macroeconomic environment, the effects of the fight against the COVID-19 epidemic, and the monetary policy of the NBP and major central banks, including the European Central Bank and the U.S. Federal Reserve.

International Regulatory Considerations

Since its EU accession in May 2004, Poland has been transposing European legislation and reforming its regulations in compliance with the EU system.  Poland sometimes disagrees with EU regulations related to renewable energy and emissions due to its important domestic coal industry.

In 2018, Poland saw significant increases in wholesale electricity prices due largely to an increase in the price of coal and EU emissions permits.  The government’s initial plans of proposing a new law to protect household consumers from rising electricity prices put it at odds with the European for lack of notification of what amounted to state aid.  The Polish energy market regulator (URE) also criticized the proposed law for not reflecting the market rate for electricity and claimed the proposed law threatened URE’s independence.  In 2019, under EU State Aid rules, the European Commission approved Poland’s plan to compensate energy-intensive companies for higher electricity prices resulting from indirect emission costs under the EU Emission Trading Scheme (ETS).  Poland’s plan will cover the period 2019-2020 and will benefit companies active in Poland in sectors facing significant electricity costs and which are particularly exposed to international competition.

Poland participates in the process of creation of European norms.  There is strong encouragement for non-governmental organizations, such as environmental and consumer groups, to actively participate in European standardization.  In areas not covered by European normalization, the Polish Committee for Standardization (PKN) introduces norms identical with international norms, i.e., PN-ISO and PN-IEC.  PKN actively cooperates with international and European standards organizations and with standards bodies from other countries.  PKN has been a founding member of the International Organization for Standardization (ISO) and a member of the International Electro-technical Commission (IEC) since 1923.

PKN also cooperates with the American Society for Testing and Materials (ASTM) International and the World Trade Organization’s (WTO) Agreement on Technical Barriers to Trade (TBT).  Poland has been a member of the WTO since July 1, 1995 and was a member of GATT from October 18, 1967.  All EU member states are WTO members, as is the EU in its own right.  While the member states coordinate their position in Brussels and Geneva, the European Commission alone speaks for the EU and its members in almost all WTO affairs.  PKN runs the WTO/TBT National Information Point in order to apply the provisions of the TBT with respect to information exchange concerning national standardization.

Useful Links:

http://ec.europa.eu/growth/single-market/european-standards/harmonised-standards/ 

http://eur-lex.europa.eu/oj/direct-access.html?locale=en )

Legal System and Judicial Independence

The government has continued to implement and introduce new measures related to the judiciary that has drawn criticism from legal experts, NGOs, and international organizations.  Observers noted in particular the introduction of an extraordinary appeal mechanism in the 2017 Supreme Court Law.  The extraordinary appeal mechanism states:  final judgments issued since 1997 can be challenged and overturned in whole or in part for a three-year period starting from the day the legislation entered into force on April 3, 2018.  By the end of 2019, the Extraordinary Appeals Chamber had received 79 complaints.  The majority were submitted by the Justice Minister; nine were submitted by the Human Rights Ombudsman.  As of December 29, 2019, the Chamber had reviewed nine complaints, of which five were accepted, and four were rejected.  All five complaints which the chamber accepted regarded civil law.  Twenty-three cases were pending; the status of the remaining 47 cases was unavailable.

In April and May 2018, the Polish President signed into law amendments to the common courts law, the National Judiciary Council law, and the 2017 amendments to the Supreme Court law.  This was in response to the December 2017 European Commission rule of law recommendation and infringement procedure triggered under Article 7 of the Lisbon Treaty for what the Commission considered to be “systemic threats” to the independence of the Polish courts.  The key concerns focused on the Polish government’s ability to remove up to 40 percent of the Supreme Court’s judges and the justice minister’s power to discipline judges.  Separately, the Commission has sought redress through the European Court of Justice (ECJ).  The Polish government has countered that its reforms do not infringe judicial independence and are intended to make court operations more efficient and transparent.

On July 2, 2018, the European Commission launched an infringement procedure against Poland, two days before provisions of the revised Supreme Court law lowering the mandatory retirement age for judges went into effect (affecting 27 of the 74 Supreme Court justices at that time).  On September 24, 2018 the European Commission referred the country’s amended Supreme Court law to the ECJ, stating “the Polish law on the Supreme Court is incompatible with EU law as it undermines the principle of judicial independence, including the “irremovability” of judges.”   On October 19, 2018, the ECJ issued an interim injunction requiring the government to reinstate those judges who had been retired under the amended law.  On November 19, 2018, the government submitted legislation to automatically reappoint all justices retired under the Supreme Court law to fulfill the ECJ’s interim measures, and President Duda signed the legislation into law on December 17, 2018.  On June 24, 2019, the ECJ issued a final judgement regarding the Polish law on the Supreme Court, confirming in full the position of the Commission.

On April 3, 2019 the Commission launched an infringement procedure on the grounds that the disciplinary regime for judges undermines the judicial independence of Polish judges and does not ensure the necessary guarantees to protect judges from political control, as required by the ECJ.  On October 10, 2019 the Commission referred this case to the ECJ.  On January 14, 2020, the Commission asked the ECJ to impose interim measures on Poland, ordering it to suspend the functioning of the Disciplinary Chamber of the Supreme Court.  On April 8, 2020, the ECJ ruled that Poland must immediately suspend the application of the national provisions on the powers of the Disciplinary Chamber of the Supreme Court with regard to disciplinary cases concerning judges, confirming in full the position of the Commission.  This order applies until the Court will have rendered its final judgment in the infringement procedure.

A new law signed on December 20, 2019 amending a series of legislative acts governing the functioning of the justice system in Poland entered into force on February 14, 2020.  The law enables judges to be disciplined for public activities incompatible with the principles of the independence of the courts and the independence of judges, actions which may considerably impair the functioning of the justice system, and for actions which question the judicial appointments of other judges.  On April 29, 2020, the Commission sent a Letter of Formal Notice to Poland regarding this new law on the judiciary, the first step of infringement procedures.

The Polish legal system is code-based and prosecutorial.  The main source of the country’s law is the Constitution of 1997.  The legal system is a mix of Continental civil law (Napoleonic) and remnants of communist legal theory.  Poland accepts the obligatory jurisdiction of the European Court of Justice (ECJ), but with reservations.  In civil and commercial matters, first instance courts sit in single-judge panels, while courts handling appeals sit in three-judge panels. District Courts (Sad Rejonowy) handle the majority of disputes in the first instance.  When the value of a dispute exceeds a certain amount or the subject matter requires more expertise (such as those regarding intellectual property rights), Circuit Courts (Sad Okregowy) serve as first instance courts.  Circuit Courts also handle appeals from District Court verdicts.  Courts of Appeal (Sad Apelacyjny) handle appeals from verdicts of Circuit Courts as well as generally supervise the courts in their region.

The Polish judicial system generally upholds the sanctity of contracts.  Foreign court judgements, under the Polish Civil Procedure Code and European Community regulation, can be recognized.  However, there are many foreign court judgments which Polish courts do not accept or accept partially.  There can also be delays in the recognition of judgments of foreign courts due to an insufficient number of judges with specialized expertise.  Generally, foreign firms

are wary of the slow and over-burdened Polish court system, preferring other means to defend their rights.  Contracts involving foreign parties often include a clause specifying that disputes will be resolved in a third-country court or through offshore arbitration.  (More detail in Section 4, Dispute Settlement.)

Laws and Regulations on Foreign Direct Investment

Foreign nationals can expect to obtain impartial proceedings in legal matters.  Polish is the official language and must be used in all legal proceedings.  It is possible to obtain an interpreter.  The basic legal framework for establishing and operating companies in Poland, including companies with foreign investors, is found in the Commercial Companies Code.  The Code provides for establishment of joint-stock companies, limited liability companies, or partnerships (e.g., limited joint-stock partnerships, professional partnerships).  These corporate forms are available to foreign investors who come from an EU or European Free Trade Association (EFTA) member state or from a country that offers reciprocity to Polish enterprises, including the United States.

With few exceptions, foreign investors are guaranteed national treatment.  Companies that establish an EU subsidiary after May 1, 2004 and conduct or plan to commence business operations in Poland must observe all EU regulations.  However, in some cases they may not be able to benefit from all privileges afforded to EU companies.  Foreign investors without permanent residence and the right to work in Poland may be restricted from participating in day-to-day operations of a company.  Parties can freely determine the content of contracts within the limits of European contract law.  All parties must agree on essential terms, including the price and the subject matter of the contract.  Written agreements, although not always mandatory, may enable an investor to avoid future disputes.  Civil Code is the law applicable to contracts.

Useful websites (in English) to help navigate laws, rules, procedures and reporting requirements for foreign investors:

Competition and Anti-Trust Laws

Poland has a high level of nominal convergence with the EU on competition policy in accordance with Articles 101 and 102 of the Lisbon Treaty.  Poland’s Office of Competition and Consumer Protection (UOKiK) is well within EU norms for structure and functioning, with the exception that the Prime Minister both appoints and dismisses the head of UOKiK.  This is supposed to change to be in line with EU norms, however, as of January 2020 the Prime Minister was still exercising his right to remove and nominate UOKiK’s presidents. (EU directive 2019/1.)

The Act on Competition and Consumer Protection  was amended in mid-2019.  The most important changes, which concern geo-blocking and access to fiscal and banking secrets, came into force on September 17, 2019.  Other minor changes took effect in January 2020.  The amendments result from the need to align national law with new EU laws.

Starting in January 2020, UOKiK may intervene in cases when delays in payment are excessive.  UOKiK can take action when the sum of outstanding payments due to an entrepreneur for three subsequent months amounts to at least PLN 5 million (approx. USD 1.25 million).  In 2022, the minimum amount will decrease to PLN 2 million (approx. USD 500,000).

The President of UOKiK issues approximately 100 decisions per year regarding practices restricting competition and infringing on collective interests of consumers.  Enterprises have the right to appeal against those decisions to the court.  In the first instance, the case is examined by the Court of Competition and Consumer Protection and in the second instance, by the Appellate Court.  The decision of the Appellate Court may be challenged by way of a cassation appeal filed to the Supreme Court.  In major cases, the General Counsel to the Republic of Poland will act as the legal representative in proceedings concerning an appeal against a decision of the President of UOKiK.

All multinational companies must notify UOKiK of a proposed merger if any party to it has subsidiaries, distribution networks or permanent sales in Poland.

Examples of competition reviews can be found at:

https://www.uokik.gov.pl/news.php?news_id=15526   (battery market)

https://www.uokik.gov.pl/news.php?news_id=15987   (Agora Eurozet)

https://www.uokik.gov.pl/news.php?news_id=15941   (Nord Stream 2)

https://www.uokik.gov.pl/news.php?news_id=15685  (UPC)

https://decyzje.uokik.gov.pl/bp/dec_prez.nsf 

The President of UOKiK has the power to impose significant fines on individuals in management positions at companies that violate the prohibition of anticompetitive agreements.  The amendment to the law governing UOKiK’s operation, which entered into force on December 15, 2018, provides for a similar power to impose significant fines on the management of companies in the case of violations of consumer rights.  The maximum fine that can be imposed on a manager may amount to PLN 2 million (approx. USD 500,000) and, in the case of managers in the financial sector, up to PLN 5 million (approx. USD 1.25 million).

Expropriation and Compensation

Article 21 of the Polish Constitution states: “expropriation is admissible only for public purposes and upon equitable compensation.”  The Law on Land Management and Expropriation of Real Estate states that property may be expropriated only in accordance with statutory provisions such as construction of public works, national security considerations, or other specified cases of public interest.  The government must pay full compensation at market value for expropriated property.  Acquiring land for road construction investment and recently also for the Central Airport and the Vistula Spit projects has been liberalized and simplified to accelerate property acquisition, particularly through a special legislative act.  Most acquisitions for road construction are resolved without problems.  However, there have been a few cases in which the inability to reach agreement on remuneration has resulted in disputes.  Post is not aware of any recent expropriation actions against U.S. investors, companies, or representatives.

Dispute Settlement

ICSID Convention and New York Convention

Poland is not a party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Washington Convention).  Poland is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).

Investor-State Dispute Settlement

Poland is party to the following international agreements on dispute resolution, with the Ministry of Finance acting as the government’s representative: the 1923 Geneva Protocol on Arbitration Clauses; the 1961 Geneva European Convention on International Trade Arbitration; the 1972 Moscow Convention on Arbitration Resolution of Civil Law Disputes in Economic and Scientific Cooperation Claims under the U.S.-Poland Bilateral Investment Treaty (BIT) (with further amendments).

The United Nations Conference on Trade and Development (UNCTAD) database  for treaty-based disputes lists four cases for Poland involving a U.S. party over the last decade.  The majority of Poland’s investment disputes are with companies from other EU member states.  According to the UNCTAD database, over the last decade, there have been 17 known disputes with foreign investors.

There is no distinction in law between domestic and international arbitration.  The law only distinguishes between foreign and domestic arbitral awards for the purpose of their recognition and enforcement.  The decisions of arbitration entities are not automatically enforceable in Poland, but must be confirmed and upheld in a Polish court.  Under Polish Civil Code, local courts accept and enforce the judgments of foreign courts; in practice, however, the acceptance of foreign court decisions varies.  Investors say the timely process of energy policy consolidation has made the legal, regulatory and investment environment for the energy sector uncertain in terms of how the Polish judicial system deals with questions and disputes around energy investments by foreign investors, and in foreign investor interactions with state-owned or affiliated energy enterprises.

A Civil Procedures Code amendment in January 2016, with further amendments in July 2019, implements internationally recognized arbitration standards and creates an arbitration-friendly legal regime in Poland.  The amendment applies to arbitral proceedings initiated on or after January 1, 2016 and introduced one-instance proceedings to repeal an arbitration award (instead of two-instance proceedings).  This change encourages mediation and arbitration to solve commercial disputes and aims to strengthen expeditious procedure.  The Courts of Appeal (instead of District Courts) handle complaints.  In cases of foreign arbitral awards, the Court of Appeal is the only instance.  In certain cases, it is possible to file a cassation (or extraordinary) appeal with the Supreme Court of the Republic of Poland.  In the case of a domestic arbitral award, it will be possible to file an appeal to a different panel of the Court of Appeal.

International Commercial Arbitration and Foreign Courts

Poland does not have an arbitration law, but provisions in the Polish Code of Civil Procedures of 1964, as amended, are based to a large extent on UNCITRAL Model Law.  Under the Code of Civil Procedure, an arbitration agreement must be concluded in writing.  Commercial contracts between Polish and foreign companies often contain an arbitration clause.  Arbitration tribunals operate through the Polish Chamber of Commerce, and other sector-specific organizations.  A permanent court of arbitration also functions at the business organization Confederation Lewiatan in Warsaw and at the General Counsel to the Republic of Poland (GCRP).  GCRP took over arbitral cases from external counsels in 2017 and began representing state-owned commercial companies in litigation and arbitration matters for amounts in dispute over PLN 5 million (approx. USD 1.5 million).  The list of these entities includes major Polish state-owned enterprises in the airline, energy, banking, chemical, insurance, military, oil and rail industries as well as other entities such as museums, state-owned media and universities.

The Court of Arbitration at the Polish Chamber of Commerce in Warsaw, the biggest permanent arbitration court in Poland, operates based on arbitration rules complying with the latest international standards, implementing new provisions on expedited procedure.  In recent years, numerous efforts have been made to increase use of arbitration in Poland.  In 2019, online arbitration courts appeared on the Polish market. The first such court, the Online Arbitration Court, became active in February 2019 and Ultima Ratio, which was set up by the Association of Polish Notaries, commenced operations in April 2019.  These new institutions operate entirely online, and their founders hope to offer low-cost and expedient venues for resolving small civil and commercial claims.  Due to their recent launch, it is not yet possible to judge their success.  However, the development itself reflects the need for reliable, fast and affordable alternatives to state courts in smaller disputes.

Polish state courts generally respect the wide autonomy of arbitration courts and show little inclination to interfere with their decisions as to the merits of the case.  The arbitral awards are likely to be set aside only in rare cases.  As a rule, in post-arbitral proceedings, Polish courts do not address the merits of the cases decided by the arbitration courts.  An arbitration-friendly approach is also visible in other aspects, such as in the broad interpretation of arbitration clauses.

In mid-2018, the Polish Supreme Court introduced a new legal instrument into the Polish legal field: an extraordinary complaint.  Although this new instrument does not refer directly to arbitration proceedings, it may be applied to any procedures before Polish state courts, including post-arbitration proceedings (see Section 3 for more details).

Bankruptcy Regulations

Poland’s bankruptcy law has undergone significant change and modernization in recent years.  There is now a bankruptcy law and a separate, distinct restructuring law.  Poland ranks 25th for ease of resolving insolvency in the World Bank’s Doing Business report 2020.  Bankruptcy in Poland is criminalized if a company’s management does not file a petition to declare bankruptcy when a company becomes illiquid for an extended period of time or if a company ceases to pay its liabilities.  https://www.paih.gov.pl/polish_law/bankruptcy_law_and_restructuring_proceedings 

5. Protection of Property Rights

Real Property

Poland recognizes and enforces secured interests in property, movable and real.  The concept of a mortgage exists in Poland, and there is a recognized system of recording such secured interests. There are two types of publicly available land registers in Poland: the land and mortgage register (ksiegi wieczyste), the purpose of which is to register titles to land and encumbrances thereon; and the land and buildings register (ewidencja gruntow i budynkow), the function of which is more technical as it contains information concerning physical features of the land, class of land and its use.  Generally, real estate in Poland is registered and legal title can be identified on the basis of entries in the land and mortgage registers which are maintained by relevant district courts.  Each register is accessible to the public and excerpts are available on application, subject to a nominal fee.  The registers are available online.

Poland has a non-discriminatory legal system accessible to foreign investors that protects and facilitates acquisition and disposition of all property rights, including land, buildings, and mortgages.  However, foreigners (both individuals and entities) must obtain a permit to acquire property (See Section 1 Limits on Foreign Control and Right to Private Ownership and Establishment).  Many investors, foreign and domestic, complain the judicial system is slow in adjudicating property rights cases.  Under the Polish Civil Code, a contract to buy real property must be made in the form of a notary deed.  Foreign companies and individuals may lease real property in Poland without having to obtain a permit.

Widespread nationalization of property during and after World War II has complicated the ability to establish clear title to land in Poland, especially in major municipalities.  While the Polish government has an administrative system for reviewing claims for the restitution of communal property, former individual property owners must file and pursue claims in the Polish court system in order to receive restitution.  There is no general statute of limitations regarding the filing or litigation of private property restitution claims, but there are exceptions for specific cases.  For example, in cases involving the communist-era nationalization of Warsaw under the Bierut Decree, there were claims deadlines that have now passed, and under current law, those who did not meet the deadlines would no longer be able to make a claim for either restitution or compensation.  During 2019, Warsaw city authorities continued implementing a 2015 Law dubbed the Small Reprivatization Act.  This Law aimed to stop the problem of speculators purchasing Warsaw property claims for low values from the original owners or their heirs and then applying for a perpetual usufruct or compensation as the new legal owner.  Critics state the law might extinguish potential claims by private individuals of properties seized during World War II or the communist era, if no one comes forward to pursue a restitution claim within the time limit.  Any potential claimants who come forward within six months after publication of the affected property by the City of Warsaw will have an additional three months to establish their claim.  The city began publishing lists in 2017 and continued to do so during 2019.  The city’s website contains further information on these cases and the process to pursue a claim: http://bip.warszawa.pl/Menu_podmiotowe/biura_urzedu/SD/ogloszenia/default.htm?page=1 .

It is sometimes difficult to establish clear title to properties.  There are no comprehensive estimates of land without clear title in Poland.

The 2016 Agricultural Land Law banned for five years the sale of state-owned farmland under the administration of the National Center for Support of Agriculture (NCSA).  Long-term leases of state-owned farmland are available for farmers looking to expand their operations up to300 hectares.  Foreign investors can (and do) lease agricultural land.  The 2016 Agricultural Land Law also imposed restrictions on sales of privately-owned farmland, giving the NCSA preemptive right of purchase.

The 2016 Agricultural Land Law adversely affected tenants with long-term state-owned land leases.  According to the law, leaseholders who did not return 30 percent of the land under lease to NCSA would not be eligible to have their leases extended beyond the current terms of the contract.  Currently, over 400 entities, including U.S. companies, face the prospect of returning some currently leased land to the Polish government over the coming years.  Some of these entities appealed to the Ombudsman, who requested the Constitutional Tribunal to verify the law’s compliance with the constitution.  In June 2019, the Polish parliament amended the Agricultural Land Law to loosen land sale requirements.  The amendment increased the size of private agricultural land, from 0.3 to 1.0 hectare that could be sold without the approval of the NCSA.  The new owner is not allowed to sell the land for five years.  The 2019 amendment did not change the land lease situation for larger operators, many of whom continue to remain ineligible to have their land leases extended.  The Law on Forest Land similarly prevents Polish and foreign investors from purchasing privately-held forests and gives state-owned entities (Lasy Panstwowe) preemptive right to buy privately-held forest land.

Intellectual Property Rights

Polish intellectual property rights (IPR) law is stricter than European Commission directives require.  Poland is a member of the World Intellectual Property Organization (WIPO) and party to many of its treaties, including the Berne Convention, the Paris Convention, the Patent Cooperation Treaty, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty.  Enforcement is improving across all sectors of Poland’s IPR regime.  Physical piracy (e.g., optical discs) is not a significant problem in Poland.  However, online piracy continues to be widespread despite progress in enforcement, and a popular cyberlocker platform in Poland is included on the 2019 Notorious Markets List.  Poland does not appear in the U.S. Trade Representative’s Special 301 Report.

Polish law requires a rights holder to start the prosecution process.  In Poland, authors’ and creators’ organizations and associations track violations and share these with prosecutors.  Rights holders express concern that penalties for digital IPR infringement are not high enough to deter violators.

In March 2019, amendments to the Act on Industrial Property Law came into force which are intended to implement  EU Trademark Directive 2015/2436.  The legislation introduced, inter alia, the abandonment of the graphical representation requirement, a new mechanism for trademark protection renewals, extended licensee’s rights, as well as remedies against counterfeit goods in transit and against infringing preparatory acts.  The changes provide new tools to fight against infringement of trademark rights.

In April 2019, the EU adopted two directives on copyright, including: 2019/790 on copyright in the digital single market and 2019/789 regarding online broadcasting and re-broadcasting.  Member states are required to transpose the reforms into national legislation by June 2021.  The Ministry of Culture and National Heritage is responsible for drafting and implementing the legislation which has not yet been made available for public consultations.

In February 2020, additional amendments to Act on Industrial Property entered into force which adapt Polish standards on inventions to those of the EU so as to streamline and speed up proceedings before the Polish Patent Office.  The amendments to the Act also extend the exemption from patent and trademark renewal fees to support start-up entrepreneurs.  The legislation complies with relevant provisions of the European Patent Convention and the Patent Cooperation Treaty.

In July 2020, amendments to the Code of Civil Procedure entered into force which, among other things, creates and operationalizes specialized IPR courts.  Poland’s new specialized courts will oversee casesrelated to all types of IPR, including copyright, and trademarks, industrial property rights, and unfair competition.  New departments for IP matters will be created at the District Courts in Gdansk, Katowice, Poznan, and Warsaw, and specialized departments will be established in the Courts of Appeal in Warsaw and Katowice.  This will replace the current system in which intellectual property matters, including those relating to highly specialized issues such as patents, plant varieties, and trademarks, are examined by commercial departments of common courts.

A specialized court that was previously established within the 22nd Department of the District Court in Warsaw for cases involving EU trademarks and community designs will lose the exclusive competence to deal with those cases and will consider IP claims regarding computer programs, inventions, designs utility, topography of integrated circuits, plant varieties, and trade secrets of a technical nature (i.e., matters of advanced complexity).  In order to conduct proceedings in these cases, it will be necessary to have highly trained judges who are familiar with IPR/IT issues.  The new rules also require parties in IPR cases to be represented by professional lawyers, legal advisers, and patent attorneys.  The changes represent a positive step for the court system, further contributing to the speed and efficiency of proceedings.

Tax incentives for IPR known collectively as “IP Box” or “Innovation Box,” included in the November 2018 tax amendment, have been applicable since January 2019.  See Section 4 – Investment Incentives.

Polish customs tracks seizures of counterfeit goods but statistics for the reporting period are currently unavailable.

General information on copyright in Poland: http://www.copyright.gov.pl/pages/main-page/copyright-in-poland/general-information.php 

Polish Patent Office: http://www.uprp.pl/o-urzedzie/Lead03,14,56,1,index,pl,text/ 

Ministry of Digitalization: https://www.gov.pl/cyfryzacja/co-robimy 

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=PL 

9. Corruption

Poland has laws, regulations, and penalties aimed at combating corruption of public officials and counteracting conflicts of interest.  Anti-corruption laws extend to family members of officials and to members of political parties who are members of parliament.  There are also anti-corruption laws regulating the finances of political parties.  According to a local NGO, an increasing number of companies are implementing voluntary internal codes of ethics.  In 2019, the Transparency International (TI) index of perceived public corruption ranked Poland as the 41st (five places lower than in 2018 TI index) least corrupt among 180 countries/territories.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

The Polish Central Anti-Corruption Bureau (CBA) and national police investigate public corruption.  The Justice Ministry and the police are responsible for enforcing Poland’s anti-corruption criminal laws.  The Finance Ministry administers tax collection and is responsible for denying the tax deductibility of bribes.  Reports of alleged corruption most frequently appear in connection with government contracting and the issuance of a regulation or permit that benefits a particular company.  Allegations of corruption by customs and border guard officials, tax authorities, and local government officials show a decreasing trend.  If such corruption is proven, it is usually punished.

Overall, U.S. firms have found that maintaining policies of full compliance with the U.S. Foreign Corrupt Practices Act (FCPA) is effective in building a reputation for good corporate governance and that doing so is not an impediment to profitable operations in Poland.  Poland ratified the UN Anticorruption Convention in 2006 and the OECD Convention on Combating Bribery in 2000.  Polish law classifies the payment of a bribe to a foreign official as a criminal offense, the same as if it were a bribe to a Polish official.

At its March 2018 meeting, the OECD Working Group on Bribery urged Poland to make progress on carrying out key recommendations that remain unimplemented more than four years after its Phase 3 evaluation in June 2013.

For more information on the implementation of the OECD Anti-Bribery Convention in Poland, please visit:  http://www.oecd.org/daf/anti-bribery/poland-oecdanti-briberyconvention.htm 

Resources to Report Corruption

Centralne Biuro Antykorupcyjne (Central Anti-Corruption Bureau – CBA)
al. Ujazdowskie 9, 00-583 Warszawa
+48 800 808 808
kontakt@cba.gov.pl
www.cba.gov.pl ; link: Zglos Korupcje (report corruption)

The Public Integrity Program of the Batory Foundation, which served as a non-governmental watchdog organization, has been incorporated into a broader operational program (ForumIdei) run by the Foundation.  The Batory Foundation continues to monitor public corruption, carries out research into this area and publishes reports on various aspects of the government’s transparency.  Contact information for Batory Foundation is: batory@batory.org.pl; 22 536 02 20.

Romania

Executive Summary

Romania welcomes all forms of foreign investment.  The government provides national treatment for foreign investors and does not differentiate treatment due to source of capital.  Romania’s strategic location, membership in the European Union, relatively well-educated workforce, competitive wages, and abundant natural resources make it a desirable location for firms seeking to access European, Central Asian, and Near East markets.  U.S. investors have found opportunities in the information technology, automotive, telecommunications, energy, services, manufacturing, consumer products, and banking sectors.

The investment climate in Romania remains a mixed picture, and potential investors should undertake due diligence when considering any investment.  The European Commission’s 2020 European Semester Country Report for Romania points to persistent legislative instability, unpredictable decision-making, low institutional quality, and corruption as factors eroding investor confidence.  The report also noted that important legislation was adopted without proper stakeholder consultation and often lacked impact assessments.

The pace of economic reforms has slowed, and since January 2017, prior government efforts to undermine prosecutors and weaken judicial independence have shaken investor confidence in anti-corruption efforts.  Political rhetoric has taken an increasingly nationalist tone, with some political leaders occasionally accusing foreign companies of not paying taxes, taking advantage of workers and resources, and sponsoring anti-government protests.  On May 26, 2019, Romanians voted in favor of a rule of law referendum initiated by President Klaus Iohannis, in response to the then government’s continued weakening of the fight against corruption.  A new government with a pro-business stance was installed on November 4, 2019.  President Iohannis was reelected on November 24, 2019, providing stability and further support for rule of law and reform.

The Government of Romania’s (GOR) mandatory transfer of payroll taxes from employers to employees in January 2018 negatively affected all companies through additional administrative costs resulting from negotiation and registration of new labor contracts.  The government’s sale of minority stakes in state-owned enterprises (SOEs) in key sectors, such as energy generation and exploitation, has stalled since 2014.  The GOR has weakened enforcement of its state-owned enterprise (SOE) corporate governance code, exempting several SOEs from the code and weakening SOEs’ capability to invest through regular and exceptional dividend distributions.

Consultations with stakeholders and impact assessments are required before enactment of legislation.  However, this requirement has been unevenly followed, and public entities generally do not conduct impact assessments.  Frequent government changes have led to rapidly changing policies and priorities that serve to complicate the business climate.  Romania has made significant strides to combat corruption, but corruption remains an ongoing challenge.  Inconsistent enforcement of existing laws, including those related to the protection of intellectual property rights, also serves as a disincentive to investment.  Fiscal changes, passed through Emergency Ordinance (EO114) on December 21, 2018 without prior consultation, imposed taxes on the banking, energy, and telecommunications sectors.  The measure shocked markets, causing private sector backlash.  The Government softened the bank tax provisions in March 2019, and on January 6, 2020 the current government repealed the measures in EO114/2018.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 70 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2020 55 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 50 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 USD 4 billion http://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2018 USD 11,290 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Romania actively seeks foreign direct investment, and offers a market of around 19 million consumers, a relatively well-educated workforce at competitive wages, a strategic location, and abundant natural resources.  To date, favored areas for U.S. investment include IT and telecommunications, energy, services, manufacturing – especially in the automotive sector, consumer products, and banking.  InvestRomania is the government’s lead agency for promoting and facilitating foreign investment in Romania.  InvestRomania offers assistance and advisory services free of charge to foreign investors and international companies for project implementation and opening new offices or manufacturing facilities.

Romania’s accession to the European Union (EU) on January 1, 2007 helped solidify institutional reform.  However, legislative and regulatory unpredictability as well as weak public administration continue to negatively impact the investment climate.  As in any foreign country, prospective U.S. investors should exercise careful due diligence, including consultation with competent legal counsel, when considering an investment in Romania.  Governments in Romania have repeatedly allowed political interests or budgetary imperatives to supersede accepted business practices in ways harmful to investor interests.

The energy sector has suffered from recent changes.  In 2018, offshore natural gas companies benefited from a streamlined permitting process but were hit with a windfall profit tax that previously applied only to onshore gas production.  Additionally, in February 2018, legislation changed the reference price for natural gas royalties from the Romanian market price to the Vienna Central European Gas Hub (CEGH) price, resulting in a significant increase in royalties.  The GOR has set July 1, 2020 as the deadline for natural gas market liberalization and January 1, 2021 as the deadline for electricity market liberalization.

Investments involving public authorities can be more complicated than investments or joint ventures with private Romanian companies.  Large deals involving the government – particularly public-private partnerships and privatizations of key state-owned enterprises (SOE) – can be stymied by vested political and economic interests or bogged down due to a lack of coordination between government ministries.

The government has repeatedly reviewed Public-Private Partnership (PPP) legislation, and there are no active PPP projects under implementation to date.  In December 2017, the GOR shifted the burden of mandatory payroll deductions for pensions, healthcare, and income taxes from employers to employees.  To avoid reductions in employee net pay and retain labor in a tight market, many companies increased salaries to offset employee losses.  Other companies, wary of further possible changes, offered monthly bonuses rather than formally amending employee contracts.

The government and foreign investors have ongoing disputes over tax matters such as the “claw back tax” on pharmaceuticals, which increased from 19 percent in Q4 2017 to 28 percent in Q4 2019.  A presidential decree capping the tax at its current levels was issued in March 2020 due to concerns that further increases would impact COVID-19 medication.  Additionally, Parliament passed concurrent legislation in April 2020 that, pending a presidential signature, would create classes of medication that are taxed at separate levels:  15% for medicine produced in Romania, 20% for generics, and 25% for innovative drugs.  Pharmaceutical companies pay the claw back tax on all sales of drugs reimbursed through the public health system.  The Ministry of Health (MOH) calculates the tax to recover the cost for reimbursed drug sales in the previous quarter that exceed its budget.  Since implementation in 2009, the pharmaceutical industry has suggested numerous solutions to increase predictability and transparency in the National Health Insurance House’s computations.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities are free to establish and own business enterprises, and to engage in all forms of remunerative activity.  Romanian legislation and regulation provide national treatment for foreign investors, guarantee free access to domestic markets, and allow foreign investors to participate in privatizations.  There is no limit on foreign participation in commercial enterprises.  Foreign investors are entitled to establish wholly foreign-owned enterprises in Romania (although joint ventures are more typical), and to convert and repatriate 100 percent of after-tax profits.

Romania has taken established legal parameters to resolve contract disputes expeditiously.  Mergers and acquisitions are subject to review by the Competition Council.  According to the Competition Law, the Competition Council notifies Romania’s Supreme Defense Council regarding any merger or acquisition of stocks or assets which could impact national security.  The Supreme Defense Council then reviews these referred mergers and acquisitions for potential threats to national security.  To date, the Supreme Defense Council has not blocked any merger or acquisition.  The Romanian capital account was fully liberalized in 2006, prior to gaining EU membership in 2007.  Foreign firms are allowed to participate in the management and administration of the investment, as well as to assign their contractual obligations and rights to other Romanian or foreign investors.

Other Investment Policy Reviews

Romania has not undergone any third-party investment policy reviews through multilateral organizations in over ten years.  The Heritage Foundation’s 2020 Economic Freedom Report indicates recognition of secured interests in private property, but that the property registry is inadequate and impedes investment.  The Report also notes that, for Romania to make the leap into the mostly free economic freedom category, the government must repair the weakest link in the country’s economic freedom chain: the low integrity of the government and its ineffective fight against corruption.  Inconsistency and a lack of predictability in the jurisprudence of the courts and the interpretation of the laws remain major concerns.  High levels of corruption, bribery, and abuse of power remain problems.  Legislative instability, unpredictable decision-making, and the low quality of institutions create an uphill battle for business owners.  Labor force participation is among the lowest in the EU and the labor market is heavily regulated.

According to the World Bank, economic growth rates have increased, but the benefits have not been felt by all Romanians.  Progress on implementing reforms and improving the business environment has been uneven.  The World Bank’s 2020 Doing Business Report and Doing Business in the European Union Report indicate that Romania ranks below the EU average in the ease of starting a business.

Business Facilitation

The National Trade Registry has an online service available in Romanian at https://portal.onrc.ro/ONRCPortalWeb/ONRCPortal.portal .  Romania has a foreign trade department and an investment promotion department within the Ministry of Economy, Energy, and Business Climate.  InvestRomania is the government’s lead agency for promoting and facilitating foreign investment in Romania.  InvestRomania offers assistance and advisory services free of charge to foreign investors and international companies for project implementation and opening new offices or manufacturing facilities.  More information is available at http://www.investromania.gov.ro/web/ .

According to the World Bank, it takes six procedures and 20 days to establish a foreign-owned limited liability company (LLC) in Romania, compared to the regional average for Europe and Central Asia of 5.2 procedures and 11.9 days.  In addition to the procedures required of a domestic company, a foreign parent company establishing a subsidiary in Romania must authenticate and translate its documents abroad.  Foreign companies do not need to seek an investment approval.  The Trade Registry judge must hold a public hearing on the company’s application for registration within five days of submission of the required documentation.  The registration documents can be submitted, and the status of the registration request monitored online.

Companies in Romania are free to open and maintain bank accounts in any foreign currency, although, in practice, Romanian banks offer services only in Romanian lei (RON) and certain hard currencies (Euros and U.S. dollars).  The minimum capital requirement for domestic and foreign LLCs is RON 200 (USD 47).  Areas for improvement include making all registration documents available to download online in English as currently only a portion are available online, and they are only in Romanian.

Romania defines microenterprises as having less than nine employees, small enterprises as having less than 50 employees, and medium-sized enterprises as having less than 250 employees.  Regardless of ownership, microenterprises and SMEs enjoy “de minimis” and other state aid schemes from EU funds or from the state budget.  Business facilitation mechanisms provide for equitable treatment of women in the economy.

Outward Investment

There are no restrictions or incentives on outward investment.

3. Legal Regime

Transparency of the Regulatory System

Romanian law requires consultations with stakeholders, including the private sector, and a 30-day comment period on legislation or regulation affecting the business environment (the “Sunshine Law”).  Some draft pieces of legislation pending with the government are available in Romanian at http://www.sgg.ro/acte-normative/ .  Proposed items for cabinet meetings are not always publicized in advance or in full.  As a general rule, the agenda of cabinet meetings should include links to the draft pieces of legislation (government decisions, ordinances, emergency ordinances, or memoranda) slated for government decision, but this is not always the case.  Legislation pending with the parliament is available at http://www.cdep.ro/pls/proiecte/upl_pck.home for the Chamber of Deputies and at https://www.senat.ro/legis/lista.aspx  for the Senate.  The Chamber of Deputies is the decision-making body for economic legislation.  Regulatory impact assessments are often missing, and Romanian authorities do not publish the comments they receive as part of the public consultation process.

Foreign investors point to the excessive time required to secure necessary zoning permits, environmental approvals, property titles, licenses, and utility hook-ups.

Public comments received by regulators are not made public.  The Sunshine Law (Law 52/2003 on Transparency in Public Administration) requires public authorities to allow the public to comment on draft legislation and sets the general timeframe for stakeholders to provide input.  However, if the public authority does not follow the Sunshine Law’s public consultation timelines, no penalty or sanction applies.  In some cases, public authorities have set deadlines much shorter than the standards set forth in the law.

International Regulatory Considerations

As an EU member state, Romanian legislation is largely driven by the EU acquis, the body of EU legislation.  EC regulations are directly applicable, while implementation of directives at the national level is done through the national legislation.  Romania’s regulatory system incorporates European standards.  Romania has been a World Trade Organization (WTO) member since January 1995 and a member of the General Agreement on Tariffs and Trade (GATT) since November 1971.  Romania is a member of the EU since 2007.  Technical regulation notifications submitted by the EU are valid for all Member States.  The EU signed the Trade Facilitation Agreement (TFA) in October 2015.  Romania has implemented all TFA requirements.

Legal System and Judicial Independence

Romania recognizes property and contractual rights, but enforcement through the judicial process can be lengthy, costly, and difficult.  Foreign companies engaged in trade or investment in Romania often express concern about the Romanian courts’ lack of expertise in commercial issues.  There are no specialized commercial courts, but there are specialized civil courts.  Judges generally have limited experience in the functioning of a market economy, international business methods, intellectual property rights, or the application of Romanian commercial and competition laws.  As stipulated in the Constitution, the judicial system is independent from the executive branch and generally considered procedurally competent, fair, and reliable.  Affected parties can challenge regulations and enforcement actions in court.  Such challenges are adjudicated in the national court system.

Inconsistency and a lack of predictability in the jurisprudence of the courts or in the interpretation of the laws remains a major concern for foreign and domestic investors and for wider society.  Even when court judgments are favorable, enforcement of judgments is inconsistent and can lead to lengthy appeals.  Failure to implement court orders or cases where the public administration unjustifiably challenges court decisions constitute obstacles to the binding nature of court decisions.

Mediation as a tool to resolve disputes is gradually becoming more common in Romania, and a certifying body, the Mediation Council, sets standards and practices.  The professional association, the Union of Mediation Centers in Romania, is the umbrella organization for mediators throughout the county.  Court-sanctioned and private mediation is available at recognized mediation centers in every county seat.

There is no legal mechanism for court-ordered mediation in Romania, but judges can encourage litigants to use mediation to resolve their cases.  If litigants opt for mediation, they must present their proposed resolution to the judge upon completion of the mediation process.  The judge must then approve the agreement.

Laws and Regulations on Foreign Direct Investment

Romania became a member of the European Union on January 1, 2007.  The country has worked assiduously to create an EU-compatible legal framework consistent with a market economy and investment promotion.  At the same time, implementation of these laws and regulations frequently lags or is inconsistent, and lack of legislative predictability undermines Romania’s appeal as an investment destination.

Romania’s legal framework for foreign investment is encompassed within a substantial body of law largely enacted in the late 1990s.  It is subject to frequent revision.  Major changes to the Civil Code were enacted in October 2011 including replacing the Commercial Code, consolidating provisions applicable to companies and contracts into a single piece of legislation, and harmonizing Romanian legislation with international practices.  The Civil Procedure Code, which provides detailed procedural guidance for implementing the new Civil Code, came into force in February 2013.  Fiscal legislation is revised frequently, often without scientific or data-driven assessment of the impact the changes may have on the economy.

Given the state of flux of legal developments, investors are strongly encouraged to engage local counsel to navigate the various laws, decrees, and regulations, as several pieces of investor-relevant legislation have been challenged in both local courts and the Constitutional Court.  There have been few hostile takeover attempts reported in Romania.  Romanian law has not focused on limiting potential mergers or acquisitions.  There are no Romanian laws prohibiting or restricting private firms’ free association with foreign investors.

Competition and Anti-Trust Laws

Romania has extensively revised its competition legislation, bringing it closer to the EU Acquis Communautaire and best corporate practices.  A new law on unfair competition came into effect in August 2014.  Companies with a market share below 40 percent are no longer considered to have a dominant market position, thus avoiding a full investigation by the Romanian Competition Council (RCC) of new agreements, saving considerable time and money for all parties involved.  Resale price maintenance and market and client sharing are still prohibited, regardless of the size of either party’s market share.  The authorization fee for mergers or takeovers ranges between EUR 10,000 (USD 10,858) and EUR 50,000 (USD 54,291).  The Fiscal Procedure Code requires companies that challenge an RCC ruling to front a deposit while awaiting a court decision on the merits of the complaint.

Romania’s Public Procurement Directives outline general procurements of goods and equipment, utilities procurement (“sectorial procurement”), works and services concessions, and remedies and appeals.  An extensive body of secondary and tertiary legislation accompanies the four laws and has been subject to repeated revisions.  Separate legislation governs defense and security procurements.  In a positive move, this new body of legislation moved away from the previous approach of using lowest price as the only public procurement selection criterion.  Under the new laws, an authority can use price, cost, quality-price ratio, or quality-cost ratio.  The new laws also allow bidders to provide a simple form (the European Single Procurement Document) to participate in the award procedures.  Only the winner must later submit full documentation.

The public procurement laws stipulate that challenges regarding procedure or an award can be filed with the National Complaint Council (NCC) or the courts.  Disputes regarding execution, amendment, or termination of public procurement contracts can be subject to arbitration.  The new laws also stipulate that a bidder has to notify the contracting authority before challenging either the award or procedure.  Not fulfilling this notification requirement results in the NCC or court rejecting the challenge.

The EC’s 2020 European Semester Country Report for Romania notes that despite improved implementation, public procurement remains inefficient.  According to the report, 97% of businesses think corruption is widespread in Romania, and 87% say it is widespread in public procurement managed by national authorities.

Expropriation and Compensation

The law on direct investment includes a guarantee against nationalization and expropriation or other equivalent actions.  The law allows investors to select the court or arbitration body of their choice to settle disputes.  Several cases involving investment property nationalized during the Communist era remain unresolved.  In doing due diligence, prospective investors should ensure that a thorough title search is done to ensure there are no pending restitution claims against the land or assets.

Dispute Settlement

ICSID Convention and New York Convention

Romania is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.  Romania is also a party to the European Convention on International Commercial Arbitration concluded in Geneva in 1961 and is a member of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID).  Romania’s 1975 Decree 62 provides for legal enforcement of awards under the ICSID Convention.

Investor-State Dispute Settlement

Romania is a signatory to the New York Convention, the European Convention on International Commercial Arbitration (Geneva), and the Settlement of Investment Disputes between States and Nationals of Other States (ICSID).  There have been 15 ICSID cases in total against Romania.  Three of them involved U.S. investors.  The arbitral tribunal ruled in favor of Romania in two of them.  Six investor-state arbitration cases against Romania are currently pending with the International Center for Settlement of Investment Disputes (ICSID).  Local courts recognize and enforce foreign arbitral awards against the government.  There is no history of extrajudicial action against investors.

International Commercial Arbitration and Foreign Courts

Romania increasingly recognizes the importance of investor-state dispute settlement and has provided assurances that the rule of law will be enforced.  Many agreements involving international companies and Romanian counterparts provide for the resolution of disputes through third-party arbitration.  Local courts recognize and enforce foreign arbitral awards and judgments of foreign courts.  There are no statistics on the percentage of cases in which Romanian courts ruled against state-owned enterprises (SOEs).

Romanian law and practice recognize applications to other internationally known arbitration institutions, such as the International Chamber of Commerce (ICC) Paris Court of Arbitration and the United Nations Commission on International Trade Law (UNCITRAL).  Romania has an International Commerce Arbitration Court administered by the Chamber of Commerce and Industry of Romania.  Additionally, in November 2016, the American Chamber of Commerce in Romania (AmCham Romania) established the Bucharest International Arbitration Court (BIAC).  This new arbitration center focuses on business and commercial disputes involving foreign investors and multinationals active in Romania.

According to the World Bank 2020 Doing Business Report, it takes on average 512 days to enforce a contract, from the moment the plaintiff files the lawsuit until actual payment.  Associated costs can total around 27 percent of the claim.  Arbitration awards are enforceable through Romanian courts under circumstances similar to those in other Western countries, although legal proceedings can be protracted.

Bankruptcy Regulations

Romania’s bankruptcy law contains provisions for liquidation and reorganization that are generally consistent with Western legal standards.  These laws usually emphasize enterprise restructuring and job preservation.  To mitigate the time and financial cost of bankruptcies, Romanian legislation provides for administrative liquidation as an alternative to bankruptcy.  However, investors and creditors have complained that liquidators sometimes lack the incentive to expedite liquidation proceedings and that, in some cases, their decisions have served vested outside interests.  Both state-owned and private companies tend to opt for judicial reorganization to avoid bankruptcy.

In December 2009, the debt settlement mechanism Company Voluntary Agreements (CVAs) was introduced as a means for creditors and debtors to establish partial debt service schedules without resorting to bankruptcy proceedings.  The global economic crisis did, however, prompt Romania to shorten insolvency proceedings in 2011.

According to the World Bank’s Doing Business Report, resolving insolvency in Romania takes 3.3 years on average, compared to 2.3 years in Europe and Central Asia, and costs 10.5 percent of the debtor’s estate, with the most likely outcome being a piecemeal sale of the company.  The average recovery rate is 34.4 cents on the dollar.  Globally, Romania stands at 56 in the ranking of 190 economies on the ease of resolving insolvency.

5. Protection of Property Rights

Real Property

The Romanian Constitution, adopted in December 1991 and revised in 2003, guarantees the right to ownership of private property.  Mineral and airspace rights, and similar rights, are excluded from private ownership.  Under the revised Constitution, foreign citizens can gain land ownership through inheritance.  With EU accession, citizens of EU member states can own land in Romania, subject to reciprocity in their home country.

Companies owning foreign capital may acquire land or property needed to fulfill or develop company goals.  If the company is dissolved or liquidated, the land must be sold within one year of closure and may only be sold to a buyer(s) with the legal right to purchase such assets.  Investors can purchase shares in agricultural companies that lease land in the public domain from the State Land Agency.

The 2006 legislation that regulates the establishment of specialized mortgage banks also makes possible a secondary mortgage market by regulating mortgage bond issuance mechanisms.  Commercial banks, specialized mortgage banks, and non-bank mortgage credit institutions offer mortgage loans.  Romania’s mortgage market is now almost entirely private.  The state-owned national savings bank (CEC Bank), also offers mortgage loans.  Since 2000, the Electronic Archives of Security Interests in Movable Property (AEGRM) has overseen the filing of transactions regarding mortgages, assimilated operations, or other collateral provided by the law as well as their advertising.  Most urban land has clear title, and the National Cadaster Agency (NCA) is slowly working to identify property owners and register land titles.  According to the National Cadaster Plan, 2023 is the deadline for full registration of lands and buildings in the registry.  According to NCA data, 1.9 million hectares of land and 37.7% of the estimated real estate assets (buildings) were registered in the cadaster registry as of March 2020.

Romania has made marginal improvement in implementing digital records of real estate assets, including land.  The 2020 World Bank Doing Business Report ranks Romania 46 for the ease of registering property.  The cadaster property registry is far from complete, and the lack of accurate and complete information for land ownership continues to be a challenge for private investors ‎and SOEs alike.

Intellectual Property Rights

Romania remains on the Watch List of the U.S. Trade Representative’s Special 301 Report in 2020.  Online piracy and the use of unlicensed software continue to present challenges for intellectual property-intensive industries.  While the enforcement of intellectual property rights (IPR) lacks priority status at the policy level, law enforcement authorities, including prosecutors and police officers, and IP-intensive industry cooperate at the working-level.  Low penalties for IPR violations impede investigations and do not offer any meaningful deterrent to further IPR crimes.  This has led to innovative approaches to prosecuting IPR crimes within this constrained legal and fiscal environment: to increase the odds of IPR cases advancing in court, law enforcement authorities, when appropriate, are bundling related charges of fraud, tax evasion, embezzlement, and organized crime activity alongside IPR violations.  Not only has this increased the odds of IPR cases going to court, it also strengthens the evidence of “social harm” stemming from IPR violations as lack of social harm was often cited as a reason for dismissing IPR cases in the past.

Romania is a signatory to international conventions concerning IPR, including the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), and has enacted legislation protecting patents, trademarks, and copyrights.  Romania has signed the Internet Convention to protect online authorship.  In January 2020, Romania passed a law to enhance the transparency of collective rights management of copyrights.  While Romania has the legal framework to protect IPR, enforcement remains weak and ineffective, especially in the area of internet piracy.  Notorious physical markets for pirated goods have largely been eliminated, but unlicensed use of software and online hosting services for pirated content remain prevalent.  Several content hosting services reportedly located in Romania have appeared in stakeholder nominations for the Notorious Markets Report.  Romania has passed broad IPR protection enforcement provisions as required by the WTO yet judicial enforcement remains lax.

Romania is both a transit and destination country for counterfeit goods.  Customs officers can seize counterfeit products ex-officio and destroy them upon inspection and declaration by the rights holder.  The government is responsible for paying for the storage and destruction of the counterfeit goods.  The National Customs Directorate reported the seizure of 6.11 million pieces of counterfeited goods in 2019, compared to 1.25 million pieces of counterfeited goods in 2018, 1.55 million pieces in 2017, 1.52 million pieces in 2016, and 6.17 million pieces in 2015.  Customs authorities said the increase reflected more rigorous information sharing between EU customs authorities in line with EU Regulation 608/2013 regarding counterfeit seizures.  Additionally, the Customs Directorate noted closer trans-border cooperation under the EC’s Anti-Fraud Office.  Matches, ball bearings, cigarettes, cosmetics, clothing, toys, pens, and tools accounted for most of the items seized.  The Customs Directorate did not report any seizures of counterfeit medicines for the third consecutive year.  Authorities seized increasing quantities of cigarettes, ball bearings, clothing, belts, perfumes and cosmetics, and car accessories.  Seized quantities of condoms, handbags, footwear, and mobile phone accessories significantly dropped.  According to both the National Customs Directorate and the national police, the vast majority of counterfeit goods seized in Romania originate in China.

Patents

Romania is a party to the World Intellectual Property Organization (WIPO) Patent Cooperation Treaty and the Paris Convention .  Romanian patent legislation generally meets international standards with foreign investors accorded equal treatment with Romanian citizens under the law.  Patents are valid for 20 years.  Romania has been a party to the European Patent Convention since 2002.  Patent applications can be filed online.  Since 2014, Romania has also enforced a distinct law regulating employee inventions.  The right to file a patent belongs to the employer for up to two years following the departure of the employee.

Trademarks

Romania is party to the Madrid Agreement, the Singapore Treaty, and the Trademark Law Treaty.  In 1998, Romania passed a trademark and geographical indications law, which was amended in 2010 to make it fully consistent with equivalent EU legislation at that time.  The EU has since adopted a new Trademark Directive (EU Directive 2436/2015) that was to be implemented by all EU member states by January 2019.  Romania is the single EU member state that has not yet implemented this legislation.  Trademark registrations can be filed online and are valid for ten years from the date of application and renewable for similar periods.

Copyrights

Romania is a member of the Berne Convention, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty.  The Romanian Copyright Office (ORDA) was established in 1996 and promotes and monitors copyright legislation.  The General Prosecutor’s Office (GPO) provides national coordination of IPR enforcement, but copyright law enforcement remains a low priority for Romanian prosecutors and judges.  Many magistrates still tend to view copyright piracy as a “victimless crime” and this attitude has resulted in weak enforcement of copyright law.  Due to the popularity of downloading pirated content, copyright infringement of music and film is widespread throughout Romania.

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/.

9. Corruption

Romania’s fight against high- and medium-level corruption, a model in Southeastern Europe over the past decade suffered significant setbacks between 2016 and late 2019 due to a concerted campaign under the previous government to weaken anti-corruption efforts, the criminal and judicial legislative framework, and judicial independence.  Judicial institutions, NGOs, the EU, and NATO allied governments have all raised concerns about legislative initiatives that furthered this trend in that time period.  In Transparency International’s 2019 Corruption Perceptions Index, Romania’s score fell from 47 in 2018 to 44 out of 100.  This is among the lowest ranking of EU member states, tying with Hungary and ranking one position above Bulgaria.  The current government has begun rolling back the negative actions of the prior government, but this effort will take some time to have full effect.

Domestic and internal rule-of-law observers and law enforcement criticized the wide range of amendments that the former government introduced to the criminal and criminal procedure codes as weakening the investigative toolkits, including in fighting corruption between 2016 and 2019.  In July 2019, the Constitutional Court found these changes unconstitutional, and the current government plans to revise these codes.

The European Commission (EC) under the Cooperation and Verification Mechanism (CVM), and the Council of Europe’s (COE) Group of States Against Corruption (GRECO) prepared 2019 reports prior to the current National Liberal Party (PNL) government taking power in November 2019.  The October 2019 report, which covered actions taken through June 2019, confirmed the backtracking from the progress made in previous years and set out in the November 2018 report.  The report also emphasized that “The key institutions of Romania need to collectively demonstrate a strong commitment to judicial independence and the fight against corruption as indispensable cornerstones, and to ensure the capacity of national safeguards and checks and balances to act.”  GRECO’s July 2019 Interim Compliance Report warned that statutes enacted through emergency ordinances, or with insufficient transparency and public consultation, will weaken judicial independence.  A June 2019 Venice Commission report was also highly critical of the use of Emergency Ordinances.  The Constitutional Court found most of those changes unconstitutional.  A May 2019 non-binding referendum bans the use of Emergency Ordinances for issues related to the justice sector.

After a political and media campaign against the National Anti-Corruption Directorate (DNA) resulted in the dismissal of the Chief Prosecutor of the DNA in 2018, the position remained vacant until a new government took power in November 2019.  The government filled the position in March 2020.  Meanwhile the prosecutor’s office set up by the previous government to investigate and prosecute judges and prosecutors, which appeared to only be undertaking politically motivated cases, continues to operate.  The current government’s efforts to disband or reform it stalled during the COVID-19 crisis.  Successful court challenges of the High Court of Cassation and Justice’s procedures triggered the review of numerous high-level corruption cases.  Both the national cabinet and Parliament adopted codes of conduct, yet their overly general provisions have so far rendered them inconsequential.  Conflicts of interest, respect for standards of ethical conduct, and integrity in public office in general remained a concern for all three branches of government.  Individual executive agencies enforced sanctions slowly, and agencies’ own inspection bodies were generally inactive.

In June 2019, the previous government adopted a sizable Administrative Code by emergency ordinance.  The Code weakened the authority of the National Civil Service Agency to oversee civil service by merit-based selection, lowered the voting requirements for transferring management of properties by local councils, and limited local elected officials’ legal liability for official acts by shifting it to civil servants.  Implementation of the 2016-2020 national anticorruption strategy, which the previous government adopted in 2016, has been slow, especially with regard to prevention efforts.  The strategy focused on strengthening administrative review and transparency within public agencies, prevention of corruption, increased and improved financial disclosure, conflict of interest oversight, more aggressive investigation of money laundering, and passage of legislation to allow for more effective asset recovery.  The strategy includes education in civics and ethics for civil servants, a requirement for peer reviews of state institutions, stepped-up measures to strengthen integrity in the business environment, a significant decrease in public procurement fraud, and an increased role for ethics advisors and whistle-blowers.  There has been little action in these areas, especially on the prevention component.  Absent political support from the top, the new National Agency for Managing Seized Assets (ANABI) has only made limited progress.

Romania implemented the revised Public Procurement Directives with the passage in 2016 of new laws to improve and make public procurement more transparent.  The National Agency for Public Procurement has general oversight over procurements and can draft legislation, but procurement decisions remain with the procuring entities.  State entities, as well as public and private beneficiaries of EU funds, are required by law to follow public procurement legislation and use the e-procurement system.  Sectoral procurements, including private companies in energy and transportation, also have to follow the public procurement laws and tender via the e-procurement website.  The February 2020 EU Country Report for Romania points out that public-procurement remains inefficient.

In October 2016, the “Prevent” IT system, an initiative sponsored by the National Integrity Agency for ex-ante check of conflicts of interests in public procurement, was signed into law.  The mechanism aims to avoid conflicts of interest by automatically detecting conflict of interests in public procurement before the selection and contract award procedure.

The laws extend to politically exposed persons yet at the same time, politicians frequently criticize magistrates in the media and judicial decisions are often treated with a lack of respect.  Laws prohibit bribery, both domestically and for Romanian companies doing business abroad.  The judiciary remains paper-based and inefficient, and Romania loses a number of cases each year in the European Court of Human Rights (ECHR) due to excessive trial length.  Asset forfeiture laws exist, but a functioning regime remains under development.  Fully 80 percent of cases in the court system are property related.

While private joint stock companies use internal controls, ethics, and compliance programs to detect and prevent bribery, since 2017 the government has rolled back corporate governance rules for state-owned enterprises and has repeatedly resorted to profit and reserves distribution in dividends to bolster the budget.  U.S. investors have complained of both government and business corruption in Romania, with the customs service, municipal officials, and local financial authorities most frequently named.  According to the EC’s 2020 European Semester Country Report for Romania, since 2013, the share of companies that perceive corruption as a problem increased in Romania by 23 percentage points, the largest increase in the EU.  This result stands in stark contrast with the EU average, which continued to decrease (now at 37%).  Overall, 97% of businesses think that corruption is widespread in Romania, and 87% say it is widespread in public procurement managed by national authorities.  On a more positive note, 50% of respondents think that those engaged in corruption would be caught by police, and 43% think that those caught for bribing a senior official receive appropriate sanctions.  These results are both higher than the EU average.

Romania is a member of the Southeast European Law Enforcement Center (SELEC).  NGOs enjoy the same legal protections as any other organization, but NGOs involved in investigating corruption receive no additional protections.  Recent regulations have increased costs and administrative burdens for NGOs and reduced the pool of potential donors.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Romania is member of the UN Anticorruption Convention and the Council of Europe’s Group of States Against Corruption (GRECO).  Romania is not a member of the OECD Anti-Bribery Convention.

Romania expressed interest to join the new anti-corruption working group of the Open Government Partnership initiative.

Resources to Report Corruption

Contact at government agency responsible for combating corruption:

ORGANIZATION: National Anticorruption Directorate (DNA)
ADDRESS: Str. Stirbei Voda nr. 79-81, Bucuresti
TELEPHONE NUMBER: +40 21 312 73 99
EMAIL ADDRESS: anticoruptie@pna.ro
WEBSITE: http://www.pna.ro/sesizare.xhtml?jftfdi=&jffi=sesizare 

Contact at “watchdog” organizations:

ORGANIZATION: Expert Forum
ADDRESS:Strada Semilunei, apt 1, Sector 2, Bucuresti,
TELEPHONE NUMBER: +40 21 211 7400
EMAIL ADDRESS: office@expertforum.ro

ORGANIZATION: Freedom House Romania
ADDRESS: Bd. Ferdinand 125, Bucuresti
TELEPHONE NUMBER: +4021 253 28 38
EMAIL ADDRESS: guseth@freedomhouse.ro

ORGANIZATION: Funky Citizens
ADDRESS: Colivia, Pache Protopopescu 9
TELEPHONE NUMBER: +40 0723 627 448
EMAIL ADDRESS: elena@funkycitizens.org

Serbia

Executive Summary

Serbia’s investment climate has been modestly improving in recent years, driven by macroeconomic reforms, greater financial stability, improved fiscal discipline, and a European Union (EU) accession process that provides impetus for legal changes that improve the business environment. The government successfully completed a three-year Stand-by Arrangement with the International Monetary Fund (IMF), with the government exceeding all its fiscal targets in 2018. The government signed a new 30-month Policy Coordination Instrument with the IMF in mid-2018. Serbia improved four places in 2020 on the World Bank’s Doing Business Index and is now ranked 44th globally in ease of doing business. Attracting foreign investment remains an important priority for the Serbian government. U.S. investors in Serbia are generally positive, highlighting the country’s strategic location, well-educated and affordable labor force, excellent English language skills, investment incentives, and free-trade arrangements with key markets, particularly the EU. Generally, U.S. investors enjoy a level playing field with their Serbian and foreign competitors. The U.S. Embassy in Belgrade often assists investors when issues arise, and Serbian leaders are responsive to our concerns.

Despite notable progress in Serbia, challenges remain, particularly with regard to bureaucratic delays and corruption. Other risks to the investment climate include unresolved loss-making state-owned enterprises (SOEs), a large informal economy, and an inefficient judiciary. Political influence on the decisions of nominally independent regulatory agencies is also a concern.

Serbian companies faced temporary export restrictions on certain agricultural products and on all medicines in March and April 2020 due to the COVID-19 pandemic. The Serbian government lifted the export restriction on medicines on April 24 and lifted restrictions on all other affected goods on May 7.

The Serbian government has identified economic growth and job creation as its top economic priorities and has committed itself to resolving several long-standing issues related to the country’s slow transition to market-driven capitalism. On the legislative front, the government has passed significant reforms to labor law, construction permitting, inspections, public procurement, and privatization that have helped improve the business environment. Both companies and officials have noted that the adoption of reforms has sometimes outpaced thorough implementation of these reforms. Digitizing certain functions (e.g., construction permitting, tax administration, e-signatures, and removing the previously ubiquitous requirement for ink stamps) has not yet brought a dramatic improvement in processing times and may not be consistently implemented.

The government is slowly making progress on resolving the fate of troubled SOEs. Where possible, this has been achieved through bankruptcy or privatization actions. For example, bankruptcy protections were removed for 17 SOEs in May 2016, and the situation of most of these companies has been resolved. The government is also slowly decreasing Serbia’s bloated public-sector workforce, mainly through attrition and hiring freezes, which continued through 2018.

If the government delivers on promised reforms during its EU accession process, business opportunities could continue to grow in the coming years. Sectors that stand to benefit include agriculture and agro-processing, solid waste management, sewage, environmental protection, information and communications technology (ICT), renewable energy, health care, mining, and manufacturing.

Women in Serbia generally enjoy equal treatment in business, and the government offers various programs to support women’s businesses. One program that started in 2017 provides approximately USD 1 million from the Serbian government budget to support women’s innovative entrepreneurship in the form of small grants.

Investors should monitor the government’s implementation of reforms as well as the government’s changing investment incentive programs.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 91 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2020 44 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 57 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 USD 145 million http://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2018 USD 7,234 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Serbia is open to FDI, and attracting FDI is a priority for the government. Even during its socialist past, Serbia prioritized international commerce and attracted a sizeable international business community. This trend continues, and the Law on Investments extends national treatment to and eliminates discriminatory practices against foreign investors. The law also allows the repatriation of profits and dividends, provides guarantees against expropriation, allows customs duty waivers for equipment imported as capital in kind, and enables foreign investors to qualify for government incentives.

The Government’s investment promotion authority is the Development Agency of Serbia (Razvojna agencija Srbije – RAS: http://ras.gov.rs/ ). RAS offers a wide range of services, including support of direct investments, export promotion, and coordinating the implementation of investment projects. RAS serves as a one-stop-shop for both domestic and international companies. The government maintains a dialogue with businesses through associations such as the Serbian Chamber of Commerce, American Chamber of Commerce in Serbia, Foreign Investors’ Council (FIC), and Serbian Association of Managers (SAM).

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities have the right to establish and own businesses, and to engage in all forms of remunerative activity.

For some business activities, licenses are required, e.g., financial institutions must be licensed by the National Bank of Serbia prior to registration. Licensing limitations apply to both domestic and foreign companies active in finance, energy, mining, pharmaceuticals, medical devices, tobacco, arms and military equipment, road transportation, customs processing, land development, electronic communications, auditing, waste management, and production and trade of hazardous chemicals.

Serbian citizens and foreign investors enjoy full private-property ownership rights. Private entities can freely establish, acquire, and dispose of interests in business enterprises. By law, private companies compete equally with public enterprises in the market and for access to credit, supplies, licenses, and other aspects of doing business. Serbia does not maintain investment screening or approval mechanisms for inbound foreign investment. U.S. investors are not disadvantaged or singled out by any rules or regulations.

Agribusiness: Foreign citizens and foreign companies are prohibited from owning agricultural land in Serbia. However, foreign ownership restrictions on farmland do not apply to companies registered in Serbia, even if the company is foreign-owned. Unofficial estimates suggest that Serbian subsidiaries of foreign companies own some 20,000 hectares of farmland in the country. EU citizens are exempt from this ban, as of 2017, although they may only buy up to two hectares of agricultural land under certain conditions. They must permanently reside in the municipality where the land is located for at least 10 years, practice farming on the land in question for at least three years, and own adequate agriculture machinery and equipment.

Defense: The Law on Investments adopted in 2015 ended discriminatory practices that prevented foreign companies from establishing companies in the production and trade of arms (for example, the defense industry) or in specific areas of the country. Further liberalization of investment in the defense industry continued via a new Law on the Production and Trade of Arms and Ammunition, adopted in May 2018. The law enables total foreign ownership of up to 49 percent in seven SOEs, collectively referred to as the “Defense Industry of Serbia,” so long as no single foreign shareholder exceeds 15 percent ownership. The law also cancels limitations on foreign ownership for arms and ammunition manufacturers.

Other Investment Policy Reviews

Serbia underwent formal reviews by the Organization for Economic Cooperation and Development (OECD) on Labour Market and Social Policies in 2008 and by the United Nations Conference on Trade and Development (UNCTAD) on competition policy in 2011.

Business Facilitation

According to the World Bank’s 2020 Doing Business Index, it takes seven procedures and seven days to establish a foreign-owned limited liability company in Serbia. This is fewer days but more procedures than the average for Europe and Central Asia. In addition to the procedures required of a domestic company, a foreign parent company establishing a subsidiary in Serbia must translate its corporate documents into Serbian.

Under the Business Registration Law, the Serbian Business Registers Agency (SBRA) oversees company registration. SBRA’s website is available in English at www.apr.gov.rs/home.1435.html . All entities applying for incorporation with SBRA can use a single application form and are not required to have signatures notarized.

Companies in Serbia can open and maintain bank accounts in foreign currency, although they must also have an account in Serbian dinars (RSD). The minimum capital requirement is symbolic at RSD 100 (less than USD 1) for limited liability companies, rising to RSD 3 million (approximately USD 27,500) for a joint stock company. A single-window registration process enables companies that register with SBRA to obtain a tax registration number (poreski identifikacioni broj – PIB) and health insurance number concurrently with registration. In addition, companies must register employees with the Pension Fund at the Fund’s premises. Since December 2017, the Labor Law requires employers to register new employees before they start their first day at work; previously, the deadline was registration within 15 days of employment. These amendments represent an attempt by the government to decrease the grey labor market by allowing labor inspectors to penalize employers if they find unregistered workers.

Pursuant to the Law on Accounting, companies in Serbia are classified as micro, small, medium, and large, depending on the number of employees, operating revenues, and value of assets.

RAS supports direct investment and promotes exports. It also implements projects aimed at improving competitiveness, supporting economic development, and supporting small-and medium-sized enterprises (SMEs) and entrepreneurs. More information is available at http://ras.gov.rs .

Serbia’s business-facilitation mechanisms provide for equitable treatment of both men and women when a registering company, according to the World Bank’s 2020 Doing Business Index. The government has declared 2017-2027 a Decade of Entrepreneurship, with special programs to support entrepreneurship by women.

Outward Investment

The Serbian government neither promotes nor restricts outward direct investment. Restrictions on short-term capital transactions—i.e., portfolio investments—were lifted in April 2018 through amendments to the Law on Foreign Exchange Operations. Prior to this, residents of Serbia were not allowed to purchase foreign short-term securities, and foreigners were not allowed to purchase short-term securities in Serbia. There are no restrictions on payments related to long-term securities.

Capital markets are not fully liberalized for individuals. Citizens of Serbia are not allowed to have currency accounts abroad, or to keep accounts abroad, except in exceptional situations listed in the Law on Foreign Exchange Operations (such situations may include work or study abroad).

3. Legal Regime

Transparency of the Regulatory System

Serbia is undertaking an extensive legislative amendment process aimed at harmonizing its laws with those of the European Union’s acquis communautaire. Harmonization of Serbian law with the acquis has created a legal and regulatory environment more consistent with international norms.

The government, ministries, and regulatory agencies develop, maintain, and publish a plan online of all anticipated legislation and regulations, as well as deadlines for their enactment. Serbian law requires that the text of proposed legislation and regulations be made available for public comment and debate if the law would significantly affect the legal regime in a specific field, or if the subject matter is an issue of a particular interest to the public. The website of Serbia’s unicameral legislature, called the National Assembly (www.parlament.gov.rs ), provides a list of both proposed and adopted legislation. There is no minimum period of time set by law for the text of proposed legislation or regulations to be publicly available.

In recent years, Serbia’s National Assembly has adopted many laws through an “urgent procedure”. By law, an urgent procedure can be used only “under unforeseeable circumstances,” to protect human life and health, and to harmonize legislation with the EU acquis. Bills proposed under an urgent procedure may be introduced with less than 24 hours’ notice, thus limiting public consideration and parliamentary debate. The European Commission’s 2019 Staff Working Document for Serbia stated that “continued frequent use of the urgent procedure for the adoption of laws limits the effective inclusion of civil society in the law-making process” and that such parliamentary practices have also “led to a deterioration in legislative debate and scrutiny[.]” The Council of Europe’s Group of States against Corruption (GRECO) echoed concerns regarding the lack of transparency in the legislative process.

International Financial Reporting Standards (IFRS) are required for publicly listed companies and financial institutions, as well as for the following large legal entities, regardless of whether their securities trade in a public market: insurance companies, financial leasing lessors, voluntary pension funds and their management companies, investment funds and their management companies, stock exchanges, securities brokerages, and factoring companies. Additionally, IFRS standards are required for all foreign companies whose securities trade is in any public market.

Although there are no informal regulatory processes managed by NGOs or the private sector, several Serbian organizations publish recommendations for government action to improve the transparency and efficiency of business regulations. The Foreign Investors Council publishes an annual White Book (http://www.fic.org.rs/projects/white-book/white-book.html ), the National Alliance for Local Economic Development (NALED) publishes a recommendations titled Eliminating Administrative Barriers to Doing Business in Serbia (https://www.slideshare.net/NALED/grey-book-10-recommendations-for-eliminating-administrative-obstacles-to-doing-business-in-serbia ), and the American Chamber of Commerce (AmCham) publishes similar materials on its website (www.amcham.rs ).

In 2018, Serbia enacted a Law on Ultimate Beneficial Owners Central Registry (“Law”). This Law was adopted to harmonize domestic legislation with international standards and to improve the existing system of detecting and preventing money laundering and the financing of terrorism. The Law on Ultimate Beneficial Owners Central Registry introduced a single, public, online electronic database maintained by the Serbian Business Registers Agency (www.apr.gov.rs), containing information on natural persons which are the ultimate beneficial owners of the companies (“Register”). Companies incorporated before December 31, 2018, are obliged to prepare and keep documentation regarding their ultimate beneficial owners at their offices, while new companies are obliged to register this information with the Register within 15 days of their incorporation. All companies were required to be registered accordingly in 2019.

In February 2018, Serbia joined the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS), which aims to address tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. Under the framework, 112 countries and jurisdictions are collaborating to implement measures against BEPS.

Regulatory inspections in Serbia are numerous and decentralized. Nationally, there are 37 different inspectorates, operating within the competence of 12 different ministries. They operate without any significant cooperation or coordination, there is overlapping and duplication of functions among inspectorates, and there is a lack of consistency even within individual inspectorates, which represents a source of additional burdens and difficulties for business operation. Administrative courts are the legal entities that consider appeals from inspection decisions.

Serbia’s public finances are relatively transparent as it regularly publishes draft and adopted budgets, as well as budget revisions. The Serbian government has also published and Parliament adopted all of the end-of-year budgets from 2002 through 2018. The Serbian government regularly publishes information related to public debt on the website www.javnidug.gov.rs . This information is updated daily and is generally considered accurate.

International Regulatory Considerations

Serbia is not a member of the World Trade Organization or the EU. Serbia obtained EU candidate country status in 2012 and opened formal accession negotiations. The WTO accepted Serbia’s application for accession on February 15, 2005, and Serbia currently has observer status. No accession dates have been set for Serbia’s membership in either the EU or WTO.

Legal System and Judicial Independence

Serbia has a civil law system. The National Assembly codifies laws; the courts have sole authority to interpret legislation. Although judicial precedent is not a source of law, written judgments have the non-binding effect of helping to harmonize court practices. Serbia has a written law on contracts and commercial law.

In general, contract enforcement is weak, and the courts responsible for enforcing property rights remain overburdened. When negotiating contracts, the parties may agree on the manner in which to resolve disputes. Most often for domestic entities, contract dispute resolution is left to the courts and can be pursued through civil litigation. Under Serbian commercial law, the Law on Obligations regulates contractual relations (also known as the Law on Contracts and Torts). Civil Procedure Law, which details the procedure in commercial disputes, governs contract-related disputes. Parties to a contract are free to decide which substantive law will govern the contract. The law of Serbia need not be the governing law of a contract entered into in Serbia. Foreign courts’ judgments are enforceable in Serbia only if Serbian courts recognize them. Jurisdiction over recognition of foreign judgments rests with the Commercial Courts and Higher Courts. The Law on Resolution of Disputes with the Regulations of Other Countries, as well as by bilateral agreements, regulates the procedures for recognition of foreign court decisions.

The organization of the court system and jurisdiction of courts in Serbia are regulated by statute. The court system consists of the Constitutional Court, courts of general jurisdiction, and courts of special jurisdiction. Basic courts are courts of first instance and cover one or more municipalities. Higher courts cover the territory of one or more basic courts and are also courts of first instance, while acting as courts of second instance over basic courts. Commercial courts adjudicate commercial matters, with the Commercial Appeal Court being the second-instance court for such matters. Appellate courts are second instance courts to both basic and higher courts, except when higher courts act as second instance courts to basic courts. The Constitutional Court decides on the constitutionality and legality of laws and bylaws, and protects human and minority rights and freedoms. The Supreme Cassation Court is the highest court in Serbia and is competent to decide on extraordinary judiciary remedies and conflicts of jurisdiction. Regulations and regulatory enforcement actions are appealable within the national court system.

There is a distinction in Serbia between Commercial Courts and courts of general jurisdiction. Commercial Courts have original jurisdiction over disputes arising from commercial activities, including disputes involving business organizations, business contracts, foreign investment, foreign trade, maritime law, aeronautical law, bankruptcy, civil economic offenses, intellectual property rights, and misdemeanors committed by commercial legal entities. Their jurisdiction extends to both legal and natural persons engaged in commercial activities, in cases where both parties are economic operators. When only one of the parties is an economic operator and the other is not, such disputes are decided by courts of general civil jurisdiction and not by Commercial Courts. As an exception, in bankruptcy and reorganization proceedings, Commercial Courts have jurisdiction over all disputes where an economic operator is in bankruptcy in relation to other economic or non-economic operators.

Jurisdiction over civil commercial disputes is organized on two levels: Commercial Courts hear first instance cases; and the Appellate Commercial Court decides on appeals against lower court decisions. Commercial courts have broad jurisdiction. There are 16 trial-level Commercial Courts in Serbia. They handle disputes between legal entities, those between domestic and foreign companies; disputes concerning intellectual property and related rights; those arising under the application of Serbia’s Company Law and its regulation; and those relating to privatization and securities; relating to foreign investments, ships and aircraft, navigation at sea and on inland waters, and involving maritime and aviation law. Commercial courts also conduct bankruptcy and reorganization proceedings.

Congestion rates in the Commercial Courts are high. The time to case disposition in commercial litigation is in line with EU averages. However, there is inconsistent application of the law across Serbia, including in Commercial Courts.

According to the Constitution, Serbia’s judicial system is legally independent of the executive branch; but in practice, significant obstacles remain to true judicial independence. The European Commission’s 2019 Staff Working Document for Serbia observes that the current constitutional and legislative framework leaves room for undue political influence over the judiciary, and that political pressure on the judiciary remains high. Serbia has proposed draft constitutional amendments aimed at strengthening the independence of the judiciary, but those amendments have not yet been adopted or ratified.

Laws and Regulations on Foreign Direct Investment

Significant laws for investment, business activities, and foreign companies in Serbia include the Law on Investments, the Law on Foreign Trade, the Law on Foreign Exchange Operations, the Law on Markets of Securities and other Financial Instruments, the Company Law, the Law on Registration of Commercial Entities, the Law on Banks and Other Financial Institutions, Regulations on Conditions for Establishing and Operation of Foreign Representative Offices in Serbia, the Law on Construction and Planning, the Law on Financial Leasing, the Law on Concessions, the Customs Law, and the Law on Privatization. These statutes set out the basic rules foreign companies must follow if they wish to establish subsidiaries in Serbia, invest in local companies, open representative offices in Serbia, enter into agency agreements for representation by local companies, acquire concessions, or participate in a privatization process in Serbia. Other relevant laws include:

  • The Law on Value Added Tax, Law on Income Tax, Law on Corporate Profit Tax, Law on Real Estate Tax, and the Law on Mandatory Social Contributions. .
  • Laws and regulations related to business operations can be found on the Economy Ministry’s website at .
  • Laws and regulations on portfolio investments are on the Securities Commission’s website at .
  • Laws and regulations related to payment operations can be found on the National Bank of Serbia’s website at

In 2019, Serbia undertook major anti-money laundering and counter-financing of terrorism regime (AML/CFT) legislative reforms, following the intergovernmental Financial Action Task Force’s (FATF) February 2018 finding that Serbia had strategic deficiencies in its AML/CFT regime. To respond to the deficiencies, twelve new laws and over 60 regulations came into force. The new legislation includes a new AML/CFT Law, as well as amendments to the Criminal Code with regard to the further criminalization of money laundering. Among other AML/CFT reforms, Serbia introduced a Law on Ultimate Beneficial Owners Central Registry. The Serbian Business Registers Agency maintains a single, public, online electronic database containing information on natural persons who are the ultimate beneficial owners of legal entities. FATF removed Serbia from its monitoring process in June 2019, but Serbia remains subject to enhanced follow-up procedures by the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism, known as MONEYVAL.

There is no primary or “one-stop-shop” website for investment that provides relevant laws, rules, procedures, and reporting requirements for investors. However, numerous Serbian firms that provide legal and other professional services publish comprehensive information for foreign investors, including PricewaterhouseCoopers, https://www.pwc.rs/en/publications/assets/Doing-Business-Guide-Serbia-2019.pdf .

Competition and Anti-Trust Laws

The Law on Protection of Competition was enacted in 2009 and amended in 2013. The Commission for the Protection of Competition is responsible for competition-related concerns and in principle implements the law as an independent agency reporting directly to the National Assembly. In some cases, companies have reported perceptions that political factors have influenced the Commission’s decision-making. In 2018, the Commission completed seven proceedings for violations of competition rules, approved 158 mergers (and rejected six), and issued 15 opinions about potential breaches of competition rules. Annual reports of the Commission’s actions are published online at http://www.kzk.gov.rs/izvestaji . Laws and regulations related to market competition are available at http://www.kzk.gov.rs/en/zakon-2 .

Expropriation and Compensation

A foreign investor is guaranteed national treatment, which means that any legal entity or natural person investing in Serbia enjoys full legal security and protection equal to those of local entities. A stake held by a foreign investor or a company with a foreign investment cannot be the subject of expropriation. The contribution of a foreign investor may be in the form of convertible foreign currency, contribution in kind, intellectual property rights, and securities.

Serbia’s Law on Expropriation authorizes expropriation (including eminent domain) for the following reasons: education, public health, social welfare, culture, water management, sports, transport, public utility infrastructure, national defense, local/national government needs, environmental protection, protection from weather-related damage, mineral exploration or exploitation, resettlement of persons holding mineral-rich lands, property required for certain joint ventures, and housing construction for the socially disadvantaged.

In the event of an expropriation, Serbian law requires compensation in the form of similar property or cash approximating the current market value of the expropriated property. The law sets forth various criteria for arriving at the amount of compensation applicable to different types of land (e.g. agricultural, vineyards or forests), or easements that affect land value. The local municipal court is authorized to intervene and decide the level of compensation if there is no mutually agreed resolution within two months of the expropriation order.

The Law on Investment provides safeguards against arbitrary government expropriation of investments. There have been no cases of expropriation of foreign investments in Serbia since the dissolution of the former Federal Republic of Yugoslavia in 2003. There are, however, outstanding claims against Serbia related to property nationalized under the Socialist Federal Republic of Yugoslavia, which was dissolved in 1992.

The 2014 Law on Restitution of Property and Compensation applies to property seized by the government since the end of World War II (March 9, 1945), and includes special coverage for victims of the Holocaust, who are authorized to reclaim property confiscated by Nazi occupation forces. Under the law, restitution should be in kind when possible, and otherwise in the form of state bonds. Many properties are exempt from in-kind restitution, including property previously owned by corporations. Heirless property left by victims of the Holocaust is subject to a separate law, which was approved in February 2016.

Serbia committed itself under its restitution law to allocate EUR 2 billion, plus interest, for financial compensation to citizens in bonds and in cash. The restitution law caps the amount of compensation that any single claimant may receive at EUR 500,000 (approximately USD 565,000). With amendments to the Law on Restitution and Compensation adopted in December 2018, the government postponed for the third time issuance of these bonds until December 2021, pending approval of necessary by-laws that would regulate bond issuance. The Law mandates that by-laws be adopted by Government of Serbia by June 2020. The bonds will be denominated in euros, carry a two-percent annual interest rate, have a maturity period of 12 years, and be tradable on securities markets. The deadline for filing restitution applications was March 1, 2014. The Agency for Restitution received 75,414 property claims, and the adjudication process is still ongoing. Information about the Agency for Restitution and the status of cases is available on its website at www.restitucija.gov.rs/eng/index.php .

Dispute Settlement

ICSID Convention and New York Convention

Serbia is a signatory to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention, also known as the Washington Convention), and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. The Law on Arbitration and the Law on Management of Courts regulate proceedings and jurisdiction over the recognition of foreign arbitral awards.

Investor-State Dispute Settlement

Although Serbia is a signatory to many international treaties regarding international arbitration, enforcement of an arbitration award can be a slow and difficult process. Serbia’s Privatization Agency refused for five years (2007-2012) to recognize an International Chamber of Commerce/International Court of Arbitration award in favor of a U.S. investor. The dispute caused the U.S. Overseas Private Investment Corporation (OPIC), which had insured a portion of the investment, to severely restrict its activities in Serbia. The U.S. Embassy facilitated a settlement agreement between the Serbian government and the investor, and OPIC reinstated its programs for Serbia in February 2012, but in 2015 and early 2016 both a first instance and appellate Serbian court dismissed OPIC’s request for enforcement action to collect damages awarded to it by an international arbitration board in the same case. Serbia has no Bilateral Investment Treaty (BIT) with the United States. In the past 10 years, three publicly-known investment disputes have involved U.S. citizens. There is no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

The Law on Arbitration authorizes the use of institutional and ad hoc arbitration in all disputes, and regulates the enforcement of arbitration awards. The law is modeled after the United Nations Commission on International Trade Law (UNICTRAL Model Law).

Commercial contracts, in which at least one contracting party is a foreign legal or natural person, may incorporate arbitration clauses, invoking the jurisdiction of the Foreign Trade Court of Arbitration of the Serbian Chamber of Commerce, or any other foreign institutional arbitration body, including ad hoc arbitration bodies. International arbitration is an accepted means for settling disputes between foreign investors and the state.

Serbia is a signatory to the following international conventions regulating the mutual acceptance and enforcement of foreign arbitration:

  • 1923 Geneva Protocol on Arbitration Clauses
  • 1927 Geneva Convention on the Execution of Foreign Arbitration Decisions
  • 1958 Recognition and Enforcement of Foreign Arbitral Awards (New York Convention)
  • 1961 European Convention on International Business Arbitration
  • 1965 International Centre for the Settlement of Investment Disputes (ICSID)

Serbia allows for mediation to resolve disputes between private parties. Mediation is a voluntary process and is conducted only when both parties agree. The Law on Mediation regulates mediation procedures in disputes in the following areas of law: property, commercial, family, labor, civil, administrative and in criminal procedures where the parties act freely, unless the law stipulates exclusive authority of a court or other relevant authority.

Mediators can be chosen from the list of the Serbian National Association of Mediators, or from an official registry within the Ministry of Justice. There are two types of mediation: court-annexed and private mediation. A person can also be referred to mediation by a court, advocate, local ombudsman, employees of municipal or state authorities, an employer, or the other party to the conflict.

Bankruptcy Regulations

Serbia’s bankruptcy law is in line with international standards. According to the bankruptcy law, the goal is to provide compensation to creditors via the sale of the assets of a debtor company. The law stipulates automatic bankruptcy for legal entities whose accounts have been blocked for more than three years, and allows debtors and creditors to initiate bankruptcy proceedings. The law ensures a faster and more equitable settlement of creditors’ claims, lowers costs, and clarifies rules regarding the role of bankruptcy trustees and creditors’ councils. Parliament adopted new amendments to the Bankruptcy Law in December 2017. These amendments enable better collection and reduced costs for creditors; provide shorter deadlines for action by bankruptcy trustees and judges; improve the position of secured creditors; anticipate new ways of assessing debtors’ assets by licensed appraisers; and introduce a special rule to lift bans on the execution of debtor assets that are under mortgage, giving rights to the secured creditor to sell such assets under rules that apply to mortgage sales.

Foreign creditors have the same rights as Serbian creditors with respect to initiating or participating in bankruptcy proceedings. Claims in foreign currency are calculated in dinars at the dinar exchange rate on the date the bankruptcy proceeding commenced. Serbia’s Criminal Code criminalizes intentionally causing bankruptcy, and fraud in relation to a bankruptcy proceeding. The 2020 World Bank Doing Business Index ranked Serbia 41 out of 190 economies with regards to resolving insolvency, with an average time of two years needed to resolve insolvency and average cost of 20 percent of the estate. The recovery rate was estimated at 34.5 cents on the dollar (https://www.doingbusiness.org/content/dam/doingBusiness/country/s/serbia/SRB.pdf ).

5. Protection of Property Rights

Real Property

Serbia has an adequate body of laws for the protection of property rights, but enforcement of property rights through the judicial system can be very slow. A multitude of factors can complicate property titles: restitution claims, unlicensed and illegal construction, limitation of property rights to rights of use, outright title fraud and other issues. Investors are cautioned to investigate thoroughly all property title issues on land intended for investment projects.

During the country’s socialist years, owners of nationalized land became users of the land and acquired rights of use that, until 2003, could not be freely sold or transferred. In July 2015, the government adopted a law that allows for property usage rights to be converted into ownership rights with payment of a market-based fee.

In March 2015, the government implemented new amendments to the Law on Planning and Construction that separated the issuance of permits from conversion issues. These amendments cut the administrative deadline for issuing construction permits for a potential investor to 30 days and introduced a one-stop shop for electronic construction permits.

Serbia’s real-property registration system is based on a municipal cadaster and land books. Serbia has the basis for an organized real estate cadaster and property-title system. However, legalizing tens of thousands of structures built over the past twenty years without proper licenses remains an enormous challenge, as an estimated two million buildings in Serbia are not registered in the cadaster, of which almost half are residential properties. According to some estimates, every third building in Serbia was not built in accordance with legal requirements. In November 2015, the government adopted a new Law on Legalization, which simplified the registration process. Since then, however, only slightly more than 230,000 decisions on legalization have been issued. The deadline set by the law for legalization of all buildings constructed without proper permits is November 2023.

The World Bank’s 2020 Doing Business Index ranks Serbia 58th of 190 countries for time required to register real property (33days).

Intellectual Property Rights

Serbia is a member of the World Intellectual Property Organization (WIPO) and party to all major WIPO treaties, including the Berne Convention, the Paris Convention, the Patent Cooperation Treaty, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty. While Serbia is not a member of the World Trade Organization (WTO), the Serbian government has taken steps to adhere to the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Serbia’s intellectual property rights (IPR) laws include TRIPS-compliant provisions and are enforced by courts and administrative authorities.

For the most part, Serbia’s IPR legislation is modern and compliant with both the EU acquis communautaire and international standards. According to the EU’s 2019 Progress Report, Serbia has generally aligned its IPR legislation with the acquis.

Procedures for registration of industrial property rights and deposit of works and authorship with the Serbian Intellectual Property Office are straightforward and similar to procedures in most European countries. Relevant information is available at: http://www.zis.gov.rs/home.59.html  .

Enforcement of IPR remains haphazard but is roughly consistent with levels in neighboring countries. The government has a Permanent Coordination Body for IPR enforcement activities with participation from the tax administration, police, customs, and several state inspection services. Cooperation with the Special Department for High-Technology Crime has already resulted in court decisions to impose penalties in test cases against online traders and counterfeits. The Public Procurement Law requires bidders to affirm that they have ownership of any IPR utilized in fulfilling a public procurement contract. Although still present, trade in counterfeit goods—particularly athletic footwear and clothing—is declining in volume as the government has increased its enforcement efforts, including at the border. Upon seizure, however, authorities cannot destroy the goods unless they receive formal instructions from the rights holders who are billed for the storage and destruction of the counterfeit goods.

Inspectorates and customs authorities’ actions against IPR violations are relatively fast. However, enforcement of IPR in the court system often lasts up to two years. Proceedings improved after the creation of semi-specialized IPR courts in 2015 according to the Foreign Investors’ Council. The Serbian Intellectual Property Office continues to train judges on IPR to enable more timely court decisions.

Digital IPR theft is not common, but many digital brands are not properly protected, and there is a risk of trademark squatting.

Developments in 2019 and 2020

Patents: The Law on Patents in 2019 introduced significant changes to an employer’s ability to patent their employees’ inventions. Specifically, the amended law allows employers to file a patent application for a former employee’s innovations for up to one year after their employment ends, providing a higher level of legal certainty for corporations.

Topography of Semiconductor Products: The Law on the Legal Protection of Topography of Semiconductor Products was amended in 2019 and made fully compliant with EU legislation. There is no publicly available data indicating that anyone has ever exercised these rights in Serbia.

Copyright: Amendments made in 2019 to the Law on Protection of Copyright and Related Rights extends the definition of a work of authorship to include the technical and user documentation associated with software. The Law also addresses two additional issues: first, that multiple authors of a software product will all be deemed to be co-authors, and second, that an employee may require their employment contract to include additional remunerations for any software they create that their employer uses. However, if the employment agreement lacks such provisions , the employee is not entitled to remunerations after the fact, even if their software generates revenue for their employer. These provisions also apply to database producers. With respect to digital works, the 2019 amendments draw a clear line between digital and physical works. Owners or purchasers of a digital copy of a video game, TV show episode, or software are not entitled to further share and/or distribute copies.

Enforcement of Copyright: Court procedures for copyright infringement and related rights case are defined comprehensively, for they emphasize the need to preserve evidence and render urgent precautionary measures, including before an official claim might be submitted or the alleged infringing party is able to respond to the claim. The 2019 amendments clarify that a revision (as a legal remedy) may be filed in copyright infringement and related rights cases regardless of the claim’s value. The amendments also explicitly authorize the courts to summon any retailer or user of illegally downloaded mp3 files, software, or TV episodes.

Trademarks: Serbia recently adopted a new Law on Trademarks that came into force on February 1, 2020 and includes two major changes. The first major change is the introduction of an opposition system. As before, the Intellectual Property Office performs an official examination of the refusal grounds for a trademark application, but now the trademark applications are published before the trademark is granted so that interested parties can challenge the validity of the pending registration. Interested parties have three months to file opposition proceedings from the date of publication, and the trademark applicant must respond within another 60 days or opposition is granted and the trademark is refused. This approach is similar to other European countries. The second major change due to Serbia’s new Law is the allowance of parallel imports. Serbia’s previous national trademark exhaustion system authorized brandholders to prevent parallel imports. In contrast, the new worldwide system means that the trademarkholder cannot prohibit others from reselling the products that are legally in circulation anywhere in the world. Serbia is now compliant with U.S. standards. The former national system was aligned with EU legislation, which differentiates between goods circulating within the single market and those that were imported from a country outside of the EU market. During their accession process to the EU, Serbia will be required to align its legislation with that of the EU.

Administrative Fees: Amendments to Serbia’s Law on Administrative Fees entered into force in December 2019 and decreases the filing fee for applications filed electronically compared to those filed on paper. The fees for electronic filing of patents and utility model appplications have been reduced by 50 percent and electronic fees for industrial design and trademark applications have been reduced by 25 percent. These measures are meant to encourage electronic filings and make the process more accessible for individuals and small companies.

Statistics: The Customs Administration and Market Inspection issue periodic reports on seizures, but there is no unified methodology. The Customs Administration publishes daily information on the significant border seizures via its official Internet presentation at: http://www.carina.rs/cyr/Stranice/Default.aspx  and its official Facebook page: and http://www.facebook.com/upravacarina.rs/ 

The market inspectors perform regular on-demand and ex-officio inspections. In 2019, there were 2,146 controls performed and 209,538 articles were seized. The statistics are accessible at: https://mtt.gov.rs/informator-o-radu/ 

The tax administration checks software legality during its regular tax controls of businesses, but it performs only 100 regular inspections per year. The estimated value of Serbia’s illegal software market is approximately USD 51 million. According to the 2018 BSA Global Software Survey, software piracy in Serbia is around 66 percent. Although this is down from 72 percent in 2011, it remains among the highest piracy rates in the Balkan region. Serbia is not included in the U. S. Trade Representative (USTR) Special 301 Report or the Notorious Markets List.

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

9. Corruption

Surveys show that corruption is believed to be prevalent in many areas and remains an issue of concern. Serbia was ranked 91st in Transparency International’s 2020 Corruption Perceptions Index, down from 87th in 2018. However, its score – 39 out of 100 possible points – remained unchanged.

Serbia is a signatory to the Council of Europe’s Civil Law Convention on Corruption and has ratified the Council’s Criminal Law Convention on Corruption, the UN Convention against Transnational Organized Crime, and the UN Convention against Corruption. Serbia also is a member of the Group of States against Corruption (GRECO), a peer-monitoring organization that provides peer-based assessments of members’ anti-corruption efforts on a continuing basis.

The Serbian government has worked to bring its legal framework for preventing and combating corruption more in line with EU norms, and a dedicated state body—the Anti-Corruption Agency (ACA) —oversees efforts in this area. The Criminal Code specifies a large number of potential offenses that can be used to prosecute corruption and economic offenses, including but not limited to giving or accepting a bribe, abuse of office, abuse of a monopoly, misfeasance in public procurement, abuse of economic authority, fraud in service, and embezzlement.

As of 2018, Serbia’s National Assembly strengthened anti-corruption laws through three pieces of legislation. The Law on Organization and Competence of State Organs in Suppressing Corruption, Organized Crime for the first time established specialized anti-corruption prosecution units and judicial departments, mandated the use of task forces, and introduced liaison officers and financial forensic experts. The Law on Asset Forfeiture was amended to expand coverage to new criminal offences, and amendments to the Criminal Code made corruption offenses easier to prosecute. Following these legal changes, specialized anti-corruption departments started operations in March 2018 in Novi Sad, Belgrade, Kraljevo, and Niš to prosecute offenders who have committed crimes of corruption valued at less than RSD 200 million (USD 2.1 million). Cases valued above this level are handled by the Organized Crime Prosecutor’s Office.

Serbian law also requires income and asset disclosure by appointed or elected officials, and regulates conflict of interest for all public officials. The disclosures cover assets of the officials, spouses, and dependent children. Declarations are publicly available on the ACA website, and failures to file or to fully disclose income and assets are subject to administrative and/or criminal sanctions. Significant changes to assets or income must be reported annually, upon departure from office, and for a period of two years after separation.

Serbian authorities do not require private companies to establish internal codes of conduct related to corruption or other matters, but some professional associations – e.g., for attorneys, engineers and doctors – enforce codes of conduct for their members. Private companies often have internal controls, ethics, or compliance programs designed to detect and prevent bribery of government officials. Large companies often have elaborate internal programs, especially in industries such as tobacco, pharmaceuticals, medical devices, and industries regularly involved in public procurement.

Serbian law does not provide protection for non-governmental organizations involved in investigating corruption. However, the criminal procedure code provides witness protection measures, and Serbia enacted a Whistleblower Protection Law in June 2015, under which individuals can report corruption in companies and government agencies and receive court protection from retaliation by their employers. In September 2019, whistleblower Aleksandar Obradovic, an IT expert at the state-owned Krusik munitions plant, was arrested and charged with revealing trade secrets after he leaked documents showing dubious deals between Krusik and private companies, including a deal with the GIM Company in which a cabinet minister’s father was involved. A judge lifted Obradovic’s house arrest and ban on internet use in December 2019. However, prosecutors continue to pursue his case, arguing that Obradovic is not covered by the Whistleblower Protection Law.

U.S. firms interested in doing business or investing in Serbia are advised to perform due diligence before concluding business deals. Legal audits generally are consistent with international standards, using information gathered from public books, the register of fixed assets, the court register, the statistical register, as well as from the firm itself, chambers, and other sources. The U.S. Commercial Service in Belgrade can provide U.S. companies with background information on companies and individuals via the International Company Profile (ICP) service. An ICP provides information about a local company or entity, its financial standing, and reputation in the business community, and includes a site visit to the local company and a confidential interview with the company management. For more information, contact the local office at belgrade@trade.gov and visit www.export.gov/serbia . The U.S. Commercial Service also maintains lists of international consulting firms in Belgrade, local consulting firms, experienced professionals, and corporate/commercial law offices, in addition to its export promotion and advocacy services for U.S. business.

Some U.S. firms have identified corruption as an obstacle to foreign direct investment in Serbia. Corruption appears most pervasive in cases involving public procurement, natural resource extraction, government-owned property, and political influence/pressure on the judiciary and prosecutors.

The Regional Anti-Corruption Initiative maintains a website with updates about anti-corruption efforts in Serbia and the region: http://rai-see.org/ .

Resources to Report Corruption

Serbian Anti-Corruption Agency
Carice Milice 1, 11000 Belgrade, Serbia
+381 (0) 11 4149 100
office@acas.rs

Transparency International Serbia
Transparentnost Serbia
Palmoticeva 27, 11000 Belgrade, Serbia
+381 (0) 11 303 38 27
ts@transparentnost.org.rs

Slovakia

Executive Summary

The Slovak Republic is a small, open, export-oriented economy, with a population of 5.5 million.  Slovakia joined the European Union (EU) and NATO in 2004 and the Eurozone in 2009.  Slovakia is an attractive destination for foreign direct investment (FDI), with a favorable geographic location in the heart of Europe, and an investment-friendly regulatory environment.  A new government was elected in the parliamentary election in February 2020.  This new government campaigned heavily on an anti-corruption platform and has pledged to improve the local business climate.

In 2019, Slovak GDP grew by 2.3 percent, fueled mainly by growing domestic consumption.  While average wages in Slovakia continue to be significantly below the OECD average, high social insurance payments increase the overall cost of labor, particularly for low-skilled, low-wage workers.  Employers’ combined social and health contributions are equivalent to 35 percent of wages.  The corporate income tax rate is 21 percent except for small companies with revenues below €100,000, whose tax rate was lowered in 2020 to 15 percent.

When the COVID-19 outbreak reached Europe, Slovakia organized one of the fastest and strictest response programs in the region in order to avoid overstraining its limited healthcare capacities.  Slovakia’s economic recovery will largely depend on the recovery of its main economic partners: Germany, Czechia, Poland and others.  Most recent estimates of the Finance Ministry’s Institute of Financial Policy expect a contraction of approximately –7.2 percent of GDP and a drop in exports by 21.4 percent in 2020 followed by a quick rise of GDP of 6.8 percent in 2021.  The labor market will likely lose 88,000 jobs and unemployment should rise by 3 percent to 8.8 percent in 2020.  In the worst scenario, the government deficit could fall to 7 percent of GDP.  However, due to slow absorption of EU funds, the Slovak government expects to be able to cover almost €2.5 billion of its coronavirus related expenses using EU funds.

Slovakia continues to face structural challenges of an inefficient judiciary, a lack of investment in innovation, an inadequate education system, and high perception of corruption.  There have been few high value-added investments to date, despite Slovak efforts to court R&D.  Private and public investment in R&D remains very low compared to the OECD average, and inefficiencies in drawing available EU funds persist.

Slovakia remains the largest per capita car producer in the world, with four major car producers and hundreds of suppliers.  Manufacturing industries, including automotive, machinery and transport equipment, metallurgy and metal processing, electronics, chemical and pharmaceutical remain attractive and have the potential for further growth.

Positive aspects of the Slovak investment climate include:

  • Membership in the EU and the Eurozone
  • Open, export-oriented economy close to western European markets
  • Qualified and relatively inexpensive workforce
  • Investment incentives, including for foreign investors
  • Firm government commitment to EU deficit and debt targets
  • Sound banking sector, deep economic and financial integration within Europe

Negative aspects of the Slovak investment climate include:

  • High sensitivity to regional economic developments
  • Shortages in qualified labor, due in part to education system inadequacies
  • Weak public administration, allegations of corruption, weak judiciary
  • Significant regional disparities, suboptimal national transport network
  • Low rate of public and private R&D
  • Heavy reliance on EU structural funds, chronic deficiencies in allocation of funds
Table 1: Key Metrics and Rankings 
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 59 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 45 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 37 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 $847 http://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2018 $18,260 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Slovakia is one of the most open economies in the EU.  The government’s overall attitude toward foreign direct investment (FDI) is positive, and the government does not limit or discriminate against foreign investors.  FDI plays an important role in the country’s economy, with major foreign investments in manufacturing and industry, banking, information and communication technologies (ICT), and Business Service Centers, where U.S. companies have a significant presence.

Slovakia’s assets, including skilled labor, EU and Eurozone membership, and location at the crossroads of Europe, have attracted a significant U.S. commercial and industrial presence, including Accenture, Adient, Amazon, Amphenol, AT&T, Cisco, Dell, Garrett, GlobalLogic, Hewlett-Packard, IBM, Lear, Oracle, U.S. Steel, Whirlpool, and many others.

The Ministry of Economy coordinates efforts to improve the business environment, innovation, and support for least-developed regions.  Within the Ministry of Economy, the Slovak Investment and Trade Development Agency (SARIO) is responsible for identifying and

advising potential investors.  The government supports foreign investors and offers investment incentives based on specific criteria, usually delivered in the form of tax allowances, or grants to support employment, regional development, and training.  The Regional Investment Aid Act (57/2018) specifies eligibility criteria.  Section four covers investment incentives in detail.

According to the National Bank of Slovakia, in 2018, inward FDI flows to Slovakia reached

€1 billion, and inward FDI stock was €51 billion.  EU Member States are the largest foreign investors in Slovakia, including the Netherlands, Austria, the Czech Republic, Luxembourg, and Germany.  South Korea remains an important investor among non-EU countries, given its importance in global automotive supply chains.

The Act on Special Levy on Regulated Sectors (235/2012 Coll., and later amendments) imposes a special tax on regulated industries, including the energy and network industries, insurance companies, electronic communications companies, healthcare, air transport, and others.  The levy applies to profits generated from regulated activities above €3 million.  The Act on Special Levy on Selected Financial Institutions (384/2011 Coll., and later amendments) imposed a special 0.2 percent levy on banks, most of which are foreign-owned.  In November 2019, ahead of February 2020 elections, and despite public declarations that the levy would cease to exist in 2020, the government increased the levy to 0.4 percent (valid as of January 2020).

Per amendment to the Act on Income Tax (344/2017 Coll.) valid as of January 2019, sharing economy platforms in the area of transport or housing are obliged to register a permanent platform in Slovakia.  Income is taxed in accordance with the valid income tax rules of 21 percent for corporate income tax in Slovakia.  If the service provider does not register a platform, the firm will be obligated to pay either a 19 or 35 percent withholding tax on the fees it pays to a foreign entity, based on the residence of the recipient of such fee, and based on whether bilateral taxation treaties exist.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity in Slovakia.  Businesses can contract directly with foreign entities.  Private enterprises are free to establish, acquire, and dispose of business interests, but must pay all Slovak obligations of liquidated companies before transferring any remaining funds out of Slovakia.

Slovakia has no formal performance requirements for establishing, maintaining, or expanding foreign investments.  Large-scale privatizations are possible via direct sale or public auction.  There are no formal requirements to approve FDI, though the Government ultimately approves investment incentives.  If investment incentives apply, the Economy Ministry manages the associated legislative process.  The Act on Regional Investment Aid (57/2018) specifies eligibility requirements.

The Slovak government treats foreign entities established in Slovakia in the same manner as domestic entities, and foreign entities face no impediments in participating in R&D programs financed and/or subsidized by the Slovak government.  Since January 2020, up to 200 percent of R&D spending is tax deductible.

The Slovak government holds stakes in a number of energy companies.  It has historically been less open to private investment in energy assets that it considers to be in the national security interest.  There are no domestic ownership requirements for telecommunications and broadcast licenses.  The Act on Civil Air Transport (143/1998 Coll.) sets out rules for foreign operators seeking to operate in Slovakia.

Please consult the following websites for more information:

Other Investment Policy Reviews

Business Facilitation

According to the World Bank’s Doing Business 2020 report , Slovakia ranks 118th out of 190 countries surveyed on the ease of starting a business (up from 127th in the 2019 edition).  It takes around 21.5 days to start a business in Slovakia (versus 26.5 days in 2019), and involves seven procedures.

The Central Government Portal “slovensko.sk” provides useful information on e-Government services in the area of starting and running a business, citizenship, justice, registering vehicles, social security, etc.  Checklists of procedures necessary for registrations, applications for permits, etc., are currently available on websites of individual institutions, and the Economy Ministry is working on streamlining the information into one common platform.

Please consult the following websites for more information:

Outward Investment

The majority of Slovak exports go to fellow EU countries.  Due to their limited size, Slovak companies have not made significant outward foreign direct investments.

Several state agencies share responsibilities for supporting investment (inward and outward) and trade.  SARIO is officially responsible for export facilitation and attracting investment.  The Slovak Export-Import Bank (EXIM BANK) supports exports and outward investments with financial instruments to reduce risks related to insurance, credit, guarantee, and financial activities; it assists both large companies and small and medium sized enterprises (SMEs),

and is the only institution in Slovakia authorized to provide export and outward investment-related government assistance.  The Ministry for Foreign and European Affairs runs a Business Center that provides services in the area of export and investment opportunities.  Slovakia’s

diplomatic missions, the Ministry of Finance’s Slovak Guarantee and Development Bank, and the Deputy Prime Minister’s Office for Investments and Regional Development also play a role in facilitating external economic relations.

3. Legal Regime

Transparency of the Regulatory System 

The business community continues to voice concerns regarding the transparency of Slovakia’s regulatory environment.  A frequently changing and complex legislative environment is often cited as a business obstacle for both local and global companies, and the long-term predictability of regulations affecting the business and legal environment is weak.  Businesses note that most of the changes affecting the regulatory environment lack estimated costs and impacts for businesses.

The Legislative and Information Portal of the Ministry of Justice, Slov-Lex, is a publicly accessible centralized online portal for laws and regulations, including actual draft texts, information about inter-agency and public review processes.  Draft bills, including investment laws proposed by ministries through a standard legislative procedure are available for public comment through the portal; however, the public is often granted little time to comment on draft legislature, and there is no obligation for a government reaction to comments prior to final submission to the cabinet.

While the process of adopting new laws and regulations follows clearly defined rules, MPs or parliamentary groups have been using an extraordinary option of proposing draft bills outside the standard participatory legislative procedure.  This process has no rules guaranteeing opportunities for public comment, thus rendering the legislative process less predictable and less transparent.  In 2019, 11 laws were passed without due stakeholder discussion, including an increase of the bank levy paid to state coffers from 0.2 to 0.4 percent of the value of bank liabilities reported in balances and limiting the financing of political parties by external sponsors.

A law on recreational vouchers, which increases the administrative and economic burden of employers by obligating companies with more than 49 employees to pay up to €275 per year for domestic vacations has been fully implemented.  The proposed special levy on retail stores (2.5 percent of net turnover) mentioned in the 2019 ICS was not implemented following opposition from the European Commission.

In 2019, the Slovak government partially decreased the administrative burden of businesses by improving interagency sharing of legal and official documents.  Starting January 1, 2020, the corporate income tax and the income tax of the self-employed with revenues up to €100,000 decreased from 21 percent to 15 percent; the minimum monthly wage in Slovakia rose from €520 to €580; and all cash registers must be connected to the e-cash registry online system of the Financial Administration.

Regulations are not reviewed on the basis of scientific data assessments.  At their discretion, analytical institutes at some ministries (mostly under the value-for-money umbrella) produce data-driven assessments of state policies or big investment projects.  However, projects for assessment are selected by the institutes or by the ministries and they are not publicly available for comment.  Assessments are often published once completed.

The Commercial Code (98/1991  Coll.) and the Act on Protection of Economic Competition (136/2001 Coll.) govern competition policy in Slovakia.  As an EU Member State, Slovakia has transposed numerous pieces of relevant EU legislation.  The Anti-Monopoly Office, a part of the EU’s European Competition Network (ECN), is an independent state administrative body responsible for ensuring competition, including in state aid.

The Office for Public Procurement supervises and administers public procurement.   Public procurement legislation is frequently amended, and challenges remain to ensure fair competition and eradication of corruption.  Changes to the legislation, which entered into force January 2019 significantly affected access to public tenders, especially for SMEs. Ceilings for low-value tenders have increased by approximately 250%, giving more space to municipalities to directly select suppliers.

Since the new leadership was put in place in 2017, the Public Procurement Office has made efforts to improve transparency and communication with stakeholders, as well as to strengthen supervisory activities.  The Public Procurement Office introduced further reforms to make procurement process more efficient in July 2019, but Parliament did not approve the changes in November 2019.  As of April 1, 2019, the Public Procurement Office operates an optional platform in the official Bulletin of Public Procurement for low-value purchases.  All procurers (ministries/municipalities/etc.) are now able to publish online calls for bids for low-value purchases, increasing transparency and increasing possibilities for businesses to participate in public tenders.

Slovakia’s fiscal transparency is generally good.  Budget proposals, enacted budgets, and closing statements are substantially complete and publicly available.  Departures from budget goals are common.  Despite having a goal of reaching a balanced budget in 2019, Eurostat data from April 2020 reported a deficit of 1.3% of GDP, which is the worst deviation from budget goals since 2010.  The Ministry of Finance publishes monthly reviews of budget execution, which provide an overview of public revenues and expenditures broken down by source and type.  Public debt management information is an integral part of the Public Administration budget, including volume, total cost, debt service, structure, financing, forecast, risk assessments, etc.  Annex 6 of the Public Administration budget describes the Debt Management Strategy.  As an EU Member State, Slovakia follows International Financial Reporting Standards (IFRS-EU).

Please consult the following websites for more information:

International Regulatory Considerations

Slovakia is an EU Member State and EU legislation and standards fully apply in Slovakia.  The national regulatory system is enforced in areas not governed by EU regulatory mechanisms.  Slovakia is a WTO member, and the government notifies the WTO Committee on Technical Barriers to Trade of technical regulations.  The Trade Facilitation Agreement (TFA) is an EU competence; the EU approved in 2015 a Protocol of Amendment to insert the WTO TFA into Annex 1A of the WTO Agreement.

Please consult the following websites for more information:

WTO: https://www.wto.org/english/thewto_e/countries_e/slovak_republic_e.htm 

Legal System and Judicial Independence

Slovakia is a civil law country.  The Slovak judicial system is comprised of the Constitutional Court and general courts, including the Specialized Criminal Court and the Supreme Court.  General courts decide civil, commercial, and criminal matters, and review the legality of decisions by administrative bodies.  The Specialized Criminal Court focuses on cases involving corruption, organized crime, serious crimes like premeditated murder, crimes committed by senior public officials, and crimes related to extremism, such as hate crimes.  Enforcement actions are appealable and are adjudicated in the national court system.  The right to appeal against regulations is limited to some state institutions and selected public officials.

The Slovak Constitution and the European Convention of Human Rights guarantee property rights.  Slovakia has a written Commercial Code including contract law in the civil and commercial sectors.  The basic framework for investment protection and dispute resolution between Slovakia and the U.S. is outlined in the 1992 U.S.-Slovakia Bilateral Investment Treaty.

Court judgments by EU Member States are recognized and enforced in compliance with existing EU Regulations.  Third country judgments are governed by bilateral treaties or by the Act on International Private Law.  Contracts are enforced through litigation or arbitration – a largely applied form of alternative dispute resolution.

Laws guarantee judicial independence, however, in practice, public perception of judicial independence is among the lowest in the EU.  A Focus Agency public survey from August 2019 commissioned by the Supreme Court Office showed 64 percent of Slovaks lack full trust in Slovak courts.  Accountability mechanisms ensuring judicial impartiality and independence are strong, but not fully utilized.   According to judicial watchdog NGOs, some judicial nominations and personnel selections appear to be strongly influenced by political considerations.  In 2019 and 2020 numerous investigations into judicial corruption were opened.  Businesses and NGOs report the justice system remains relatively slow and inefficient and suggest verdicts lack predictability and are often poorly justified. Judges remain divided on the need for reform.  Several judges have been arrested by police for suspicion of corruption and obstruction of justice in March 2020.  .  As a result, investors generally prefer international arbitration to resolution in the national court system.

Laws and Regulations on Foreign Direct Investment

Slovakia is a politically and economically safe destination for foreign investment.  Investment incentives are available to motivate investors to place their new projects in regions with higher unemployment and to attract projects with higher added value.

The Slovak Investment and Trade Development Agency (SARIO) is a specialized government agency in charge of attracting foreign investments to Slovakia and serves as a one-stop shop for foreign investors.  The Slovak Business Agency (SBA) runs a National Business Center (NBC) in Bratislava and several other cities; it provides a one-stop shop with information and services for starting and establishing businesses.  Startups can use a simplified procedure to register their company in order to facilitate entry of potential investors.  The Interior Ministry operates Client Centers around the country where many formal procedures can be done under one roof.

Slovakia ranked 45th out of 190 countries in the World Bank’s Doing Business 2020 ranking, and 42nd out of 141 in the 2019 World Economic Forum’s Global Competitiveness Index.

Please consult the following websites for more information:

Competition and Anti-Trust Laws

The Anti-Monopoly Office of the Slovak Republic is an independent body charged with the protection of economic competition.  The Office intervenes in cases of cartels, abuse of a dominant position, vertical agreements, and controls compliance of mergers with antitrust law.  The key antitrust legislation regarding fair competition is the Competition Law (136/2001 Coll.)  Slovakia complies with EU competition policy.

Please consult the following website for more information:

Expropriation and Compensation

The Slovak Constitution guarantees the right to property.  There is an array of legal acts stipulating property rights.  The right to the Act on Expropriation of Land and Buildings (282/2015 Coll.) mandates that expropriation must only occur to the extent necessary, be in the public interest, provide appropriate compensation, and shall only occur when the goal of expropriation cannot be achieved through agreement or other means.

The most recent case of expropriation is from 2016, when Slovak government started expropriating land needed for the construction of a car making factory and accompanying road infrastructure.  The state proceeded with expropriation only after it failed to directly purchase the land from the owners.

Dispute Settlement

ICSID Convention and New York Convention

Slovakia is a contracting state to the International Centre for Settling International Disputes (ICSID) and the World Bank’s Commercial Arbitration Tribunal (established under the 1966 Washington Convention).  Slovakia is a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitrage Awards, which obligates Slovakia to accept binding international arbitration.  The Finance Ministry leads on bilateral investment treaty matters and manages and represents Slovakia in international arbitration.  Investment contracts with foreign investors in Slovakia are covered by respective ministries depending on the sector, in most cases by the Ministry of Economy.

Investor-State Dispute Settlement

The basic framework for investment protection and dispute resolution between Slovakia and the United States is governed by the 1992 U.S.-Slovakia Bilateral Investment Treaty with an additional Protocol signed in 2003.

To date, eleven known cases of international arbitration have concluded, none of which Slovakia lost.  In one of the international arbitrations, a U.S. investor was making claims under the U.S. – Slovakia Bilateral Investment Treaty but respected the decision of the International Centre For Settlement of Investment Disputes, which ruled in Slovakia’s favor.

The legal system generally enforces property and contractual rights, but decisions may take years, thus limiting the courts’ relevance in dispute resolution.  According to the World Bank Doing Business 2020 report, Slovakia ranked 46th out of 190 countries in the “enforcing contracts” indicator, with a 775-day average for enforcing contracts.  The report notes that Slovakia made enforcing contracts easier by implementing electronic processing services.  Slovak courts recognize and enforce foreign judgments, subject to the same delays.  Although the commercial code generally appears to be applied consistently, the business community continues to cite a lack of legislation protecting creditor rights, corruption, political influence, lengthy procedures, and weak enforcement of court rulings as persisting problems.  U.S. and other investors privately described instances of multi-million dollar losses that were settled out of court because of doubts about the court system’s ability to offer a credible legal remedy.

International Commercial Arbitration and Foreign Courts

The alternative dispute resolution mechanisms in Slovakia are relatively fast compared to the court system.  The list of permanent arbitration courts authorized by the Slovak Ministry of Justice is published on the Ministry’s website.  Decisions should be reached within 90 days of the date when the lawsuit was filed.  It is possible to lodge an appeal to a civil court against an arbitrary decision within three months of the date of its issuance or lodge a complaint about an arbitrary decision to the chairman of the permanent arbitration court or to the Ministry of Justice.

Alternative dispute resolution proceedings can be also initiated by filing a motion with one of the alternative dispute resolution entities included in the list published by the Ministry of the Economy on its website.  The settlement of a dispute takes place through written communication and is to be settled within 90 days of the delivery of a complete motion.  Unless the parties reach an agreement, the alternative dispute resolution entity will prepare a justified opinion. If any attempt to settle the dispute by mutual agreement fails, there is no appeal against the result of such proceedings.

The other option for extrajudicial dispute settlement is mediation.  Mediation can be used even after a court proceeding has started.  The agreement resulting from mediation is legally enforceable only if it has the form of a notarial record or court settlement.  The list of mediators is published on the website of the Association of Mediators.  In the case of an unsuccessful mediation, parties can still take the case to arbitration or to court.

There are two acts applicable to alternative dispute resolution in Slovakia – the Act on Mediation (420/2004 Coll.) and the Act on Arbitration (244/2002 Coll.).  The Slovak Act on Arbitration is largely modeled after UNCITRAL model law.  Local courts in Slovakia recognize and enforce foreign arbitral awards.

Please consult the following websites for more information:

Bankruptcy Regulations

The Law on Bankruptcy and Restructuring (377/2016 Coll.) governs bankruptcy issues.  The law allows companies to undergo court-protected restructuring and both individuals and companies to discharge their debts through bankruptcy.  The International Monetary Fund credited the Act for speeding up processing, strengthening creditor rights, reducing discretion by bankruptcy judges, and randomizing the allocation of cases to judges to reduce potential corruption.  The Act contains provisions to prevent preferential treatment for creditors over company shareholders, measures limiting space for arbitrariness in bankruptcy administrators’ conduct, and stricter liability rules for those responsible for initiating bankruptcy proceedings, as well as new provisions on related parties valid as of January 2019.  The Commercial Code also contains provisions on bankruptcy and restructuring and provisions to prevent speculative mergers, including in cases of ongoing bankruptcy.

Slovakia ranked 46th out of 190 in the World Bank’s Doing Business 2020 ranking of the ease of resolving insolvency (42nd in 2019), with an average of four years for resolving insolvency.

Please consult the following websites for more information:

5. Protection of Property Rights

Real Property

The mortgage market in Slovakia is growing rapidly, and a reliable system of record keeping exists.  From January 1, 2020 the National Bank of Slovakia further tightened the rules on providing mortgages to cool down the property market.  Secured interests in property and contractual rights are recognized and enforced.

Even though the Cadastral Office records that less than 10 percent of the land in Slovakia lacks a clear title, there are instances when the property owner is unknown.  In such cases, real estate titles can take significant amounts of time to determine.  Legal decisions may take years, thus limiting the utility of the court system for dispute resolution.

Parcels commonly have a very high number of co-owners.  There are currently 8.4 million parcels, 4.4 million recorded owners of land, and 100 million co-owning relations.  On average, one parcel has 11.93 co-owners, and one owner has an average of 22.74 parcels.  To address this issue, the Agriculture Ministry started a robust land ownership reform in 2019 to consolidate parcels and simplify ownership records in the cadaster database.  A dedicated web portal allows verification of information about land and property ownership.

Foreigners can acquire real property without restrictions.  In February 2019, the Slovak Constitutional Court ruled against a Law on Agricultural Land Ownership (140/2014 Coll.), which indirectly limited the sale of land to foreigners by requiring at least three years of previous agricultural business activity and having at least 10 years of residency in Slovakia.

Squatting is illegal in Slovakia and ownership of unoccupied property will not revert to squatters or other parties unless they are entitled to own the land.

Slovakia was 8th out of 190 countries in the World Bank’s 2020 Doing Business “registering property” indicator, averaging 16.5 days to register a property compared to average of OECD high income countries of 23.6 days.

Please consult the following websites for more information:

Intellectual Property Rights

The Slovak legal system provides strong protection for intellectual property rights (IPR).  The country transposes and follows robust EU regulations and adheres to major international IPR treaties, including the Berne Convention, the Paris Convention, and numerous others on design classification, registration of goods, appellations of origin, patents, etc.  The protection of IPR falls under the jurisdiction of two agencies.  The Industrial Property Office of the Slovak Republic is the central government body overseeing industrial property protection, including patents, and the Culture Ministry is responsible for copyrights, including software.  The Financial Administration, which is part of the Finance Ministry, plays an important role in enforcing IPR and deals with customs, which plays a major part in the fight against counterfeit goods.  In case of IPR infringement, rights holders can bring a civil lawsuit in the district courts in Bratislava, Banska Bystrica, and Kosice and, if applicable, have the right to claim lost profits.  The courts can issue injunctions to prevent further infringement of IPR.  In certain cases, violation of IPR can be considered a criminal offense.

No major IPR-related laws were passed in 2019.  The EU Directives on copyright (2019/790 and 2019/789) are required to be transposed by June 2021.  Slovakia is not included in USTR’s Special 301 Report or the Notorious Markets List.

There were 1,901 suspected breaches of IPR in 2018 for goods imported from third countries (up from 1363 cases in 2017, especially in the form of textiles and shoes), but the value of seized counterfeit goods declined 53 percent from 2017 to €735,845.  The number of domestic IPR infringement cases grew from 918 in 2017 to 996 in 2018 with an increase in value in 2018 by 51 percent to €2.7 million.

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/ .

Please consult the following websites for more information:

9. Corruption

Slovakia is a party to international treaties on corruption.  Among them are the OECD Convention on Combating Bribery of Foreign Public Officials, the UN Anti-Organized Crime Convention, the UN Anti-Corruption Convention, and the Criminal Law Convention on Corruption and Civil Law Convention on Corruption.  Slovakia is a member of the Group of States against Corruption (GRECO).

The giving or accepting of a bribe constitutes a criminal act according to Slovak law.  Slovak criminal law incorporates criminal liability for legal persons, including corporations. Nevertheless, corruption continues to be among the most serious issues for the business community.  According to the Special Eurobarometer survey of October 2017, 81 percent of respondents believed that corruption is part of Slovakia’s business culture.  In 2019 Transparency International’s global corruption perception ranking showed that Slovakia dropped from 57th place in 2018 to 59th place.  There is no data available on whether U.S. firms identify corruption as an obstacle to foreign direct investment.  In a March 2018 survey by five foreign chambers of commerce (Slovak-German Chamber of Commerce, Slovak-Austrian Chamber of Commerce, Dutch Chamber of Commerce, Swedish Chamber of Commerce, and Advantage Austria), respondents highlighted the fight against criminality and corruption as the worst among evaluated investment criteria.  The investors further noted that concerns about corruption and rule of law could potentially damage the image of Slovakia and raise questions about future stability.

NGO analysts and GRECO point out that conflicts of interest and asset declaration regulations lack the necessary level of detail to be implemented and enforced in practice.  There is a high threshold for reporting gifts accepted by judges and prosecutors.  Government authorities do not require private companies to establish internal codes of conduct that would prohibit bribery of public officials, although some companies have adopted such measures voluntarily.  While law enforcement has effectively investigated some cases of petty bribes and mid-level corruption, anti-corruption non-governmental organizations assess that high-level corruption is rarely investigated or prosecuted effectively; only two ministerial-level officials have been convicted of corruption-related crimes since Slovak independence in 1993.  According to survey published by the Transparency International Slovakia between October 2016 and 2019 only 10 percent of corruption cases decided by the Specialized Criminal Court exceeded the amount of EUR 5,000.

Following the murder of investigative journalist Jan Kuciak and his fiancée Martina Kusnirova in February 2018 and the resulting changes in the government and police leadership, one individual involved in high-level tax fraud was convicted and a number of judges were charged with corruption, interference in the independence of courts and obstruction of justice.  In March 2020 Pavol Rusko, a former director of TV Markiza, and Marian Kočner, accused of plotting the murder of Jan Kuciak and his fiancé, and were sentenced to 19 years in jail for obstruction of justice and promissory notes fraud.  Based on the promissory notes, Kočner claimed €69 million from TV Markiza.  The appeal proceedings are pending.  TV Markiza is part of NASDAQ-traded Central European Media Enterprise (CME), and was majority owned by AT&T.  CME was sold to Czech firm PPF in 2019, pending approval from relevant EU and national regulatory authorities.

The previous government in power from 2016-2020 approved a National Anti-corruption Plan in September 2019.  NGOs investigating corruption do not enjoy any special protection.  In 2019 the Parliament adopted the law on whistleblower protection including a new office assigned to enhance whistleblower protection.  The Head of the Office has not yet been selected.   In June 2019 Parliament streamlined application of the anti-shell company law that provides for increased transparency in governmental contracting by requiring private companies reveal their ownership structure before entering into business contracts with state entities.

Some members of civil society and many politicians claim political influence over the police and prosecution services have impeded corruption investigations, allowing individuals with strong political connections to avoid prosecution for corrupt practices.  Several police investigators have publicly claimed, and other investigators told journalists in private, that the police corps’ politically nominated leadership discouraged investigation of politically sensitive cases, manipulated police statistics on criminality, and forced honest police officers to leave the force.  Following February 2020 parliamentary elections, a new government took over with a political program heavily focused on strengthening anti-corruption measures.

In January 2020, a conflict of interest in civil service regulation was launched by Cabinet decree, introducing a Code of Conduct for Civil Servants (400/2019 Coll.).

Disclosure of contracts in the Central Registry of Contracts by public administrators and state-owned enterprises is compulsory.  However, there continues to be frequent media reports alleging corruption in public tenders and EU subsidy programs.

Private businesses, especially those with foreign ownership, often have internal codes of ethics, in many cases also extending to contractors.

Resources to Report Corruption 

Contact details of government agencies responsible for combating corruption:

Dusan Kovacik
Head of the Special Prosecutor’s Office
Office of the Special Prosecution under the General Prosecutor’s Office
Sturova 2
812 85  Bratislava
Telephone: +421 33 690 3171
Dusan.Kovacik@genpro.gov.sk

Branislav Zurian
Director of the National Criminal Agency
Ministry of Interior, National Police Headquarters
Račianska 45
812 72 Bratislava
Telephone: +421 964052102
Branislav.Zurian@minv.sk

Contact details of “watchdog” organizations:

Gabriel Sipos
Executive Director
Transparency International Slovakia
Bajkalska 25
82718 Bratislava
Telephone: +421 2 5341 7207
sipos@transparency.sk

Zuzana Petkova
Executive Director
Stop Corruption Foundation
Stare Grunty 18
841 04 Bratislava
petkova@zastavmekorupciu.sk

Peter Kunder
Executive Director
Fair Play Alliance
Smrecianska 21
811 05 Bratislava
Telephone: +421 2 207 39 919
kunder@fair-play.sk

Tunisia

Executive Summary

Tunisia continued to make progress on its democratic transition and successfully held its second round of parliamentary and presidential elections since the 2011 revolution in September and October 2019, which led to the formation of a new government on February 27, 2020.  In 2019, Tunisia’s economy experienced a GDP growth of 1 percent.  The country still faces high unemployment, high inflation, and rising levels of public debt.

In recent years, successive governments have advanced much-needed structural reforms to improve Tunisia’s business climate, including an improved bankruptcy law, an investment code and initial “negative list,” a law enabling public-private partnerships, and a supplemental law designed to improve the investment climate.  The Government of Tunisia (GOT) has also encouraged entrepreneurship through the passage of the Start-Up Act.  The GOT also passed the “organic budget law” to ensure greater budgetary transparency and make the public aware of government investment projects over a three-year period.  These reforms will help Tunisia attract both foreign and domestic investment.

Tunisia’s strengths include its proximity to Europe, sub-Saharan Africa, and the Middle East, free-trade agreements with the EU and much of Africa, an educated workforce, and a strong interest in attracting foreign direct investment (FDI).  Sectors such as agribusiness, aerospace, renewable energy, telecommunication technologies, and services are increasingly promising.  The decline in the value of the dinar over recent years has strengthened investment and export activity in the electronic component manufacturing and textile sectors.

Nevertheless, substantial bureaucratic barriers to investment remain.  State-owned enterprises play a large role in Tunisia’s economy, and some sectors are not open to foreign investment.  The informal sector, estimated at 40 to 60 percent of the overall economy, remains problematic, as legitimate businesses are forced to compete with smuggled goods.

The United States has provided more than USD 500 million in economic growth-related assistance since 2011, in addition to loan guarantees in 2012, 2014, and 2016 that enabled the GOT to borrow nearly USD 1.5 billion at low interest.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 74 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 78 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 70 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 320 million https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 3,360 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The GOT is working to improve the business climate and attract FDI.  The GOT prioritizes attracting and retaining investment, particularly in the underdeveloped interior regions, and reducing unemployment.  More than 3,350 foreign companies currently operate in Tunisia, and the government has historically encouraged export-oriented FDI in key sectors such as call centers, electronics, aerospace and aeronautics, automotive parts, textile and apparel, leather and shoes, agro-food, and other light manufacturing.  In 2019, the sectors that attracted the most FDI were energy (37 percent), services (12 percent), the electrical and electronic industry (20.6 percent), the mechanical industry (8.5 percent), and agro-food products (4 percent).  Inadequate infrastructure in the interior regions results in the concentration of foreign investment in the capital city of Tunis and its suburbs (40.4 percent), the northern coastal region (20.5 percent), and the eastern coastal region (26.1 percent).  Internal western and southern regions attracted only 13 percent of foreign investment despite special tax incentives for those regions.

The Tunisian Parliament passed an Investment Law (#2016-71) in September 2016 that went into effect April 1, 2017 to encourage the responsible regulation of investments.  The law provided for the creation of three major institutions:

  • The High Investment Council, whose mission is to implement legislative reforms set out in the investment law and decide on incentives for projects of national importance (defined as investment projects of more than 50 million dinars and 500 jobs).
  • The Tunisian Investment Authority, whose mission is to manage investment projects of more than 15 million dinars and up to 50 million dinars. Investment projects of less than 15 million dinars are managed by the Foreign Investment Promotion Agency (FIPA).
  • The Tunisian Investment Fund, which will fund foreign investment incentive packages.

These institutions were all launched in 2017.  However, the Foreign Investment Promotion Agency (FIPA) continues to be Tunisia’s principal agency to promote foreign investment.  FIPA is a one-stop shop for foreign investors.  It provides information on investment opportunities, advice on the appropriate conditions for success, assistance and support during the creation and implementation of the project, and contact facilitation and advocacy with other government authorities.

Under the 2016 Investment Law (article 7), foreign investors have the same rights and obligations as Tunisian investors.  Tunisia encourages dialogue with investors through FIPA offices throughout the country.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign investment is classified into two categories:

  • “Offshore” investment is defined as commercial entities in which foreign capital accounts for at least 66 percent of equity, and at least 70 percent of the production is destined for the export market.  However, investments in some sectors can be classified as “offshore” with lower foreign equity shares.  Foreign equity in the agricultural sector, for example, cannot exceed 66 percent and foreign investors cannot directly own agricultural land, but agricultural investments can still be classified as “offshore” if they meet the export threshold.
  • “Onshore” investment caps foreign equity participation at a maximum of 49 percent in most non-industrial projects.  “Onshore” industrial investment may have 100 percent foreign equity, subject to government approval.

Pursuant to the 2016 Investment Law (article 4), a list of sectors outlining which investment categories are subject to government authorization (the “negative list”) was set by decree on May 11, 2018.  The sectors include natural resources; construction materials; land, sea and air transport; banking, finance, and insurance; hazardous and polluting industries; health; education; and telecommunications.  Per the decree, if the relevant government decision-making body does not respond to an investment request within a specified period, typically 60 days, the authorization is automatically granted to the applicant.  The decree went into effect on July 1, 2018.

Other Investment Policy Reviews

The WTO completed a Trade Policy Review for Tunisia in July 2016.  The report is available here:  https://www.wto.org/english/tratop_e/tpr_e/tp441_e.htm .

The OECD completed an Investment Policy Review for Tunisia in November 2012.  The report is available here:  http://www.oecd.org/daf/inv/investment-policy/tunisia-investmentpolicyreview-oecd.htm .

Business Facilitation

In May 2019, the Tunisian Parliament adopted law 2019-47, a cross-cutting law that impacts legislation across all sectors.  The law is designed to improve the country’s business climate and further improve its ranking in the World Bank’s Doing Business Report.  Moreover, the law simplified the process of creating a business, permitted new methods of finance, improved regulations for corporate governance, and provided the private sector the right to operate a project under the framework of a public-private partnership (PPP).

This legislation and previous investment laws are all referenced on the United Nations Conference on Trade and Development (UNCTAD) website: https://investmentpolicy.unctad.org/country-navigator/221/tunisia .

The World Bank Doing Business 2020 report ranks Tunisia 19  in terms of ease of starting a business.  In the Middle East and North Africa, Tunisia ranked second after the UAE, and first in North Africa ahead of Morocco (53), Egypt (114), Algeria (157), and Libya (186):  https://www.doingbusiness.org/en/data/exploreeconomies/tunisia#DB_sb .

The Agency for Promotion of Industry and Innovation (APII) and the Tunisia Investment Authority (TIA) are the focal point for business registration.  Online project declaration for industry or service sector projects for both domestic and foreign investment is available at:  www.tunisieindustrie.nat.tn/en/doc.asp?mcat=16&mrub=122 .

The new online TIA platform allows potential investors to electronically declare the creation, extension, and renewal of all types of investment projects.  The platform also allows investors to incorporate new businesses, request special permits, and apply for investment and tax incentives. https://www.tia.gov.tn/ .

APII has attempted to simplify the business registration process by creating a one-stop shop that offers registration of legal papers with the tax office, court clerk, official Tunisian gazette, and customs.  This one-stop shop also houses consultants from the Investment Promotion Agency, Ministry of Employment, National Social Security Authority (CNSS), postal service, Ministry of Interior, and the Ministry of Trade.  Registration may face delays as some agencies may have longer internal processes.  Prior to registration business must first initiate an online declaration of intent, to which APII provides a notification of receipt within 24 hours.

The World Bank’s Doing Business 2020 report indicates that business registration takes an average of 9 days and costs about USD 90 (253 Tunisian dinars):   http://www.doingbusiness.org/en/data/exploreeconomies/tunisia#DB_sb .

For agriculture and fisheries, business registration information can be found at:  www.apia.com.tn .

In the tourism industry, companies must register with the National Office for Tourism at: http://www.tourisme.gov.tn/en/investing/administrative-services.html .

The central point of contact for established foreign investors and companies is the Foreign Investment Promotion Agency (FIPA):  http://www.investintunisia.tn .

Outward Investment

The GOT does not incentivize outward investment, and capital transfer abroad is tightly controlled by the Central Bank.

3. Legal Regime

Transparency of the Regulatory System

As stipulated in the 2014 constitution, Tunisia has adopted a semi-parliamentary political system whereby power is shared among the Parliament, the Presidency of the Republic, and the Government, which is composed of a ministerial cabinet led by a Prime Minister (Head of Government).  The Presidency and the Government fulfill executive roles. The Government creates the majority of laws and regulations; however, the Presidency of the Republic and Parliament also develop and propose laws.

The Parliament debates and votes on the adoption of legislation.  Draft legislation is accessible to the public via the Parliament’s website.

Ministerial decrees and other regulations are debated at the level of the Government and adopted by a Ministerial Council headed by the Prime Minister.

After adoption, all laws, decrees, and regulations are published on the website of the Official Gazette and enforced by the Government at the national level.

The Government takes few proactive steps to raise public awareness of the public consultation period for new draft laws and decrees.  Civil society, NGOs, and political parties are all pushing for increased transparency and inclusiveness in rule-making.  Many draft bills, such as the budget law, were reviewed before submission for a final vote under pressure from civil society.  Business associations, chambers of commerce, unions, and political parties reviewed the 2016 Investment Law prior to final adoption.

In January 2019, the Tunisian Parliament passed the Organic Budget Law, which is a foundational law defining the parameters for the government’s annual budgeting process.  The law aimed to bring the budget process in line with principles expressed in the 2014 constitution by enlarging Parliament’s role in the budgetary process and strengthening the financial autonomy of the legislative and judiciary branches.  The law required the government to organize its budget by policy objective, detail budget projections over a three-year timeframe, and revise its accounting system to ensure greater transparency.

Not all accounting, legal, and regulatory procedures are in line with international standards.  Publicly listed companies adhere to national accounting norms.

The Parliament has oversight authority over the GOT but cannot ensure that all administrative processes are followed.

The World Bank Global Indicators of Regulatory Governance  for Tunisia are available here: http://rulemaking.worldbank.org/en/data/explorecountries/tunisia .

Tunisia is a member of the Open Government Partnership, a multilateral initiative that aims to secure concrete commitments from governments to promote transparency, empower citizens, fight corruption, and harness new technologies to strengthen governance:  http://www.opengovpartnership.org/country/tunisia .

Most of Tunisia’s public finances and debt obligations are debated and voted on by the Parliament.

International Regulatory Considerations

As part of its negotiations toward a comprehensive free-trade agreement with the EU, the GOT is considering incorporating a number of EU standards in its domestic regulations.

Tunisia became a member of the WTO in 1995 and is required to notify the WTO regarding draft technical regulations on Technical Barriers to Trade (TBT).  However, in October 2018 the Ministry of Commerce released a circular that temporarily restricted the import of certain goods without going through the WTO notification process, which negatively impacted some business operations without forewarning.

Tunisia has yet to ratify the WTO Trade Facilitation Agreement (TFA) that would improve processes at the port of entry.  However, Tunisia submitted a “Category A” notification in September 2014 and a “Category C” notification in September 2019, which should have required the GOT to implement TFA measures by February 2017.

Legal System and Judicial Independence

The Tunisian legal system is secular and based on the French Napoleonic code and meets EU standards.  While the 2014 Tunisian constitution guarantees the independence of the judiciary, constitutionally mandated reforms of courts and broader judiciary reforms are still ongoing.

Tunisia has a written commercial law but does not have specialized commercial courts.

Regulations or enforcement actions can be appealed at the Court of Appeals.

Laws and Regulations on Foreign Direct Investment

The 2016 Investment Law directs tax incentives towards regional development promotion, technology and high value-added products, research and development (R&D), innovation, small and medium-sized enterprises (SMEs), and the education, transport, health, culture, and environmental protection sectors.  Foreign investors can apply for government incentives online through the Tunisian Investment Authority (TIA) website:  https://www.tia.gov.tn/en .

The primary one-stop-shop webpage for investors looking for relevant laws and regulations is hosted at the Investment and Innovation Promotion Agency website, http://www.tunisieindustrie.nat.tn/en/doc.asp?mcat=12&mrub=209 .  The 2016 Investment Law (article 15) calls for the creation of an Investor’s Unique Point of Contact within the Ministry of Development, Investment, and International Cooperation to assist new and existing investors to launch and expand their projects.

In addition, the Parliament has adopted a number of economic reforms since 2015, including laws concerning renewable energy, competition, public-private partnerships, bankruptcy, and the independence of the Central Bank of Tunisia, as well as a Start-Up Act to promote the creation of new businesses and entrepreneurship.

Competition and Anti-Trust Laws

The 2015 Competition Law established a government appointed Competition Council to reduce government intervention in the economy and promote competition based on supply and demand.

This law voided previous agreements that fixed prices, limited free competition, or restricted the entry of new companies as well as those that controlled production, distribution, investment, technical progress, or supply centers.  While the law ensures free pricing of most products and services, there are a few protected items, such as bread and electricity, for which the GOT can still intervene in pricing.  Moreover, in exceptional cases of large increases or collapses in prices, the Ministry of Commerce reserves the right to regulate prices for a period of up to six months.  The Ministry of Commerce also reserves the right to intervene in sectors to ensure free and fair competition.  However, the Competition Council can make exceptions to its anti-trust policies if it deems it necessary for overall technical or economic progress.

The Competition Council also has the power to investigate competition-inhibiting cases and make recommendations to the Ministry of Commerce upon the Ministry’s request.

Expropriation and Compensation

There are no outstanding expropriation cases involving U.S. interests.  The 2016 Investment Law (article 8) stipulates that investors’ property may not be expropriated except in cases of public interest.  Expropriation, if carried out, must comply with legal procedures, be executed without discrimination on the basis of nationality, and provide fair and equitable compensation.

U.S. investments in Tunisia are protected by international law as stipulated in the U.S.-Tunisia Bilateral Investment Treaty (BIT).  According to Article III of the BIT, the GOT reserves the right to expropriate or nationalize investments for the public good, in a non-discriminatory manner, and upon advance compensation of the full value of the expropriated investment.  The treaty grants the right to prompt review by the relevant Tunisian authorities of conformity with the principles of international law.  When compensation is granted to Tunisian or foreign companies whose investments suffer losses owing to events such as war, armed conflict, revolution, state of national emergency, civil disturbance, etc., U.S. companies are accorded “the most favorable treatment in regards to any measures adopted in relation to such losses.”

Dispute Settlement

ICSID Convention and New York Convention

Tunisia is a member of the International Center for the Settlement of Investment Disputes (ICSID) and is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Investor-State Dispute Settlement

U.S. investments in Tunisia are protected by international law as stipulated in the U.S.-Tunisia Bilateral Investment Treaty (BIT).  The BIT stipulates that procedures shall allow an investor to take a dispute with a party directly to binding third-party arbitration.

Disputes involving U.S. persons are relatively rare.  Over the past 10 years, there were three dispute cases involving U.S. investors; two were settled and one is still ongoing.  U.S. firms have generally been successful in seeking redress through the Tunisian judicial system.

The Tunisian Code of Civil and Commercial Procedures allows for the enforcement of foreign court decisions under certain circumstances, such as arbitration.

There is no pattern of significant investment disputes or discrimination involving U.S. or other foreign investors.

International Commercial Arbitration and Foreign Courts

The Tunisian Arbitration Code brought into effect by Law 93-42 of April 26, 1993, governs arbitration in Tunisia.  Certain provisions within the code are based on the United Nations Commission on International Trade Law (UNCITRAL) model law.  Tunisia has several domestic dispute resolution venues.  The best known is the Tunis Center for Conciliation and Arbitration.  When an arbitral tribunal does not adhere to the rules governing the process, either party can apply to the national courts for relief.  Unless the parties have agreed otherwise, an arbitral tribunal may, on the request of one of the parties, order any interim measure that it deems appropriate.

Bankruptcy Regulations

Parliament adopted in April 2016 a new bankruptcy law that replaced Chapter IV of the Commerce Law and the Recovery of Companies in Economic Difficulties Law.  These two laws had duplicative and cumbersome processes for business rescue and exit and gave creditors a marginal role.  The new law increases incentives for failed companies to undergo liquidation by limiting state collection privileges.  The improved bankruptcy procedures are intended to decrease the number of non-performing loans and facilitate access of new firms to bank lending.

According to the World Bank Doing Business 2020 report, Tunisia’s recovery rate (how much creditors recover from an insolvent firm at the end of insolvency proceedings) is about 51.3 cents on the dollar, compared to 27.3 cents for MENA and 70.2 cents for OECD high-income countries.

5. Protection of Property Rights

Real Property

Secured interests in property are enforced in Tunisia.  Mortgages and liens are in common use, and the recording system is reliable.

Foreign and/or non-resident investors are allowed to lease any type of land, but can only acquire non-agricultural land.

A large portion of privately held land, especially agriculture land, has no clear title, and the government is investing a great deal of effort to encourage people to clear and register their properties.  For the past ten years, it has been estimated that privately held land accounts for approximately 45 percent.

Properties legally purchased must be duly registered to ensure they remain the property of their actual owners, even if they have been unoccupied for a long time.

According to the World Bank’s Doing Business 2020 report, registering a property in Tunisia is done in five steps, takes 35 days, and costs around 6.1 percent of the total property cost. In North Africa, Tunisia ranks second after Morocco but is ahead of Egypt, Algeria, and Libya.

Intellectual Property Rights

Tunisia is a member of the World Intellectual Property Organization (WIPO) and signatory to the United Nations Agreement on the Protection of Patents and Trademarks.  The agency responsible for patents and trademarks is the National Institute for Standardization and Industrial Property (INNORPI — Institut National de la Normalisation et de la Propriété Industrielle).  Tunisia also is party to the Madrid Protocol for the International Registration of Marks.  Foreign patents and trademarks should be registered with INNORPI.

Tunisia’s patent and trademark laws are designed to protect owners duly registered in Tunisia.  In the area of patents, foreign businesses are guaranteed treatment equal to that afforded to Tunisian nationals.  Tunisia updated its legislation to meet the requirements of the WTO agreement on Trade-Related Aspects of Intellectual Property (TRIPS).

Copyright protection is the responsibility of the Tunisian Copyright Protection Organization (OTDAV — Office Tunisien des Droits d´Auteurs et des Droits Voisins), which also represents foreign copyright organizations.

The 2009 Intellectual Property law greatly expanded the current scope of protections.  The minimum fine for counterfeiting is 10,000 Tunisian dinars (approximately USD 3,800), and copyright protection is valid for the holder’s lifetime.  Customs agents have the authority to seize suspected counterfeit goods immediately.  Tunisia’s 2014 constitution enshrined intellectual property protection in article 41.

If customs officials suspect a copyright violation, they are permitted to inspect and seize suspected goods.  For products utilizing foreign trademarks registered at INNORPI, the Customs Code empowers customs agents to enforce intellectual property rights (IPR) throughout the country.  Tunisian copyright law applies to literary works, art, scientific works, new technologies, and digital works.  Its application and enforcement, however, have not always been consistent with foreign commercial expectations.  Print, audio, and video media are particularly susceptible to copyright infringement in Tunisia.  Smuggling of illegal items takes place through Tunisia’s porous borders.

In 2015, the GOT issued a decree defining registration and arbitration procedures for trade and service marks, and establishing a national trademark registry.  The new decree contained provisions governing the registration of trademarks under the Madrid Protocol and included improvements such as the extension of the deadline for opposition to the registration of trademarks, as well as the electronic filing of applications for trademarks registration.

In March 2020, the Tunisian Parliament approved the government’s request for Tunisia to host the headquarters of the Pan-African Intellectual Property Body (PAIPO).  Tunisia is waiting for at least 14 African countries to ratify the formation of PAIPO in order for it to enter into force.

The registration of pharmaceutical drugs in Tunisia requires that the product is both registered and marketed in the country of origin.  In 2005, Tunisia removed its restriction on pharmaceutical imports where there are similar generic products manufactured locally.

Resources for Rights Holders 

Peter Mehravari
Intellectual Property Attaché for the Middle East and North Africa
U.S. Embassy Kuwait City, Kuwait
U.S. Department of Commerce Global Markets
U.S. Patent and Trademark Office
Tel: +965 2259 1455
peter.mehravari@trade.gov

AmCham Tunisia:  http://www.amchamtunisia.org.tn/ 

Attorneys list: https://tn.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys/

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

9. Corruption

Most U.S. firms involved in the Tunisian market do not identify corruption as a primary obstacle to foreign direct investment.  However, some have reported that routine procedures for doing business (customs, transportation, and some bureaucratic paperwork) are sometimes tainted by corrupt practices.  Transparency International’s Corruption Perceptions Index 2019 gave Tunisia a score of 43 out of 100 and a rank of 74 among 180 countries which was the same as in 2018.  Regionally, Tunisia is ranked 7 for transparency among MENA countries and first in North Africa, ahead of Morocco, Algeria, Egypt, and Libya.  Transparency International expressed concern that Tunisia’s score has not improved in recent years despite advances in anti-corruption legislation, including laws to protect whistleblowers, improve access to information, and encourage asset declarations by public officials or individuals with public trust roles.

Recent government efforts to combat corruption include:  the seizure and privatization of assets belonging to Ben Ali’s family members; assurances that price controls on food products, and gasoline are respected; enhancement of commercial competition in the domestic market; establishment of a Minister in Charge of Public Service, Good Governance, Anti-corruption; arrests of corrupt businessmen and officials; and harmonization of Tunisian corruption laws with those of the European Union.

The constitution requires those holding high government offices to declare assets “as provided by law.”  In 2018 parliament adopted the Assets Declaration Law, identifying 35 categories of public officials required to declare their assets upon being elected or appointed and upon leaving office.  By law the National Authority for the Combat Against Corruption (INLUCC) is then responsible for publishing the lists of assets of these individuals on its website.  In addition the law requires other individuals in specified professions that have a public role to declare their assets to INLUCC, although this information would not be made public.  This provision applies to journalists, media figures, civil society leaders, political party leaders, and union officials.  The law also enumerates a “gift” policy, defines measures to avoid conflicts of interest, and stipulates the sanctions that apply in cases of illicit enrichment.  In 2019, Tunisia’s newly elected government officials declared their assets, including the 217 Members of Parliament.

In February 2017, Parliament passed law no. 2017-10 on corruption reporting and whistleblower protection.  The legislation was a significant step in the fight against corruption, as it establishes the mechanisms, conditions, and procedures for denouncing corruption.  Article 17 of the law provides protection for whistleblowers, and any act of reprisal against them is considered a punishable crime.  For public servants, the law also guarantees the protection of whistleblowers against possible retaliation from their superiors.  In September 2017, the GOT established the Independent Access to Information Commission.  This authority was prescribed in the 2016 Access to Information Law to proactively encourage government agencies to comply with the new law and to adjudicate complaints against the government for failing to comply with the law.  Following the passage of the access to information and whistleblower protection laws, the government initiated an anti-corruption campaign led by then prime minister Youssef Chahed.  A series of arrests and investigations targeted well-known businesspersons, politicians, journalists, police officers, and customs officials.  Preliminary charges included embezzlement, fraud, and taking bribes.

Tunisia’s penal code devotes 11 articles to defining and classifying corruption and assigns corresponding penalties (including fines and imprisonment).  Several other regulations also address broader concepts of corruption.  Detailed information on the application of these laws and their effectiveness in combating corruption is not publicly available, and there are no GOT statistics specific to corruption. The Independent Commission to Investigate Corruption, created in 2011, handled corruption complaints from 1987 to 2011.  The commission referred 5 percent of cases to the Ministry of Justice.  In 2012, the commission was replaced by the National Authority to Combat Corruption (INLUCC), which has the authority to forward corruption cases to the Ministry of Justice, give opinions on legislative and regulatory anti-corruption efforts, propose policies and collect data on corruption, and facilitate contact between anti-corruption efforts in the government and civil society.

During a March 16, 2019 press conference, INLUCC president Chawki Tabib said that it takes seven to 10 years on average for corruption cases to be processed in the judicial system.  In 2018 the Tunisian Financial Analysis Committee, which operates under the auspices of the Central Bank as a financial intelligence unit, announced that it froze approximately 200 million dinars ($70 million) linked to suspected money-laundering transactions.  The committee received approximately 600 reports of suspicious transactions related to corruption and illicit financial flows during the year.

Since 1989, a comprehensive law designed to regulate each phase of public procurement has governed the public sector.  The GOT also established the Higher Commission on Public Procurement (HAICOP) to supervise the tender and award process for major government contracts.  The government publicly supports a policy of transparency.  Public tenders require bidders to provide a sworn statement that they have not and will not, either by themselves or through a third party, make any promises or give gifts with a view to influencing the outcome of the tender and realization of the project.  Starting September 2018, the government imposed by decree that all public procurement operations be conducted electronically via a bidding platform called Tunisia Online E-Procurement System (TUNEPS).  Despite the law, competition on government tenders appears susceptible to corrupt behavior.  Pursuant to the Foreign Corrupt Practices Act (FCPA), the U.S. Government requires that American companies requesting U.S. Government advocacy certify that they do not participate in corrupt practices.

Resources to Report Corruption

Contacts at agencies responsible for combating corruption:

Chawki Tabib
President
The National Anti-Corruption Authority (Instance Nationale de Lutte Contre la Corruption – INLUCC)
http://www.inlucc.tn 
71 Avenue Taieb Mhiri, 1002 Tunis Belvédère – Tunisia
+216 71 840 401 / Toll Free: 80 10 22 22
contact@inlucc.tn

“Watchdog” organization

Achraf Aouadi
President
I WATCH Tunisia
14 Rue d’Irak 1002 Lafayette, Tunisia
+ 216 71 844 226
contact@iwatch.tn

Turkey

Executive Summary

Turkey experienced strong economic growth on the back of the many positive economic and banking reforms it implemented between 2002 and 2007.  After the global economic crisis of 2008-2009, Turkey continued to attract substantial investment as a relatively stable emerging market with a promising trajectory of reforms and a strong banking system.  Turkey saw nine years of gross domestic product (GDP) growth between 2011 and 2018. However, over the last several years, economic and democratic reforms have stalled and by some measures, regressed.  GDP growth was 2.6 percent in 2018 as the economy entered a recession in the second half of the year.  Challenged by the continuing currency crisis, particularly in the first half of 2019, the Turkish economy grew by only 0.9 percent in 2019.  While the Government of Turkey originally projected 5.0 percent GDP growth in 2020, the COVID-19 pandemic has dramatically slowed economic activity and the majority of economists project a growth rate that is negative or near zero for the year.  In April 2020, the World Bank lowered its economic growth forecast for Turkey to 0.5 percent for 2020, while the IMF predicts a contraction of 5 percent.

The government’s economic policymaking remains opaque, erratic, and politicized, contributing to a fall in the value of the lira.  Inflation reached more than 11 percent and unemployment over 13 percent by the end of 2019.  The COVID-19 crisis will likely lower inflation due to reduced demand, but will put upward pressure on the unemployment number.

The government’s push to require manufacturing and data localization in many sectors and the recent introduction of a digital services tax have negatively impacted foreign investment into the country.  Other issues of import include tax reform and the decreasing independence of the judiciary and the Central Bank.  Turkey hosts 3.7 million Syrian refugees, which creates an additional economic burden on the country as the government provides them services such as education and healthcare.

Recent laws targeting the Information and Communication Technology (ICT) sector have increased regulations on data, online broadcasting, tax collection, and payment platforms.  In particular, ICT and other companies report GOT pressure to localize data, which it views as a precursor to greater GOT access to user information and source code.  Law #6493 on Payment and Security Systems, Payment Services and e-money Institutions, also requires financial institutions to establish servers in Turkey in order to localize data.  The Turkish Banking Regulation and Supervision Agency (BDDK) is the authority that issues business licenses as long as companies 1) localize their IT systems in Turkey, and 2) keep the original data, not copies, in Turkey.  Regulations on data localization, internet content, and taxation/licensing have resulted in the departure of several U.S. tech companies from the Turkish market, and has chilled investment by other possible entrants to the e-commerce and e-payments sectors.  The laws potentially affect all companies that collect private user data, such as payment information provided online for a consumer purchase.

Turkey transitioned from a parliamentary to a presidential system in July 2018, following a referendum in 2017 and presidential election in June 2018.  The opacity of government decision making, lack of independence of the central bank, and concerns about the government’s commitment to the rule of law, combined with high levels of foreign exchange-denominated debt held by Turkish banks and corporates, have led to historically low levels of foreign direct investment (FDI).

While there are still an estimated 1,700 U.S. businesses active in Turkey, many with long-standing ties to the country, the share of American activity is relatively low given the size of the Turkish economy.  Increased protectionist measures add to the challenges of investing in Turkey, which saw 2018-2019 investment flows from the United States and the world drop by 21 percent and 17 percent, respectively.  Although there are still positive growth prospects and some established companies have increased investments, near-term projections indicate that foreign investment will continue to slow.

The most positive aspects of Turkey’s investment climate are its favorable demographics and prime geographical position, providing access to multiple regional markets.  Turkey is an island of relative stability in a turbulent region, making it a popular hub for regional operations.  Turkey has a relatively educated work force, well-developed infrastructure, and a consumption-based economy.

In the past few years, the government has increasingly marginalized critics, confiscated over 1,100 companies worth more than USD 11 billion, and purged more than 130,000 civil servants, often on tenuous terrorism-related charges alleging association with Fethullah Gulen, whom Turkey’s government alleges was behind the 2016 coup attempt.  The political focus on transitioning to a presidential system, cross-border military operations in Syria, the worsening economic climate, and persistent questions about the relationship between the United States and Turkey as well as Turkey’s relationship with the European Union (EU), all may negatively affect consumer confidence and investment in the future.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 91 of 180 https://www.transparency.org/
cpi2019
World Bank’s Doing Business Report 2019 33 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 49 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2018 4,656 http://apps.bea.gov/international/
di1usdbal
World Bank GNI per capita 2018 10,420 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment  

Turkey acknowledges that it needs to attract significant new foreign direct investment (FDI) to meet its ambitious development goals.  As a result, Turkey has one of the most liberal legal regimes for FDI among Organization for Economic Cooperation and Development (OECD) members.  According to the Central Bank of Turkey’s balance of payments data, Turkey attracted a total of USD 5.6 billion of FDI in 2019, almost USD 1 billion down from USD 6.7 billion in 2018.  This figure is the lowest FDI figure for Turkey in the last 15 years.  In order to attract more FDI, Turkey needs to improve enforcement of international trade rules, ensure the transparency and timely execution of judicial awards, increase engagement with foreign investors on policy issues, and pursue policies to promote strong, sustainable, and balanced growth.  It also needs to take other political measures to increase stability and predictability for investors.  A stable banking sector, tight fiscal controls, efforts to reduce the size of the informal economy, increased labor market flexibility, improved labor skills, and continued privatization of state-owned enterprises would, if pursued, have the potential to improve the investment environment in Turkey.

Most sectors open to Turkish private investment are also open to foreign participation and investment.  All investors, regardless of nationality, face similar challenges:  excessive bureaucracy, a slow judicial system, relatively high and inconsistently applied taxes, and frequent changes in the legal and regulatory environment.  Structural reforms that would create a more transparent, equal, fair, and modern investment and business environment remain stalled.  Venture capital and angel investing are still relatively new in Turkey.

Turkey does not screen, review, or approve FDI specifically.  However, the government has established regulatory and supervisory authorities to regulate different types of markets.  Important regulators in Turkey include the Competition Authority; Energy Market Regulation Authority; Banking Regulation and Supervision Authority; Information and Communication Technologies Authority; Tobacco, Tobacco Products and Alcoholic Beverages Market Regulation Board; Privatization Administration; Public Procurement Authority; Radio and Television Supreme Council; and Public Oversight, Accounting and Auditing Standards Authority.  Some of the aforementioned authorities screen as needed without discrimination, primarily for tax audits.  Screening mechanisms are executed to maintain fair competition and for other economic benefits.  If an investment fails a review, possible outcomes can vary from a notice to remedy, which allows for a specific period of time to correct the problem, to penalty fees.  The Turkish judicial system allows for appeals of any administrative decision, including tax courts that deal with tax disputes.

Limits on Foreign Control and Right to Private Ownership and Establishment  

There are no general limits on foreign ownership or control.  However, there is increasing pressure in some sectors for foreign investors to partner with local companies and transfer technology, and some discriminatory barriers to foreign entrants, on the basis of “anti-competitive practices,” especially in the information and communication technology (ICT) sector or pharmaceuticals.  In many areas Turkey’s regulatory environment is business-friendly.  Investors can establish a business in Turkey irrespective of nationality or place of residence.  There are no sector-specific restrictions that discriminate against foreign investor access, which are prohibited by World Trade Organization (WTO) Regulations.

Other Investment Policy Reviews 

The OECD published an Environmental Performance Review for Turkey in February 2019, noting the country was the fastest growing among OECD members.  Turkey’s most recent investment policy review through the World Trade Organization (WTO) was conducted in March 2016.  Turkey has cooperated with the World Bank to produce several reports on the general investment climate that can be found at:  http://www.worldbank.org/en/country/turkey/research .

Business Facilitation  

The Presidency of the Republic of Turkey Investment Office is the official organization for promoting Turkey’s investment opportunities to the global business community and assisting investors before, during, and after their entry into Turkey.  Its website is clear and easy to use, with information about legislation and company establishment. (http://www.invest.gov.tr/en-US/investmentguide/investorsguide/Pages/EstablishingABusinessInTR.aspx ).  The website is also where foreigners can register their businesses.

The conditions for foreign investors setting up a business and transferring shares are the same as those applied to local investors.  International investors may establish any form of company set out in the Turkish Commercial Code (TCC), which offers a corporate governance approach that meets international standards, fosters private equity and public offering activities, creates transparency in managing operations, and aligns the Turkish business environment with EU legislation as well as with the EU accession process.

Turkey defines micro, small, and medium-sized enterprises according to Decision No. 2018/11828 of the Official Gazette dated June 2, 2018:

  • Micro-sized enterprises: fewer than 10 employees and less than or equal to 3 million Turkish lira in net annual sales or financial statement.
  • Small-sized enterprises: fewer than 50 employees and less than or equal to 25 million Turkish lira in net annual sales or financial statement.
  • Medium-sized enterprises: fewer than 250 employees and less than or equal to 125 million Turkish lira in net annual sales or financial statement.

Outward Investment

The government promotes outward investment via investment promotion agencies and other platforms.  It does not restrict domestic investors from investing abroad.

3. Legal Regime

Transparency of the Regulatory System

The Government of Turkey (GOT) has adopted policies and laws that, in principle, should foster competition and transparency.  The GOT makes its budgetary spending reports available online.  Copies of draft bills are generally made available to the public by posting them to the websites of the relevant ministry, Parliament, or Official Gazette.  Foreign companies in several sectors, however, claim that regulations are applied in a nontransparent manner.  In particular, public tender decisions and regulatory updates can be opaque and politically driven.

Accounting, legal, and regulatory procedures appear to be consistent with international norms, including standards set forth by the International Financial Reporting Standards (IFRS), the EU, and the OECD.  Publicly traded companies adhere to international accounting standards and are audited by well-respected international firms.

International Regulatory Considerations

Turkey is a candidate for EU membership, however, the accession process has stalled, with the opening of new chapters put on hold.  Some, though not all, Turkish regulations have been harmonized with the EU, and the country has adopted many European regulatory norms and standards. Turkey is a member of the WTO, though it does not notify all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).

Legal System and Judicial Independence

Turkey’s legal system is based on civil law, provides means for enforcing property and contractual rights, and there are written commercial and bankruptcy laws.  Turkey’s court system, however, is overburdened, which sometimes results in slow decisions and judges lacking sufficient time to consider complex issues.  Judgments of foreign courts, under certain circumstances, need to be upheld by local courts before they are accepted and enforced.  Recent developments reinforce the Turkish judicial system’s need to undertake significant reforms to adopt fair, democratic, and unbiased standards. The government is currently implementing the first round of judicial reforms approved in 2019.  Some critics have observed indications the judiciary remains subject to influence, particularly from the executive branch, and faces a number of challenges that limit judicial independence.

Laws and Regulations on Foreign Direct Investment

Turkey’s investment legislation is simple and complies with international standards, offering equal treatment for all investors.  The New Turkish Commercial Code No. 6102 (“New TCC”) was published in the Official Gazette on February 14, 2011.  The backbone of the investment legislation is made up of the Encouragement of Investments and Employment Law No. 5084, Foreign Direct Investments Law No. 4875, international treaties and various laws and related sub-regulations on the promotion of sectorial investments.  Regulations related to mergers and acquisitions include: a) Turkish Code of Obligations: Article 202 and Article 203, b) Turkish Commercial Code: Articles 134-158, c) Execution and Bankruptcy Law: Article 280, d) Law on the Procedures for the Collection of Public Receivables: Article 30, and e) Law on Competition: Article 7.  The government’s primary website for investors is http://www.invest.gov.tr/en-US/Pages/Home.aspx .

Competition and Anti-Trust Laws

The Competition Authority is the sole authority on competition issues in Turkey and handles private sector transactions.  Public institutions are exempt from its authority.  The Constitutional Court can overrule the Competition Authority’s finding of innocence in a competition case.  There have been some cases of Turkish courts blocking foreign company operations on the basis of anti-competitive claims, with a few investigations into foreign companies initiated.  Such cases can take over a year to resolve, during which time the companies can be prohibited from doing business in Turkey, which benefits their (local) competitors.

Expropriation and Compensation

Under the U.S.-Turkey Bilateral Investment Treaty (BIT), expropriation can only occur in accordance with due process of law, can only be for a public purpose, and must be non-discriminatory.  Compensation must be prompt, adequate, and effective.  The GOT occasionally expropriates private real property for public works or for state industrial projects.  The GOT agency expropriating the property negotiates the purchase price.  If the owners of the property do not agree with the proposed price, they are able to challenge the expropriation in court and ask for additional compensation.  There are no known outstanding expropriation or nationalization cases for U.S. firms.  Although there is not a pattern of discrimination against U.S. firms, the GOT has aggressively targeted businesses, banks, media outlets, and mining and energy companies with alleged ties to the so-called “Fethullah Terrorist Organization (FETO)” and/or the July 2016 attempted coup, including the expropriation of over 1,100 private companies worth more than USD 11 billion.

Dispute Settlement

ICSID Convention and New York Convention

Turkey is a member of the International Centre for the Settlement of Investment Disputes (ICSID) and is a signatory to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.    Foreign arbitral awards will be enforced if the country of origin of the award is a New York Convention state, if the dispute is commercial under Turkish law, and as long as none of the grounds under Article V of the New York Convention are proved by the opposing party.

Investor-State Dispute Settlement

U.S. investors generally have full access to Turkey’s local courts and the ability to take the government directly to international binding arbitration if a breach of the U.S.-Turkey Bilateral Investment Treaty has occurred.

International Commercial Arbitration and Foreign Courts

Turkey adopted the International Arbitration Law, based on the UNCITRAL model law, in 2001.  Local courts accept binding international arbitration of investment disputes between foreign investors and the state.  In practice, however, Turkish courts have sometimes failed to uphold international arbitration awards involving private companies and have favored Turkish firms.  There are two main arbitration bodies in Turkey: the Union of Chambers and Commodity Exchanges of Turkey (www.tobb.org.tr ) and the Istanbul Chamber of Commerce Arbitration and Mediation Center (www.itotam.com/en ).  Most commercial disputes can be settled through arbitration, including disputes regarding public services.  Parties decide the arbitration procedure, set the arbitration rules, and select the language of the proceedings.  The Istanbul Arbitration Center was established in October 2015 as an independent, neutral, and impartial institution to mediate both domestic and international disputes through fast track arbitration, emergency arbitrator, and appointments for ad hoc procedures.  Its decisions are binding and subject to international enforcement. (www.istac.org.tr/en ).

As of January 2019, some commercial disputes may be subject to mandatory mediation; if the parties are unable to resolve the dispute through mediation, the case moves to a trial.

Bankruptcy Regulations

Turkey criminalizes bankruptcy and has a bankruptcy law based on the Execution and Bankruptcy Code No. 2004 (the “EBL”), published in the Official Gazette on June 19, 1932 and numbered 2128.  The World Bank’s 2019 Doing Business Index gave Turkey a rank of 120 out of 190 countries for ease of resolving insolvency, listing an average of 5 years to unwind a business, and averaging 10.5 cents on the dollar: See: http://www.doingbusiness.org/data/exploretopics/resolving-insolvency )

5. Protection of Property Rights

Real Property

Secured interests in property, both movable and real, are generally recognized and enforced, and there is a reliable system of recording such security interests.  For example, real estate is registered with a land registry office.  Turkey’s legal system protects and facilitates acquisition and disposal of property rights, including land, buildings, and mortgages, although some parties have complained that the courts are slow to render decisions and are susceptible to external influence.  However, following the July 2016 coup attempt, the GOT confiscated over 1,100 companies as well as significant real estate holdings for alleged terrorist ties.  Although the seizures did not directly impact many foreign firms, it nonetheless raises investor concerns about private property protections.

The Ministry of Environment and Urbanization enacted a law on title-deed registration in 2012 removing the previous requirement that foreign purchasers of real estate in Turkey had to be in partnership with a Turkish individual or company that owns at least a 50-percent share in the property, meaning foreigners can now own their own land.  The law is also much more flexible in allowing international companies to purchase real property.  The law also increases the upper limit on real estate purchases by foreign individuals to 30 hectares and allows further increases up to 60 hectares with permission from the Council of Ministers.  As of March 2020, a valuation report, based upon real market value, must be prepared for real estate sales transactions involving buyers that are foreign citizens.  To ensure that land has a clear title, interested parties may inquire through the General Directorate of Land Registry and Cadastre.  (www.tkgm.gov.tr ). The World Bank’s Doing Business Indexgave Turkey a rank of 27 out of 190 countries for ease of registering property in 2019.  See: http://doingbusiness.org.en/rankings# 

Intellectual Property Rights

Turkey continues to implement its intellectual property rights (IPR) law, the Industrial Property Code No. 6769, which entered into force in 2017.  The law brings together a series of “decrees” into a single, unified, modernized legal structure.  It also greatly increases the capacity of the country’s patent office and improves the framework for commercialization and technology transfer.  Turkey is a member of the World Intellectual Property Organization (WIPO) and party to many of its treaties, including the Berne Convention, the Paris Convention, the Patent Cooperation Treaty, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty.

However, while legislative frameworks are improving, IPR enforcement remains lackluster.  Turkey remains on USTR’s Special 301 Watch List for 2020.   Concerns remain about policies requiring local production of pharmaceuticals, inadequate protection of test data, and a lack of transparency in national pricing and reimbursement.  IPR enforcement suffers from a lack of awareness and training among judges and officers, as well as a lack of prioritization relative to terrorism and other concerns.  Law enforcement officers do not have ex-officio authority to seize and destroy counterfeit goods, which are prevalent in the local markets.  Software piracy is also high.  The Istanbul Grand Bazaar in Turkey is included in USTR´s 2019 Notorious Markets List.

Additionally, the practice of issuing search-and-seizure warrants varies considerably.  IPR courts and specialized IPR judges only exist in major cities.  Outside these areas, an application for a search warrant must be filed at a regular criminal court (Court of Peace) and/or with a regular prosecutor.  The Courts of Peace are very reluctant to issue search warrants.  Although, by law, “reasonable doubt” is adequate grounds for issuing a search-and-seizure order, judges often set additional requirements, including supporting documentation, photographs, and even witness testimony, which risk exposing companies’ intelligence sources.  In some regions, Courts of Peace judges rarely grant search warrants, for example in popular tourist destinations.  Overall, according to some investors, it is difficult to protect IPR and general enforcement is deteriorating.  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 .

9. Corruption

Corruption remains a concern, a reality reflected in Turkey’s sliding score in recent years in Transparency International’s annual Corruption Perceptions Index, where it ranked 91 of 180 countries and territories around the world in 2019.  Government mechanisms to investigate and punish alleged abuse and corruption by state officials remained inadequate, and impunity remained a problem.  Though independent in principle, the judiciary remained subject to government, and particularly executive branch, interference, including with respect to the investigation and prosecution of major corruption cases.  In some cases, the COVID-19 state of emergency has amplified pre-existing concerns about judicial independence.  (See the Department of State’s annual Country Reports on Human Rights Practices for more details: https://www.state.gov/j/drl/rls/hrrpt/humanrightsreport/index.htm#wrapper).   Turkey is a participant in regional anti-corruption initiatives, specifically co-heading the G20 Anti-Corruption working group with the United States.   Under the new presidential system, the Presidential State Supervisory Council is responsible for combating corruption.

Public procurement reforms were designed in Turkey to make procurement more transparent and less susceptible to political interference, including through the establishment of an independent public procurement board with the power to void contracts.  Critics claim, however, that government officials have continued to award large contracts to firms friendly with the ruling Justice and Development Party (AKP), especially for large public construction projects.

Turkish legislation outlaws bribery, but enforcement is uneven.  Turkey’s Criminal Code makes it unlawful to promise or to give any advantage to foreign government officials in exchange for their assistance in providing improper advantage in the conduct of international business.

The provisions of the Criminal Law regarding bribing of foreign government officials are consistent with the provisions of the Foreign Corrupt Practices Act of 1977 of the United States (FCPA).  There are, however, a number of differences between Turkish law and the FCPA.  For example, there is no exception under Turkish law for payments to facilitate or expedite performance of a “routine governmental action” in terms of the FCPA.  Another difference is that the FCPA does not provide for punishment by imprisonment, while Turkish law provides for punishment by imprisonment from 4 to 12 years.  The Presidential State Supervisory Council, which advises the Corruption Investigations Committee, is responsible for investigating major corruption cases brought to its attention by the Committee.  Nearly every state agency has its own inspector corps responsible for investigating internal corruption.  The Parliament can establish investigative commissions to examine corruption allegations concerning cabinet ministers; a majority vote is needed to send these cases to the Supreme Court for further action.

Turkey ratified the OECD Convention on Combating Bribery of Public Officials and passed implementing legislation in 2003 to provide that bribes of foreign, as well as domestic, officials are illegal.  In 2006, Turkey’s Parliament ratified the UN Convention against Corruption.

Resources to Report Corruption

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

ORGANIZATION: Presidential State Supervisory Council
ADDRESS: Beştepe Mahallesi, Alparslan Türkeş Caddesi, Devlet Denetleme Kurulu, Yenimahalle
TELEPHONE NUMBER: Phone: +90 312 470 25 00  Fax : +90 312 470 13 03
NAME: Seref Malkoc
TITLE: Chief Ombudsman

ORGANIZATION: The Ombudsman Institution
ADDRESS: Kavaklidere Mah. Zeytin Dali Caddesi No:4 Cankaya ANKARA
TELEPHONE NUMBER: +90 312 465 22 00
EMAIL ADDRESS: iletisim@ombudsman.gov.tr

Ukraine

Executive Summary

Prior to the onset of the COVID-19 epidemic, Ukraine’s economy had significantly improved in the years since the severe financial crisis and near collapse of the banking system triggered by Russia’s military intervention in 2014.  Hard-won reforms had brought macro-economic stability and some improvements to the business environment.  The April 2019 election of President Zelenskyy, who campaigned on a platform of ending the conflict with Russia, eliminating corruption, and adopting economic policies that deliver European standards of growth and opportunity, further improved the economic outlook for Ukraine.  As part of this revolution at the ballot box, 80 percent of the Rada (parliament) was replaced and the president’s party, Servant of the People, won a majority of seats.  The government and the Rada then set out to pursue the new president’s ambitious reform agenda, and passed approximately 100 laws in 100 days, including dozens to improve the business environment and attract international investment. This new “turbo regime” also took on controversial economic reforms, such as lifting the moratorium on the sale of agricultural land.

Ukraine’s economic recovery nevertheless remains fragile as it continues to struggle to overcome years of corruption and government mismanagement, and as vested interests and oligarchic influences continue to manipulate public policy for personal gain.  The latter has jeopardized a new IMF assistance program, which is the linchpin for international financial support for Ukraine and a crucial factor in maintaining investor confidence in the country.  Moreover, the President’s decision to completely overhaul the Cabinet on March 6, 2020 raised concerns over the future of the reforms and the power oligarchs continue to wield.  It also resulted in a lot of uncertainty just as Ukraine began to face the immense public health and economic challenges brought on by an unanticipated global health pandemic.  Due to COVID-19, external demand for Ukrainian goods is collapsing and internal measures to reduce the spread of coronavirus have had a major disruptive impact on both domestic production and consumption.  The IMF forecasts that Ukraine’s GDP will contract by 7.7 percent in 2020.

Ukraine has significant investment potential given its large consumer market, highly educated and cost-competitive work force, and abundant natural resources. Ukraine’s Association Agreement with the EU gives Ukraine preferential market access and is accelerating Ukraine’s economic integration with the EU. U.S. companies have found success in Ukraine, particularly in the agriculture, consumer goods, and technology sectors. Ukraine is an agricultural powerhouse, and is the world’s third-largest grain exporter. Ukraine’s IT service and software R&D sectors show great potential due to the country’s large, skilled workforce.

Foreign direct investment (FDI) remains low, however, with net inflow in 2019 equaling only two percent of GDP. Foreign investors cite corruption in the judiciary, poor infrastructure, powerful vested interests, and weak protection of property rights as some of the major challenges to doing business. The conflict with Russia also continues to impede greater investment in Ukraine. In the Russia-controlled areas in the Donbas region of Ukraine, the conflict with Russia-led forces has resulted in significant damage to freight rail, mines, and industrial facilities. Investors should note that the situation in both Crimea (unlawfully occupied by Russia since the spring of 2014) and in occupied areas of Donbas remains dire. U.S. sanctions prohibit U.S. companies from participating in most transactions involving Crimea.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 126 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 64 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 47 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 $402 http://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2018 $2,660 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The government of Ukraine actively seeks FDI.  In 2014, the National Investment Council was established as a consultative and advisory body under the president, and in 2016 the Ukrainian government established an investment promotion office UkraineInvest, with a mandate to attract and support FDI.  Ukraine also established a Business Ombudsman in 2015 to provide a forum for domestic or foreign businesses to file complaints about unjust treatment by state or municipal authorities, state-owned or controlled companies, or their officials.  Ukraine has made attracting investment a top priority for 2020.  Accordingly, this year it launched various incentive programs to increase investment.  President Zelenskyy has remarked on multiple occasions about his desire to have an ongoing dialogue with investors and has arranged various meetings with Ukrainian businesses and foreign business associations such as the American Chamber of Commerce and the European Business Association.

Limits on Foreign Control and Right to Private Ownership and Establishment

The regulatory framework for the establishment and operation of business in Ukraine by foreign investors is generally similar to that for domestic investors.  Registering a foreign investment is governed by “The Law on Foreign Investments” (2013).  Before registering their business, non-Ukrainian citizens must register with the Office of Immigration in the Ministry of Foreign Affairs and receive a taxpayer identification number through the State Fiscal Service.  The accreditation process for representative offices of foreign companies and their branches is has been historically slower and more costly than the simplified registration process for Ukrainian businesses.  Legislation was adopted in November 2019, however, that reduced the cost of accreditation for foreign representative offices (excluding Russian businesses) from $2,500 to one minimum monthly wage (which in 2019 was approximately $70) and the timeframe from 60 to 20 days.  The Ministry of Economic Development, Trade, and Agriculture issues these accreditations.

Foreign and domestic private entities can engage in all forms of remunerative activity, with some exceptions:  foreign companies are restricted from owning agricultural land, producing bio-ethanol, and some publishing activities.  In addition, Ukrainian law authorizes the government to set limits on foreign participation in state-owned enterprises, although the definition of “foreign participation” is vague, and the law is rarely used in practice.  Certain critical infrastructure, especially in the energy sector, is precluded by law from private ownership and therefore not available to foreign investors.  This includes the gas transmission system, electricity grids, and various plants and factories.  Ukraine currently reviews merger and acquisition investments only on competition grounds, but is considering a mechanism for investment review on security grounds.  According to Ukraine’s investment promotion office, UkraineInvest, foreign direct investments are reviewed on an ad hoc basis by the Cabinet of Ministers if concerns arise, but there is no formal process in place.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) conducted formal reviews in 2016, and can be found at OECD: http://www.oecd.org/investment/oecd-investment-policy-reviews-ukraine-2016-9789264257368-en.htm ; WTO: https://www.wto.org/english/tratop_e/tpr_e/tp434_e.htm .

Business Facilitation

Ukraine has taken major steps forward to facilitate the ease of doing business, and it moved up seven spots in the World Bank’s 2020 Doing Business Ranking from 71th place in 2019 to 64th.  This is Ukraine’s largest annual leap since 2014 and the highest ranking the country has ever received.  The country demonstrated improvements in six out of the ten indicators the World Bank assesses, scoring the highest in categories such as “starting a business” and “dealing with construction permits.” Legislation adopted in October 2019 on “Encouraging Investment Activity in Ukraine,” which abolished outdated and inefficient regulations, improved the protection of minority investors’ rights, and increased lending options for businesses is expected to further facilitate doing business in Ukraine.

Private entrepreneurs and legal entities can register online at https://poslugy.gov.ua/ and https://online.minjust.gov.ua/dokumenty/choise/ .  These online registrations systems are not commonly used because it is difficult to submit the required documents online.  Once a company is registered with the State Registrar, its data is transferred by the registrar to the relevant state authorities, such as the State Committee of Statistics of Ukraine, the State Pension Fund, State Fiscal Service, the Employment Insurance Fund, the Social Security Fund, and the Fund for Social Insurance.  Registering a joint-stock company or a limited liability company takes approximately six days.

Outward Investment

As of December 1, 2019, Ukraine’s investments in foreign countries totaled approximately $6.5 billion, according to data provided by the State Statistics Service of Ukraine.  Individuals are limited to investing a maximum of EUR 50,000 ($56,000) abroad per year, and any investment exceeding this cap requires a license from the National Bank of Ukraine.  Legal entities and private entrepreneurs registered in Ukraine have a cap of EUR 2 million ($2.24 million) per year.

3. Legal Regime

Transparency of the Regulatory System

Ukraine is working towards building a transparent, consistent regulatory environment.  Regulatory regimes in Ukraine are characterized by outdated, contradictory, and burdensome regulations, a high degree of arbitrariness and favoritism in decisions by government officials, weak protection of property rights, and irregular payments and other bribes.  The country, however, is generally moving in the right direction towards clearer rules and fair competition.  Ukraine’s efforts to implement its EU Association Agreement, including the Deep and Comprehensive Free Trade Area (DCFTA), should help boost overall transparency and legal certainty as Ukraine strives to establish legal and regulatory systems that are consistent with international norms.  Continued deregulation is also one of Ukraine’s key commitments under its IMF program.

The formulation of regulations falls solely under the purview of the Government.  In Ukraine there are no regulatory processes managed by non-governmental organizations or private sector associations.  The relevant ministry or regulatory agency is required by law to publish draft text of proposed regulations on its website for review and comment for at least one month but not more than three months.  Along with the draft text, the governmental body must include a data-based assessment justifying the need for the regulation and analyzing its potential impact.  The ministry or agency receives comments via its website, at public meetings, and through targeted outreach to stakeholders.  The comments received are generally not made public.  At the end of the consultation period, the relevant ministry or regulator may publish the results on its website.  Often, however, final draft legislative initiatives are not publicly available or they reappear in dramatically different form.  The Ministry of Economy announced in November 2019 that Ukraine is working to launch a pilot program to create an electronic platform on which it could publicize all draft regulatory measures, accept public comments, and provide responses to those comments.  Information on existing legislation is available on the Verkhovna Rada (parliament) and Cabinet of Ministers websites.

Public finances and debt obligations are transparent. Budget documents and information on debt obligations are widely and easily accessible to the general public, including online.  Budget documents provide a mostly full picture of the government’s planned expenditures and revenue streams.  Information on debt obligations is publicly available, and is published as part of the budget document on the Parliament’s website. Information on the status of sovereign and guaranteed debt is published and updated on a monthly basis on the Finance Ministry’s website.  Statistics are broken down by type of debt, type of creditor, and type of currency.

International Regulatory Considerations

Ukraine is not a member of the EU, but it is working to approximate many of its standards to meet EU requirements and facilitate access to EU markets.  As Ukraine drafts laws, it often incorporates or references EU norms and standards.  Ukraine is a member of the WTO and a signatory to the WTO Trade Facilitation Agreement.  The Ministry of Economic Development,   Trade and Agriculture (MEDTA) is responsible for notifying all draft technical regulations to the WTO Committee on Technical Barriers to Trade.  Ukraine’s notification of draft text to the WTO for comment has significantly improved in the past few years, but there have been instances where the draft text was submitted relatively late in the legislative process after it had already passed the first reading in the Parliament.  Ukraine has committed to continue improving its process of notifying all proposed regulatory changes to the WTO and its process for reviewing and responding to comments to these notifications

Legal System and Judicial Independence

The legal system in Ukraine is based on a civil system of codified laws passed by the parliamentary body, the Verkhovna Rada.  Contracts related to foreign investments fall within the jurisdiction of a system of specialized commercial courts.  Generally, the Foreign Investment Law provides that a dispute between a foreign investor and the state of Ukraine must be settled in the Ukrainian courts, unless otherwise provided for by international treaties.

Courts of general jurisdiction are organized by territory and specialty and include: local courts; appellate courts; specialized high courts for civil and criminal cases; and the Supreme Court.  Commercial and contract law in Ukraine are codified in the Commercial Code and Civil Code. There is a three-tier system of specialized commercial courts with first and appellate instances and the Commercial Cassation Court of the Supreme Court as the highest instance.  Local courts are either courts of general jurisdiction or specialized courts (i.e. commercial and administrative courts).  Local commercial courts exercise jurisdiction over commercial and corporate disputes, while local administrative courts administer justice in legal disputes connected with state government and municipalities, with the exception of military disputes.  Regulations and enforcement actions are subject to appeal with no exceptions within terms prescribed in procedural codes and are adjudicated in the national (general) court system.

The judicial system is independent of the executive branch; however, extensive corruption in the court system provides an opening for outside influence.  Among the major problems of the Ukrainian judicial system are its overall lack of capacity and the existence of executive and prosecutorial influence on judges.  Ukraine is ranked 105 out of 141 countries with regard to judicial independence by the Global Competitiveness Index report  2018-2019 (up twelve spots from the 2017-2018 report).

Laws and Regulations on Foreign Direct Investment

The Law of Ukraine on Investment Activity (1991) established the general principles for investment and was subsequently followed by additional legislative acts to facilitate foreign investment, most recently the Law “On Amendments to Some Laws to Remove Obstacles for Attracting Foreign Investments” and Law “On Amendments to Certain Legislative Acts of Ukraine on Encouraging Investment Activity in Ukraine.”  Due in part to conflicts in the body of laws that govern investment and commercial activity in Ukraine, and persistent issues with corruption, foreign investors have found it difficult to pursue cases in Ukrainian courts and often seek arbitration outside of the country.  The website of Ukraine’s Investment Promotion Office (https://ukraineinvest.com/ ) provides relevant laws, rules, procedures, and reporting requirements for potential investors.

Competition and Anti-Trust Laws

The Antimonopoly Committee of Ukraine (AMCU) is the Ukrainian state authority for protection of economic competition.  AMCU’s functions include investigating and prosecuting anticompetitive conduct, granting permissions for mergers and acquisitions, considering applications regarding violations of public procurement as an appeal body, monitoring the state aid system, competition advocacy within the government, and formulating competition policy.

Expropriation and Compensation

Current legislation permits legal expropriation of property in certain criminal proceedings or in cases of failure to fulfil investment obligations during privatization procedures.  Additionally, the Law “On Legal Regime of Martial Law” and the Law “On Confiscation of Property During Legal Regime of Martial Law”  allow voluntary or forced expropriations for military purposes with compensation to be provided either immediately or following cancellation of the “special regime/martial law.”

Dispute Settlement

ICSID Convention and New York Convention

Ukraine is a Party to both the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.  On October 20, 2015, the Government of Ukraine submitted a formal UN communication, noting that Ukraine’s ability to implement its obligations under the New York Convention in the occupied territories of Crimea, Donetsk, and Luhansk is limited and not guaranteed until Ukraine regains effective control from the Russian Federation.  The full text of the communication is available at: C.N.597.2015.TREATIES-XXII.1 of 20 October 2015 .

The procedure for recognition and enforcement of foreign arbitral awards in Ukraine is regulated by the following legislative acts:

  • The Law on International Commercial Arbitration (ICAL, 1994).  ICAL is almost a literal translation of the UNCITRAL Model Law.
  • The Code of Civil Procedure of Ukraine (CPC, 2004).  Pursuant to Article 390 of the CPC, Ukrainian courts shall enforce foreign court decisions provided that:  recognition and enforcement are stipulated under an international treaty ratified by the Verkhovna Rada; or on the basis of the reciprocity principle under an ad hoc agreement with a foreign country, whose court decision shall be enforced in Ukraine.

Investor-State Dispute Settlement

Many of Ukraine’s bilateral investment treaties recognize binding international arbitration of investment disputes.  Claims under the Bilateral Investment Treaty (BIT) between the United States and Ukraine by American investors are rare.  The Embassy only tracks disputes at the request of U.S. businesses or individuals involved in the case, and cannot provide a comprehensive number for all investment disputes involving U.S. or other foreign investors in Ukraine.  Such disputes are a significant problem, however, both in fact and in terms of public perception.  As of early 2019, the Embassy was tracking approximately 20 active disputes, some very protracted.  Going back 10 years, the Embassy has tracked almost 100 disputes involving a U.S. business or individual.  The majority of disputes are related to customs and tax issues, or corporate raids.

ICAL limits the jurisdiction of international arbitration tribunals to civil law disputes arising from international economic operations (provided that the commercial enterprise of at least one party exists outside of Ukraine), disputes between international organizations and enterprises with foreign investments in Ukraine, and intracompany disputes of these enterprises.  ICAL does not address foreign arbitral awards issued against the government.

Extrajudicial action against foreign investors in the form of official acts of government (e.g. unwarranted inspections, investigations, fines) and illegitimate acts by private parties (e.g. corporate raiding) occur in Ukraine.  The Ukrainian government has made it a stated priority to improve the business environment, end corporate raiding, and attract more foreign investment.  In 2019, the Ukrainian Parliament passed legislation aimed to end corporate raidership: the Law “On Amendments to Certain Legislative Acts of Ukraine on Property Rights Protection,” and the “On Amendments to the Land Code of Ukraine and Other Legislative Acts on Counteracting Raiding.”

International Commercial Arbitration and Foreign Courts

The Law on Arbitration Courts (2004) stipulates that parties can refer most of their commercial or civil-law disputes to courts of arbitration, which are non-state bodies.  Article 51 stipulates that awards of the aforementioned courts of arbitration are final, and Article 57 stipulates that they can be subject to mandatory enforcement via a competent state court.

Ukraine’s International Commercial Arbitration Court (ICAC) and Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry are both annexed to the ICAL, which itself is a near-direct translation of the UNCITRAL model law.  ICAL distributes the functions of arbitration assistance and supervision between the district courts and the President of the Chamber of Commerce and Industry of Ukraine for both ad hoc and institutional arbitrations.  Local courts are obliged to recognize and enforce foreign arbitral awards under ICAL and the CPC, per Ukraine’s obligations under the ICSID and the New York Convention of 1958.  However, the reliability, consistency, and timeliness of implementation are unknown.

Bankruptcy Regulations

In a turning point for Ukrainian bankruptcy law reform, in October 2018 the Ukrainian parliament adopted the Code of Bankruptcy Proceedings to replace the existing bankruptcy law that had been in force since 1992.  The law took effect in October 2019.  The new law improves creditors’ rights by allowing them to select their bankruptcy administrator, decide the starting prices of debtor assets at auction, and participate in other asset sales maters.  The law also improves the procedures for selling debtors’ assets by introducing online auctions.  In addition, the law removes a requirement for asset collection through courts or enforcement services before insolvency proceedings can begin.  This eases the debt collection process and reduces the cost for lawyers and court fees for creditors.  The new bankruptcy code also provides additional protection of creditors’ interests whose claims are secured by a pledge and determines the conditions for claiming their rights to the pledged collateral.

Bankruptcy is not criminalized in Ukraine.  The Criminal Code of Ukraine, however, does criminalize: 1) intentionally making an entity bankrupt; and, 2) distorting certain financial data in order to conceal the insolvency of a financial institution.  In the 2020 World Bank’s Doing Business Report Ukraine ranked 146 out of 190 in the “resolving insolvency” subcategory, one spot lower than last year’s ranking of 145.  Ukraine’s low ranking is driven by a low recovery rate and the high costs associated with recovering funds from insolvent firms by creditors.

5. Protection of Property Rights

Real Property

Ukraine has a regulatory framework protecting property interests, as well as mortgages and liens.  The record system is generally reliable and maintained by the Ministry of Justice.  Still, judicial reform is needed to ensure efficient enforcement of property rights.  Foreign nationals can lease land, but there is a moratorium on the sale of agricultural land that prevents them from acquiring land.  Ukrainian media estimates that five percent of land in Ukraine does not have clear title.  Unoccupied property can become communal property only by court decision following a request from the local body authorized to manage real estate property.  The request can only be made a year after the property was registered as unoccupied

Intellectual Property Rights

Ukraine has a long history of inadequate enforcement and protection of intellectual property rights (IPR).  Ukraine has been listed on the Priority Watch List of the U.S Trade Representative’s Special 301 Report since 2015 due to the widespread use of unlicensed software, the transshipment and sale of counterfeit goods, rampant Internet piracy, and the unfair and nontransparent system of collective management organizations (CMOs) found in Ukraine.  In the past few years, Ukraine has made significant strides in establishing the necessary legal framework to ensure adequate and effective protection of IPR and has actively engaged various stakeholders, including the United States and the EU.  In addition, President Zelenskyy has identified the improvement of IPR protection as a priority for the coming year, as he hopes to attract investment by leading high-tech and entertainment companies.

In the past year, Ukraine’s cyber police have significantly ramped up efforts to investigate online piracy crimes, resulting in the closure of major illegal video streaming sites.  In April 2019, the cyber police launched a nationwide anti-piracy operation that focused on identifying and investigating the owners of illicit websites.  The anti-piracy operation has resulted in the identification of operators and shutdown of thirty-five video streaming sites, including Kinogo, which received approximately 100,000 hits daily.

Ukraine has also passed various key pieces of IPR legislation, including the Law “On Amendments to the Customs Code of Ukraine Concerning Protection of IPR during the Movement of Goods through the Customs Border of Ukraine,” which aims to bring Ukrainian IPR border measures in line with EU regulations and contains provisions to improve the protection of copyrights and trademarks at the border.  Following the adoption of the Law “On Efficient Management of Property Rights of Rights Holders in the Sphere of Copyright and/or Related Rights,” Ukraine began reform the accreditation process of CMOs to reduce the number of rogue CMOs and ensure proper distribution of royalties.  Consequently, CMOs now must undergo vigorous competition to be accredited.  In recognition of these efforts, a third of the Globalized System of Preferences (GSP) benefits suspended in 2017 were reinstated in October 2019.

Additional progress still needs to be made in Ukraine in terms of IPR protection, and enforcement of IPR remains poor.  Due to this weak enforcement, online markets that facilitate the sale and distribution of counterfeit goods continue to operate in Ukraine.  Industry reports that large quantities of allegedly counterfeit goods are readily available in these online marketplaces and that the process to remove the listings of these items is cumbersome and ineffective.  Sales of counterfeit goods in physical marketplaces continue to be widespread as well.  The Notorious Markets List identifies that one of the largest counterfeit markets in Europe, with around 6,000 merchants, is the 7th Kilometer Market in Odessa.  Law enforcement authorities do not perform raids or seizures at this market according to stakeholders and local media.  The Troyeshchyna and Petrivka markets in Kyiv, and the Khmelnytskiy market and Barabasova market in Kharkiv, also sell high volumes of counterfeit goods.  Customs authorities reported 20 cases of illegal trade of counterfeit goods in 2019 that were valued at over a million dollars.  Moreover, the use of unlicensed software by state-owned enterprises (SOEs) and certain governmental bodies remains an issue.  Many initiatives to improve the protection of IPR, such as the adoption of several key pieces of legislation on copyrights, trademarks, and patents, the establishment of an IP office and a specialized IP court, and the accreditation of legitimate CMOs, are still under way.

Ukraine is a member of the World Intellectual Property Organization (WIPO) and is party to the Berne Convention, the Paris Convention, the Patent Cooperation Treaty, the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty.  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/ .

9. Corruption

Ukraine has numerous laws to combat corruption by public officials, and following the Revolution of Dignity in 2014 the government launched new anti-corruption institutions, including the National Anti-Corruption Bureau (NABU) to investigate corruption by public officials, the Special Anti-Corruption Prosecutor’s Office (SAPO), and the National Agency for Prevention of Corruption (NAPC).  In addition, legislation was adopted that mandated that public officials declare their assets on a publicly viewable online system.  These new institutions, however, have had an uneven track record.  After the successful 2016 launch of the asset declaration system for public officials, the NAPC failed to fulfill its mandate to verify officials’ declarations and to fairly manage political party finance reporting until being rebooted following the election of President Zelenskyy in April 2019.  NABU and SAPO have taken 245 corruption cases to court since 2015, including indictments of high-level officials, but had failed to obtain a single conviction as cases became mired in court proceedings until the launch of the High Anti-Corruption Court in September 2019.

Foreign businesses, including U.S. companies, continue to identify corruption in many sectors as a significant obstacle to FDI.  Reform of public procurement has been a success story, with the introduction of the online ProZorro system providing transparency for most procurement, except in the defense sector, which remains non-transparent and allegedly a continuing source of corruption.  The Ukrainian parliament is currently reviewing draft legislation to reform the defense procurement process and likely will adopt the bill in the coming months.   However, declassification of the process will be largely contingent on amendments made to the Law on State Secrets.  The energy sector has seen some improvements, including reforms at the large oil and gas SOE Naftogaz, but participants in the sector continue to complain of significant and sometimes insurmountable corruption.  Government interference in the corporate governance of Naftogaz is a persistent concern and has now spread to Ukrenergo, Energoatom, and Ukrhydroenergo, among others.  There are allegations of corruption at specific SOEs in a variety of sectors, as well as allegations that external corrupt forces interfere regularly in SOE operations.

There are a number of NGOs actively involved in investigating corruption and advocating for anti-corruption measures.  In 2017, the Parliament passed a law with broad requirements for non-governmental individuals engaged in anti-corruption activities to file public asset declarations.

Resources to Report Corruption

NABU, established in October 2014, is the appropriate resource for the reporting of high-level corruption.

Government of Ukraine contact for combating corruption:
National Anti-Corruption Bureau
3, Vasyl Surikov St, Kyiv, Ukraine 03035
Hot-line:  0-800-503-200
info@nabu.gov.ua
Corruption Reporting eForm: http://nabu.gov.ua/povidomlennya-pro-kryminalne-pravoporushennya 

Contact at Transparency International:
Mr. Andriy Borovyk
Executive Director|
Transparency International Ukraine
2A provulok Kostia Hordiienka, 1st floor, Kyiv, Ukraine 01024
+38(044) 360-52-42
office@ti-ukraine.org