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Bulgaria

Executive Summary

Bulgaria is still seen by many investors as an attractive investment destination with government incentives for new investment. Bulgaria continues to offer some of the least expensive labor in EU, with low and flat corporate and income taxes. There are no legal limits on foreign ownership or control of firms. With some exceptions, foreign entities are given the same treatment as national firms and their investments are not screened or otherwise restricted.  There is strong growth in software development, business process outsourcing, and building services for technical maintenance. The IT and back office outsourcing sectors have attracted a number of U.S. and European companies to Bulgaria, and many have established global and regional service centers in the country. U.S. and foreign investors have also been attracted to the automotive sector in recent years, and USD 120 million was invested in the sector overall in 2018. EU multi-year funds support economic growth in the form of grants for selected infrastructure projects.

There are, however, emerging challenges. A shortage of skilled labor, due to out-migration and an aging population, is becoming more pronounced and driving labor cost increases in selected sectors.  Foreign investors remain concerned about rule of law in Bulgaria. Corruption is endemic, particularly on large infrastructure projects and in the energy sector. Investors cite other problems impeding investment, such as unpredictability due to frequent regulatory and legislative changes and a slow judicial system.  As of early 2019, there are questions as to the government’s commitment to upholding its contracts, including with major U.S. investors. In another example, a U.S. company has faced extended regulatory obstacles in its attempts to enter the energy market. 

Foreign Direct Investment (FDI) has continued to decline, remaining far below peak levels in the wake of Bulgaria’s entry into the EU in 2007.  Structural funds from the European Union have helped sustained growth, filling in the gaps left by the declining FDI.

Bulgaria’s economy grew by 3.1 percent in 2018, driven mainly by domestic consumption, government procurement, EU funds and, to a lesser extent, exports.  Official unemployment dropped to 5.2 percent in 2018, and the economy is near its full-employment level. The shortage of skilled labor in many sectors has led to wage increases far above gains in labor productivity, putting pressure on Bulgaria’s competitiveness.  The wage gains have driven inflation up to 2.8 percent in 2018, putting an end to a three-year deflationary period between 2015 and 2017.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 77 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 59 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 37 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $848 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $7,860 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

At present, there are no general limits on foreign ownership or control of firms, nor is there screening or restricting of foreign investment in Bulgaria.  However, while Bulgaria generally affords national treatment to foreign investors, there are reports of discrimination against U.S. investors by government officials.  Two major U.S. investors in Bulgaria have been subjected to open criticism by government officials as “American” companies responsible for high energy costs in Bulgaria.  The government continues to threaten to have the companies’ long-term contracts abrogated. In another case, a U.S. company has faced bureaucratic hurdles in its efforts to compete in the energy sector with a monopolistic state-owned Russian incumbent.  More often, investors cite general problems with corruption, rule of law, frequently changing legislation, and uneven law enforcement. Transparency International’s (TI) Corruption Perception Index for 2018 ranked Bulgaria 77th out of 180 surveyed countries, down six places from last year’s 71st, and scoring 42 on a 100-point scale, well below the EU average of 66.  The Invest Bulgaria Agency (IBA), the government’s investment promotion body, provides information, administrative services, and incentive assessments to prospective foreign investors. Its website http://www.investbg.government.bg/en   contains general information for foreign investors.

Limits on Foreign Control and Right to Private Ownership and Establishment

With a few exceptions, there are no limits for foreign and domestic private entities to establish and own a business in Bulgaria. The Offshore Company Act lists 28 activities (including government procurement, natural resource exploitation, national park management, banking, insurance) banned for companies registered in offshore jurisdictions, with more than 10 percent foreign participation. The law, however, allows those companies to do business if the physical owners of the parent company are Bulgarian citizens and known to the public, if the parent company’s stock is publicly traded, or if the parent company is registered in a jurisdiction with which Bulgaria enjoys a treaty for the avoidance of double taxation (including the United States).  Despite the EU creation of a national security investment review framework, Bulgaria currently has no specific law or established mechanism in place for screening individual foreign investments for potential national security risks. Nonetheless, investments can be scrutinized on an ad hoc basis or through the Law on the Measures against Money Laundering.

Other Investment Policy Reviews

Reviews of Bulgaria’s investment climate by the Organization for Economic Cooperation and Development (OECD) can be found at this website: https://www.oecd.org/development/bulgaria-strengthens-its-co-operation-with-the-oecd-via-an-action-plan.htm   

The United Nations Conference on Trade and Development (UNCTAD) has this report: https://unctadstat.unctad.org/CountryProfile/GeneralProfile/en-GB/100/index.html   

Business Facilitation

Bulgaria typically supports small and medium business creation and development in conjunction with EU-funded innovation and competitiveness programs and with a special emphasis on export promotion and small- and medium-sized enterprise (SME) development. Typically, a new business is expected to register an account with the state social security agency and, in some cases, with the local municipality as well.  Electronic company registration is available at: https://public.brra.bg/Internal/Registration.ra?0   . Women receive equitable treatment to men, and the Bulgarian law protects minorities from discrimination.

Bulgaria ranked overall 59th (out of 190 surveyed economies worldwide) in the World Bank’s 2019 Doing Business report; 99th in Starting a New Business, and 147th place in the ‘Getting Electricity’ category. 

Outward Investment

There is no government agency for outward investment promotion; no restrictions exist for any local business to invest abroad.

2. Bilateral Investment Agreements and Taxation Treaties

Bulgaria has a Bilateral Investment Treaty (BIT) with the United States, which obligates the parties to uphold national treatment and includes provisions for investor-State dispute settlement through international arbitral bodies. The BIT also includes a side letter on protections for intellectual property rights. Upon Bulgaria’s joining the EU, Bulgaria and the United States exchanged notes in 2003 to make Bulgaria’s obligations under the BIT compatible with its EU obligations, and finalized the process in January 2007.

As of 2019, Bulgaria also has bilateral investment treaties signed with the following countries: Albania, Algeria, Argentina, Armenia, Austria, Azerbaijan (not in force), Bahrain (not in force), Belarus, Belgium, China, Croatia, Cuba, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Georgia, Germany, Ghana (not in force), Greece, Hungary, India (terminated), Indonesia (terminated), Iran, Israel, Italy (terminated), Jordan, Kazakhstan, Kuwait, Latvia, Lebanon, Libya, Lithuania, Luxembourg, Northern Macedonia, Malta, Moldova, Mongolia (not in force), Montenegro, Morocco, Nigeria (not in force), North Korea (not in force), Oman, Pakistan (not in force), Poland, Portugal, Romania, Russia, San Marino, Serbia, Singapore, Slovakia, Slovenia, South Korea, Spain, Sudan (not in force), Sweden, Switzerland, Syria, Thailand, The Netherlands, Tunisia, Turkey, Ukraine, United Kingdom and Northern Ireland, Uzbekistan, Vietnam, and Yemen.

Bulgaria has a bilateral tax treaty with the United States. As of 2019, Bulgaria has signed bilateral double taxation treaties with the United States and the following countries: Albania, Algeria, Armenia, Austria, Azerbaijan, Bahrain Belarus, Belgium, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Jordan, Kazakhstan, Kuwait, Latvia, Lebanon, Lithuania, Luxembourg, Macedonia, Malta, Moldova, Mongolia, Montenegro, Morocco, North Korea, Norway, Poland, Portugal, Qatar, Romania, Russia, Serbia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Syria, Thailand, The Netherlands Turkey, Ukraine, United Arab Emirates, United Kingdom and Northern Ireland, Uzbekistan, Vietnam, and Zimbabwe.

3. Legal Regime

Transparency of the Regulatory System

In general, the regulatory environment in Bulgaria is characterized by complexity, lack of transparency, and arbitrary or weak enforcement.  These factors create incentives for public corruption. Bulgarian law lists 38 operations subject to licensing. The law requires all regulations to be justified by defined need (in terms of national security, environmental protection, or personal and material rights of citizens), and prohibits restrictions merely incidental to the stated purposes of the regulation.  The law also requires the regulating authority to perform a cost-benefit analysis of any proposed regulation. This requirement, however, is often ignored when Parliament reviews draft bills. With few exceptions, all draft bills are made available for public comment, both on the central government website and the relevant agency’s website, and interested parties are given 30 days to submit their opinions.  The government maintains a web platform, www.strategy.bg  , on which it posts draft legislation. 

In addition, the law eliminates bureaucratic discretion in granting requests for routine economic activities, and provides for silent consent when the government does not respond to a request in the allotted time.  Local companies in which foreign partners have controlling interests may be requested to provide additional information or to meet additional mandatory requirements in order to engage in certain licensed activities, including production and export of arms and ammunition, banking and insurance, and the exploration, development, and exploitation of natural resources.  Bulgarian government licenses exports of dual-use goods and bans the export all goods under international trade sanctions lists. The Bulgarian government’s budget is assessed as transparent and in accordance with international standards and principles. Data on government debt is publicly available but data on the debt accrued by state-owned companies is not. 

International Regulatory Considerations

Bulgaria became a member of the World Trade Organization in December 1996.  Under the provisions of Article 207 of the Treaty on the Functioning of the European Union (Lisbon Treaty), common EU trade policies are exclusively the competence of the EU and the European Commission, which coordinates them with the 27 member states. 

Legal System and Judicial Independence

The 1991 Constitution serves as the foundation of the legal system and creates an independent judicial branch comprised of judges, prosecutors, and investigators.  The judiciary continues to be the least trusted institution in the country, with widespread allegations of corruption and undue political and business influence. The busiest courts in Sofia suffer from serious backlogs, limited resources, and inefficient procedures that hamper the swift and fair administration of justice.

There are three levels of courts.  Bulgaria’s 113 regional courts exercise jurisdiction over civil and criminal cases.  Above them, 29 district courts (including the Sofia City Court and the Specialized Court for Organized Crime and High Level Corruption) serve as courts of appellate review for regional court decisions and have trial-level (first-instance) jurisdiction in serious criminal cases and in civil cases where claims exceed BGN 25,000 (USD 14,500), excluding alimony, labor disputes, and financial audit discrepancies, or in property cases where the property’s value exceeds BGN 50,000 (USD 29,000).  Six appellate courts review the first-instance decisions of the district courts. The Supreme Court of Cassation is the court of last resort for criminal and civil appeals. 

There is a separate system of 28 specialized administrative courts that rule on the legality of local and national government decisions, with the Supreme Administrative Court serving as the court of final instance.

The Constitutional Court, which is separate from the rest of the judiciary, issues final rulings on the compliance of laws with the Constitution.

Bulgaria has adequate means of enforcing property and contractual rights under local legislation. In practice, however, the government’s handling of investment disputes has been slow, and intervention at the highest level is often required.  Investors sometimes perceive that jurisprudence is inconsistent, and that national legislation is used to deter competition by foreign investors.

Laws and Regulations on Foreign Direct Investment

The 2004 Investment Promotion Act stipulates equal treatment of foreign and domestic investors.  The law encourages investment in manufacturing and high technology, as well as in education and human resource development.  It creates incentives by helping investors purchase land, providing state financing for basic infrastructure and training new staff, and facilitating tax incentives and opportunities for public-private partnerships (PPPs) with the central and local government.  The most common PPPs are in the form of concessions, which include the lease of government property for private use for up to 35 years.

Foreign investors must comply with the 1991 Commercial Code, which regulates commercial and company law, and the 1951 Law on Obligations and Contracts, which regulates civil transactions.

InvestBulgaria’s official web site http://www.investbg.government.bg/en   is a useful source of information on Bulgaria’s economy, investment law, and statistics for prospective foreign investors.

Competition and Anti-Trust Laws

The Commission for Protection of Competition (the “Commission”) oversees market competition and enforces the Law on the Protection of Competition (the “Competition Law”). The Competition Law, enacted in 2008, is intended to implement EU rules that promote competition.  Monopolies can only be established in enumerated categories of strategic industries.  The law forbids restrictive trade practices, abuse of market power, and certain forms of unfair competition.   In practice, the Competition Law has been applied inconsistently, and the Competition Commission has been seen as lacking impartiality.

Expropriation and Compensation

Private real property rights are legally protected by the Bulgarian Constitution. Only in the case where a public need cannot be met by other means, the Council of Ministers or a regional governor may expropriate land, provided that the owner is compensated at fair market value. Expropriation actions by the Council of Ministers or by regional authorities can be appealed at a local administrative court. The U.S.-Bulgaria Bilateral Investment Treaty (BIT) commits both parties to prompt, adequate, and effective compensation in the event of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Bulgaria is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) and the 1961 European Convention on International Commercial Arbitration.  Bulgaria is a member of the World Bank-based International Centre for the Settlement of Investment Disputes (ICSID).

Investor-State Dispute Settlement

Bulgaria accepts binding international arbitration in disputes with foreign investors.  Arbitral awards, both foreign and domestic, are enforced through the judicial system. The party must petition the Sofia City Court for a writ of execution and then execute the award according to the general framework for execution of judgments.  Foreclosure proceedings may also be initiated.

International Commercial Arbitration and Foreign Courts

There are more than 20 arbitration institutions in Bulgaria, with the Arbitration Court of the Bulgarian Chamber of Commerce and Industry (BCCI) being the oldest.  Bulgarian law instructs courts to act on civil litigation cases within three months after a claim is filed. In practice, however, dispute settlement can take several months and up to a few years.

Bankruptcy Regulations

The 1994 Commercial Code Chapter on Bankruptcy provides for reorganization or rehabilitation of a legal entity, maximizes asset recovery, and provides for fair and equal distribution among all creditors.  The law applies to all commercial entities, except public monopolies or state-owned enterprises (SOEs). The 2015 Insurance Code regulates insurance company failures, while bank failures are regulated under the 2002 Bank Insolvency Act and the 2006 Credit Institutions Act. The 2014 bankruptcy of the country’s fourth-largest bank, Corporate Commercial bank, was a test case that showed serious deficiencies in the process of recovery and preservation of bank assets during bankruptcy proceedings.

Non-performance of a financial obligation must be adjudicated before the bankruptcy court can determine whether the debtor is insolvent.  There is a presumption of insolvency when the debtor is unable to perform an executable obligation under a commercial transaction or public debt or related commercial activities, has suspended all payments, or is able to pay only the claims of certain creditors.  The debtor is deemed over-indebted if its assets are insufficient to cover its short-term monetary obligations.

Bankruptcy proceedings may be initiated on two grounds:  the debtor’s insolvency, or the debtor’s excessive indebtedness.  Under Part IV of the Commercial Code, debtors or creditors, including state authorities such as the National Revenue Agency, can initiate bankruptcy proceedings.  The debtor must declare bankruptcy within 30 days of becoming insolvent or over-indebted. Bankruptcy proceedings supersede other court proceedings initiated against the debtor except for labor cases, enforcement proceedings, and cases related to receivables securitized by third parties’ property.  Such cases may be initiated even after bankruptcy proceedings begin.

Creditors must declare to the trustee all debts owed to them within one month of the start of bankruptcy proceedings.  The trustee then has seven days to compile a list of debts. A rehabilitation plan must be proposed within one month after publication of the list of debts in the Commercial Register.  After creditors’ approval, the court endorses the rehabilitation plan, terminates the bankruptcy proceeding, and appoints a supervisory body for overseeing the implementation of the rehabilitation plan.  The court must endorse the plan within seven days and put it forward to the creditors for approval. The creditors must convene to discuss the plan within a period of 45 days. The court may renew the bankruptcy proceedings if the debtor does not fulfill its obligations under the rehabilitation plan.

The Bulgarian National Bank may revoke the operating license of an insolvent bank when the bank’s own capital is negative and the bank has not been restructured according to the procedure defined in Article 51 in the Law on the Recovery and Resolution of Credit Institutions and Investment Firms.  In the World Bank’s 2019 Doing Business Report, Bulgaria ranked 59th for ease of “resolving insolvency,” ahead of three EU peers (Luxembourg, Greece, and Malta).

4. Industrial Policies

Investment Incentives

The 2004 Investment Promotion Act (revised in 2018) stipulates equal treatment of foreign and domestic investors. The law encourages investment in manufacturing, services, and high technology, education, and human resource development via a range of incentives, which include: helping investors purchase municipal or state-owned land without tender, providing state financing for basic infrastructure and for training new staff, and reimbursing the employer’s portion of social security payments. The law also provides tax incentives and fast-track administrative procedures for public-private partnerships.  The government policy for investment promotion excludes a number of sectors classified as ‘strategic’ for national security purposes.

Investment projects deemed particularly important for the economy and meet the legal requirement for a minimum investment commitment in the amount of EUR 10 to 50 million and for creating 50 to 150 new jobs are classified as priority projects.  The exact amount of the required investment depends on the level of economic activity expected to be generated. Priority investors may receive incentives such as below-market prices when acquiring property rights (full or limited) on central or municipal government property, government grants for research and development (R&D) and education projects, and institutional support for establishing PPPs.

Additional incentives include a two-year valued-added tax (VAT) exemption on equipment imports for investment projects over EUR 2.5 million, provided the project will be implemented within a two-year period and create at least 20 new jobs.  Corporate income tax exemption can also be granted for manufacturing projects, with no minimum investment requirement, that are implemented in high unemployment areas and create at least 10 jobs.

The government does not have a practice of issuing guarantees or jointly financing foreign direct investment projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

The role of Free Trade Zones vastly diminished following Bulgaria’s full integration into the EU single market in 2007.  At the same time, EU integration encouraged local authorities to seek partnerships with the private sector and provide resources (i.e., land, infrastructure, etc.) for the development of industrial zones and technological parks.  Located favorably on one of the main highways, the Trakia Economic Zone just outside of Plovdiv, the largest in Bulgaria, consists of two industrial parks, two industrial zones, one high tech park and one agribusiness park.  In addition, the state-owned National Industrial Zones Company currently operates fully functioning industrial zones in Sofia, Burgas, Vidin, Ruse, Svilengrad and Varna.  The NIZC assists investors in these economic zones with established infrastructure, location, and transport logistics.   The common thread among all these economic zones is that they are either located in regions with plenty of available labor, in economically disadvantaged regions where the government provides special investment incentives, or are at important cross border points.  The high-technology Sofia Tech Park has joined efforts with the Bulgarian Academy of Sciences and several local universities to create innovation clusters expected to become the largest R&D center and high-tech incubator in Bulgaria.

Performance and Data Localization Requirements

Bulgaria generally does not impose export performance or local content requirements as a condition for establishing, maintaining, or expanding an investment.  However, non-EU workers cannot exceed 35 percent of the total workforce to be considered Bulgarian small- and medium-sized enterprises, or 20 percent in firms classified as large.  Employment visas and work permits are required for most expatriate personnel from non-EU countries. Many U.S. companies have experienced difficulties in the past obtaining work permits for their non-Bulgarian, non-EU employees.  In 2017 the government simplified procedures and shortened issuance time for work visas for non-EU workers. 

There are no requirements for foreign IT providers to turn over source code or provide access to surveillance, nor are there mechanisms used to enforce any rules on maintaining a certain amount of data storage within Bulgaria. 

5. Protection of Property Rights

Real Property

Bulgaria assigned the rights of land use back to its original owners in early 1990s.  Restrictions still exist on ownership of agricultural land by non-EU citizens. Companies whose shareholders are registered offshore are banned from acquiring or owning Bulgarian agricultural land.

Mortgages are recorded centrally with the Bulgarian Registry Agency.   In the World Bank’s 2019 Doing Business report, Bulgaria placed 67th out of 190 countries in the category of registering property http://www.doingbusiness.org/en/rankings  

Intellectual Property Rights

Bulgarian patent law has been harmonized with EU law for patents and utility model patent protection.  However, in patent procedures, there are reports of conflicts of interest and delays in decision-making and informing patent holders.  These issues, coupled with a lack of accountability of the Bulgarian Patent Office, have weakened patent protection in the country.

Bulgaria is a member of the Convention on Granting of European Patents (European Patent Convention) and a contracting state of the European Patent Office (EPO).  Bulgaria has also signed the London agreement for facilitating the validation process but has yet to amend its own law accordingly. Bulgaria is also part of the Patent Cooperation Treaty (PCT).  Bulgaria grants the right to exclusive use of inventions for 20 years from the date of patent application, subject to payment of annual fees, which range from BGN 50 (USD 29) to BGN 1,700 (USD 987), depending on the time remaining before the patent expires. Supplementary protection certificates (SPCs) are also an available protection option.  Innovations can also be protected as utility models (small inventions). They are registered without novelty examination. The term of validity of a utility model registration is four years from the date of filing with the Patent Office. It may be extended by two consecutive three-year periods, but the total term of validity may not exceed 10 years.  There is no accessible database for registered and valid patent and utility models in Bulgaria.

Under Bulgarian law, new and original industrial designs can be granted certificates from the Patent Office and entered in the state register. The registration does not require examination by the Patent Office for novelty or originality. The term of protection is 10 years, renewable for up to 25 years. Bulgaria is a contracting state of the Hague Agreement Concerning the International Deposit of Industrial Designs.

Compulsory licensing (allowing competitors to enter the market despite a valid patent) may be ordered under certain conditions, including failure to execute the patent. Disputes arising from the creation, protection, or use of inventions and utility models can be settled under administrative, civil, or arbitration procedures.

Pursuant to the 1996 Protection of New Plant Varieties and Animal Breeds Act, the Patent Office can issue a certificate protecting new plant varieties and animal breeds for between 25 and 30 years. Responding to long-standing industry concerns, the Bulgarian government included in its Drug Law a provision to provide data exclusivity (i.e., protection of confidential data submitted to the government to obtain approval to market pharmaceutical products).

Bulgaria is a member of the Lisbon Agreement for the Protection of Appellations of Origin and their International Registration.  Bulgaria enforces EU legislation for protecting geographical indications (GIs) and Traditional Specialties Guaranteed (TSG).

Trademarks, service marks, and rights to geographic indications are only protected pursuant to registration with the Bulgarian Patent Office or an international registration (under the Madrid Agreement and the Madrid protocol) designating Bulgaria; protection does not arise merely from use in commerce.  A trademark is normally granted within ten months of filing a complete application. Refusals can be appealed to the Disputes Department of the Patent Office. Decisions of this department can be appealed to the Sofia Administrative Court within three months of the decision. The right of exclusive use of a trademark is granted for ten years from the date of submitting the application. Extension requests must be filed during the final year of validity and can be renewed up to six months after expiration.  Protection may be terminated at third-party request if a trademark is not used for a five-year period.

Trademark infringement is a significant problem in Bulgaria for U.S. cigarette and apparel producers, and smaller-scale infringement affects other U.S. products.  Bulgarian legislation provides for criminal, civil, and administrative remedies against trademark violation. Bulgaria has implemented simplified border control procedures for the destruction of seized fake goods without civil or criminal trial.  In addition to civil penalties prescribed by the Trademarks and Geographical Indications Act (TGIA), the Criminal Code prohibits use of a third person’s trademark without the proprietor’s consent. In practice, criminal convictions for trademark and copyright infringement are rare and sentencing tends to be lenient.  Legal entities cannot be held liable under the Criminal Code.

The 1993 Copyright Act defines copyrightable work as any work of literature, art, or science, which is the result of creative activity, including: literary works, publications and computer programs; musical works; stage productions; films and other audiovisual works; fine arts, including applied art, design and folk artistic crafts; architectural works and spatial development plans; photographic works; and works created in a manner similar to photographic works.  Under Bulgarian law, translations and reprocessing of existing works and folklore works, periodicals, encyclopedias, collections, anthologies, bibliographies, databases that include two or more works or materials, are also eligible for copyright protection. The law allows rights holders to form organizations for collective management of rights.

In 2018, Bulgaria was taken off USTR’s Special 301 Watch List after demonstrating improvement in its IP law enforcement.  In 2019 Bulgaria remained off the list for a second consecutive year.

Bulgaria is not formally listed in the 2018 Out-of-Cycle Review of Notorious Markets but is mentioned as a possible location for a popular torrent site allegedly infringing the U.S. content industry’s copyrights.  Online and broadcast piracy remains a challenging copyright enforcement issue in Bulgaria.

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

6. Financial Sector

Capital Markets and Portfolio Investment

The Bulgarian Stock Exchange (BSE), the only securities-trading venue in Bulgaria, operates under a license from the Financial Supervision Commission and is majority-owned by the Ministry of Finance.  The 1999 Law on Public Offering of Securities regulates the issuance of securities, securities transactions, stock exchanges, and investment intermediaries.

Since its 2007 entry in the EU, Bulgaria has aligned its regulation of securities markets with EU standards under the Markets in Financial Instruments Directive (MiFID). The BSE is a full member of the Federation of European Stock Exchanges (FESE) and operates under the Deutsche Boerse’s trading platform Xetra.  The BSE’s total market capitalization, although still modest, increased 13.3 percent in 2018, reaching nearly 26 percent of Bulgaria’s GDP. Overall, however, Bulgarian companies strongly prefer obtaining financing from local banks to going to the local financial markets.

Money and Banking System

At the end of 2018, there were 25 commercial banks (20 subsidiaries and 5 branches), with total assets of BGN 105.6 billion (USD 61.8 billion), equivalent to 98 percent of GDP.  Approximately 78 percent of the banking system is owned by foreign banking groups, mostly EU-based. In 2018, there was a visible trend toward consolidation; the top five banks’ weight in the banking system was 59.4 percent.

Bulgaria has maintained budget surpluses in recent years but the Government has financed some of its expenditures by issuing bonds (generally Euro-denominated) on the international capital markets.  Commercial banks and private pension funds are the primary purchasers of these instruments.  EU-based banks are eligible to be primary dealers of Bulgarian government bonds.

Repatriation of profits is possible after presenting documentation that taxes have been paid.

Foreign Exchange and Remittances

Foreign Exchange

Bulgaria operates a Currency Board Arrangement (CBA) whereby the lev (BGN) is fixed to Euro, exchanging EUR 1 for BGN 1.95583.  Foreign exchange is freely accessible. The Foreign Currency Act stipulates that anyone may import or export up to EUR 10,000 or its foreign exchange equivalent without filling out a customs declaration.  The import or export of over EUR 10,000 or its equivalent in Bulgarian leva or another currency across the border to or from a non-EU country must be declared to the customs authorities; in the case of an EU country, it must be declared if requested by the customs authorities.  Exporting over BGN 30,000 (USD 17,340) in cash requires a declaration about the source of the funds, supported by documents certifying that the exporter does not owe taxes (unless the funds were earlier imported and declared).

In 2014, the United States and Bulgaria signed an intergovernmental agreement that implements provisions of the Foreign Account Tax Compliant Act (FATCA), which targets tax non-compliance by U.S. citizens who hold accounts with Bulgarian financial institutions. The Parliament ratified the agreement in 2015.

Remittance Policies

There is no official policy regarding remittances, which are an increasingly important source of funding for Bulgarian families with relatives overseas.

Sovereign Wealth Funds

Bulgaria does not have a sovereign wealth fund.

7. State-Owned Enterprises

Upon EU accession, Bulgaria was recognized as a market economy, in which the majority of the companies are private.  Significant state-owned enterprises (SOEs) remain, however, such as for railways and for the postal service. SOEs also predominate in the healthcare, infrastructure, and energy sectors; many of these are collectively managed by a common holding company (also an SOE).  Bulgaria’s roughly 220 SOEs account for about five percent of employment in the country, and their revenues amount to about 13.5 percent of the GDP. Some of the SOEs receive annual government subsidies for current and capital expenditures, regardless of their actual performance.  SOEs’ budgets and audit reports are posted on the Ministry of Finance website. The list of all SOEs can be found on: http://www.minfin.bg/bg/948   

The law treats equally public and private sector companies vis-à-vis bidding on concessions, taxation, or other government-controlled processes.  Bulgaria became party to the WTO’s Government Procurement Agreement (GPA) upon its entry into the EU in 2007.

Privatization Program

No major privatizations are currently planned.  All majority or minority state-owned properties are eligible for privatization, with the exception of those included in a specific list of public interest companies, including water management companies, state hospitals, and state sports facilities. State-owned military manufacturers can be privatized with Parliamentary approval.

Municipally-owned property can be privatized upon decision by a municipal council, or authorized body and upon publication of the municipal privatization list in the national gazette. Foreign companies may participate in privatization tenders. The 2010 Privatization and Post-Privatization Act created a single Privatization and Post-Privatization Agency http://www.priv.government.bg/   responsible for privatization oversight.

8. Responsible Business Conduct

In 2007 the government adopted a National Corporate Governance Code to encourage companies to observe global principles of responsible business conduct (RBC).  The non-governmental Bulgarian Network for Social and Corporate Responsibility (CSR) https://www.csr.bg /   promotes CSR among Bulgarian companies and highlights good business practices.  Bulgaria is not currently an adherent of the OECD Guidelines for Multinational Enterprises, and is not a member of the Extractive Industries Transparency Initiative.

9. Corruption

Bribery is a criminal act under Bulgarian law for both the giver and the receiver.  Individuals who mediate and facilitate a bribe are also held accountable. However, widespread corruption continues to be one of the most difficult problems in Bulgaria’s investment climate.  Human trafficking, narcotics, and contraband smuggling channels contribute to corruption in Bulgaria. Bulgaria has laws, regulations, and penalties on the books to combat corruption, but its law enforcement capacity remains limited and the authorities mainly prosecute easy-to-prove, low-level cases.  As a result, Bulgaria has seen few cases of high public interest, such as instances involving alleged siphoning of millions from the state coffers or EU funds, or involving public tenders for large energy and infrastructure projects. The high-profile prosecutions that do take place are often seen as selective or politically motivated.  Bulgaria ranks 77th out of 180 countries in Transparency International’s Corruption Perception Index for 2018, in last place among EU members.

In early 2018, the Center for Prevention and Countering Corruption and Organized Crime became the umbrella agency incorporating previously independent bodies combating corruption.

Bulgaria has ratified the OECD Anti-Bribery Convention and is a participating member of the OECD Working Group on Bribery.  Bulgaria has also ratified the Council of Europe’s Convention on Laundering, Search, Seizure, and Confiscation of Proceeds of Crime (1994) and Civil Convention on Corruption (1999).  Bulgaria has signed and ratified the UN Convention against Corruption (2003); the Additional Protocol to the Council of Europe’s Criminal Law Convention on Corruption; and the UN Convention against Transnational Organized Crime.  In 2018, the Bulgarian Parliament adopted the Anti-Money Laundering Act, which transposes the 2015 EU Directive on the prevention of the use of the financial system for the purposes of money laundering and terrorist financing.

Resources to Report Corruption

Organizations or agencies responsible for reporting on or combating corruption:

  • Mr. Plamen Georgiev, Chairman
    Commission on Corruption Prevention and Illegal Assets Forfeiture
    112 Rakovski Blvd, Sofia, 1000
    ciaf@ciaf.government.bg
  • Mr. Ognyan Minchev, Board President
    Transparency International Bulgaria
    50 Sandor Petofi Str., Sofia
    mbox@transparency.bg

10. Political and Security Environment

There have been no incidents in recent years involving politically motivated crime.

11. Labor Policies and Practices

The official adult literacy rate in Bulgaria is 98.4 percent (15 years and older), according to the most recent data from the UN’s Human Development Report, but illiteracy is significantly higher among some minorities.  Many Bulgarians have strong backgrounds in engineering, medicine, economics, and the sciences, but there is a shortage of professionals with management skills as well as of skilled workers. Foreign and local investors have also complained of a mismatch between the educational system and the labor market’s demands.  Emigration, particularly among young skilled professionals, has exacerbated the shortages. Overall, the labor market has grown tighter, with the 2018 unemployment rate reaching a multi-year low of 5.2 percent of the labor force.

The Bulgarian Constitution recognizes workers’ rights to join trade unions and to organize.  The National Council for Tripartite Cooperation (NCTC) provides a forum for dialogue among the government, employer organizations, and trade unions on issues such as cost-of-living adjustments and social security contributions.  Bulgaria has two large trade union confederations represented at the national level, the Confederation of Independent Trade Unions of Bulgaria (CITUB) and the Confederation of Labor Podkrepa (Support).

There are very few restrictions on trade union activity, but employees in smaller private firms are often not represented.  Unionized labor is most commonly seen in the highly subsidized railway and postal sectors. Under the Bulgarian Labor Code, employer-employee relations are regulated by employment contracts.  Collective labor contracts can be concluded at the sectoral level, enterprise level, regional, and municipal level. The Labor Code addresses worker occupational safety and health issues and mandates a minimum wage (set by the Council of Ministers).  The minimum wage in 2019 is BGN 560 (USD 325.5) per month.

The Bulgarian Labor Code provides for benefits for outgoing employees depending on the reason for termination of the employment contract and on whose initiative the termination has been enacted.  In cases of forcible termination, the employee is normally entitled to compensation from the employer, generally for up to one month of the gross salary.

Disputes between labor and management can be referred to the courts, but resolution is often slow.  The National Institute for Conciliation and Arbitration (NICA) has developed a framework for collective labor dispute mediation and arbitration.  However, NICA-sponsored collective labor dispute resolutions remain few in number.

12. OPIC and Other Investment Insurance Programs

The U.S. Overseas Private Investment Corporation (OPIC) is active in Bulgaria, as is the World Bank-based Multilateral Investment Guarantee Agency.  Both organizations provide political risk insurance. OPIC has funded three projects in Bulgaria: for solar energy, for small business development, and for education:  https://www.opic.gov/opic-action/active-opic-projects  

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2017 $58,221 2016 $53,241 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $848 2017 $848 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2017 $29 N/A N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 91.5% 2016 79.4% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

* Source for Host Country Data: Bulgarian National Bank (BNB). For comparative purposes, data inside the table draws from the U.S./international source provided in the last column.


Table 3: Sources and Destination of FDI

The official FDI data in 2018 is broadly consistent with the IMF dollar-adjusted data.  The data for the Netherlands are heavily influenced by investment by non-Dutch companies (particularly Russian) incorporated in the country.  Distortions such as this substantially overstate the actual role of some countries as sources of FDI and understate that of the United States.  A recent study, based on beneficial owner analysis, placed the United States as historically the sixth-largest source country for FDI in Bulgaria, significantly above its nominal ranking at #13.  According to the same analysis, the United States is historically the largest non-EU source of FDI in Bulgaria.

Direct Investment From/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $49,604 100% N/A N/A N/A
Netherlands $8,594 17.3% N/A N/A N/A
Austria $4,756 9.2% N/A N/A N/A
Germany $3,358 6.8% N/A N/A N/A
Italy $2,995 6.0% N/A N/A N/A
United Kingdom $2,730 5.5% N/A N/A N/A
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Bulgarian companies’ tendency to seek tax advantages by using offshore entities impacts the data below, particularly in the case of Luxembourg

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $8,858 100% All Countries $2,247 100% All Countries $6,611 100%
United States $936 10.6% Luxembourg $679 30.2% Romania $865 13.1%
Luxembourg $887 10.0% United States $500 22.2% Hungary $479 7.2%
Romania $872 9.8% Germany $277 12.3% Poland $466 7.0%
Czech Rep $532 6.0% France $223 9.9% Czech Rep $459 6.9%
France $519 5.9% Ireland $164 7.3% United States $436 6.6%

14. Contact for More Information

Samuel Mikhelson
Economic Officer
MikhelsonSS@state.gov

Czech Republic

Executive Summary

The Czech Republic is a medium-sized, open, export-driven economy with 80 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 32.4 percent going to Germany alone. The United States is the Czech Republic’s largest non-EU export partner.  The Czech banking sector remains healthy. The country has strong, stable growth, with 2.9 percent GDP growth in 2018.

The Czech National Bank ended its foreign exchange intervention in the Czech crown (CZK) in April 2017, which had kept the crown at 27 to the euro (EUR).  Since then, the CZK has appreciated to CZK25.8 per EUR and CZK22.9 per USD as of March 2019. 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 EUR and agreed to join the Eurozone under the country’s EU accession agreement, the Czech government has said it will not seek to join the common currency in the next few years and the possibility remains widely unpopular among Czech voters.

The Czech Republic fully complies with EU and the Organization for Economic Co-operation and Development (OECD) standards for labor laws and equal treatment of foreign and domestic investors.  Labor laws are comparable with those of most developed nations. 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, although pressure on wages in competitive industries like IT has been much higher.  The country is now facing a labor shortage as most companies struggle to find workers with the unemployment rate solidly below 3 percent – the lowest rate in the EU. The 1992 U.S.-Czech Bilateral Investment Treaty, signed with the former Czechoslovakia, provides for international arbitration of investor–state disputes.

Great strides have been taken since the fall of communism to open the market to competition and privatization, but the Czech Republic still lacks sufficient enforcement of anti-trust violations.  The Czech Republic is committed to improving transparency and reducing corruption. The Czech government enforces intellectual property rights (IPR) protections.

There are few restrictions on foreign investment except in certain sectors that require access to sensitive information.   The government is currently in the process of drafting legislation to create a mechanism to screen foreign investments for national security concerns.  The Czech Republic has taken strides to diversify its traditional investments in engineering into new fields of research and development and innovative technologies.  EU structural funding has enabled the country to open a number of world-class scientific and high-tech research centers. EU member states are the largest investors in the Czech Republic.


Table 1:  Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 38 of 180 https://www.transparency.org/cpi2018
World Bank’s Doing Business Report “Ease of Doing Business” 2018 35 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 27 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in Partner Country (M USD, stock positions) 2017 $5,406 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $18,160 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 an attractive destination for companies to locate, operate, and expand.  Act No. 72/2000 allows the Czech government to give investment incentives to investors who make new investments or expand their existing investments in the country. CzechInvest, the government investment promotion agency that operates under the Ministry of Industry and Trade, 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 foreign direct investment (FDI).  Total foreign investment in the Czech Republic (equity capital + reinvested earnings + other capital) equaled USD 156 billion at the end of 2017, compared to USD 121.9 billion in 2016.  The increased activity of foreign investors reflects the solid state of the Czech economy and recovery in Europe. Of these, CzechInvest negotiated 106 new investment projects by foreign investors in the Czech Republic in 2017, worth USD 2.9 billion.

As a medium-sized, open, export-driven economy, the Czech market is strongly dependent on foreign demand, especially from the EU.  In 2018, 84.1 percent of Czech exports went to fellow EU member states, with 65.5 percent of this volume shipped to the EU and 32.4 percent to Germany, the Czech Republic’s largest trading partner according to the Czech Statistical Office.  The global economic crisis pulled the Czech Republic into its longest historical recession and highlighted its sensitivity to economic developments in the EU. Since emerging from recession in 2013, the economy has enjoyed some of the highest GDP growth rates of the European Union.  GDP growth reached 4.4 percent in 2017 and 2.9 percent in 2018. Growth estimates are smaller for 2019 at 2.6 percent, given uncertainty surrounding Brexit and the possibility of increasing international trade tariffs. Some experts predict a hard Brexit could cost the Czech economy 1.1 percent of GDP and 40,000 jobs.

The Czech Republic has no plans to adopt the EUR and instead has taken a delayed approach to adopting the Eurozone’s common currency.  Economic difficulties in the Eurozone during the global downturn weakened public support for the country’s adoption of the EUR, as did the Greek crisis, and the current government opposes setting a target date for accession.

Some unfinished elements in the economic transition, such as the slow pace of legislative and judicial reforms, have 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, intellectual property rights protection, 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.  The slow pace of the courts is often compounded by judges’ lack of familiarity with commercial or intellectual property law.

Both foreign and domestic businesses voice concerns about corruption.  Other 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 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).

The government does not differentiate between foreign investors from different countries.

In response to the European Commission’s September 2017 investment screening proposal, the Czech Republic is currently in the process of drafting legislation to create a mechanism to screen foreign investments for national security concerns.  The legislation would require government review before foreign investments in sensitive sectors like defense and critical infrastructure. Investments in certain other sectors could also require review within five years of a transaction if new advancements in technology mean foreign ownership could pose a national security risk.

The U.S.-Czech Bilateral Investment Treaty contains specific guarantees of national treatment and Most Favored Nation treatment for U.S. investors in all areas of the economy other than insurance and real estate (see the section on the Bilateral Investment Treaty below).  U.S. investors are not disadvantaged or singled out by the Czech government.

Other Investment Policy Reviews

In the past three years, the government has not undergone any third-party investment policy reviews through a multilateral organization.

Business Facilitation

Individuals have a number of bureaucratic requirements to set up a business or operate as a freelancer or contractor.  The Ministry of Industry and Trade 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/  .  The Ministry of Industry and Trade 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: http://www.businessinfo.cz/en/psc.html  .

The time required to start a business was 25 days in 2018, which is slightly above the world average of 20.1 days.  The Czech Republic’s Business Register is publicly accessible and provides details on business entities. 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 publically 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, outward Czech outward investments amounted only to USD 32.4 billion in 2017, compared to inward investments of USD 156 billion.  However, outward investment activity has increased 78 percent since 2014. 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.

2. Bilateral Investment Agreements and Taxation Treaties

The Czech Republic and the United States have a bilateral investment treaty (BIT).  The government of Czechoslovakia signed the original BIT with the United States in 1992, and the Czech Republic adopted this treaty in 1993, after the split with Slovakia.  The Czechs amended the treaty in 2003, along with other new EU entrants that had U.S. BITs, following negotiations with the European Commission about conflicts within the EU acquis communautaire.

Several dozen other countries have signed and ratified investment agreements with the Czech Republic, and some are in the process of ratification.  The full list of agreements, including ratification dates, can be found on the Ministry of Finance website in Czech only at: http://www.mfcr.cz/cs/legislativa/dohody-o-podpore-a-ochrane-investic/prehled-platnych-dohod-o-podpore-a-ochra  .  The list of all BITs between the Czech Republic and other countries is available in English at:  https://investmentpolicyhub.unctad.org/IIA/CountryBits/55  .

A bilateral U.S.-Czech Convention on Avoidance of Double Taxation has been in force since 1993.  In 2007, the U.S. and Czech governments signed a bilateral Totalization Agreement that exempts Americans working in the Czech Republic from paying into both the Czech and U.S. social security systems.  The agreement took effect January 1, 2009. In 2013, the U.S. and Czech governments signed a Supplementary Totalization Agreement amending the original agreement to reflect new Czech legislation on health insurance.  In 2014, the United States and the Czech Republic signed an Agreement on Improvement of International Tax Compliance and to implement the Foreign Account Tax Compliance Act (FATCA).

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. According to the latest Open Budget Survey, the Czech Republic scores 61 out of 100 countries in terms of public financial transparency.  The Czech government provides the public with substantial budget information, and the legislature adequately oversees the planning and implementation of the budget cycle. However, the survey recommends that the government include comparisons between borrowing estimates and actual results in the Year-End Report.

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

Legal System and Judicial Independence

The Czech Commercial Code and Civil Code are largely based on the German legal system, 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, but decisions may vary from court to court.  The reason for diverse legislative approaches may well be the fact that the new civil code did not only rewrite the system, but also introduced new terminology.  Consequently, the two substantive laws, the Penal Code and the Civil Code, have been adopted without a new procedural law to explain how the laws should be applied, which would allow courts to proceed according to clearly outlined jurisdictional guidelines.  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 at http://www.businessinfo.cz/en/   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 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 by potential investors 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, 30 investment disputes have involved a foreign investor. Of these, 17 have been resolved, 16 where the court ruled in favor of the Czech Republic and one where the parties settled out of court.

International Commercial Arbitration and Foreign Courts

Mediation is an option in nearly every area of law including family law, commercial law, and criminal law.  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

A significant amendment to the bankruptcy law came into force on June 1, 2017.  The amendment includes provisions prohibiting insolvency tourism, restriction of voting rights of the creditors from the debtor’s group, provisions against “bullying” insolvency petitions, and stricter rules for documenting the existence of a claim when filing a creditor’s insolvency petitions.  It also sets penalties for bankruptcy administrators of up to CZK5 million (USD 200,000) for serious administrative violations such as failure to state the address of the bankruptcy administrator where the administrator actually executes his activities. Moving up 10 spots from 2018, the Czech Republic ranked fifteenth in the 2019 edition of the World Bank’s Doing Business Report for ease of resolving insolvency.

4. Industrial Policies

The Czech Republic offers incentives to foreign and domestic firms that invest in the manufacturing sector, technology and research and development centers (R&D), and business support centers.  Incentives are funded from the Czech Republic’s national budget as well as from European Union Structural Funds.  The government provides investment incentives in the form of corporate income tax relief for 10 years, cash grants for job creation up to USD 13,000 per job, cash grants for training up to 50 percent of training costs, and cash grants for the purchase of fixed assets up to 10 percent of eligible costs. In 2019, an amendment to the legislation on investment incentives (Act No. 72/2000 Coll.) will likely go into effect.  The amendment will shift incentives from support for all types of investment towards support for investments that require higher-level, technical and R&D support.

The government does not have a common practice of issuing guarantees or jointly financing foreign direct investment projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

Both Czech and EU laws permit foreign investors involved in joint ventures to take advantage of commercial or industrial customs-free zones into which goods may be imported and later exported without depositing customs duty.  Free trade zone treatment means duties need to be paid only in the event that the goods brought into the free trade zone are introduced into the local economy. Since the Czech Republic became part of the single customs territory of the European Community and now offers various exemptions on customs tariffs, the original tariff-driven use of these free trade zones has declined.  While there were some instances of abuse of customs-free zones for tax evasion purposes, new Customs Act No. 242/2016 Coll. now precludes this practice by repealing a clause on exemption from value added taxation in customs-free zones.

Performance and Data Localization Requirements

The Czech Republic abides by EU law governing data localization and performance.  That being said, within the EU, the Czech Republic is highly critical of data localization policies.  On December 2, 2016, it published a joint statement alongside 13 other countries stressing the importance of the free flow of data within Europe.

The host government does not mandate local employment.  There are no government-imposed conditions on permission to invest.  The host government does not follow “forced localization.”

The visa process for non-EU foreign investors and their employees is time consuming and slow, but the requirements are the same for domestic, EU, and non-EU companies.  Worker mobility is currently a difficult issue for all companies operating in the Czech Republic due to the extremely low unemployment rate.

5. Protection of Property Rights

Real estate (land and buildings) located in the Czech Republic must be registered in the 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 33rd for ease of registering property in the 2019 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 signatory to the Bern, Paris, and Universal Copyright Conventions.  In 2001, the government ratified the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Treaty on Performances and Phonograms.  Domestic legislation protects all intellectual property rights, 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 WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS) requirements.  The Customs Administration of the Czech Republic and the Czech Commercial Inspection have legal authority to seize counterfeit goods. The Criminal Code, which came into effect January 1, 2010, increased maximum penalties for trademark, industrial rights, and copyright violations from two to eight years. 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  .

IPR violations at markets on the borders of Germany and Austria were once an issue of great concern, but since 2008 Czech authorities have made substantial efforts against physical markets and have adopted an acceptable legal framework for IPR protection.  In recognition of this fact, USTR removed the Czech Republic from the Special 301 Watch List in 2011. While online piracy is a growing concern, the legal framework for IPR protection 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 intellectual property (IP offices), please see WIPO’s country profiles at http://www.wipo.int/directory/en/  .

6. Financial Sector

Capital Markets and Portfolio Investment

The Czech Republic is open to portfolio investment.  The Prague Stock Exchange (PSE) is small, with only 16 listed companies.  The overall trade volume of stocks decreased from CZK 168.03 billion (USD 6.8 billion) in 2016 to CZK 138.78 billion (USD 5.8 billion) in 2017, with an average daily trading volume of CZK 555.13 million (USD 23.0 million).

In March 2007, the PSE created the Prague Energy Exchange (PXE) to trade electricity in the Czech Republic and Slovakia and, later, Hungary.  PXE’s goal is to increase liquidity in the electricity market and create a standardized platform for trading energy. Following a June 2017 merger of PXE’s trading platform with German power exchange EEX, the PXE benefited from both an increased number of traders and increased trade volume.

The Czech National Bank, as the financial market supervisory authority, sets rules to safeguard the stability of the banking sector, the capital markets, the insurance industry, and the pension scheme industry, and systematically regulates, supervises and, where appropriate, issues penalties for non-compliance with these rules.

The Central Credit Register (CCR) is an information system that pools information on the credit commitments of individual entrepreneurs and legal entities, facilitating the efficient exchange of information between CCR participants.  CCR participants consist of all banks and branches of foreign banks operating in the Czech Republic, as well as other individuals included in a special law.

As an EU member country, the local market provides credits and credit instruments on market terms.  Foreign investors are able to get credit on the local market and a variety of credit instruments are available.

The Czech Republic respects IMF Article VIII.

Money and Banking System

Large domestic banks belong to European banking groups.  Most operate conservatively and concentrate almost exclusively on the domestic Czech market.  As a result, Czech banks remained relatively healthy throughout the last global financial crisis.  Results of regular banking sector stress tests, as conducted by the Czech National Bank, repeatedly confirm the outstanding state of the Czech banking sector which is deemed resistant to potential shocks.  The stress test conditions developed by the Czech National Bank present substantially stricter criteria than those established by the European Central Bank (ECB). Results of the most recent stress test conducted by the Czech National Bank are available at https://www.cnb.cz/en/financial_stability/stress_testing/  .  As of February 28, 2019, the total assets of commercial banks stood at CZK7.8 billion (approximately USD 342 billion), according to the Czech National Bank.  Foreign investors have access to bank credit on the local market, and credit is generally allocated on market terms. Domestic household borrowing in foreign currencies is negligible.

The Czech National Bank has 10 correspondent banking relationships.  The Czech Republic has not lost any correspondent banking relationships in the past three years and there are no relationships in jeopardy.

The Czech National Bank does not determine crypto currencies to be standard currency units and, therefore, does not regulate them.  An amendment to the Anti-Money Laundering Act No. 253/2008 Col., effective from January 2017, expands the list of entities that are likely to be confronted with money laundering cases as a result of access to virtual currencies, such as currency platforms and wallet providers, and subjects them to additional reporting requirements.

Foreign Exchange and Remittances

Foreign Exchange Policies

The CZK is fully convertible.  As of April 2017, the Czech National Bank no longer pegs the CZK to the EUR and the CZK floats freely.  The Czech National Bank supervises the foreign exchange market and its compliance with foreign exchange regulations.  The law permits conversion into any currency.

Imports or exports equal to or exceeding EUR10,000 (~USD 11,200) in cash, travelers’ checks, money orders, securities, other investment tools or commodities of high value (such as precious metals or stones) must be declared at the border.

Remittance Policies

All international transfers of investment-related profits and royalties can be carried out freely.  The U.S.-Czech Bilateral Investment Treaty guarantees repatriation of earnings from U.S. investments in the Czech Republic.  However, a 15 percent withholding tax is charged on repatriation of profits from the Czech Republic. This tax is reduced under the terms of applicable double taxation treaties.  There are no administrative obstacles for removing capital. The average delay for remitting investment returns meets the international standard of three working days.

Sovereign Wealth Funds

The Czech government does not operate a sovereign wealth fund.

7. State-Owned Enterprises

The Ministry of Finance administers ownership rights of state-owned enterprises (SOEs).  Potential conflicts of interest are covered by existing Act No. 159/2006 on Conflicts of Interest, and newly adopted Act No. 14/2017 on Amendments to the Act on Conflict of Interest.  Legislation on the civil service, which took effect January 1, 2015, established measures to prevent political influence over public administration, including operation of SOEs.

Private enterprises are generally allowed to compete with public enterprises under the same terms and conditions with respect to access to markets, credit, government contracts and other business operations.  SOEs purchase or supply goods or services from private sector/foreign firms. SOEs are subject to the same domestic accounting standards, rules, and taxation policies as their private competitors, and are not given any material advantages compared to private entities.  State-owned or majority state-owned companies are present in several (strategic) fields, including the energy, postal service, information & communication, and transport sectors.

SOEs are usually structured as joint-stock companies.  They do not report directly to government ministries, but are managed by a board of directors (statutory body) and a supervisory board that generally includes representatives of the government and trade unions (representing employees, both union and non-union, as required by law).  Like privately owned joint-stock companies, the SOEs are fully responsible for their obligations toward third parties, although shareholders are not personally liable for a company’s obligations. SOEs are required by law to publish an annual report, disclose their accounting books, and submit to an independent audit.  Private enterprises and SOEs carry out procurement in accordance with the Act on Public Procurement No. 134/2016, and its addendum No. 147/2017, which is fully harmonized with the existing EU legislation on public procurement.

The Czech Republic has 16 wholly-owned SOEs and four majority-owned SOEs.  Wholly-owned SOEs employ roughly 29,000 people, have USD 6 billion in annual income, and own more than USD 9.8 billion in assets.  There is not a unified, published list of all companies with some percentage of state ownership, but information can be found on individual ministry websites or by directly contacting the ministry who manages the company.

As an OECD member, the Czech Republic promotes the OECD Principles of Corporate Governance and the affiliated Guidelines on Corporate Governance for SOEs.  SOEs are subject to the same legislation as private enterprises regarding their commercial activities.

Privatization Program

According to the Ministry of Finance, as a result of several waves of privatization of formerly state-owned companies since 1989, over 90 percent of the Czech economy is now in private hands.  Privatization programs have generally been open to foreign investors. In fact, most major state-owned companies were privatized with foreign participation. The government evaluates all investment offers for state enterprises.  Many complainants have alleged non-transparent or unfair practices in connection with past privatizations. No privatization program is currently underway.

8. Responsible Business Conduct

The concept of responsible business conduct (RBC) is now widely understood and every year is implemented by more companies in the Czech Republic.  The government understands and supports the concept of corporate social responsibility (CSR).

In April 2014, the Czech government adopted a National Action Plan (NAP) for CSR.  The major goal of the NAP is to establish fundamental principles and to support and encourage CSR, highlighting that CSR should remain a voluntary policy.  In 2015, the Sustainable Development Section of the Quality Council of the Czech Republic created a National Informational CSR Portal that provides businesses, NGOs, representatives of state administration, and the public with updates related to CSR in the Czech Republic.  In 2016, the government updated the NAP to address public tenders and encourage businesses and state administration to consider the potential long-term social and environmental impacts of their procurement decisions instead of deciding strictly based on financial costs. The new NAP (2019-2023) was approved by the government in January 2019.  The new NAP aims to motivate businesses and public administration to voluntarily implement specific CSR projects and create favorable conditions for CSR projects.

Post is not aware of any controversial instances of corporate impact on human rights.  The government strictly and effectively enforces legislation in the area of human rights, labor rights, consumer protection, and environmental protection to protect individuals from adverse business impacts.  Domestic standards are generally very high and in many instances exceed EU-wide requirements. Negligence or failure to comply with this legislation results in serious consequences.

Shareholders are protected by developed legislation that clearly describes legal processes, organizational structures, administration, and management of all business components, including stakeholders.    

Companies are not required to disclose publicly information about their RBC or CSR activities.  Various local NGOs monitor and advise CSR programs, such as the Association for Corporate Social Responsibility, the Business Leaders Forum, Business for Society, and the CSR Committee of the American Chamber of Commerce.  The Association for CSR is the host entity in the Czech Republic for the UN Global Compact, a UN strategic policy initiative for businesses that are committed to aligning their operations and strategies with 10 universally accepted principles in the areas of human rights, labor, environment, and anti-corruption.

The host government encourages local as well as foreign enterprises to follow generally accepted RBC principles on grounds of adherence to the OECD Guidelines for Multinational Enterprises (MNE) and to the United Nations Guiding Principles of Business and Human Rights.  The OECD Guidelines for MNE are actively promoted by the National Contact Point (NCP) and the United Nations Principles are being reviewed at the Office of the Government, with the goal to issue a separate national action plan to secure its implementation. The NCP working group consists of representatives of the government, employer organizations (Confederation of Industry and Trade), employee organizations (Czech-Moravian Confederation of Trade Unions), and NGOs (Frank Bold).  The NCP closely and actively cooperates with other regional NCPs to share best practices, procedures, and experience.

The host government adheres to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.  The Ministry of Industry and Trade is responsible for implementation and compliance.

The Czech Republic does not have any significant oil and natural gas resources and it is dependent on purchasing these commodities from abroad.  There are no special domestic transparency measures requiring the disclosure of payments made to governments for projects related to the commercial development of oil, natural gas, or minerals.  Payments for extraction of minerals in the Czech Republic abide by the Mining Law, which requires that payments are processed for extracted minerals as well as for mined areas. International trade with oil, natural gas, and minerals is not subject to any special legislation; it follows the general rules of international trade.  The Czech Republic is not an Extractive Industries Transparency Initiative (EITI)-compliant country or an EITI candidate.

9. Corruption

Despite concerns about corruption, U.S. companies have not been significantly deterred from investing in the Czech Republic.  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.  Corruption of public officials is prosecuted on the regional level to ensure that prosecutors have specialized knowledge and avoid bias; the government believes that regional prosecutors know the local environment and actors better than their colleagues on the national level.  There have been several successful cases prosecuting corruption, but cases are often lengthy and face many delays. The 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. Anti-corruption laws apply equally to Czech and foreign investors. Criminal procedure law allows for the seizure of criminal proceeds paid or transferred to family members of corrupt officials, although their prosecutions depend on evidence.

Czech law obliges legislators, members of the cabinet, and other selected public officials to declare their assets annually.  The public can view the declarations with limited content on a website, but access to more details remains complicated because it requires a password issued by the Justice Ministry that is only valid for 30 days.

In addition to the financial disclosure law, the Bohuslav Sobotka government (2014-2017) was successful in passing an amendment to the law on public procurement, a law on the register of public tenders, and a law on transparent financing of political parties.  The government failed to enact a debated bill on the public prosecution service that contained measures to ensure stronger prosecutor independence. The amended law on public procurement seeks to counter conflict-of-interest in awarding contracts or government procurement.

The government ratified the OECD Anti-Bribery Convention in January 2000 and the UN Convention against Corruption in January 2014.  According to the 2017 OECD Phase 4 Evaluation Report, the Czech Republic demonstrates its commitment to improvement in the implementation of the Convention; however, it must take significant steps to enforce its foreign bribery laws and its efforts to detect, investigate, and prosecute foreign bribes.  The report calls for better protection of whistleblowers and for better implementation of the criminal liability of legal entities law that has been amended six times since it came into force in 2012. Based on the report, no legal person has been prosecuted for the bribery of foreign public officials.

In October 2016, the government passed a new public procurement law that introduces new tools for evaluation of tenders that takes into account not only the price, but also the quality of the offer.  The law also requires every contracting authority to post the winning contract on its public profile within 15 working days after the contract has been signed. Furthermore, it increases the threshold for the simplified procedure of construction tenders from CZK10 to CZK50 million (USD 2.5 million), which many NGOs criticized for decreasing transparency because many construction tenders fall under CZK50 million.  The law requires more than one bidder for all procurements and requires bidders to disclose more of their ownership structure in the bidding process, but it also contains some exceptions to those obligations. American businesses have expressed some concerns about such frequent changes in competition policies as obstacles to investment.

The government encourages companies to establish internal codes of conduct that, among other things, prohibit bribery of public officials.  Many companies have adopted such codes but it is not an obligatory government requirement.

An amendment to the Law on the Central Registry of Contracts was enacted in December 2015 and took effect July 1, 2016.  The amendment requires all national, regional, and local authorities and companies to make public all newly concluded contracts valued at CZK50,000 (USD 2,400) or more.  As of July 1, 2017 contracts not posted publicly in the Registry within 30 days will not be acknowledged as effective. The Registry of Contracts has its own government web page in Czech only at:  http://smlouvy.gov.cz  .

Several NGOs such as Oziveni, Transparency International, and Anticorruption Endowment receive corruption reports online.  In 2015, Oziveni introduced a new software GlobalLeaks that enables absolute anonymity to those who decide to report corruption.  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
http://www.justice.cz 
+420 221 997 595
Email: korupce@msp.justice.cz

Contact at “watchdog” organizations:

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

Oziveni
Muchova 13, 160 00 Praha 6
tel: +420 257 531 983
Email: oziveni@oziveni.cz
http://www.oziveni.cz 

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

10. Political and Security Environment

The risk of political violence in the Czech Republic is extremely low.  Two historic political changes – the Velvet Revolution, which ended the communist era in 1989, and the dissolution of Czechoslovakia into the Czech Republic and Slovakia in 1993 – occurred with minimal loss of life and without significant violence.  The political institutions underpinning parliamentary democracy generally function smoothly. Elections have resulted in orderly and peaceful changes of government.

11. Labor Policies and Practices

A historically strong and well-developed machinery industry, one of the key drivers of Czech exports, requires a wide range of technically qualified staff, including the entire spectrum of professions from manual workers to engineers and designers.  The rapidly growing electronics and information technology sectors are also creating demand for highly skilled workers. Key economic growth and export-driven industries are facing the challenge of demand for highly skilled technical workers that exceeds supply.  Robotic automation and digitalization are also impacting many industries.

The wide availability in the Czech Republic of an educated, relatively low-cost labor force on the doorstep of Western Europe was a major attraction for foreign investors in the 1990s.  While the wage gap continues to narrow and the income convergence process reflects the Czech Republic’s economic growth in recent years, Czech wages still trail significantly those of neighbors like Germany and Austria.  In 2018, wage levels increased by an average of 8.1 percent, according to the Czech Statistical Office. According to Eurostat, the Czech Republic’s unemployment rate was 1.9 percent in February 2019, which is the lowest in the EU, however, unemployment rates vary significantly between regions.

Unemployment insurance and other social safety net programs exist for workers laid off for economic reasons.  Labor laws differentiate between layoffs and firing. Labor laws are generally very strict and favor the employee rather than the employer.

Given record low unemployment, employers are facing labor shortages and some companies have started to rethink investment or expansion plans out of concern they will not be able to find workers to fill new jobs.

Czech law guarantees Czech workers’ right to form and join independent unions of their choice without authorization or excessive requirements.  It permits them to conduct their activities without interference. The right to freely associate covers both citizens and foreign workers. The law also provides for collective bargaining.  It prohibits anti-union discrimination and does not recognize union activity as a valid reason for dismissal. Workers in most occupations have the legal right to strike if mediation efforts fail, and they generally exercise this right.

Strikes can be restricted or prohibited in essential service sectors such as hospitals, electricity/water supply services, air traffic control, the nuclear energy sector, and oil /natural gas sectors.  Members of the armed forces, prosecutors, and judges may not form trade unions or strike. The scope for collective bargaining is limited for civil servants, whose wages are regulated by law. Only trade unions may legally represent workers, including non-members.  Labor dispute resolutions are carried out in civil court proceedings. There were no strikes in the last year that posed an investment risk.

12. OPIC and Other Investment Insurance Programs

A bilateral agreement was signed in 1990 between the Overseas Private Investment Corporation (OPIC) and Czech Republic.  Finance programs of OPIC, including investment insurance, have been available in the Czech Republic since 1991. Investors are urged to contact OPIC’s offices in Washington directly for up-to-date information regarding availability of services and eligibility.  The Czech Republic is a member of the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA).

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) (M USD) 2017 $215,861  2017 $215,726 http://data.worldbank.org/country/czech-republic  
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in Partner Country (M USD, stock positions) 2017 $1,284 2017 $5,406 http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Host Country’s FDI in the United States (M USD, stock positions) 2017 $85 2017 N/A https://apps.bea.gov/international/factsheet/factsheet.cfm?Area=364  
Total Inbound Stock of FDI as % host GDP 2017 65.8% 2017 78.3% https://data.oecd.org/fdi/fdi-stocks.htm  

*Sources:  Czech Statistical Office (www.czso.cz  ), Czech National Bank (https://www.cnb.cz/cnb/obiee_pzi  ).

As of 2015, the Czech National Bank records cross-border equity capital stocks for quoted shares (in line with the ESA 2010 and BPM6 international manuals) at market value instead of book value, rather than valuing FDI as the sum of historical flows, which is the methodology used by the United States.  As a result, while the 2014 figure for total U.S. FDI stock was listed at USD 4.388 billion under the sum of historical flows method, under the new methodology, it is valued at USD 1.567 billion. This explains the large discrepancy between U.S. and Czech figures for 2017.


Table 3:  Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data – 2017
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $149,556 100% Total Outward $26,708 100%
Netherlands $30,997 21% Netherlands $8,625 32%
Germany $25,304 17% Cyprus $4,920 18%
Luxembourg $16,990 11% Slovakia $3,718 14%
Austria $16,551 11% Luxembourg $3,514 13%
France $11,625 8% Romania $1,222 5%
“0” reflects amounts rounded to +/- USD 500,000.

The IMF rankings for the top five sources of FDI stock are consistent with data from the Czech National Bank.  IMF rankings for destinations of FDI stock vary – the Czech National Bank lists Luxembourg second, Cyprus third, and Slovakia fourth (as opposed to IMF data, which places Cyprus second, Slovakia third, and Luxembourg fourth).   IMF and Czech National Bank figures for inward direct investment vary by up to 4 percent and figures for outward direct investment vary by up to 6 percent. These statistical distortions are much smaller than previous years as a result of the global adoption of the recently revised OECD Benchmark Definition for FDI, which is designed to discount investment flows from special purpose entities.

The top sources of and destinations of Czech FDI represent a combination of major EU trading partners and favored tax havens.  The leading country for both inward and outward direct investment flows is the Netherlands. In the early 1990s, the Netherlands became a popular place for corporate registration for domestic and foreign businesses active in the Czech Republic.  In recent years, the main rationale for registering a business in the Netherlands is favorable corporate income taxes, stimulating rapid development of offshore corporate structures in the Czech Republic. While the tax haven effect has dissipated (corporate income tax rates in the Czech Republic and Netherlands are nearly equal), the Netherlands remains a popular country for large corporations.  Luxembourg attracts Czech businesses for the same reason. Among other FDI partner countries, Cyprus offers one of the lowest corporate income tax rates in the EU (currently 12.5 percent), and tax exemption of dividends.


Table 4:  Sources of Portfolio Investment

Portfolio Investment Assets – 2017
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $36,519 100% All Countries $19,732 100% All Countries $16,787 100%
Luxembourg $6,819 19% Luxembourg $5,899 30% Slovakia $2,538 15%
Austria $4,498 12% Belgium $3,036 15% Netherlands $2,310 14%
United States $3,368 9% United

States

$2,280 12% Austria $2,249 13%
Slovakia $3,241 9% Austria $2,248 11% Poland $2,005 12%
Belgium $3,108 9% Ireland $1,305 7% United States $1,088 6%

The Czech National Bank does not provide its own statistical data on portfolio investments by individual countries, but provides a reference to IMF data on its website.  As far as portfolio investment assets for all countries, the 2017 IMF results are consistent with the Czech National Bank’s data.

14. Contact for More Information

Economic Section – U.S. Embassy Prague
Trziste 15, 118 01 Prague 1
+420 257 022 000
Email: PragueInvestmentClimate@state.gov

Denmark

Executive Summary

Denmark is regarded by many independent observers as one the world’s most attractive business environments and is characterized by political, economic, and regulatory stability. It is a member of the European Union (EU) and Danish legislation and regulations conform to EU standards on virtually all issues. It maintains a fixed exchange rate policy, with the Danish Krone linked closely to the Euro. Denmark is a social welfare state with a thoroughly modern market economy reliant on free trade in goods and services. It is a net exporter of food, fossil fuels, chemicals and wind power, but depends on raw material imports for its manufacturing sector. Within the EU, Denmark is among the strongest supporters of liberal trade policy. Transparency International regularly ranks Denmark as having among the world’s lowest levels of perceived public sector corruption.

The Danish economy is enjoying a solid upswing. GDP growth averaged 2.0 percent annually over the last three years (2016 – 2018) and 2.3 percent 2015 – 2017.  GDP grew 1.4 percent in 2018 but 2.6 percent Q4 2017 – Q4 2018. The Danish Government estimates that growth will continue at 1.7 percent in 2019 and 1.6 percent in 2020. . Employment is at a historical high with a labor force of 2,776,036, and unemployment at 3.7 percent at the start of 2019.  Danish companies are performing well, and their willingness to invest in order to meet market demand is high. With the current low unemployment, the risk of labor bottleneck issues is increasing in certain sectors, mainly construction, where demand for skilled labor outstrips supply. Danish consumers enjoy increased purchasing power due to increased employment, low interest rates, and positive real wage trends. Observers believe the economy is at full capacity and that economic growth will continue in coming years, although as the competition for economic resources intensifies, it will likely become increasingly difficult to maintain growth rates at this level.

Denmark is an open economy, highly reliant on international trade, with exports accounting for about 55 percent of GDP.  Developments in its major trading partners – Germany, Sweden, the United States and the UK – have substantial impact on Danish national accounts. Gross unemployment, a national definition, was 3.7 percent at the start of 2019, and is forecast to remain subdued in coming years. The OECD Harmonized Unemployment Rate was 5.0 percent in February 2019.

Denmark is a major international development assistance donor, having contributed DKK 16.3 billion (USD 2.6 billion) in 2018, with 68 percent of Danish assistance being bilateral and 32 percent multilateral. Denmark is one of six countries meeting the UN requirement of ODA contribution of 0.7 percent of GNI. Danish assistance in 2017 amounted to 0.74 percent of GNI.

The entrepreneurial climate, including female-led entrepreneurship, is strong; Denmark is a relatively large contributor to the World Bank’s Women Entrepreneurship Finance Facility with a USD 10.6 million contribution.

Underlying macroeconomic conditions in Denmark are sound, with an attractive investment climate. Denmark is strategically situated to link continental Europe with the Nordic and Baltic countries. Transport and communications infrastructures are efficient. Denmark is among world leaders in high-tech industries such as information technology, life sciences, clean energy technologies, and shipping.

Note:  Separate reports on the investment climates for Greenland and for the Faroe Islands can be found at the end of this report.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 1 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 3 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 8 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 $13,873 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $55,220 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

A small country with an open economy, Denmark is highly dependent on foreign trade, with exports comprising the largest component (55 percent) of GDP. Danish trade and investment policies are liberal. In general, investment policies are forward-looking, aimed at fostering and developing businesses, especially in high-growth sectors. The Economist Intelligence Unit (EIU) ranks Denmark second globally and first regionally on its business environment ranking. The EIU characterizes Denmark’s business environment as among the most attractive in the world, reflecting a sound macroeconomic framework, excellent infrastructure, low bureaucracy and a friendly policy towards private enterprise and competition. Principal concerns include a high personal tax burden, low productivity growth and uncertainties relating to Brexit, as the UK is a close trading partner that shares many of Denmark’s policy goals within the EU. Overall, however, operating conditions for companies should remain broadly favorable. Denmark scores top marks in various categories, including the political and institutional environment, macroeconomic stability, foreign investment policy, private enterprise policy, financing, and infrastructure.

As of January 2019, the EIU rated Denmark an “AA” country on its Country Risk Service, with a stable outlook. Sovereign risk rated “AA,” and political risk “AAA.” Denmark ranked tenth out of 140 on the World Economic Forum’s 2018 Global Competitiveness Report, third on the World Bank’s 2019 Doing Business ranking, and fifth on the EIU 2018 Democracy Index. “The Big Three” credit rating agencies Standard & Poor’s, Moody’s, and Fitch Group all score Denmark AAA.

“Invest in Denmark,” an agency of the Ministry of Foreign Affairs and part of the Danish Trade Council, provides detailed information to potential investors. The website for the agency is www.investindk.com  .

Corporate tax records of all companies, associations and foundations, which pay taxes in Denmark, were made public beginning in December 2012 and are updated annually. The corporate tax rate is 22 percent.

Limits on Foreign Control and Right to Private Ownership and Establishment

As an EU member state, Denmark is bound by EU rules on free movement of goods, capital, persons and certain services. Denmark welcomes foreign investment and does not distinguish between EU and other investors. There are no additional permits required by foreign investors, nor any reported bias against foreign companies from municipal or national authorities.

Denmark’s central and regional governments actively encourage foreign investment on a national-treatment basis, with relatively few limits on foreign control. A foreign or domestic private entity may freely establish, own, and dispose of a business enterprise in Denmark. The capital requirement for establishing a corporation (A/S) or Limited Partnership (P/S) is DKK 400,000 (approx. USD  63,317) and for establishing a private limited liability company (ApS) DKK 40,000 (approx. USD 6,331.

As of 15 April, it is no longer possible to set up an “Entrepreneurial Company” (IVS). The company type was intended to allow entrepreneurs a cheap and simple way to incorporate with limited liability, with a starting capital of only DKK1 (USD 0.16). Due to repeated instances of fraud and unintended use of the IVS, it has been abolished. Simultaneously, the capital requirements to set up a Private Limited Company were lowered, bringing Denmark more in line with other Scandinavian countries, and to ensure it will continue to be cheap and simple to establish limited liability companies in Denmark. Currently there are approx. 45,000 IVS in existence. These companies have a deadline of 2 years to re-register as Private Limited Companies (ApS), with a minimum capital of DKK 40,000. If they fail to re-register, they will be forcibly dissolved.  No restrictions apply regarding the residency of directors and managers.

Since October 2004, any private entity may establish a European public limited company (SE company) in Denmark. The legal framework of an SE company is subject to Danish corporate law, but it is possible to change the nationality of the company without liquidation and re-founding. An SE company must be registered at the Danish Business Authority if the official address of the company is in Denmark. The minimum capital requirement is EUR 120,000 (approx. USD 135,000).

Danish professional certification and/or local Danish experience are required to provide professional services in Denmark. In some instances, Denmark may accept an equivalent professional certification from other EU or Nordic countries on a reciprocal basis. EU-wide residency requirements apply to the provision of legal and accountancy services.

Ownership restrictions are applied in the following sectors:

  • Hydrocarbon exploration: Requires 20 percent Danish government participation on a “non-carried interest” basis.
  • Defense materials: The law governing foreign ownership of Danish defense companies (L538 of May 26, 2010) stipulates that the Minister of Justice has to approve foreign ownership of more than 40 percent of the equity or more than 20 percent of the voting rights, or if foreign interests gain a controlling share in a defense company doing business in Denmark. This approval is generally granted unless there are security or other foreign policy considerations weighing against approval.
  • Maritime: There are foreign (non-EU resident) ownership requirements on Danish-flagged vessels other than those owned by an enterprise incorporated in Denmark. Ships owned by Danish citizens, Danish partnerships or Danish limited liability companies are eligible for registration in the Danish International Ships Register (DIS). Ships owned by EU or European Economic Area (EEA) entities with a genuine link to Denmark are also eligible for registration, and foreign companies with a significant Danish interest can register a ship in the DIS.
  • Aviation: For an airline to be established in Denmark it must have majority ownership and be effectively controlled by an EU state or a national of an EU state, unless otherwise provided for through an international agreement to which the EU is a signatory.
  • Securities Trading: Non-resident financial institutions may engage in securities trading on the Copenhagen Stock Exchange only through subsidiaries incorporated in Denmark.
  • Real Estate: Purchases of designated vacation properties, or ‘summer houses’, are restricted to citizens of Denmark. Such properties cannot be inhabited year-round, and are located in municipally designated ‘summer house area’ zones, typically near coastlines. EU citizens and companies from EU member states can purchase any type of real estate, except vacation properties, without prior authorization from the authorities. Companies and individuals from non-EU countries that have been present/resident in Denmark for at least five years in total and are currently resident in Denmark can also purchase real estate, except vacation properties, without prior authorization. Non-EU companies or individuals that do not meet these requirements can only purchase real estate with the permission of the Danish Ministry of Justice. Permission is freely given to people with a Danish residency permit, except with regard to purchases of vacation properties.

Other Investment Policy Reviews

The most recent UNCTAD review of Denmark occurred in March 2013, available here: http://unctad.org/en/PublicationsLibrary/webdiaeia2013d2_en.pdf . There is no specific mention of Denmark in the latest WTO Trade Policy Review of the European Union, revised in October 2017.

An EU Commission Staff Working Paper on the investment environment in Denmark is available here: https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/european-semester/european-semester-your-country/denmark_en   while a 2015 private sector investment and taxation review by Deloitte can be found here: http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-denmarkguide-2015.pdf .

Denmark ranked first out of 175 in Transparency International’s 2018 Corruption Perceptions Index. It received a ranking of 3 out of 190 for “Ease of Doing Business” in the World Bank’s 2019 Doing Business Report, placing it first in Europe. In the World Economic Forum’s Global Competitiveness report for 2018, Denmark was ranked 10 out of 140 countries.

The World Intellectual Property Organization’s (WIPO) Global Innovation Index ranked Denmark 8 out of 126 in 2018

Business Facilitation

The Danish Business Authority (DBA) is responsible for business registrations in Denmark. As a part of the Danish Business Authority, “Business in Denmark” provides information on relevant Danish rules and online registrations to foreign companies in English. The Danish business registration website is www.virk.dk  . It is the main digital tool for licensing and registering companies in Denmark and offers a business registration processes that is clear and complete.

Registration of sole proprietorships and partnerships is free of charge, while there is a fee for registration of other business types: DKK 670 (USD 106) if the registration is done digitally and DKK 2150 (USD 340) if the registration form is sent by e-mail or post.

The process for establishing a new business is distinct from that of registration. The Ministry of Foreign Affairs “Invest in Denmark” program provides a step-by-step guide to establishing a business, along with other relevant resources which can be found here: www.investindk.com/Downloads  .The services are free of charge and available to all investors, regardless of country of origin.

Processing time for establishing a new business varies depending on the chosen business entity. Establishing a Danish Limited Liability Company (Anpartsselskab – ApS), for example, generally takes four to six weeks for a standard application. Establishing a sole proprietorship (Enkeltmandsvirksomhed) is simpler, with processing generally taking about one week.

Those providing temporary services in Denmark must provide their company details to the Registry of Foreign Service Providers (RUT). The website (www.virk.dk  ) provides English guidance on how to register a service with RUT. A digital employee’s signature, referred to as a NemID, is required for those wishing to register a foreign company in Denmark. A CPR number (a 10-digit personal identification number) and valid ID are needed to obtain a NemID, though not Danish citizenship.

In the Danish Financial Statements Act no. 1580 of 10 January 2015 section 7(2), small enterprises are defined as enterprises with fewer than 50 employees and whose annual turnover does not exceed DKK 89 million (approx. USD 13.6 million) or annual balance sheet total does not exceed DKK 44 million (approx. USD 6.7 million). Medium-sized enterprises are defined as enterprises with fewer than 250 employees and either have an annual turnover that does not exceed DKK 313 million (approx. USD 47.5 million) or annual balance sheet total does not exceed DKK 156 million (approx. USD 23.7 million).

Outward Investment

Danish companies are not restricted from investing abroad, and Danish outward investment has exceeded inward investments for more than a decade.

2. Bilateral Investment Agreements and Taxation Treaties

The United States and Denmark have shared a Friendship, Commerce, and Navigation Treaty since 1961 that, among other things, ensures National Treatment, Most-Favored Nation status, transparency of the regulatory process, and competitive equality with state-owned enterprises. Denmark has concluded investment protection agreements with the following 47 countries (including Hong Kong): Albania, Algeria, Argentina, Bangladesh, Belarus, Bosnia and Herzegovina, Bulgaria, Chile, China, Croatia, Egypt, Ethiopia, Ghana, Hungary, Indonesia, Kuwait, Laos, Latvia, Lithuania, Macedonia, Malaysia, Mexico, Mongolia, Montenegro, Morocco, Mozambique, Nicaragua, North Korea, Pakistan, Peru, the Philippines, Russia, Serbia, Slovakia, Slovenia, South Korea, Sri Lanka, Tanzania, Tunisia, Turkey, Uganda, Ukraine, Venezuela, Vietnam, and Zimbabwe.  Denmark has signed investment protection agreements with Brazil, Cuba, Kyrgyzstan and Paraguay, but these currently await ratification. There has been little change to the status of these investment protection agreements since the enactment of the European Union’s Lisbon Treaty, which moved competency to the EU Commission.

The U.S.-Danish Bilateral Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income has been in force since 2000. In May 2006, an amending protocol was signed; the most important aspect relates to the elimination of withholding tax on cross-border dividend payments. On November 19, 2012, the United States and Denmark signed an Intergovernmental Agreement (IGA) to implement the Foreign Account Tax Compliance Act (FATCA).

3. Legal Regime

Transparency of the Regulatory System

The judicial system is extremely well-regarded and considered fair. The legal system is independent of the legislative branch of the government and is based on a centuries-old legal tradition. It includes written and consistently applied commercial and bankruptcy laws. Secured interests in property are recognized and enforced. The World Economic Forum’s (WEF) 2018 Global Competitiveness Report, which ranks Denmark as the world’s tenth most competitive economy and fifth among EU member states, characterizes it as having among the best functioning and most transparent institutions in the world. Denmark ranks high on specific WEF indices related to macroeconomic stability (1st), labor market (5th), business dynamism (12th), ICT adoption (8th) and innovative capabilities (12th).

In an effort to facilitate business administration, Denmark maintains only two “legislative days” per year—January 1st and July 1st—the only days on which new laws and regulations affecting the business sector can come into effect. Danish laws and policies granting national treatment to foreign investments are designed to increase FDI in Denmark. Denmark consistently applies high standards with regard to health, environment, safety, and labor laws. Danish corporate law is generally in conformity with current EU legislation. The legal, regulatory and accounting systems are relatively transparent and in accordance with international standards. Bureaucratic procedures are streamlined and transparent, and proposed laws and regulations are published in draft form for public comment. Public finances and debt obligations are transparent.

As of December 19, 2012, the Ministry of Taxation made all companies’ corporate tax records public, and it updates and publicizes them annually. The publication is intended to increase transparency and public scrutiny of corporate tax payments. Greenland and the Faroe Islands retain autonomy with regards to tax policy.

The government uses transparent policies and effective laws to foster competition and establish “clear rules of the game,” consistent with international norms and applicable equally to Danish and foreign entities. The Danish Competition and Consumer Authority work to make markets well-functioning so businesses compete efficiently on all parameters. The Authority is a government agency under the Danish Ministry of Industry, Business and Financial Affairs. It enforces the Danish Competition Act. The purpose of the Act and Danish consumer legislation is to promote efficient resource allocation in society, to prevent the restriction of efficient competition, to create a level playing field for enterprises and to protect consumers.

Publicly listed companies in Denmark must adhere to the Danish Financial Statements Act when preparing their annual reports. The accounting principles are International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) and Danish Generally Accepted Accounting Principles (GAAP). Financial statements must be prepared annually. The Danish Financial Statements Act covers all businesses.

Private limited companies, public limited companies and corporate funds are obliged to prepare financial statements in accordance with which accounting class the company should follow based on size, as follows:

  • Small businesses (Class B): Total assets of DKK 44 million (USD 6.7 million), net revenue of DKK 89 million (USD 13.5 million), average number of full-time employees during the financial year of 50.
  • Medium-sized enterprises (Class C medium): Total assets of DKK 156 million (USD 23.7 million), net revenue of DKK 313 million (USD 47.5 million), average number of full-time employees during the financial year of 250.
  • Large companies (Class C large): Companies that are neither small nor medium companies.

According to the Danish Financial Statements Act, personally owned businesses, personally owned general partnerships (multiple owners) and general funds are characterized as Class A and thus have no requirement to prepare financial statements unless the owner voluntarily chooses to do so.

All government draft proposed regulations are published at the portal for public hearings, “Høringsportalen” (www.hoeringsportalen.dk  ), to solicit inputs from interested parties. After receiving feedback and possibly undergoing amendments, proposed regulations are published at the Danish Parliament’s website (www.ft.dk). Final regulations are published at www.lovtidende.dk   and www.ft.dk  . All ministries and agencies are required to publish proposed regulations. Denmark has a World Bank composite score of “4.75” for the Global Indicators of Regulatory Governance, on a 0 – 5 scale. With respect to governance, the World Bank suggests the following areas for improvement:

  • Affected parties cannot request reconsideration or appeal adopted regulations to the relevant administrative agency;
  • There is no existing requirement that regulations be periodically reviewed to see whether they are still needed or should be revised.

International Regulatory Considerations

Denmark adheres to the WTO Agreement on Trade-Related Investment Measures (TRIMs); no inconsistencies have been reported.

Legal System and Judicial Independence

Since the adoption of the Danish constitution in 1849, decision-making power in Denmark has been divided into the legislative, executive and judicial branches. The principle of a three-way separation of power and the independence of courts of law help ensure democracy and the legal rights of the country’s citizens. The district courts, the high courts and the Supreme Court represent the three basic levels of the Danish legal system, but the legal system also comprises a range of other institutions with special functions.

For further information please see:

http://www.domstol.dk/om/publikationer/HtmlPublikationer/Profil/Profilbrochure percent20- percent20UK/index.html  .

Laws and Regulations on Foreign Direct Investment

The government agency “Invest in Denmark” is part of the Danish Trade Council and is situated within the Ministry of Foreign Affairs. The agency provides detailed information to potential investors. The website for the agency is www.investindk.com  . The Faroese government promotes Faroese trade and investment through its website https://www.faroeislands.fo/economy-business/  . For more information regarding investment potential in Greenland, please see Greenland Holding at www.venture.gl   or the Greenland Tourism & Business Council at https://visitgreenland.com/  .

As an EU member state, Denmark is bound by EU rules on the free movement of goods, capital, persons and certain services. Denmark welcomes foreign investment and does not distinguish between EU and other investors. There are no additional permits required of foreign investors, nor any reported biases against foreign companies from municipal or national authorities.

A new EU investment screening framework encouraging member states to screen foreign investments in strategic sectors is expected to lead to national foreign investment screening legislation, effective in 2020.

Competition and Anti-Trust Laws

The Danish Competition and Consumer Authority (CCA) reviews transactions for competition-related concerns. According to the Danish Competition Act, the CCA requires notification of mergers and takeovers if the combined turnover of the participating companies exceeds DKK 50 million (approx. USD 7.6 million). However, notification is not required if one of the participating companies has turnover of less than DKK 10 million (approx. USD 1.5 million). If the combined turnover of the merging companies exceeds DKK 900 million (approx. USD 137 million) and at least two of the merging companies each have turnover exceeding DKK 100 million (approx. USD 15.1 million) or if one of the merging companies has domestic annual turnover exceeding DKK 3.8 billion (approx. USD 577 million) and at least one of the merging companies has global annual turnover exceeding DKK 3.8 billion (approx. USD 577 million), the merger or takeover is also subject to approval by the CCA. Large scale mergers also require approval from EU Competition authorities.

Expropriation and Compensation

By law, private property can only be expropriated for public purposes, in a non-discriminatory manner, with reasonable compensation, and in accordance with established principles of international law. There have been no recent expropriations of significance in Denmark and there is no reason to expect significant expropriations in the near future.

Dispute Settlement

ICSID Convention and New York Convention

Investor-State Dispute Settlement

International Commercial Arbitration and Foreign Courts

There have been no major disputes over investment in Denmark in recent years. Denmark has been a member of the World Bank-based International Center for the Settlement of Investment Disputes (ICSID) since 1968. ICSID offices have also been extended to the Faroe Islands and Greenland. Denmark is a party to the 1958 (New York) Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning local courts must enforce international arbitration awards that meet certain criteria. Subsequent Danish legislation makes international arbitration of investment disputes binding in Denmark. Denmark declared in 1976 that the New York Convention applies to the Faroe Islands and Greenland. Denmark is a party to the 1961 European Convention on International Commercial Arbitration and to the 1962 Agreement relating to the application of this Convention. Denmark adopted the UNCITRAL Model Law on International Commercial Arbitration in 1985.

Bankruptcy Regulations

Monetary judgments under the bankruptcy law are made in freely convertible Danish Kroner. The bankruptcy law addresses creditors’ claims against a bankruptcy in the following order: (1) costs and debt accrued during the treatment of the bankruptcy; (2) costs, including the court tax, relating to attempts to find a solution other than bankruptcy; (3) wage claims and holiday pay; (4) excise taxes owed to the government; and (5) all other claims. In the World Bank’s 2019 Doing Business Report, Denmark ranks 6th in “resolving insolvency.”

4. Industrial Policies

Investment Incentives

Performance incentives are available both to foreign and domestic investors. For instance, foreign and domestic investors in designated regional development areas may take advantage of certain grants and access to preferential financing. Investments in Greenland may be eligible for incentives as well. Foreign subsidiaries located in Denmark can participate in government-financed or subsidized research programs on a national-treatment basis.

Foreign Trade Zones/Free Ports/Trade Facilitation

The only free port in Denmark is the Copenhagen Free Port, operated by the Port of Copenhagen. The Port of Copenhagen and the Port of Malmo (Sweden) merged their commercial operations in 2001, including the free port activities, in a joint company named CMP. CMP is one of the largest port and terminal operators in the Nordic Region and one of the largest Northern European cruise-ship ports; it occupies a key position in the Baltic Sea Region for the distribution of cars and transit of oil. The facilities in the free port are mostly used for tax-free warehousing of imported goods, for exports, and for in-transit trade. Tax and duties are not payable until cargo leaves the Free Port. The processing of cargo and the preparation and finishing of imported automobiles for sale can freely be set up in the Free Port. Manufacturing operations can be established with permission of the customs authorities, which is granted if special reasons exist for having the facility in the Free Port area. The Copenhagen Free Port welcomes foreign companies establishing warehouse and storage facilities.

Performance and Data Localization Requirements

Performance requirements are applied only in connection with investment in hydrocarbon exploration, where concession terms normally require a fixed work program, including seismic surveys and in some cases exploratory drilling, consistent with applicable EU directives. Performance requirements are mostly designed to protect the environment, mainly through encouraging reduced use of energy and water. Several environmental and energy requirements are systematically imposed on households as well as businesses in Denmark, both foreign and domestic. For instance, Denmark was the first of the EU countries, in January 1993, to introduce a carbon dioxide (CO2) tax on business and industry. This includes certain reimbursement schemes and subsidy measures to reduce the costs for businesses, thereby safeguarding competitiveness.

Performance requirements are governed by Danish legislation and EU regulations. Potential violations of the rules governing this area are punishable by fines or imprisonment.

Performance requirements are applied uniformly to domestic and foreign investors.

The Danish government does not follow “forced localization” policies, nor does it require foreign IT providers to turn over source code and/or provide access to surveillance. The Danish Data Protection Agency, a government agency, the Ministry of Justice and the Ministry for Culture are the entities involved with data storage.

5. Protection of Property Rights

Real Property

Property rights in Denmark are well protected by law and in practice. Real estate is chiefly financed through the well-established Danish mortgage bond credit system, the security of which compares to that of government bonds. To comply with the covered bond definition in the EU Capital Requirements Directive (CRD), the Danish mortgage banking regulation was amended effective July 1, 2007. With the amended Danish mortgage banking regulation, commercial banks now have the same opportunities as mortgage banks and ship-financing institutions to issue covered bonds. Only issuers that have been granted a license from the Danish Financial Supervisory Authority (FSA) are able to issue Danish covered bonds.

Secured interests in property are recognized and enforced in Denmark. All mortgage credits in real estate are recorded in local public registers of mortgages. Except for interests in cars and commercial ships, which are also publicly recorded, other property interests are generally unrecorded. The local public registers are a reliable system of recording security interests. Denmark is ranked 11th in the World Bank’s Doing Business Report for its ease of “registering property.”

Intellectual Property Rights

Intellectual property in Denmark is well protected. Denmark adheres to key international conventions and treaties concerning protection of property rights. Denmark has ratified the World Trade Organization (WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). The World Intellectual Property Organization (WIPO) internet treaties, the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT), have also been signed, ratified, and are in force.

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/  .

A list of attorneys in Denmark known to accept foreign clients can be found at https://go.usa.gov/xmkME  . This list of attorneys and law firms is provided by the American Embassy as a convenience to U.S. citizens. It is not intended to be a comprehensive list of attorneys in Denmark, and the absence of an attorney from the list is in no way a reflection on competence. A complete list of attorneys in Denmark, Greenland and the Faeroe Islands may be found at the Danish Bar Association web site: www.advokatnoeglen.dk.

6. Financial Sector

Capital Markets and Portfolio Investment

Denmark has fully liberalized foreign exchange flows, including those for direct and portfolio investment purposes. Credit is allocated on market terms and freely available. Denmark adheres to its IMF Article VIII obligations. The Danish banking system is under the regulatory oversight of the Financial Supervisory Authority. Differentiated voting rights – A and B stocks – are used to some extent, and several Danish companies are controlled by foundations, which can restrict potential hostile takeovers, including foreign takeovers.

The Danish stock market functions efficiently. In 2005, the Copenhagen Stock Exchange became part of the integrated Nordic and Baltic market place, OMX Exchanges, which is headquartered in Stockholm. Besides Stockholm and Copenhagen, OMX also includes the stock exchanges in Helsinki, Tallinn, Riga and Vilnius. In order to increase the access to capital for primarily small companies, the OMX in December 2005 opened a Nordic alternative marketplace – “First North” – in Denmark. In February 2008, the exchanges were acquired by the NASDAQ-OMX Group. In the World Economic Forum 2018 report, Denmark ranks 12th out of 140 on the metric “Financial System”

The Danish stock market is divided into four different branches/indexes. The C25 index contains the 25 most valuable companies in Denmark. Other large companies with a market value exceeding USD 1.1 billion (EUR 1 billion) are in the group of “Large Cap,” companies with a market value between USD 170 million (EU 150 million) and USD 1.1 billion belong to the “Mid Cap” segment, while companies with a market value smaller than USD 170 million belong to “Small Cap” group.

Money and Banking System

The major Danish banks are rated by international agencies, and their creditworthiness is rated as high by international standards. The European Central Bank and the Danish National Bank reported that Denmark’s major banks have passed stress tests by considerable margins.

Denmark’s banking sector is relatively large; based on the ratio of consolidated banking assets to GDP, the sector is three times bigger than the national economy. Domestic banks in Denmark own approximately 87 percent of the industry’s total assets, while foreign banks hold only 13 percent. The assets of the three largest Danish banks – Danske Bank, Nordea Bank Danmark, and Jyske Bank – constitute approximately 75 percent of the total assets in the Danish banking sector.

Denmark’s biggest systemically important bank, Dansk Bank, with assets that are roughly 1 1/2 times Denmark’s total GDP, is under criminal investigation in several jurisdictions amid accusations an Estonian branch became a European hub for money launderers from Russia. The bank has admitted that a significant part of about EUR 200 billion (USD 230 billion) that flowed through the non-resident portfolio of its tiny Estonian branch between 2007 and 2015 could have illicit origins.  The scandal has led to significant tightening of financial regulation, including increasing penalties by up to 700 percent and increased funding for the Financial Supervisory Authority.

The primary goal of the Central Bank (Nationalbanken) is to keep the peg of the Danish currency towards the Euro – with allowed fluctuations of 2.25 percent. It also functions as the general lender to Danish commercial banks and controls the money supply in the economy.

As occurred in many countries, Danish banks experienced significant turbulence in 2008 – 2009. The Danish Parliament subsequently passed a series of measures to establish a “safety net” program, provide government lending to financial institutions in need of capital to uphold their solvency requirements, and ensure the orderly winding down of failed banks.  The Parliament passed an additional measure, the fourth Bank Package, in August 2011, which sought to identify systemically important financial institutions, ensure the liquidity of banks which assume control of a troubled bank, support banks acquiring troubled banks by allowing them to write off obligations of the troubled bank to the government, and change the funding mechanism for the sector-funded guarantee fund to a premiums-based, pay-as-you-go system. According to the Danish Government, Bank Package 4 provides mechanisms for a sector solution to troubled banks without senior debt holder losses, but does not supersede earlier legislation. As such, senior debt holder losses are still a possibility in the event of a bank failure.

On October 10, 2013, the Danish Minister for Business and Growth concluded a political agreement with broad political support which, based on the most recent financial statements, identified seven financial institutions as “systemically important”: Danske Bank, Nykredit, Nordea Bank Danmark, Jyske Bank, Sydbank and DLR Kredit. These were identified based on three quantitative measures: 1) a balance sheet to GDP ratio above 6.5 percent; 2) market share of lending in Denmark above 5 percent; or 3) market share of deposits in Denmark above 5 percent, which will be lowered to 3 percent during 2018. If an institution is above the requirement of any one of the three measures, it will be considered systemically important and must adhere to the stricter requirements on capitalization, liquidity and resolution. The Faroese SIFI are P/F BankNordik, Betri Banki P/F and Norðoya Sparikassi, while Grønlandsbanken is the only SIFI in Greenland.

Experts expect a revision of the Danish system of troubled financial institution resolution mechanisms in connection with a decision to join the EU Banking Union. The national payment system, “Nets” was sold to a consortium consisting of Advent International Corp., Bain Capital LLC, and Danish pension fund ATP in March 2014 for DKK 17 billion (USD 2.58 billion). Nets went public with an IPO late 2016.

Foreign Exchange and Remittances

Foreign Exchange

Exchange rate conversions throughout this document are based on the 2018 average exchange rate where Danish Kroner (DKK) 6.3174 = 1 USD (USD )

There are no restrictions on converting or transferring funds associated with an investment into or out of Denmark. Policies in place are intended to facilitate the free flow of capital and to support the flow of resources in the product and services markets. Foreign investors can obtain credit in the local market at normal market terms, and a wide range of credit instruments is available.

Denmark has not adopted the Euro currency. The country meets the EU’s economic convergence criteria for membership and can join if it wishes to do so. Denmark conducts a fixed exchange rate policy with the Danish Krone linked closely to the Euro within the framework of ERM II. The Danish Krone (DKK; plural: Kroner, in English, “the Crown”) has a fluctuation band of +/- 2.25 percent of the central rate of DKK 746.038 per 100 Euro. The Danish Government supports inclusion in a European Banking Union, as long as it can be harmonized with the Danish Euro opt-out and there is a guarantee that the Danish mortgage finance system will be allowed to continue in its present form.

The Danish political reservation concerning Euro participation can only be abolished by national referendum, and Danish voters have twice (in 1992 and 2000) voted it down. The government has stated that in principle it supports adopting the Euro, but no referendum is expected for the foreseeable future. Regular polling on this issue shows a majority of public opinion remains in favor of keeping the Krone. According to the Stability and Growth Pact, a Euro country’s debt to GDP ratio cannot exceed 60 percent and budget deficit to GDP ratio cannot exceed 3 percent. Denmark’s debt to GDP ratio was 34.1 percent by the end of 2018, down from 36.1 percent in 2017. Denmark ran a budget surplus of 0.5 percent in 2018 and of 1.4 percent in 2017, well within Stability & Growth Pact parameters.

Remittance Policies

Sovereign Wealth Funds

Denmark maintains no sovereign wealth funds.

7. State-Owned Enterprises

Denmark is party to the Government Procurement Agreement (GPA) within the framework of the World Trade Organization (WTO). State owned entities (SOEs) hold dominant positions in rail, energy, utility and broadcast media in Denmark. Large scale public procurement must go through public tender in accordance with EU legislation. Competition from SOEs is not considered a barrier to foreign investment in Denmark. As an OECD member, Denmark promotes and upholds the OECD Corporate Governance Principals and subsidiary SOE Guidelines.

Privatization Program

Denmark has no current plans to privatize its SOEs.

8. Responsible Business Conduct

As an OECD member, Denmark promotes, through the Danish Business Authority, the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. Denmark’s National Contact Point can be reached at: http://mneguidelines.oecd.org/ncps/denmark.htm  .

The Danish Business Authority has published a National Action Plan to advance Corporate Social Responsibility (CSR) and Responsible Business Conduct (RBC) in Denmark; the most recent plan covers the 2012 – 2015 period and contains 42 initiatives focusing on business-driven CSR. A global survey by the London Business School and Harvard Business School concluded that corporate management is considered the most trustworthy in Denmark, Finland and Singapore. All major companies in Denmark have a public CSR strategy.  The government hosts www.csrgov.dk  , a website “to promoting corporate social responsibility (CSR) through development and dissemination of new knowledge, guidelines and tools for companies.”

9. Corruption

Denmark is the least corrupt country in the world according to the 2018 Corruption Perceptions Index by Transparency International, which has local representation in Denmark. The Ministry of Justice is responsible for combating corruption, which is covered under the Danish Penal Code. Penalties for violations range from fines to imprisonment of up to four years for a private individual’s involvement and up to six years for a public employee’s involvement. Since 1998, Danish businesses cannot claim a tax deduction for the cost of bribes paid to officials abroad.

Denmark is a signatory to the OECD Convention on Combating Bribery, the UN Anticorruption Convention, and a participating member of the OECD Working Group on Bribery. In the Working Group’s 2014 Phase 3 report on Denmark, the government was urged to be more proactive in its investigations and to prosecute foreign bribery allegations.

Resources to Report Corruption

Resources to which Corruption may be reported:

The Danish State Prosecutor for Serious Economic and International Crime,
Kampmannsgade 1
1604 København V.
Phone: +45 72 68 90 00
Fax: +45 45 15 01 19
Email: saoek@ankl.dk

Ministry of Foreign Affairs of Denmark’s development assistance agency DANIDA to report any knowledge of corruption within DANIDA projects or among staff or DANIDA partners.

http://um.dk/en/danida-en/about-danida/Danida-transparency/anti-corruption/report-corruption/  

“Watchdog” organization:

Transparency International Danmark
c/o CBS
Dalgas Have 15, 2. sal, lokale 2c008
2000 Frederiksberg

The Secretariat is manned by Jasmin Frentzel Sørensen and Emma Siemens Lorenzen who can be reached at sekretariatet@transparency.dk

Contact at Embassy Copenhagen responsible for combating corruption:

Sung Choi
Political Officer
U.S. Department of State
Dag Hammarskjolds Alle 24, 2100 Copenhagen, Denmark
+45 3341 7100
CopenhagenICS@state.gov

10. Political and Security Environment

Denmark is a politically stable country. Incidents involving politically-motivated damage to projects or installations are very rare. This is reflected in the EIU’s “AAA” rating of Denmark in terms of political risk.

11. Labor Policies and Practices

The Danish labor force is generally well-educated and efficient. English language skills are good, and English is considered a natural second language among a very high proportion of Danes. The labor market is stable and flexible. U.S. companies operating in Denmark have indicated that Danish rules on the hiring and firing of employees generally enable employers to adjust the workforce quickly to changing market conditions.

The Danish labor force amounted to approximately 3.036 million persons in January 2019. Of these, 716,278 (Q2, 2018) are employed in the public sector. Denmark’s OECD-harmonized unemployment rate was 5.0 percent in February 2019, relative to the EU-28 6.5 percent and OECD 5.32 percent averages (. The unemployment rate is expected to remain stable  in the coming years due to policies intended to increase the labor supply and continued demand for labor.

The public sector in Denmark is large and accounts for about 25 percent of the employment at full-time equivalence. The labor force participation rate for women is among the highest in the world. By Q4, 2018, 76.3 percent of working-age women participated in the labor force and the employment rate was 66.6 percent 72.6 percent. The male labor force participation rate and employment rate were 82.6 percent and 78.4 percent, respectively

The Danish labor force is highly organized, with approximately 75 percent belonging to a union. Labor disputes and strikes occur only sporadically. As a general rule, private sector labor/ management relations are excellent, based on dialogue and consensus rather than confrontation. Working conditions are laid down in a complex system of legislation and organizational agreements, where most aspects of wage and working conditions are determined through collective bargaining rather than legislation.

The contractual workweek for most wage earners is 37 and 1/2 hours. By law, employees are entitled to five weeks of paid annual leave. However, the majority of the labor force has the right to six weeks of paid annual leave, gained through other labor market agreements.

Denmark has well-functioning unemployment insurance and sick-pay schemes, self-financed or financed by the state. Maternity leave in Denmark is 52 weeks, 18 of which are reserved for the mother and two for the father, while the remainder may be divided between the parents as they see fit. Employers are obliged to pay salary for at least 14 weeks, while the government supports the remainder of the leave.  Forthcoming EU legislation will reserve 8 of the weeks’ leave to fathers. The legislation is expected to be enacted in member states before 2022.

Danish wages are high by international standards and have prompted the use of capital-intensive technologies in many sectors. Some investors report that the high average wage level is detrimental to Danish competitiveness. Although high wages and generous benefits including time off reduce competitiveness, high productivity and low direct costs to employers can result in per employee costs that are lower than in other industrialized countries. Nominal wages increased by 2.6 percent from Q4 2017 to Q4 2017, while inflation was 0.7 percent in 2018, down from 1.1 percent in 2017 enhancing real wage increases. Nominal wages are forecast to increase by approximately 3.5 percent annually towards 2022, which will allow for substantial real wage increases with continued subdued inflation.

Generally, personal income tax rates in Denmark are among the highest in the world. However, foreign employees making more than an amount specified annually by the Danish Immigration Service and certain researchers may choose to be subject to a 27 percent income tax rate, plus a labor market contribution amounting to 32.84 percent income tax in the first seven years of working in Denmark. Certain conditions must be fulfilled for key employees to be eligible for the 27 percent tax scheme: for example, since January 1, 2019, wages had to total at least DKK 66,600 (USD 10,550) per month before the deduction of labor market contributions and after Danish labor market supplementary pension contributions. There are also limits based on an individual’s previous work history in the Danish labor market. Compared with the general Danish progressive income tax system, this is an attractive incentive. Further information can be obtained from Danish embassies or from the Danish Immigration Service (www.nyidanmark.dk  ).

Danish work permits are not required for citizens of EU countries. U.S. companies have reported that in general, work permits for foreign managerial staff may be readily obtained. However, permits for non-managerial workers from countries outside the EU and the Nordic countries are granted only if substantial professional or labor-related conditions warrant. Special rules, detailed by the Danish Immigration Service in its “Positive List Scheme” apply to certain professional fields experiencing a shortage of qualified manpower. The list is updated twice annually. Foreigners who have been hired in the designated fields will be immediately eligible for residence and work permits. The minimum educational level required for a position on the Positive List is a Professional Bachelor’s degree, e.g. pedagogue. In some cases, a Danish authorization must be obtained. This is explicitly stated on the Positive List. (E.g.; non-Danish trained doctors must be authorized by the Danish Patient Safety Authority.) Professions covered by the Positive List Scheme included engineers, scientists, doctors, nurses, IT specialists, marine biologists, lawyers, accountants and a wide range of other Masters or Bachelors degree positions. As of 2019, the Pay Limit Scheme extends to positions with an annual pay of no less than DKK 426,985 (approximately USD 67,589), regardless of the field or specific nature of the job. Persons who have been offered a highly paid job have particularly easy access to the Danish labor market through the Pay Limit Scheme. The length of work and residence permits granted under the Pay Limit Scheme depends on the length of the employment contract in Denmark. For permanent employment contracts, work permits are granted for an initial period of 4 years. After this period the permit can be extended if the same job is held. There are several other schemes meant to make it easier for certified companies to bring employees with special skills or qualifications to Denmark. These schemes vary in duration and requirements.

Danish immigration law also allows issuance of residency permits of up to 18 months duration based on an individual evaluation, using a point system based on education, language skills and adaptability.

Denmark has ratified all eight ILO Core Conventions and been an ILO member since 1919.

12. OPIC and Other Investment Insurance Programs

OPIC programs are not applicable to U.S. investments in Denmark, but may be used by at least 95 percent U.S.-owned subsidiaries in Denmark to support their investments in qualifying countries.

Denmark is a member of the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA).

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2017 $330,250 2017 $324,872 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $11,068 2017 $13,873 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2017 $20,136 2017 $17,974 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 33.8% 2017 35.4% UNCTAD data available at

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

[Select country, scroll down to “FDI Stock”- “Inward”, scan rightward for most recent  year’s “as percentage of gross domestic product”]

* Source for Host Country Data:
http://www.dst.dk/en/Statistik/emner/nationalregnskab-og-offentlige-finanser/aarligt-nationalregnskab   (or www.statbank.dk  ).


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $151,800 100% Total Outward $235,040 100%
Sweden $25,233 17% UK $29,929 13%
Netherlands $22,270 15% Sweden $29,900 13%
France $17,636 12% Germany $26,227 11%
Luxembourg $15,390 10% Switzerland $21,232 9%
United Kingdom $13,446 9% United States $16,183 7%
“0” reflects amounts rounded to +/- USD 500,000.

Source: IMF: http://data.imf.org/?sk=40313609-F037-48C1-84B1-E1F1CE54D6D5&sId=1482186404325  


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $477,399 100% All Countries $275,761 100% All Countries $201,638 100%
U.S.A. $143,069 30% U.S.A. $104,272 38% Germany $47,222 23%
Germany $58,002 12% Luxembourg $32,105 12% United States $38,797 19%
Luxembourg $36,405 8% UK $18,457 7% Sweden $15,483 8%
UK $27,265 6% Ireland $16,259 6% France $12,286 6%
Sweden $25,947 5% Japan $11,186 4% Netherlands $10,043 5%

Source: IMF: http://data.imf.org/regular.aspx?key=60587804  

14. Contact for More Information

Aaron Feit
Economic Officer
Dag Hammarskjolds Alle 24,
2100 Copenhagen, Denmark
Email: CopenhagenICS@state.gov

Other Areas in the Kingdom of Denmark

GREENLAND

Greenland’s status within the Kingdom of Denmark is outlined in the Self Rule Act (SRA) of 2009, which details the Greenlandic government’s right to assume a number of responsibilities from the Danish government, including the administration of justice, business and labor, aviation, immigration and border control, as well as financial regulation and supervision. Greenland has already acquired control over taxation, fisheries, internal labor negotiations, natural resources, and oversight of offshore labor, environment, and safety regulations. Denmark continues to have control over the Realm’s foreign affairs, security, and defense policy, in consultation with Greenland and the Faroe Islands. Denmark also retains authority over border control issues, including immigration into Greenland. Greenland is not a part of the EU or Schengen Area, and special rules apply for foreigners arriving from a Schengen country. Denmark provides Greenland with an annual block grant of DKK 3.9 billion — roughly USD 620 million — that accounts for about 20 percent of Greenland’s GDP and half of the Greenland government revenue.

The Greenlandic government seeks to increase revenues by promoting greater development of fisheries, extractive resources, and tourism, and by trimming the public sector through privatization of enterprises currently owned by the government. Key initiatives include improving access to financing for new businesses and enhancing Greenland’s corporate tax competitiveness. Rising prices for fish and shellfish, the predominant Greenlandic exports, have generated strong earnings for large parts of the fisheries sector. Catches of prawn, by far the most important single species, have increased recently following years of declines. Catches of mackerel are also increasing.

Capital city Nuuk has seen extensive construction activity in recent years and a planned expansion of the airport will lead to further growth and facilitate expansion of tourism. Other efforts to develop tourism include increases in accommodation (hotel rooms), a reduction in passenger tax for cruise ships, and a focus on promoting foreign language education to create a more multilingual workforce. The government is calling for stricter safety requirements for navigation in Greenlandic waters.

In the mineral extractives sector, two smaller mines (ruby and anorthosite) have begun producing, while two other companies have applied for permission to extract rare earth elements in southern Greenland, in one case combined with the extraction of uranium, which is estimated could one day become the world’s fifth-largest uranium mine and second-biggest rare earths operation. The government endorses maintaining the previous government’s relaxation on a ban on uranium mining, and states that all IAEA and EURATOM standards must be met. However, the issue of uranium mining in Greenland remains sensitive.

Greenlandic Economic Outlook

Greenland is currently enjoying an economic upswing, though its highly specialized economy – over 90 percent of exports is fisheries – faces significant challenges. The Greenlandic economy has exhibited strong growth in recent years, mainly driven by large catches and high prices of fish and shellfish, but also supported by consumption, investments and recently the resource extraction industry. The Greenlandic Economic Council estimate that real GDP grew by 4.4 percent annually from 2014 to 2016, and then subsided to 1.2 percent in 2017.   The Council estimate that GDP growth again has accelerated to about 3 percent in 2018 and 2019. Growth has led to labor shortages, both geographically and by sector and there is risk that the economy could overheat, especially in connection with large construction projects. An unemployment rate is not calculated, but the Council estimates unemployment has declined from about 10 percent in 2014 to currently below 5 percent. The public budget has exhibited surpluses since 2015. The Greenlandic economy continues to be buttressed by a yearly block grant from the Danish Government which amounted to just over half of the Greenlandic government budget and 20.4 percent of Greenland’s DKK 18.5 billion (USD 2.8 billion) GDP in 2017.   Increased public spending at government and local levels has had an expansionary effect in 2017 and 2018. The Greenlandic economy is characterized by the unusual condition of having higher public than private consumption. Consequently, government consumption is of proportionally greater importance to the economic trend.

The Greenland Parliament (called “Inatsisartut”) and the Government of Greenland (Naalakkersuisut) adopted a Budget Act for 2018 with an estimated balanced annual budget in the period 2018-2021. The public budget has exhibited small surpluses since 2015. The municipalities, government and government-owned enterprises, had a gross debt of approximately 22 percent of GDP by the end of 2017.

The Greenland Economic Council (GEC) – an independent advisory council – concluded in the Council’s 2017 report that, “Projections for the public finances shows a major sustainability problem.” The Council warns of the effects of increasing public expenditures as larger portions of the population age into retirement, resulting in fewer wage earners in the labor market, and that a realistic plan to close the gap between expected expenditures and revenues, could require the Government to cut social spending. The GEC has advised that development of a more self-sufficient economy require further development of the extractive and tourism sectors. Natural resource exploration has declined in recent years in line with lower worldwide mineral prices. The two mines in operation, however, are also generating some optimism that more small-scale mining operations could follow.

Greenland exported DKK 4.057 billion (USD 643 million) in 2018, a 4.8 increase from 2017, mainly attributable to higher value of catches. Some 93 percent of Greenlandic exports, measured in local currency, were fish products, with the remainder being mainly raw materials and machinery. Exports went primarily to Denmark (87 percent), followed by Portugal, and Iceland. Greenland imported goods worth DKK 2.972 billion (USD 451 million) in the first nine months of 2017, primarily machinery (27 percent), foods (20 percent), intermediate products (17.6 percent), and fuels (12.5 percent). Imports came from Denmark (79 percent), Sweden, and China among others. Imports from the United States represented 0.9 percent of total imports. Due to its vast geographic expanse, Greenland’s physical and telecommunications infrastructure is less interconnected and developed than in other parts of the Kingdom of Denmark. The labor force was comprised of 27,271 people in 2017, and the average unemployment rate was 6.8 percent, though that in the capital was significantly lower The Greenlandic government is actively trying to attract investments to Greenland to diversify the economy and integrate it into the world economy as part of a long-term path toward eventual independence from Denmark.

Establishing a Company in Greenland

A foreign company can establish a commercial enterprise in Greenland in one of the following ways: through a subsidiary, a registered affiliate, a representative office, or a taxable entity. A subsidiary is only liable for its own assets. The capital requirement for establishing a corporation (A/S) is DKK 500,000 (approx. USD 75,900) and for establishing a private limited liability company (ApS) is DKK 50,000 (approx. USD 7,915)

An established company planning to do business in Greenland must obtain a CVR (Central Company Register) registration number. This also applies to subsidiaries. A registration number can be acquired online from the Danish Business Administration at https://indberet.virk.dk/myndigheder/stat/ERST/Start_groenlandsk_virksomhed  

A registered affiliate has no capital requirements, but only a company with a legally registered office in the EU, USA, Canada or the Nordic countries can open an affiliate, which is not treated as an independent company, but rather as an extension of the main company for legal purposes. This means that the head office is liable for all the affiliate’s assets.

A representative office is not regulated or defined; however, a representative office may not enter contracts or deliver services. It is, rather, intended to be a marketing office, or an office to establish contacts with the goal of eventually entering the market.

An exploration license is viewed as a taxable entity. There is more lenient regulation in the extraction industry regarding company composition: if a foreign company is granted an exploration license, it is not required to register as an affiliate, but the license is taxable, and therefore the firm must submit tax information like a regular company. However, a loss can be carried forward and written off against future profits. A CVR registration is required.

A foreign company can do business in Greenland in a consecutive or non-consecutive 90 day period over 12 months without being required to register as a business.

Greenland Tax

Greenland has double taxation agreements with Denmark, the Faroe Islands, Iceland, and Norway. Greenland has signed a Foreign Accounts Tax Compliance Act (FATCA) agreement with the United States.

The corporate income tax rate is 30 percent; an additional surcharge of six percent of the tax payable brings the total corporate tax rate to 31.8 percent. Companies which are operating under the Mineral Resources Act can apply for an exemption of the surcharge, thereby lowering the tax rate to 30 percent.

Taxation of royalty payments is 30 percent. Greenland has no value added tax (VAT) system, sales tax, or similar taxes. There are, however, some payable duties, such as taxes for cruise liners, ports duties, etc. There are four types of depreciation in the Greenlandic tax law. Buildings can be depreciated five percent annually. Ships, planes, and hydrocarbon prospecting can be depreciated 10 percent annually. Mineral licenses can be depreciated 25 percent annually, and operating equipment can be depreciated at a rate of 30 percent annually. Assets with a cost of less than DKK 100,000 (USD 15,170) may be depreciated in the year of acquisition.

Greenland Labor

The Greenlandic labor force was 27,271 persons in 2017. Average unemployment for 2017 was 6.8 percent – higher than the OECD average of 5.78 percent, though a decrease from 10.3 percent in 2014. Unemployment has decreased significantly since, especially in Nuuk and the Danish Central Bank estimate it below 5 percent in 2018.  According to Statistics Greenland, 39.5 percent of the Greenlandic population in 2017 have an education beyond primary school. Of those, 54.7 percent have a vocational education.

In December 2012, Greenland passed legislation known as the “Large Scale Act,” which allows companies to use foreign labor during the construction phase of development when project costs exceed DKK 5 billion (USD 759 million) and workforce requirements exceed the local labor supply. The Act is intended for potential mining or infrastructure projects in Greenland. The Act lays out the framework for politically negotiated Impact Benefit Agreements (IBA) for the Government of Greenland and the employer to agree on the exact conditions of employment for foreign labor. The scale of Greenlandic labor utilized will be negotiated for each project and will vary depending on local capacity and the negotiated agreement for each project.

Foreign workers will enjoy the same legal protections as Greenlandic workers, in theory, including the same USD 13.85 per hour minimum wage and retention of the right to strike, but employers may deduct up to USD 180 from their pay each week to cover the cost of company-provided lodging, food, and clothing.

Investment in Natural Resources

Greenland possesses significant mineral deposits, including rare earth elements, zinc, lead, molybdenum, uranium, gold, platinum, ruby and pink sapphires, and other critical minerals. Greenland is also believed to have large quantities of iron ore and copper, although there has been limited exploration to date. Despite a harsh climate and ice coverage in Greenland, satellite images record a significant disappearance of surface ice from the island. As the trend continues, mining industry experts anticipate the retreating ice will make the island’s rich stores of raw materials more easily accessible, though still faced with the challenges of remote location and lack of infrastructure.

In October 2013, the Greenlandic Parliament abolished the country’s 25-year “zero-tolerance” policy towards uranium and other radioactive minerals, lifting the ban on mining where uranium is present. This decision will facilitate the exploitation of rare earth mineral deposits, which are often found co-mingled with radioactive minerals in Greenland.

With the 2009 SRA, Greenland gained rights to its mineral and hydrocarbon resources, and it acquired the regulatory authority over these on January 1, 2010. The SRA also created a revenue mechanism: if exploitation of Greenland’s natural resources becomes commercially viable, Greenland will keep the first DKK 75 million (USD 11.38 million) in annual revenues derived from these resources, with further revenues split equally between the Danish and Greenlandic Governments. Denmark’s share will be transferred by deducting the equivalent amount from the annual block grant to Greenland of DKK 3.9 billion (USD 620 million). Once the full value of the block grant is reached, any additional revenue will be subject to negotiations between the Danish and Greenlandic governments. The Greenlandic Government welcomes this lucrative scenario, but remains aware of the potential adverse impacts that a rapid influx of wealth from these activities could have on Greenlandic society.

Most of Greenland’s identified rare earth deposits are licensed by the Mineral License and Safety Authority and some have reached advanced stages of exploration. In 2018, Greenland plummeted to a position as 68th out of 83 in the annual mining survey from Canadian Fraser Institute. Greenland had been ranked 34th out of 91 mining jurisdictions surveyed in terms of investment attractiveness. In December 2013 Greenland was deemed the “best country to do mining in,” together with Mongolia, Azerbaijan, and Australia, at Europe’s Mines & Money conference.

Greenland General Business Information

OPIC programs are not applicable to U.S. investments in Greenland. Information about the Greenlandic Government can be found at http://naalakkersuisut.gl/en  . Information from the Greenlandic Government on natural resource exploration and extraction can be found at http://www.govmin.gl  .

Statistics on Greenland can be found at http://www.stat.gl/default.asp?lang=en  .

By law, private property can only be expropriated for public purposes in areas where the Greenlandic Self-government has the competencies, in a non-discriminatory manner, and with reasonable compensation. There have been no recent expropriations of significance in Greenland and there is no reason to expect significant expropriations in the near future.

In Greenland it is not possible to acquire private ownership of land, but a right of use may be sold for an area, e.g. if you buy property, you own the house, not the land on which it sits.

There have been no major disputes over foreign investment in Greenland in recent years. While it is common that disputes are settled in Greenlandic courts, the Danish Supreme Court remains the highest appeals court for disputes in Greenland. If a dispute is very specialized and within the purview of the Danish Administration of Justice Act, the parties involved can choose the Danish Maritime and Commercial Court as a court of first instance.

While Greenland’s democratic institutions and legal framework in general are strong, there have been some concerns about legislation being passed by parliament without significant hearing processes and public input.

THE FAROE ISLANDS

The Faroe Islands have an open economy and multiple trade agreements with other countries. For more than two centuries the Faroese economy has relied on fisheries and related industries. Fisheries account for close to one-sixth of the total gross value added in the Faroe Islands and about 95 percent of goods exports, excluding ships and aircraft. Salmon alone accounts for 45 percent of exports. Increased catches of mackerel and herring, as well as higher prices for salmon globally, have contributed significantly to recent economic growth. As a non-EU member, the Faroe Islands continue to have open access to the Russian market despite Russia’s retaliatory trade embargo on certain food imports from the EU. This has allowed the Faroese to sell increased quantities of salmon to the Russian market at higher than normal prices, even while prices have dropped significantly in the European market.

The Islands exported approximately DKK 8.0292 billion (USD 1.271 billion) worth of goods in 2018, 93.3 percent of which were fish products, with the remainder being marine vessels, aircraft. In recent years, construction, transportation, banking, and other financial services sectors have grown, and offshore oil and gas exploration is developing, though commercially viable finds have not been made. In 2018, the majority of goods exports went to Russia (27.3 percent), followed by the UK (10.5 percent), Denmark (8.8 percent). Goods imports totaled DKK 7.739 billion (USD 1.225 billion) in 2018. The vast majority of imports came from Europe in 2018; 1.2 percent originated in the United States. Denmark provided 36.7 percent of imports, Germany 12 percent, Norway 7.8 percent, China 6.1 percent, and Sweden 4.3 percent. Imports consist of input to industry (20.8 percent), items for household consumption (20.5 percent), e.g. food, tobacco and beverages, fuels (16.6 percent) and machinery (13.1 percent).

The Faroe Islands’ small, open, but non-diversified economy makes it highly vulnerable to changes in international markets. The Faroe Islands have full autonomy to set tax rates and fees, and to set levels of spending on the services they provide. Denmark upholds an annual block grant of DKK 642 million – roughly USD 97 million.

In 2013, the Faroese economy began a strong recovery, after several years of stagnation. The Economic Council for the Faroe Islands, together with Statistics Faroe Islands, estimate that nominal GDP rose 5.5 in 2015 followed by estimated growth of 9.3 percent in 2016, 4.0 percent in 2017, and 2.4 percent in 2018. Growth in nominal GDP was primarily driven by domestic demand and increasing salmon prices and catches. GDP growth is expected to rebound to 3.6 percent for 2019, though high demand for labor could detract from the outlook, which presupposes non-declining salmon prices and an increase in investments. Unemployment was historically low at 1.8 percent in 2018, down from 8 percent in 2011.

Central and local government and publicly owned companies are planning massive investments in infrastructure and hospitals. However, expansionary fiscal policy might put severe pressure on the job market, which could lead to labor shortages. Investment in 2016-2018 is estimated to total DKK1.7 billion (USD 258 million) or 10.2 per cent of GDP. Construction of the Eysturoy and Sundoy tunnels, with an expected cost of approximately DKK 2.64 billion (USD 400 million) or 16 percent of GDP are planned for the period 2016-21. Salmon producer Bakkafrost, the Faroe Islands’ largest company, has made public its plans to invest approximately DKK 2 billion (USD 303 million) on processing plants in 2016-2020. The Economic Council has repeatedly called for long-term planning of public investments to more effectively balance the business cycles.

Announcement of these enormous investments resulted in the Danish Systemic Risk Council issuing an unprecedented official warning of the increase of systemic risk on the Faroe Islands in the fall of 2016. By April 2018, the Council recommended increasing the banking sectors’ countercyclical capital buffer from 1 percent to 3 percent by 2020. Seven in ten construction firms say that shortage of labor is an impediment to growth, and the magnitude of the public investments could further push the economy beyond its labor capacity limit. The Economic Council for the Faroe Islands estimates that a permanent fiscal improvement of 5 percent of GDP will be required to stabilize government debt, which is currently at a low level. As of April 9, 2019, credit agency Moody’s maintain the Faroe Islands’ Aa3 rating of high quality and very low credit risk, with a stable outlook, reflecting its fiscal autonomy and revenue and expense flexibility with a track record of prudent budgeting. The stable and historical relationship with Denmark is deemed an additional strength.

The Faroe Islands opened their own securities exchange in 2000; active trading of shares followed in 2005. The exchange is collaboration with the VMF Icelandic exchange on the Nasdaq OMX Nordic Exchange Iceland.

The most recent figures available show Foreign Direct Investment into the Faroe Islands totaled DKK 1.6 billion (USD 243 million) in 2012, about half of which originated from Denmark. The Faroese government has indicated interest in attracting further foreign investment. “Invest in the Faroes” is the Faroese government unit promoting Faroese trade. The website is http://www.government.fo/  .

Looking ahead, the Faroe Islands face a demographic challenge. Currently there are 4.5 people in the working age group “16 to 66”, for every person aged 67 or older. By 2050, that number is projected to be less than half; an estimated 2.1 persons for every dependent retiree.

The Faroe Islands have in recent years engaged in several disputes with the EU over fishing quotas. The disagreements escalated in September 2012 when the EU adopted measures which allowed it to impose sanctions on the Faroe Islands. In March 2013, the Faroe Islands unilaterally increased their quota for herring and mackerel. EU member states responded by voting in favor of imposing sanctions which went into force in August 2013. Sanctions were lifted a year later after a political understanding between the two parties was reached on herring catches. Subsequently a five year agreement with the other coastal states in the North Atlantic was signed on mackerel quotas, reducing uncertainty for fisheries and improving profitability, since the agreement allows for more sustainable harvesting.

The Faroe Islands retain control over most internal affairs, including the conservation and management of living marine resources within the 200 nautical mile fisheries zone, natural resources, financial regulation and supervision and transport. Denmark continues to exercise control over foreign affairs, security, and defense, in consultation with the Faroese Government.

The labor force comprised 29,254 people in 2018. In many areas, the Faroese labor market model resembles that of the other Nordic countries, with high standards of living, well-established welfare schemes and independent labor unions. A majority of people in the Faroe Islands are bilingual or multilingual, with Danish and English being most widely spoken after Faroese. The Islands boast well-developed physical and telecommunications infrastructure and have well-established political, legal, and social structures. The standard of living for the population of 51,060 (which exceeded 50,000 for the first time in the spring of 2017) is high by world standards, and Gross National Disposable Income per capita eclipsed that of Denmark in 2014.

France and Monaco

Executive Summary

Please see the end of this report for a summary of the investment climate of Monaco.

France welcomes foreign investment and has a stable business climate that attracts investors from around the world. The French government devotes significant resources to attracting foreign investment through policy incentives, marketing, overseas trade promotion offices, and investor support mechanisms. France has an educated population, first-rate universities, and a talented workforce. It has a modern business culture, sophisticated financial markets, strong intellectual property protections, and innovative business leaders. The country is known for its world-class infrastructure, including high-speed passenger rail, maritime ports, extensive roadway networks, public transportation, and efficient intermodal connections. High-speed (3G/4G) telephony is nearly ubiquitous.

In 2018, France was the ninth largest global market for foreign direct investment (FDI) inflows with a year-on-year increase of 2 percent. In total, there are more than 28,000 foreign-owned companies doing business in France. It is the home to 29 of the world’s 500 largest companies. The World Economic Forum ranked France 17th in terms of global competitiveness in 2018. The United States is the seventh largest foreign investor in France. Around 4,600 U.S. companies in France, of all sizes, employ over 460,000 French citizens.

Following the election of French President Emmanuel Macron in May 2017, the French government implemented significant labor market and tax reforms. By relaxing the rules on companies to hire and fire employees and by offering investment incentives, Macron has buoyed business confidence in France. According to the 2018 American Chamber of Commerce in France – Bain Barometer Survey on the attitudes of U.S. investors in France, 86 percent of American investors surveyed found Macron’s reforms to be substantial and good for improving France’s investment prospects and image in the United States. From mid-November 2018, Macron faced weekly “Yellow Vest” protests over the high cost of living, taxes and social exclusion. Among U.S. investors in France, 62 percent said the current social climate was a “nuisance” for U.S. companies operating in France. Nevertheless, 42 percent of U.S. firms still plan to hire new employees in France over the next two to three years. Investors in technology, in particular, found the climate for development of digital technologies and other innovations to be attractive in France.

France’s GDP growth was 1.5 percent in 2018, down sharply from 2.7 percent in 2017. The budget deficit decreased to 2.6 percent of GDP in 2018. However, the OECD forecasts the budget deficit to reach 3.3 percent of GDP in 2019, due to the cost of the government’s €10.3 billion (USD 11.72 billion) emergency package to address the economic and social needs of middle-class and retired workers in response to the “Yellow Vest” protest movement. France’s public debt ratio, at 98.7 percent of GDP, remains one of the highest in the Euro-Zone.

Key issues to watch in 2019 include: 1) whether President Macron is able to maintain the pace of economic reform, and 2) opportunities and challenges resulting from Brexit.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 21 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 32 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 16 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 USD 85,572 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 USD 37,970 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

France welcomes foreign investment. In the current economic climate, the French government sees foreign investment as a means to create additional jobs and stimulate growth. Investment regulations are simple, and a range of financial incentives are available to foreign investors, who report they find France’s skilled and productive labor force, good infrastructure, technology, and central location in Europe attractive. France’s membership in the European Union (EU) and the Eurozone facilitates the efficient movement of people, services, capital, and goods. However, notwithstanding French efforts at economic and tax reform, market liberalization, and attracting foreign investment, perceived disincentives to investing in France include the relatively high tax environment. Labor market fluidity is improving due to labor market reforms introduced by the Macron Administration, but it is still rigid compared to some OECD economies.

Limits on Foreign Control and Right to Private Ownership and Establishment

France is among the least restrictive countries for foreign investment. With a few exceptions in certain specified sectors, there are no statutory limits on foreign ownership of companies. Foreign entities have the right to establish and own business enterprises, and engage in all forms of remunerative activity.

France does maintain a national security review mechanism. French law stipulates that control by acquisition of a domiciled company or subsidiary operating in certain sectors deemed crucial to France’s national interests relating to public order, public security and national defense are subject to prior notification, screening, and approval by the Economy and Finance Minister. Other sectors requiring approval include energy infrastructure; transportation networks; public water supplies; electronic communication networks; public health protection; and installations vital to national security. In 2018, four additional categories – semiconductors, data storage, artificial intelligence and robotics – were added to the list requiring a national security review. For all listed sectors, France can block foreign takeovers of French companies according to the provisions of the Montebourg Decree.

In 2018, the government held equity positions in approximately 81 firms. Most of the positions were relatively small, but did include provisions, which prevent foreign takeover of these firms. Exceptions, where the government had large holdings included, among others, Aeroports de Paris (50.6 percent), Engie, and Renault. In January 2018, the government sold 4.0 percent of its holding in Engie, lowering its stake to 23.64 percent of the energy company. The government also sold 5.0 percent of its stake in Renault, resulting in its ownership of 15.01 percent of the automaker.

Other Investment Policy Reviews

Given the level of development and stability of the investment climate, France has not recently been the subject of international organizations’ investment policy reviews. The OECD Economic Forecast for France (November 2018) can be found here: http://www.oecd.org/economy/france-economic-forecast-summary.htm  .

Business Facilitation

Business France is a government agency established with the purpose to promote new foreign investment, expansion, technology partnerships, and financial investment. Business France provides services to help investors understand regulatory, tax, and employment policies as well as state and local investment incentives, and government support programs. Business France also helps companies find project finance and potential equity acquisitions. Business France recently unveiled a website in English to help prospective businesses considering the French market (https://www.businessfrance.fr/en/invest-in-France  ).

In addition, France’s public investment bank, Bpifrance, assists foreign businesses to find local investors when setting up a subsidiary in France. It also supports foreign startups in France through the government’s French Tech Ticket program, which provides them with funding, a resident’s permit, and incubation facilities. Both business facilitation mechanisms provide for equitable treatment of women and minorities.

President Macron has made innovation one of his priorities with a EUR 10 billion fund that is being financed through privatizations of State-owned enterprises. France’s priority sectors for investment include: aeronautics, agro-foods, digital, nuclear, rail, auto, chemicals and materials, forestry, eco-industries, shipbuilding, health, luxury, and extractive industries. In the near-term, the French government intends to focus on driverless vehicles, batteries, the high-speed train of the future, nano-electronics, renewable energy, and health industries.

Business France and Bpifrance are particularly interested in attracting foreign investment in the tech sector. The French government has developed a brand “French Tech” to promote France as a location for start-ups and high-growth digital companies. In addition to offices in 17 French cities, French Tech offices have been established in cities including New York, San Francisco, Los Angeles, Shanghai, Hong Kong, Vietnam, Moscow, Berlin, and 14 others.

The website Guichet Enterprises (https://www.guichet-entreprises.fr/fr/  ) is designed to be a one-stop website for registering a business. The site is available in both French and English although some fact sheets on regulated industries are only available in French on the website.

Outward Investment

French firms invest more in the United States than in any other country and support approximately 678,000 American jobs. Total French investment in the United States reached USD 275.5 billion in 2018. France was our eighth-largest trading partner with approximately USD 128 billion in bilateral trade in 2018. The business promotion agency Business France also assists French firms with outward investment. There is no restriction on outward investment.

2. Bilateral Investment Agreements and Taxation Treaties

Investments in France by other EU member states are governed by the provisions of the Treaty of Rome and by European Union Law. France has Bilateral Investment Treaties (BITs) with 96 countries:  Albania, Algeria, Argentina, Armenia, Azerbaijan, Bahrain, Bangladesh, Bosnia and Herzegovina, Bulgaria, Cambodia, Chile, China, the Democratic Republic of the Congo, Costa Rica, Croatia, Cuba, Czech Republic, Djibouti, Dominican Republic, Ecuador, Egypt, El Salvador, Equatorial Guinea, Estonia, Ethiopia, Georgia, Guatemala, Haiti, Honduras, Hong Kong, Hungary, India, Iran, Israel, Jamaica, Jordan, Kazakhstan, Korea (South), Kuwait, Kyrgyz Republic, Laos, Latvia, Lebanon, Liberia, Libya, Lithuania, North Macedonia (FYROM), Madagascar, Malaysia, Malta, Mexico, Moldova, Mongolia, Montenegro, Morocco, Mozambique, Namibia, Nepal, Nicaragua, Nigeria, Oman, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Qatar, Romania, Russian Federation, Saudi Arabia, Senegal, Serbia, Seychelles, Singapore, Slovakia, Slovenia, Sri Lanka, Sudan, Tajikistan, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Venezuela, Vietnam, Yemen, and Zambia.

Bilateral Investment Treaties between France and the following countries have been signed but are not in force:  Belarus, Brazil, Chad, Colombia, Ghana, Iraq, Kenya, and Zimbabwe. France previously had BITs with Mauritius and Syria; new BITs with these two countries have been signed but have not yet entered into force.

UNCTAD maintains the most current list of ratified and non-ratified BITs, including links to each document:http://investmentpolicyhub.unctad.org/IIA/CountryBits/72#iiaInnerMenu.  

The United States and France have enjoyed a Navigation and Commerce Treaty since 1822, which guarantees national treatment of U.S. citizens. Since 1994, a Convention between the Government of the United States of America and the Government of the French Republic continues to be in force for the avoidance of double taxation and the prevention of fiscal evasion.

The Macron government temporarily raised corporate taxes in 2017 after the country’s Constitutional Court ordered the state to pay back 10 billion euros (USD 11.6 billion) in unlawful taxes on investor dividends. From a nominal corporate tax rate of 33.3 percent in 2016, the temporary corporate tax rate rose to 38.3 percent in 2017 for companies with turnover in excess of 1.0 billion euros and to 43.3 percent for those with revenues in excess of 3.0 billion euros.

In early 2019 the government demonstrated its intent to lower corporate taxes over the medium term. The 2018 tax law reduces corporate tax on profits over 500,000 euros (USD 596,000) to 31 percent for 2019, 28 percent in 2020, 26.5 percent in 2021 and 25 percent in 2022.

France has tax agreements with 127 countries:  Albania, Algeria, Andorra, Argentina, Armenia, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Belarus, Belgium, Benin, Bolivia, Bosnia and Herzegovina, Botswana, Brazil, Bulgaria, Burkina Faso, Cameroon, Canada, Cambodia, Central African Republic, Chile, China, Cyprus, the Democratic Republic of the Congo, Croatia, Czech Republic, Denmark, Ecuador, Egypt, Equatorial Guinea, Estonia, Ethiopia, Finland, Gabon, Georgia, Ghana, Greece, Guinea, Hong Kong, Hungary, India, Indonesia, Iran, Ireland, Island, Ivory Coast, Israel, Italia, Jamaica, Japan, Jordan, Kazakhstan, Kenya, Korea (South), Kosovo, Kuwait, Kyrgyz Republic, Latvia, Lebanon, Libya, Lithuania, Luxemburg, Macedonia (FYRM), Madagascar, Malaysia, Malawi, Mali, Malta, Mauritania, Mauritius Island, Mayotte, Mexico, Monaco, Mongolia, Montenegro, Morocco, Namibia, Netherlands, New Zealand, New Caledonia, Niger, Nigeria, Norway, Oman, Pakistan, Panama, Philippines, Poland, French Polynesia, Portugal, Qatar, Quebec, Romania, Russian Federation, Saudi Arabia, Saint-Martin, Saint Pierre and Miquelon, Senegal, Serbia, Singapore, South Africa, Spain, Slovakia, Slovenia, Sri Lanka, Sweden, Switzerland, Syria, Tajikistan, Taiwan, Thailand, Togo, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United Kingdom, Uruguay, Uzbekistan, Venezuela, Vietnam, Zambia, and Zimbabwe.  A bilateral tax agreement between France and Colombia has been signed but is not in force. Ref:https://www.impots.gouv.fr/portail/les-conventions-internationales  

3. Legal Regime

Transparency of the Regulatory System

France’s government has made considerable progress in the last decade on the transparency and accessibility of its regulatory system. The French government generally engages in industry and public consultation before drafting legislation or rulemaking through a regular but variable process directed by the relevant ministry. However, the text of draft legislation is not always publicly available before parliamentary approval. U.S. firms may also find it useful to become members of industry associations, which can play an influential role in developing government policies. Even “observer” status can offer insight into new investment opportunities and greater access to government-sponsored projects.

To increase transparency in the French legislative process, all ministries are required to attach an impact assessment to their draft bills. The Prime Minister’s Secretariat General (SGG for Secretariat General du Gouvernement) is responsible for ensuring that impact studies are undertaken in the early stages of the drafting process. The State Council (Conseil d’Etat), which must be consulted on all draft laws and regulations, may reject a draft bill if the impact assessment is inadequate.

After experimenting with new online consultations, the Macron Administration is regularly using this means to achieve consensus on its major reform bills. These consultations are often open to professionals as well as citizens at large. Another Macron innovation is to impose regular impact assessments after a bill has been implemented to ensure its maximum efficiency, revising, as necessary, provisions that do not work in favor of those that do. Finally, the Macron Administration aims to make all regulations and laws available online by 2022.

Over past decades, major reforms have extended the investigative and decision-making powers of France’s Competition Authority. As a result, the Authority has completed 50 enforcement investigations by end of 2016, with 14 decisions leading to sanctions of 203 million EUR (USD 251 million). The Authority publishes its methodology for calculating fines imposed on companies charged with abuse of a dominant position. It issues specific guidance on competition law compliance, and government ministers, companies, consumer organizations and trade associations now have the right to petition the authority to investigate anti-competitive practices. While the Authority alone examines the impact of mergers on competition, the Minister of the Economy retains the power to request a new investigation or reverse a merger transaction decision for reasons of industrial development, competitiveness, or saving jobs.

France’s budget documents are comprehensive and cover all expenditures of the central government. An annex to the budget also provides estimates of cost sharing contributions, though these are not included in the budget estimates. In its spring report each year, the National Economic Commission outlines the deficits for the two previous years, the current year, and the year ahead, including consolidated figures on taxes, debt, and expenditures. Since 1999, the budget accounts have also included contingent liabilities from government guarantees and pension liabilities. The government publishes its debt data promptly on the French Treasury’s website and in other documents. Data on nonnegotiable debt is available 15 days after the end of the month, and data on negotiable debt is available 35 days after the end of the month. Annual data on debt guaranteed by the state is published in summary in the CGAF Report and in detail in the Compte de la dette publique. More information can be found at:

https://www.imf.org/external/np/rosc/fra/fiscal.htm  

International Regulatory Considerations

France is a founding member of the European Union, created in 1957. As such, France incorporates EU laws and regulatory norms into its domestic law. France has been a World Trade Organization (WTO) member since 1995 and a member of GATT since 1948. While developing new draft regulations, the French government submits a copy to the WTO for review to ensure the prospective legislation is consistent with its WTO obligations. France ratified the Trade Facilitation Agreement in October 2015 and has implemented all of its TFA commitments.

Legal System and Judicial Independence

French law is codified into what is sometimes referred to as the Napoleonic Code, but is officially the Code Civil des Francais, or French Civil Code. Private law governs interactions between individuals (e.g., civil, commercial, and employment law) and public law governs the relationship between the government and the people (e.g., criminal, administrative, and constitutional law).

France has an administrative court system to challenge a decision by local governments and the national government; the State Council (Conseil d’Etat) is the appellate court. France enforces foreign legal decisions such as judgments, rulings, and arbitral awards through the procedure of exequatur introduced before the Tribunal de Grande Instance (TGI), which is the court of original jurisdiction in the French legal system.

France’s Commercial Tribunal (Tribunal de Commerce or TDC) specializes in commercial litigation. Magistrates of the commercial tribunals are lay judges, who are well known in the business community and have experience in the sectors they represent. Decisions by the commercial courts can be appealed before the Court of Appeals. France’s judicial system is procedurally competent, fair, and reliable and is independent of the government.

The judiciary – although its members are state employees – is independent of the executive branch. The judicial process in France is known to be competent, fair, thorough, and time-consuming. There is a right of appeal. The Appellate Court (cour d’appel) re-examines judgments rendered in civil, commercial, employment or criminal law cases. It re-examines the legal basis of judgments, checking for errors in due process and reexamines case facts. It may either confirm or set aside the judgment of the lower court, in whole or in part. Decisions of the Appellate Court may be appealed to the Highest Court in France (cour de cassation).

Laws and Regulations on Foreign Direct Investment

Foreign and domestic private entities have the right to establish and own business enterprises and engage in all sorts of remunerative activities. U.S. investment in France is subject to the provisions of the Convention of Establishment between the United States of America and France, which was signed in 1959 and remains in force. The rights it provides U.S. nationals and companies include: rights equivalent to those of French nationals in all commercial activities (excluding communications, air transportation, water transportation, banking, the exploitation of natural resources, the production of electricity, and professions of a scientific, literary, artistic, and educational nature, as well as certain regulated professions like doctors and lawyers). Treatment equivalent to that of French or third-country nationals is provided with respect to transfer of funds between France and the United States. Property is protected from expropriation except for public purposes; in that case it is accompanied by payment that is just, realizable and prompt.

Potential investors can find relevant investment information and links to laws and investment regulations at http://www.businessfrance.fr/  .

Competition and Anti-Trust Laws

Major reforms have extended the investigative and decision-making powers of France’s Competition Authority. The Authority publishes its methodology for calculating fines imposed on companies charged with abuse of a dominant position. It issues specific guidance on competition law compliance. Government ministers, companies, consumer organizations and trade associations have the right to petition the authority to investigate anti-competitive practices. While the Authority alone examines the impact of mergers on competition, the Minister of the Economy retains the power to request a new investigation or reverse a merger transaction decision for reasons of industrial development, competitiveness, or saving jobs.

A new law on Economic Growth, Activity and Equal Opportunities (known as the “Macron Law”), adopted in August 2016, vested the Competition Authority with the power to review mergers and alliances between retailers ex-ante (beforehand). The law provides that all contracts binding a retail business to a distribution network shall expire at the same time. This enables the retailer to switch to another distribution network more easily. Furthermore, distributors are prohibited from restricting a retailer’s commercial activity via post-contract terms. The civil fine incurred for restrictive practices can now amount to up to five percent of the business’s revenue earned in France.

France’s Competition Authority launches regular in-depth investigations into various sectors of the economy, which may lead to formal investigations and fines. On March 6, 2018, the Authority announced that after a two-year examination of the French online advertising market, it may open a full inquiry into the overwhelmingly dominant position of Google and Facebook in internet advertising markets.

Expropriation and Compensation

Government cannot legally expropriate property to build public infrastructure without fair market compensation. There have been no expropriations of note during the reporting period.

Dispute Settlement

ICSID Convention and New York Convention

France is a member of the World Bank-based International Centre for Settlement of Investment Disputes (ICSID) Convention and a signatory to the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) which means local courts are obligated to enforce international arbitral awards under this system. The International Chamber of Commerce’s International Court of Arbitration (ICA) has been based in Paris since 1923.

France was one of the first countries to enact a modern arbitration law in 1980-1981. In 2011, the French Ministry of Justice issued Decree 2011-48, which introduced further international best practices into French arbitration procedural law. As a result of that decree, parties are free to agree orally to settle their disputes through arbitration, subject to standards of due process and a newly enacted principle of procedural efficiency and fairness.

International Commercial Arbitration and Foreign Courts

French law provides conditions for the recognition and the enforcement of foreign arbitral awards in relation to the New York Convention. The provisions of French law are contained in the Code of Civil Procedure and the Code of Civil Enforcement Procedures. The French Civil Code envisions several mechanisms of alternative dispute resolution (ADR) including out-of-court arbitration and conciliation where a judicial conciliator puts an end to a dispute. France is a member of UNCITRAL. Local courts recognize and enforce foreign arbitral awards as mentioned above. The recognition of judgments of foreign courts by French courts is possible, but judgements must be accompanied by the issuance of an exequatur – a legal document issued by a sovereign authority that permits the exercise or enforcement of a foreign judgement.

Investor-State Dispute Settlement

The President of the Tribunal de Grande Instance (High Civil Court of First Instance) of Paris has the authority to issue orders related to ad-hoc international arbitration. Paris is the seat of the International Chamber of Commerce’s International Court of Arbitration, composed of representatives from 90 countries, that handles investment as well as commercial disputes.

France does not have a bilateral investment treaty with the United States.  The European Commission directly negotiates on behalf of the EU on foreign direct investment since it is part of the EU Common Commercial Policy. In 2015, the EU agreed to pursue an investment court approach to investor-State dispute settlement. While this model is included in the Comprehensive Economic and Trade Agreement (CETA) with Canada and the EU-Vietnam FTA, no actual court has yet been established in any form or context; no disputes have been brought under these post-2015 treaties.

Bankruptcy Regulations

France has extensive and detailed bankruptcy laws and regulations. Any creditor, regardless of the amount owed, may file suit in bankruptcy court against a debtor. Foreign creditors, equity shareholders and foreign contract holders have the same rights as their French counterparts. Monetary judgments by French courts on firms established in France are generally made in euros. Not bankruptcy itself, but bankruptcy fraud – the misstatement by a debtor of his financial position in the context of a bankruptcy – is criminalized. Under France’s bankruptcy code managers and other entities responsible for the bankruptcy of a French company are prevented from escaping liability by shielding their assets (Law 2012-346). France has adopted a law that enables debtors to implement a restructuring plan with financial creditors only, without affecting trade creditors. France’s Commercial Code incorporates European Directive 2014/59/EU establishing a framework for the recovery and resolution of claims on insolvent credit institutions and investment firms. In the World Bank’s 2019 Doing Business Index, France was ranked 32nd of 190 on ease of resolving insolvency.

The Bank of France, the country’s only credit monitor, maintains files on persons having written unfunded checks, having declared bankruptcy, or having participated in fraudulent activities. Commercial credit reporting agencies do not exist in France.

4. Industrial Policies

Investment Incentives

France offers financial incentives, generally equally available to both French and foreign investors. The government provides incentives for capital investment in small companies. For instance, a French company or a subsidiary of a foreign firm that would invest in a minority shareholding (less than 20 percent) of a small, innovative SME would benefit from a five year, linear amortization of their investment. To qualify, SMEs must allocate at least 15 percent of their spending on research.

Incentivizing research and development (R&D) and innovation is a high priority for the French government. Business France, the country’s export and investment promotion agency, reported that R&D operations accounted for 10 percent of foreign investments projects in 2018 and created or maintained 2,793 jobs, up 23 percent from last year. The United States is the leading foreign investor in R&D in France, accounting for 26 percent of 2018 investment decisions. International companies may join France’s 71 innovation clusters, increasing access to both production inputs and technical benefits of geographical proximity. Other components of this policy include: the Innovative New Company (Jeune Enterprise Innovante) and the French Young Entrepreneurs Initiative.

Foreign Trade Zones/Free Ports/Trade Facilitation

France is subject to all EU free trade zone regulations. These allow member countries to designate portions of their customs’ territory as duty-free, where value-added activity is limited. France has several duty-free zones, which benefit from exemptions on customs for storage of goods coming from outside of the European Union. The French Customs Service administers them, and provides details on its website (http://www.douane.gouv.fr). French legal texts are published online at http://legifrance.gouv.fr.

In September 2018, President Macron announced the extension of 44 Urban Free Zones (ZFU) in low-income neighborhoods and municipalities with at least 10,000 residents. The program provides incentives for employers, who have created 600 new jobs since 2016. Incentives include exemption from payment of payroll taxes and certain social contributions for five years, financed by EUR 15 million a year in State funds.  

Performance and Data Localization Requirements

While there are no mandatory performance requirements established by law, the French government will generally require commitments regarding employment or R&D from both foreign and domestic investors seeking government financial incentives. Incentives like PAT regional planning grants (Prime d’Amenagement du Territoire pour l’Industrie et les Services) and related R&D subsidies are based on the number of jobs created, and authorities have occasionally sought commitments as part of the approval process for acquisitions by foreign investors. PAT has been revised to benefit SMEs, with the objective of promoting the development of businesses in priority regional zones, including EUR 30 million in direct government subsidies. In 2018, a reform of the national security review system expanded the list of sensitive sectors subject to prior authorization by the Ministry of Economy and Finance. Decree 2018-1057 of November 29, 2018, expanded the scope of activities under review to include:  artificial intelligence, data storage, and the space sector, when the direct objective of this investment pertains to national defense, national security, public order and public authority. A new set of measures amending the review mechanism were included in the proposed PACTE law (Plan d’Action pour la Croissance et la Transformation des Entreprises), which was still under review at the end of 2018. Parliamentary leaders from most parties said the PACTE would be approved during the first quarter of 2019. The law would toughen sanctions on both sides of an acquisition for non-compliance with investment review mechanism.

The French government imposes the same conditions on domestic and foreign investors in cultural industries:  all purveyors of movies and television programs (i.e., television broadcasters, telecoms operators, internet service providers and video services) must invest a percentage of their revenues to finance French film and television productions. They must also abide by broadcasting cultural content quotas (minimum 40 percent French, 20 percent EU).

5. Protection of Property Rights

Real Property

Real property rights are regulated by the French civil code and are uniformly enforced. In the World Bank’s Doing Business Report (DBR), France ranks 32nd of 190 on registering property. French civil-law notaries (notaires) – highly specialized lawyers in private practice appointed as public officers by the Justice Ministry – handle residential and commercial conveyance and registration, contract drafting, company formation, successions, and estate planning. The official system of land registration (cadastre) is maintained by the French public land registry under the auspices of the French tax authority (Direction Generale des Finances Publiques or DGFiP), available online at http://www.cadastre.gouv.fr  . Mortgages are widely available, usually for a 15-year period.

Intellectual Property Rights

France is a strong defender of intellectual property rights. Under the French system, patents and trademarks protect industrial property, while copyrights protect literary/artistic property. By virtue of the Paris Convention and the Washington Treaty regarding industrial property, U.S. nationals have a priority period following filing of an application for a U.S. patent or trademark in which to file a corresponding application in France:  twelve months for patents and six months for trademarks.

Counterfeiting is a costly problem for French companies, and the government of France maintains strong legal protections and a robust enforcement mechanism to combat trafficking in counterfeit goods — from copies of luxury goods to fake medications — as well as the theft and illegal use of intellectual property. The French Intellectual Property Code has been updated repeatedly over the years to face this challenge.  Parliament recently passed a law reinforcing France’s anti-counterfeiting law and its implementation of EU directives on intellectual property rights. The new legislation increases the Euro amount for damages to companies that are victims of counterfeiting and extends trademark protection to smartcard technology, certain geographic indications, plants, and agricultural seeds. The new legislation also increases the statute of limitations for civil suits from three to ten years and strengthens the powers of customs officials to seize fake goods sent by mail or express freight.

The government also reports on seizures of counterfeit goods. In 2018, French Customs seized 5.4 million counterfeited goods, down from 8.5 million counterfeited goods in 2017. This sharp drop has been attributed to an increase of online purchases of fake goods, which are harder to control. France’s top private sector anti-counterfeiting organization, UNIFAB, called on the government in 2018 to launch a national public awareness campaign. France has robust laws against online piracy. A government agency called the High Authority for the Dissemination of Artistic Works and the Protection of Rights on Internet (Haute Autorite pour la Diffusion des Œuvres et la Protection des droits sur Internet – HADOPI) administers a “graduated response” system of warnings and fines. It has taken enforcement action against several online pirate sites, including Megaupload. HADOPI cooperates closely with the U.S. Patent and Trademark Office (USPTO) including pursuing voluntary arrangements that target intermediaries that facilitate or fund pirate sites. (Note that one of HADOPI’s tasks is to ensure that the technical measures used to protect works do not prevent the right of individuals to make personal copies of television programs for their private use.) In October 2018, HADOPI released a study showing that 27 percent of French people acquired and consumed music, films and television series through illegal sites (44 percent for television series and 42 percent for films). This figure has remained steady over the past few years. Hadopi further noted a 6 percent increase in the use of legal sites for downloading media to 48 percent in 2018. Offenders risk fines of between EUR 1,500 and EUR 300,000 and/or up to three years imprisonment. 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/  .

France does not appear on USTR’s 2019 Special 301 Report, but it is mentioned throughout the 2018 Notorious Markets List with regard to illicit streaming and copyright infringement websites.

6. Financial Sector

Capital Markets and Portfolio Investment

There are no administrative restrictions on portfolio investment in France, and there is an effective regulatory system in place to facilitate portfolio investment. France’s open financial market allows foreign firms easy access to a variety of financial products, both in France and internationally. France continues to modernize its marketplace; as markets expand, foreign and domestic portfolio investment has become increasingly important. As in most EU countries, France’s listed companies are required to meet international accounting standards. Some aspects of French legal, regulatory and accounting regimes are less transparent than U.S. systems, but they are consistent with international norms. Foreign banks are allowed to establish branches and operations in France and are subject to international prudential measures. Under IMF Article VIII France may not impose restrictions on the making of payments and transfers for current international transactions without the (prior) approval of the Fund.

Foreign investors have access to all classic financing instruments, including short-, medium-, and long-term loans, short- and medium-term credit facilities, and secured and non-secured overdrafts offered by commercial banks. These assist in public offerings of shares and corporate debt, as well as mergers, acquisitions and takeovers, and offer hedging services against interest rate and currency fluctuations. Foreign companies have access to all banking services. Most loans are provided at market rates, although subsidies are available for home mortgages and small business financing.

Euronext Paris (also known as Paris Bourse) is part of a regulated cross-border exchange located in six European countries. Euronext Growth is an alternative exchange for medium-sized companies to list on a less regulated market (based on the legal definition of the European investment services directive), with more consumer protection than the Marche Libre still used by a couple hundred small businesses for their first stock listing. A company seeking a listing on Euronext Growth must have a sponsor with status granted by Euronext, and prepare a French language prospectus for a permit from the Autorite des Marches Financiers (AMF or Financial Markets Authority), the French equivalent of the U.S. Securities and Exchange Commission. Small and medium-size enterprises (SMEs) may also list on EnterNext, a new subsidiary of the Euronext Group. The bourse in Paris also offers Euronext Access, an unregulated exchange for Start-ups.

Money and Banking System

France’s banking system recovered gradually from the 2008-2009 global financial crises and passed the 2018 stress tests conducted by the European Banking Authority. The French banking sector is healthy. Non-performing loans were 3.1 percent in France at the end of 2017, compared to a ratio of 3.6 percent in the previous year. The French banking industry is notable for its universal banking model: a single bank offers a full range of financial business lines: retail banking, specialist finance, corporate and investment banking, asset management and insurance.

Four French banks are ranked among the world’s 20 largest. The assets of France’s largest banks totaled EUR 7.5 trillion (USD 8.47 trillion) in 2018. Acting on a proposal from the Banque de France in June 2018, the High Council for Financial Stability (HCSF) told the country’s largest banks to raise the “countercyclical capital buffer” from zero to 0.25 percent of their bank’s risk-weighted assets. HCSF cited international “factors of economic and political uncertainty that could put growth at risk.”

France has a central bank, namely the Banque de France, that is a member of the Eurosystem, which groups together the European Central Bank (ECB) and the national central banks of all countries that have adopted the euro. The Banque de France is a public entity governed by the French Monetary and Financial Code. The conditions whereby it conducts its missions on national territory are set out in its Public Service Contract. The three main missions are monetary strategy, financial stability together with the High Council of financial stability (Haut Conseil de la Stabilite Financiere) which implements macroprudential policy, and the provision of economic services to the community. In addition, it participates in the preparation and implementation of decisions taken centrally by the ECB Governing Council.

Foreign banks can operate in France either as subsidiaries or branches but need to obtain a license. Credit institutions’ licenses are generally issued by France’s Prudential Authority (ACPR – Autorite de Controle Prudentiel et de Resolution) which reviews whether certain conditions are met (e.g. minimum capital requirement, sound and prudent management of the bank, compliance with balance sheet requirements, etc.). Both EU law and French legislation apply to foreign banks. Foreign banks or branches are additionally subject to prudential measures and must provide periodic reports to the ACPR regarding operations in France, including detailed reports on their financial situation. At the EU level, the ‘passporting right’ allows a foreign bank settled in any EU country to provide their services across the EU, including France. There are about 1,028 credit institutions authorized to carry on banking activities in France; the list of foreign banks is available on this website: https://www.regafi.fr/spip.php?page=results&type=advanced&id_secteur=3&lang=
en&denomination=&siren=&cib=&bic=&nom=&siren_agent=&num=&cat=01-TBR07&retrait=0
 

Foreign Exchange and Remittances

Foreign Exchange

France’s investment remittance policies are stable and transparent. All inward and outward payments must be made through approved banking intermediaries by bank transfers. There is no restriction on the repatriation of capital. Similarly, there are no restrictions on transfers of profits, interest, royalties, or service fees. Foreign-controlled French businesses are required to have a resident French bank account and are subject to the same regulations as other French legal entities. The use of foreign bank accounts by residents is permitted.

For purposes of controlling exchange, the French government considers foreigners as residents from the time they arrive in France. French and foreign residents are subject to the same rules; they are entitled to open an account in a foreign currency with a bank established in France, and to establish accounts abroad. They must report all foreign accounts on their annual income tax returns, and money earned in France may be freely converted into dollars or any other currency and transferred abroad.

France is one of nineteen countries (known collectively as the Eurozone) that use the euro currency. Exchange rate policy for the euro is handled by the European Central Bank, located in Frankfurt, Germany. The average euro to USD exchange rate from April 11, 2018 to April 12, 2019 was 1 USD to 0.88 euro.

France is a founding member of the OECD-based Financial Action Task Force (FATF, a 34-nation intergovernmental body). As reported in the Department of State’s France Report on Terrorism, the French government has a comprehensive anti-money laundering/counterterrorist financing (AML/CTF) regime and is an active partner in international efforts to control money laundering and terrorist financing. Tracfin, the French government’s financial intelligence unit, is active within international organizations, and has signed new bilateral agreements with foreign countries.

Sovereign Wealth Funds

France has no sovereign wealth fund per se (none that use that nomenclature), but does operate funds with similar intent. The Public Investment Bank (Banque Publique d’Investissement – BPI, now known as Bpifrance) supports small and-medium term enterprises (SMEs), larger enterprises (Entreprises de Taille Intermedaire) and innovating businesses. The government strategy is defined at the national level and aims to fit with local strategies. Bpifrance may hold direct stakes in companies, hold indirect stakes via generalist or sectorial funds, venture capital, development or transfer capital. Bpifrance has minority stakes in 214 firms and 56 investment funds that invest in businesses. It also provides export insurance.

7. State-Owned Enterprises

The 12 listed entities in which the French State maintains stakes are Aeroports de Paris (50.63 percent), Airbus Group (11.03 percent), Air France-KLM (14.29 percent), CNP Assurances (holds 1.11 percent; controls 66 percent), Dexia (5.73 percent), EDF (83.66 percent), ENGIE (23.64 percent), Orange (a direct 13.39 percent stake and a 9.60 percent stake through Bpifrance), Renault (15.1 percent), Safran (10.81 percent of shares and 21.9 percent of voting rights), and Thales 25.71 percent). Unlisted companies owned by the State include SNCF (rail), RATP (public transport), CDC (Caisse des depots et consignations) and La Banque Postale (bank). In all, the government has majority and minority stakes in 81 firms, in a variety of sectors.

Private enterprises have the same access to financing as SOEs, including from state-owned banks or other state-owned investment vehicles. SOEs are subject to the same tax burden and tax rebate policies as their private sector competitors. SOEs may get subsidies and other financial resources from the government.

France, as a member of the European Union, is party to the Agreement on Government Procurement (GPA) within the framework of the World Trade Organization. Companies owned or controlled by the state behave largely like other companies in France and are subject to the same laws and tax code. The Boards of SOEs operate according to accepted French corporate governance principles as set out in the (private sector) AFEP-MEDEF Code of Corporate Governance. SOEs are required by law to publish an annual report, and the French Court of Audit conducts financial audits on all entities in which the state holds a majority interest. The French government appoints representatives to the Boards of Directors of all companies in which it holds significant numbers of shares, and manages its portfolio through a special unit attached to the Ministry for the Economy and Finance Ministry, the shareholding agency APE (Agence de Participations de l’Etat). A recent APE annual report highlighted the government’s strategy to keep a sufficient level of control in strategically important companies while scaling back its shareholdings in traditional industrial sectors to invest in fast-growing companies in key sectors for economic growth.

Privatization Program

The government has partially privatized many large companies, including Air France, Orange, Renault, PSA, and ENGIE in order to create a 10 billion EUR fund for innovation and research. However, the government continues to maintain a strong presence in some sectors, particularly power, public transport, and defense industries.

8. Responsible Business Conduct

There is general awareness of standards for responsible business conduct (RBC) in France. The country has established a National Contact Point (NCP) for the OECD Guidelines for Multinational Enterprises, coordinated and chaired by the Directorate General of the Treasury in the Ministry for the Economy and Finance. Its members represent State Administrations (Ministries in charge of Economy and Finance, Labor and Employment, Foreign Affairs, Ecology, Sustainable Development and Energy), six French Trade Unions (CFDT, CGT, FO, CFE-CGC, CFTC, UNSA) and one employers’ organization, MEDEF. The NCP promotes the Guidelines and ensures their application. It provides relevant information and handles inquiries. It examines the specific instances referred to it, offers its good offices to the parties (discussion, exchange of information) and may act as a mediator in disputes, if appropriate.

The French Office of the NCP promotes the OECD Guidelines in a manner that is relevant to specific sectors. In specific instances, the NCP conducts fact-finding to assist parties in resolving disputes, and posts final statements on any recommendations for future action with regard to the Guidelines. The NCP may also monitor how its recommendations are implemented. In April 2017, the French NCP signed a two-year partnership with Global Compact France to increase sharing of information and activity between the two organizations.

In France, corporate governance standards are the product of a combination of legislative provisions and the recommendations of the AFEP-MEDEF code (two employers’ organizations). The code meets the expectations of shareholders and various stakeholders, as well as of the European Commission. The code was revised in November 2016 to add principles for the determination of remuneration and independence of directors, and now includes corporate social and environmental responsibility standards.

Also relating to transparency, the EU passed a new regulation in May 2017 to stem the trade in conflict minerals and, in particular, to stop conflict minerals and metals from being exported to the EU; to prevent global and EU smelters and refiners from using conflict minerals; and to protect mine workers from being abused. The regulation goes into effect January 1, 2021, and will then apply directly to French law.

France has played an active role in negotiating the ISO 26000 standards, the International Finance Corporation Performance Standards, the OECD Guidelines for Multinational Enterprises, and the UN Guiding Principles on Business and Human Rights. France has signed on to the Extractive Industries Transparency Initiative (EITI), although, it has not yet been fully implemented. Since 2017, large companies based in France and having at least 5,000 employees are now required to establish and implement a corporate plan to identify and assess any risks to human rights, fundamental freedoms, workers’ health, safety, and risk to the environment from activities of their company and its affiliates.

9. Corruption

In line with President Macron’s campaign promise to clean up French politics, the French parliament adopted in September 2017 the law on “Restoring Confidence in Public Life.” The new law bans elected officials from employing family members, or working as a lobbyist or consultant while in office. It also bans lobbyists from paying parliamentary, ministerial, or presidential staff and requires parliamentarians to submit receipts for expenses.

France’s “Transparency, Anti-corruption, and Economic Modernization Law,” also known as the “Loi Sapin II, came into effect on June 1, 2017. It brought France’s legislation in line with European and international standards. Key aspects of the law include: creating a new anti-corruption agency; establishing “deferred prosecution” for defendants in corruption cases and prosecuting companies (French or foreign) suspected of bribing foreign public officials abroad; requiring lobbyists to register with national institutions; and expanding legal protections for whistleblowers. The Sapin II law also established a High Authority for Transparency in Public Life (HATVP). The HATVP promotes transparency in public life by publishing the declarations of assets and interests it is legally authorized to share publicly. After review, declarations of assets and statements of interests of members of the government are published on the High Authority’s website under open license. The declarations of interests of members of Parliament and mayors of big cities and towns, but also of regions are also available on the website. In addition, the declarations of assets of parliamentarians can be accessed in certain governmental buildings, though not published on the internet.

The U.S. embassy in Paris has received no specific complaints from U.S. firms of unfair competition in France in recent years. France ranked 21rd of 180 on Transparency International’s (TI) 2018 corruption perceptions index. See https://www.transparency.org/country/FRA.

Resources to Report Corruption

The Central Office for the Prevention of Corruption (Service Central de Prevention de la Corruption or SCPC) was replaced in 2017 by the new national anti-corruption agency – the Agence Francaise Anticorruption (AFA). The AFA is charged with preventing corruption by establishing anti-corruption programs, making recommendations, and centralizing and disseminating information to prevent and detect corrupt officials and company executives. The AFA will also administrative authority to review the anticorruption compliance mechanisms in the private sector, in local authorities and in other government agencies.

Contact information for Transparency International’s French affiliate:

Transparency International France
14, passage Dubail
75010 Paris
Tel: (+33) 1 84 16 95 65
Email: contact@transparency-france.org

10. Political and Security Environment

France is a politically stable country. Occasionally, large demonstrations and protests occur (sometimes organized to occur simultaneously in multiple French cities); these normally don’t result in violence. When faced with imminent business closures, on rare occasions French trade unions have resorted to confrontational techniques such as setting plants on fire, planting bombs, or kidnapping executives or managers. In March 2018, railway workers, teachers, students, and air traffic controllers went on strike to protest President Macron’s reforms. Rolling two-day strikes of the national rail system took place from April to June 2018, but a railways labor agreement was reached in early summer. The reform of the state controlled SNCF railway company gradually introduces competition on some railways and changes to SNCF unemployment benefits and pension system.

From mid-November, Paris and other cities in France faced weekly “Gilets Jaunes” Yellow Vest demonstrations initiated by protestors upset over the high cost of living, taxes, and social exclusion. Authorities permitted peaceful protests. During some demonstrations, damage to property, including looting and arson, in popular tourist areas occurred with reckless disregard for public safety. Police response included water cannons, rubber bullets and tear gas.

According to the 2018 American Chamber of Commerce in France – Bain Barometer Survey on the attitudes of U.S. investors in France, 86 percent of American investors were positive about the overall investment climate in France and the prospects for continued reforms to the economy. Among the U.S. investors, 62 percent found the Yellow Vest protests to be a nuisance, but 42 percent of U.S. firms planned to hire new employees in France over the next two to three years.

In recent years, more than 230 people have been killed in terrorist attacks in France, including the January 2015 assault on the satirical magazine Charlie Hebdo, the November 2015 Bataclan concert hall and national stadium attacks, and the 2016 Bastille Day truck attack in Nice. While terrorists continue to target French interests, since July 2016 attacks have been smaller in scale and most often perpetrated by lone actors inspired by, but with little direct connection to, ISIS or other international terrorist organizations. French security agencies continue to disrupt plots and cells, and their efforts have been aided by recent legislation and executive measures which strengthen search and detention authorities. Despite the spate of recent small-scale attacks, France remains a strong, stable, democratic country with a vibrant economy and culture. Americans and investors from all over the world continue to invest heavily in France.

11. Labor Policies and Practices

France’s private sector labor force is a major asset in attracting foreign investment. With a return to growth (1.5 percent in 2018) and a drop in unemployment to 8.8 percent in 2018 from 8.9 percent in 2017, President Macron launched a labor market reform to reduce regulations and spur new hiring. Five ordinances (executive orders), which came into effect on January 1, 2018, introduced measures easing companies’ ability to fire workers including by capping potential damage claims in cases of wrongful dismissal, and a one-year time limit for making claims, which business organizations have requested for several decades. In order to make these proposals acceptable to labor unions, Labor Minister Penicaud increased regular required severance pay by 25 percent. For example, an employee paid a monthly EUR 2,000 and fired after 10 years will be entitled to a severance pay of EUR 5,000, instead of the previous EUR 4,000.

Mandatory company employee councils for consultations on economic, social and public safety issues have been reduced from three to one participants. Companies of all sizes are now able to initiate wide-scale voluntary layoffs with severance provisions for employees for any reason without fear of lawsuit, but with the agreement of labor unions representing a majority of employees. Finally, foreign-owned companies no longer have to justify job cuts in France on the basis of their global turnover, but can base them on poor performance in France. These measures have been welcomed by the business community.

The number of apprenticeships in France has increased by 7.7 percent in 2018 and now totals 318,000 in both the public and private sectors, according to Labor Ministry figures. Apprenticeships, like vocational training, have been placed under the direct management of the government via a newly created agency called France Compétences. Growth of apprenticeship and reform of vocational training help to explain the recent drop in the unemployment rate. The unemployment rate fell to 8.8 percent in the fourth quarter of 2018 from 9.1 percent in the previous period. Youth unemployment was at 20.8 percent in 2018, from 22.3 percent in 2017. The number of job-seekers over age 50 remains steady at 6.4 percent, down from 6.7 percent in 2017.

12. OPIC and Other Investment Insurance Programs

Given France’s high per capita income, investments in France do not qualify for investment insurance or guarantees offered by the Overseas Private Investment Corporation (OPIC).

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2017 $2,592,818 2018 $3,067,826 https://data.oecd.org/gdp/gross-domestic-product-gdp.htm#indicator-chart  
Foreign Direct Investment Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $62,367 2017 $85,572 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2017 $219,687 2018 $301,540 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 36.1 2017 36.1% UNCTAD data available at

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

 

Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 874,521 100% Total Outward 1,451,663 100%
Luxembourg 178,033 20% United States 253,822 17%
Netherlands 111,158 13% Belgium 178,663 12%
United Kingdom 107,815 12% Netherlands 158,588 11%
Switzerland 88,826 10% United Kingdom 134,746 9%
Germany 81,986 9% Germany 84,543 6%
“0” reflects amounts rounded to +/- USD 500,000.

 

Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $2,887,607 100% All Countries $931,712 100% All Countries $1,995,895 100%
Luxembourg $481,706 17% Luxembourg $287,781 31% Netherlands $234,696 12%
United States $307,540 11% United States $107,912 12% Italy $211,644 11%
Netherlands $293,559 10% Germany $92,519 10% United Kingdom $205,513 11%
United Kingdom $269,065 9% Ireland $71,831 8% United States $199,628 10%
Italy $246,658 9% United Kingdom $63,552 7% Luxembourg $193,924 10%

14. Contact for More Information

Peter Chisholm
Economic Officer
U.S. Embassy
2 Avenue Gabriel
75008 Paris, France
Tel: +33.1.43.12.2000
FranceICSeditor@state.gov
https://fr.usembassy.gov/business/

 

Special Section on Monaco

The Principality of Monaco, the world’s second smallest country by area, has an open economy that welcomes foreign investment.  Monaco enjoys a high standard of living and low unemployment.  With the exception of French citizens, foreigners (and Monegasques) actually living and working in Monaco are not subject to personal income tax.  Corporations may benefit from various tax incentives.  There are no restrictions preventing foreigners and non-residents from buying property or opening bank or brokerage accounts in Monaco, though some banks have levied fees on American accounts.  Non-residents likely account for more than half of real estate investments.  Monaco is well known for its security and political stability.

Note: the Principality of Monaco is not covered by the World Bank’s Doing Business Report, Transparency International’s Country Corruption Report, or the Heritage Foundation’s Economic Freedom Index report.

Investment Regime of Monaco

Monaco’s economic and regulatory system is closely tied to that of France, and Monaco uses the Euro as its currency.  The convention of May 1, 1963 brought French and Monegasque territories, including territorial waters, under a customs union resulting in the application of French customs law in Monaco.  Although Monaco is not a full member of the European Union, the customs union with France makes it subject to EU customs laws, thus guaranteeing that the transfer of goods and services from and into Monaco remains within the single European market.

Economic activity within Monaco, including commercial, handicraft and industrial activity, is strictly monitored by the government.  Prior approval from the Direction de l’Expansion Economique is required before conducting any economic activity in the principality, and this applies to foreign companies which may establish a branch or an administrative unit in the principality. Monegasque authorities issue approvals based on type of business; approval is personal and may not be transferred.  Any change in the terms requires a new approval.  The government is streamlining the approval process by reducing the number of documents required to nine, or six for individual authorizations.

A body called Espace Entreprises Monaco Business Office helps new investors.  The Monaco Welcome and Business office (MWBO) assists individuals and entrepreneurs in relocating to the Principality of Monaco.  In the financial sector, creation of any financial organization is subject to the approval of both the French CECEI (Committee for Credit and Investment Institutions) in Paris and of Monegasque financial supervisory authorities.  Offshore companies are subject to the same due diligence and suspicious transaction reporting regulations as other banking institutions.

Monaco has taken a number of initiatives to promote economic activity and make company operations more transparent while maintaining high ethical standards, including:

  • creation of the legal status of Limited Liability Company;
  • adoption of systems to combat money laundering, organized crime and corruption (through the creation of the Service d’Information et de Contrôle sur les Circuits Financiers, SICCFIN: http://www.siccfin.gouv.mc); and
  • special exemptions for new companies and research.

In Monaco, there is no direct taxation, with two exceptions:

  • companies earning more than 25% of their turnover (revenue) outside of the principality, and companies whose activities consist of earning revenues from patents and literary or artistic property rights, subject to a tax of 33.33% on profits, and
  • French nationals unable to prove that they resided in the principality for five years before October 31, 1962 are subject to the French income tax.

To encourage the creation of economic activity, the Principality of Monaco offers tax exemptions to new companies developing a new activity.  These new companies enjoy 100% exemption from corporate tax in the first two years, and then gradually assume normal tax obligations by the sixth year  A research tax credit was additionally created in March 2009.

On July 12, 2016, The European Union and Monaco signed an agreement making Monaco’s tax compliance regulations and automatic exchange of financial information stronger and equivalent to measures in force in the EU.  The EU-Monaco agreement entered into force in 2018.  Monaco is now classified as “largely compliant” by OECD tax transparency standards, alongside the U.S and Germany. The principality has signed 33 (32 are in force) tax information exchange agreements (TIEA), including one with the United States on September 8, 2009.

Size of the Economy of Monaco

Monaco’s GDP was EUR 5.68 billion in 2017,  EUR 5.85 billion in 2016, 5.64 billion in 2015, up 5.4% from 5.32 billion in 2014 and 4.94 billion in 2013 (Source: IMSEE – Monaco Statistics http://www.monacostatistics.mc/Economy-and-Finance/GDP).  The country’s budget comes from taxes on industry, trade, and services; a vibrant tourism sector; and several government-owned enterprises, most notably the country’s famous casinos.  Approximately 50% of government revenue  comes from the Value Added Tax (VAT) which is collected by French authorities and disbursed to Monaco according to an agreed formula.

There is a high concentration of financial professionals in Monaco, as might be expected in this center of international business.  French banking law applies in Monaco, subjecting banks to the same level of supervision as in France.  Some 33 banks and 54 financial companies operate in Monaco (Source: CMB: Compagnie Monégasque de Banque).  Recent figures show that Monaco’s outsized financial sector manages well over EUR 750 billion for a clientele that is 46% non-resident.

Germany

Executive Summary

As Europe’s largest economy, Germany is a major destination for foreign direct investment (FDI) and has accumulated a vast stock of FDI over time.  Germany is consistently ranked by business consultancies and the UN Conference on Trade and Development (UNCTAD) as one of the most attractive investment destinations based on its reliable infrastructure, highly skilled workforce, positive social climate, stable legal environment, and world-class research and development.

The United States is the leading source of non-European foreign investment in Germany.  Foreign investment in Germany was broadly stable during the period 2013-2016 (the most recent data available) and mainly originated from other European countries, the United States, and Japan.  FDI from emerging economies (particularly China) grew substantially over 2013-2016, albeit from a low level.

German legal, regulatory, and accounting systems can be complex and burdensome, but are generally transparent and consistent with developed-market norms.  Businesses enjoy considerable freedom within a well-regulated environment. Foreign and domestic investors are treated equally when it comes to investment incentives or the establishment and protection of real and intellectual property.  Foreign investors can fully rely on the legal system, which is efficient and sophisticated. At the same time, this system requires investors to closely track their legal obligations. New investors should ensure they have the necessary legal expertise, either in-house or outside counsel, to meet all requirements.

Germany has effective capital markets and relies heavily on its modern banking system.  Majority state-owned enterprises are generally limited to public utilities such as municipal water, energy, and national rail transportation.  The primary objectives of government policy are to create jobs and foster economic growth. Labor unions are powerful and play a generally constructive role in collective bargaining agreements, as well as on companies’ work councils.

German authorities continue efforts to fight money laundering and corruption.  The government supports responsible business conduct and German SMEs are increasingly aware of the need for due diligence.

The German government amended domestic investment screening provisions, effective June 2017, clarifying the scope for review and giving the government more time to conduct reviews, in reaction to an increasing number of acquisitions of German companies by foreign investors, particularly from China.  The amended provisions provide a clearer definition of sectors in which foreign investment can pose a “threat to public order and security,” including operators of critical infrastructure, developers of software to run critical infrastructure, telecommunications operators or companies involved in telecom surveillance, cloud computing network operators and service providers, and telematics companies.  All non-EU entities are now required to notify Federal Ministry for Economic Affairs and Energy in writing of any acquisition of or significant investment in a German company active in these sectors. The new rules also extend the time to assess a cross-sector foreign investment from two to four months, and for investments in sensitive sectors, from one to three months, and introduce the possibility of retroactively initiating assessments for a period of five years after the conclusion of an acquisition.  Indirect acquisitions such as those through a Germany- or EU-based affiliate company are now also explicitly subject to the new rules. In 2018, the government further lowered the threshold for the screening of investments, allowing authorities to screen acquisitions by foreign entities of at least 10 percent of voting rights of German companies that operate critical infrastructure (down from 25 percent), as well as companies providing services related to critical infrastructure.  The amendment also added media companies to the list of sensitive businesses to which the lower threshold applies. German authorities strongly supported the European Union’s new framework to coordinate national security screening of foreign investments, which entered into force in April 2019.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 11 of 180 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 2018 9 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 136 billion USD https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2017 43,490 USD http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Germany has an open and welcoming attitude towards FDI.  The 1956 U.S.-Federal Republic of Germany Treaty of Friendship, Commerce and Navigation affords U.S. investors national treatment and provides for the free movement of capital between the United States and Germany. As an OECD member, Germany adheres to the OECD National Treatment Instrument and the OECD Codes of Liberalization of Capital Movements and of Invisible Operations.  The Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance provide the legal basis for the Federal Ministry for Economic Affairs and Energy to review acquisitions of domestic companies by foreign buyers, to assess whether these transactions pose a risk to the public order or national security (for example, when the investment pertains to critical infrastructure).  For many decades, Germany has experienced significant inbound investment, which is widely recognized as a considerable contributor to Germany’s growth and prosperity. The German government and industry actively encourage foreign investment. U.S. investment continues to account for a significant share of Germany’s FDI. The investment-related challenges foreign companies face are generally the same as for domestic firms, for example, high marginal income tax rates and labor laws that complicate hiring and dismissals.

Limits on Foreign Control and Right to Private Ownership and Establishment

Under German law, a foreign-owned company registered in the Federal Republic of Germany as a GmbH (limited liability company) or an AG (joint stock company) is treated the same as a German-owned company.  There are no special nationality requirements for directors or shareholders.

However, Germany does prohibit the foreign provision of employee placement services, such as providing temporary office support, domestic help, or executive search services.

While Germany’s Foreign Economic Law permits national security screening of inbound direct investment in individual transactions, in practice no investments have been blocked to date.  Growing Chinese investment activities and acquisitions of German businesses in recent years – including of Mittelstand (mid-sized) industrial market leaders – led German authorities to amend domestic investment screening provisions in 2017, clarifying their scope and giving authorities more time to conduct reviews.  The government further lowered the threshold for the screening of acquisitions in critical infrastructure and sensitive sectors in 2018, to 10 percent of voting rights of a German company. The amendment also added media companies to the list of sensitive sectors to which the lower threshold applies, to prevent foreign actors from engaging in disinformation.  In a prominent case in 2016, the German government withdrew its approval and announced a re-examination of the acquisition of German semi-conductor producer Aixtron by China’s Fujian Grand Chip Investment Fund based on national security concerns.

Other Investment Policy Reviews

The World Bank Group’s “Doing Business 2019” and Economist Intelligence Unit both provide additional information on Germany investment climate.  The American Chamber of Commerce in Germany publishes results of an annual survey of U.S. investors in Germany on business and investment sentiment (“AmCham Germany Transatlantic Business Barometer”).

Business Facilitation

Before engaging in commercial activities, companies and business operators must register in public directories, the two most significant of which are the commercial register (Handelsregister) and the trade office register (Gewerberegister).

Applications for registration at the commercial register, which is publically available under www.handelsregister.de  , are electronically filed in publicly certified form through a notary.  The commercial register provides information about all relevant relationships between merchants and commercial companies, including names of partners and managing directors, capital stock, liability limitations, and insolvency proceedings.  Registration costs vary depending on the size of the company.

Germany Trade and Invest (GTAI), the country’s economic development agency, can assist in the registration processes (https://www.gtai.de/GTAI/Navigation/EN/Invest/Investment-guide/Establishing-a-company/business-registration.html  ) and advise investors, including micro-, small-, and medium-sized enterprises (MSMEs), on how to obtain incentives.

In the EU, MSMEs are defined as follows:

  • Micro-enterprises:  less than 10 employees and less than €2 million annual turnover or less than €2 million in balance sheet total.
  • Small-enterprises:  less than 50 employees and less than €10 million annual turnover or less than €10 million in balance sheet total.
  • Medium-sized enterprises:  less than 250 employees and less than €50 million annual turnover or less than €43 million in balance sheet total.

Outward Investment

The Federal Government provides guarantees for investments by German-based companies in developing and emerging economies and countries in transition in order to insure them against political risks.  In order to receive guarantees, the investment must have adequate legal protection in the host country. The Federal Government does not insure against commercial risks.

2. Bilateral Investment Agreements and Taxation Treaties

Germany does not have a bilateral investment treaty (BIT) with the United States. However, a Friendship, Commerce and Navigation (FCN) treaty dating from 1956 contains many BIT-relevant provisions including national treatment, most-favored nation, free capital flows, and full protection and security.

Germany has bilateral investment treaties in force with 126 countries and territories.  Treaties with former sovereign entities (including Czechoslovakia, the Soviet Union, Sudan, and Yugoslavia) continue to apply in an additional seven cases.  These are indicated with an asterisk (*) and have not been taken into account in regard to the total number of treaties. Treaties are in force with the following states, territories, or former sovereign entities.  For a full list of treaties containing investment provisions that are currently in force, see the UNCTAD Navigator at http://investmentpolicyhub.unctad.org/IIA/CountryBits/78#iiaInnerMenu  .

Afghanistan; Albania; Algeria; Angola; Antigua and Barbuda; Argentina; Armenia; Azerbaijan; Bahrain; Bangladesh; Barbados; Belarus; Benin; Bosnia and Herzegovina; Botswana; Brunei; Bulgaria; Burkina Faso; Burundi; Cambodia; Cameroon; Cape Verde; Central African Republic; Chad; Chile; China (People’s Republic); Congo (Republic); Congo (Democratic Republic); Costa Rica; Croatia; Cuba; Czechoslovakia; Czech Republic*; Dominica; Egypt; El Salvador; Estonia; Eswatini; Ethiopia; Gabon; Georgia; Ghana; Greece; Guatemala; Guinea; Guyana; Haiti; Honduras; Hong Kong; Hungary; Iran; Ivory Coast; Jamaica; Jordan; Kazakhstan; Kenya; Republic of Korea; Kosovo*; Kuwait; Kyrgyzstan; Laos; Latvia; Lebanon; Lesotho; Liberia; Libya; Lithuania; Madagascar; Malaysia; Mali; Malta; Mauritania; Mauritius; Mexico; Moldova; Mongolia; Montenegro*; Morocco; Mozambique; Namibia; Nepal; Nicaragua; Niger; Nigeria; North Macedonia; Oman; Pakistan; Palestinian Territories; Panama; Papua New Guinea; Paraguay; Peru; Philippines; Poland; Portugal; Qatar; Romania; Russia*; Rwanda; Saudi Arabia; Senegal; Serbia*; Sierra Leone; Singapore; Slovak Republic*; Slovenia; Somalia; South Sudan*; Soviet Union; Sri Lanka; St. Lucia; St. Vincent and the Grenadines; Sudan; Syria; Tajikistan; Tanzania; Thailand; Togo; Trinidad & Tobago; Tunisia; Turkey; Turkmenistan; Uganda; Ukraine; United Arab Emirates; Uruguay; Uzbekistan; Venezuela; Vietnam; Yemen; Yugoslavia; Zambia; and Zimbabwe.

A BIT with Bolivia was terminated in May 2014, a BIT with South Africa was terminated in October 2014, BITs with India and Indonesia were terminated in June 2017, and a BIT with Ecuador was terminated in May 2018.  The current BIT with Poland will be terminated in October 2019.

Germany has ratified treaties with the following countries and territories that have not yet entered into force:

Country Signed Temporarily Applicable
Brazil 09/21/1995 No
Congo (Republic) 11/22/2010 *
Iraq 12/04/2010 No
Israel 06/24/1976 Yes
Pakistan 12/01/2009 *
Timor-Leste 08/10/2005 No
Panama* 01/25/2011 *
(*) Previous treaties apply

Bilateral Taxation Treaties:

Taxation of U.S. firms within Germany is governed by the “Convention for the Avoidance of Double Taxation with Respect to Taxes on Income.” This treaty has been in effect since 1989 and was extended in 1991 to the territory of the former German Democratic Republic. With respect to income taxes, both countries agreed to grant credit for their respective federal income taxes on taxes paid on profits by enterprises located in each other’s territory.  A Protocol of 2006 updates the existing tax treaty and includes several changes, including a zero-rate provision for subsidiary-parent dividends, a more restrictive limitation on benefits provision, and a mandatory binding arbitration provision. In 2013, Germany and the United States signed an agreement on legal and administrative cooperation and information exchange with regard to the U.S. Foreign Account Tax Compliance Act. (Full document at https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Internationales_
Steuerrecht/Staatenbezogene_Informationen/Laender_A_Z/Verein_Staaten/2013-10-15-USA-Abkommen-FATCA.html
 
).

As of January 2019, Germany had bilateral tax treaties with a total of 96 countries, including with the United States, and, regarding inheritance taxes, with 6 countries.  It has special bilateral treaties with respect to income and assets by shipping and aerospace companies with 10 countries and has treaties relating to the exchange of information and administrative assistance with 27 countries.  Germany has initiated and/or is renegotiating new income and wealth tax treaties with 64 countries, special bilateral treaties with respect to income and assets by shipping and aerospace companies with 2 countries, and information exchange and administrative assistance treaties with 7 countries.

3. Legal Regime

Transparency of the Regulatory System

Germany has transparent and effective laws and policies to promote competition, including antitrust laws.  The legal, regulatory and accounting systems are complex but transparent and consistent with international norms.

Formally, the public consultation by the federal government is regulated by the Joint Rules of Procedure, which specify that ministries must consult early and extensively with a range of stakeholders on all new legislative proposals.  In practice, laws and regulations in Germany are routinely published in draft, and public comments are solicited. According to the Joint Procedural Rules, ministries should consult the concerned industries’ associations (rather than single companies), consumer organizations, environmental, and other NGOs.  The consultation period generally takes two to eight weeks.

The German Institute for Standardization (DIN) is open to foreign members.

International Regulatory Considerations

As a member of the European Union, Germany must observe and implement directives and regulations adopted by the EU.  EU regulations are binding and enter into force as immediately applicable law. Directives, on the other hand, constitute a type of framework law that is to be implemented by the Member States in their respective legislative processes, which is regularly observed in Germany.

EU Member States must implement directives within a specified period of time.  Should a deadline not be met, the Member State may suffer the initiation of an infringement procedure, which could result in high fines.  Germany has a set of rules that prescribe how to break down any payment of fines devolving on the Federal Government and the federal states (Länder).  Both bear part of the costs depending on their responsibility within legislation and the respective part they played in non-compliance.

The federal states have a say over European affairs through the Bundesrat (upper chamber of parliament).  The Federal Government is required to instruct the Bundesrat at an early stage on all EU plans that are relevant for the federal states.

The federal government notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT) through the Federal Ministry of Economic Affairs and Energy.

Legal System and Judicial Independence

German law is both predictable and reliable.  Companies can effectively enforce property and contractual rights.  Germany’s well-established enforcement laws and official enforcement services ensure that investors can assert their rights.  German courts are fully available to foreign investors in an investment dispute.

The judicial system is independent, and the federal government does not interfere in the court system.  The legislature sets the systemic and structural parameters, while lawyers and civil law notaries use the law to shape and organize specific situations.  Judges are highly competent. International studies and empirical data have attested that Germany offers an efficient court system committed to due process and the rule of law.

In Germany, most important legal issues and matters are governed by comprehensive legislation in the form of statutes, codes and regulations.  Primary legislation in the area of business law includes:

  • the Civil Code (Bürgerliches Gesetzbuch, abbreviated as BGB), which contains general rules on the formation, performance and enforcement of contracts and on the basic types of contractual agreements for legal transactions between private entities;
  • the Commercial Code (Handelsgesetzbuch, abbreviated as HGB), which contains special rules concerning transactions among businesses and commercial partnerships;
  • the Private Limited Companies Act (GmbH-Gesetz) and the Public Limited Companies Act (Aktiengesetz), covering the two most common corporate structures in Germany – the ‘GmbH’ and the ‘Aktiengesellschaft’; and
  • the Act on Unfair Competition (Gesetz gegen den unlauteren Wettbewerb, abbreviated as UWG), which prohibits misleading advertising and unfair business practices.

Germany has specialized courts for administrative law, labor law, social law, and finance and tax law.  In 2019, the first German district court for civil matters (in Frankfurt) introduced the possibility to hear international trade disputes in English.  Other federal states are currently discussing plans to introduce these specialized chambers as well. The Federal Patent Court hears cases on patents, trademarks, and utility rights which are related to decisions by the German Patent and Trademarks Office.  Both the German Patent Office (Deutsches Patentamt) and the European Patent Office are headquartered in Munich.

Laws and Regulations on Foreign Direct Investment

The Federal Ministry for Economic Affairs and Energy may review acquisitions of domestic companies by foreign buyers in cases where investors seek to acquire at least 25 percent of the voting rights to assess whether these transactions pose a risk to the public order or national security of the Federal Republic of Germany.  In the case of acquisitions of critical infrastructure and companies in sensitive sectors, the threshold for triggering an investment review by the government is 10 percent. The Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance provide the legal basis for screening investments. To our knowledge, the Federal Ministry for Economic Affairs and Energy had not prohibited any acquisitions as of April 2019.

There is no requirement for investors to obtain approval for any acquisition, but they must notify the Federal Ministry for Economic Affairs and Energy if the target company operates critical infrastructure.  In that case, or if the company provides services related to critical infrastructure or is a media company, the threshold for initiating an investment review is the acquisition of at least 10 percent of voting rights.  The Federal Ministry for Economic Affairs and Energy may launch a review within three months after obtaining knowledge of the acquisition; the review must be concluded within four months after receipt of the full set of relevant documents.  An investor may also request a binding certificate of non-objection from the Federal Ministry for Economic Affairs and Energy in advance of the planned acquisition to obtain legal certainty at an early stage. If the Federal Ministry for Economic Affairs and Energy does not open an in-depth review within two months from the receipt of the request, the certificate shall be deemed as granted.

Special rules apply for the acquisition of companies that operate in sensitive security areas, including defense and IT security.  In contrast to the cross-sectoral rules, the sensitive acquisitions must be notified in written form including basic information of the planned acquisition, the buyer, the domestic company that is subject of the acquisition and the respective fields of business.  The Federal Ministry for Economic Affairs and Energy may open a formal review procedure within three months after receiving notification, or the acquisition shall be deemed as approved. If a review procedure is opened, the buyer is required to submit further documents.  The acquisition may be restricted or prohibited within three months after the full set of documents has been submitted.

The German government amended domestic investment screening provisions, effective June 2017, clarifying the scope for review and giving the government more time to conduct reviews, in reaction to an increasing number of acquisitions of German companies by foreign investors, particularly from China.  The amended provisions provide a clearer definition of sectors in which foreign investment can pose a “threat to public order and security,” including operators of critical infrastructure, developers of software to run critical infrastructure, telecommunications operators or companies involved in telecom surveillance, cloud computing network operators and service providers, and telematics companies.  All non-EU entities are now required to notify Federal Ministry for Economic Affairs and Energy in writing of any acquisition of or significant investment in a German company active in the above sectors. The new rules also extend the time to assess a cross-sector foreign investment from two to four months, and for investments in sensitive sectors, from one to three months, and introduce the possibility of retroactively initiating assessments for a period of five years after the conclusion of an acquisition. Indirect acquisitions such as those through a Germany- or EU-based affiliate company are now also explicitly subject to the new rules.  In 2018, the government further lowered the threshold for the screening of investments, allowing authorities to screen acquisitions by foreign entities of at least 10 percent of voting rights of German companies that operate critical infrastructure (down from 25 percent), as well as companies providing services related to critical infrastructure. The amendment also added media companies to the list of sensitive businesses to which the lower threshold applies, to prevent foreign actors to engage in disinformation.

Any decisions resulting from review procedures are subject to judicial review by the administrative courts.  The German Economic Development Agency (GTAI) provides extensive information for investors, including about the legal framework, labor-related issues and incentive programs, on their website: http://www.gtai.de/GTAI/Navigation/EN/Invest/investment-guide.html.

Competition and Anti-Trust Laws

German government ensures competition on a level playing field on the basis of two main legal codes:

The Law against Limiting Competition is the legal basis for the fight against cartels, merger control, and monitoring abuse.  State and Federal cartel authorities are in charge of enforcing anti-trust law. In exceptional cases, the Minister for Economics and Energy can provide a permit under specific conditions.  The last case was a merger of two retailers (Kaisers/Tengelmann and Edeka) to which a ministerial permit was granted in March 2016. A July 2017 amendment to the Cartel Law expanded the reach of the Federal Cartel Authority (FCA) to include internet and data-based business models; as a result, the FCA investigated Facebook’s data collection practices regarding potential abuse of market power.  A February 2019 decision affirming abuse by the FCA has been challenged by Facebook at a regional court.  In November 2018, the FCA initiated an investigation of Amazon over potential abuse of market power; a decision was pending as of April 2019.

The Law against Unfair Competition (amended last in 2016) can be invoked in regional courts.

Expropriation and Compensation

German law provides that private property can be expropriated for public purposes only in a non-discriminatory manner and in accordance with established principles of constitutional and international law.  There is due process and transparency of purpose, and investors and lenders to expropriated entities receive prompt, adequate, and effective compensation.

The Berlin state government is currently reviewing a petition for a referendum submitted by a citizens’ initiative which calls for the expropriation of residential apartments owned by large corporations.  At least one party in the governing coalition officially supports the proposal, whereas the others remain undecided. Certain long-running expropriation cases date back to the Nazi and communist regimes. During the 2008-9 global financial crisis, the parliament adopted a law allowing emergency expropriation if the insolvency of a bank would endanger the financial system, but the measure expired without having been used.

Dispute Settlement

ICSID Convention and New York Convention

Germany is a member of both the International Center for the Settlement of Investment Disputes (ICSID) and New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning local courts must enforce international arbitration awards under certain conditions.

Investor-State Dispute Settlement

Investment disputes involving U.S. or other foreign investors in Germany are extremely rare. According to the UNCTAD database of treaty-based investor dispute settlement cases, Germany has been challenged a handful of times, none of which involved U.S. investors.  

International Commercial Arbitration and Foreign Courts

Germany has a domestic arbitration body called the German Institution for Dispute Settlement. ”Book 10” of the German Code of Civil Procedure addresses arbitration proceedings. The International Chamber of Commerce has an office in Berlin. In addition, chambers of commerce and industry offer arbitration services.

Bankruptcy Regulations

German insolvency law, as enshrined in the Insolvency Code, supports and promotes restructuring.  If a business or the owner of a business becomes insolvent, or a business is over-indebted, insolvency proceedings can be initiated by filing for insolvency; legal persons are obliged to do so.  Insolvency itself is not a crime, but deliberately late filing for insolvency is.

Under a regular insolvency procedure, the insolvent business is generally broken up in order to release as much money as possible through the sale of individual items or rights or parts of the company.  Proceeds can then be paid out to the creditors in the insolvency proceedings. The distribution of the monies to the creditors follows the detailed instructions of the Insolvency Code.

Equal treatment of creditors is enshrined in the Insolvency Code.  Some creditors have the right to claim property back. Post-adjudication preferred creditors are served out of insolvency assets during the insolvency procedure.  Ordinary creditors are served on the basis of quotas from the remaining insolvency assets. Secondary creditors, including shareholder loans, are only served if insolvency assets remain after all others have been served.  Germany ranks fourth in the global ranking of “Resolving Insolvency” in the World Bank’s Doing Business Report, with a recovery rate of 80.4 cents on the dollar.

4. Industrial Policies

Investment Incentives

Federal and state investment incentives – including investment grants, labor-related and R&D incentives, public loans, and public guarantees – are available to domestic and foreign investors alike.  Different incentives can be combined. In general, foreign and German investors have to meet the same criteria for eligibility.

Germany Trade & Invest, Germany’s federal economic development agency, provides comprehensive information on incentives in English at:  www.gtai.com/incentives-programs  .

Foreign Trade Zones/Free Ports/Trade Facilitation

There are currently two free ports in Germany operating under EU law:  Bremerhaven and Cuxhaven. The duty-free zones within the ports also permit value-added processing and manufacturing for EU-external markets, albeit with certain requirements.  All are open to both domestic and foreign entities. In recent years, falling tariffs and the progressive enlargement of the EU have eroded much of the utility and attractiveness of duty-free zones.

Performance and Data Localization Requirements

In general, there are no requirements for local sourcing, export percentage, or local or national ownership.  In some cases, however, there may be performance requirements tied to the incentive, such as creation of jobs or maintaining a certain level of employment for a prescribed length of time.

U.S. companies can generally obtain the visas and work permits required to do business in Germany.  U.S. Citizens may apply for work and residential permits from within Germany. Germany Trade & Invest offers detailed information online at www.gtai.com/coming-to-germany  .

There are no localization requirements for data storage in Germany.  However, in recent years German and European cloud providers have sought to market the domestic location of their servers as a competitive advantage.

5. Protection of Property Rights

Real Property

The German Government adheres to a policy of national treatment, which considers property owned by foreigners as fully protected under German law.  In Germany, mortgages approvals are based on recognized and reliable collateral. Secured interests in property, both chattel and real, are recognized and enforced.  According to the World Bank’s Doing Business Report, it takes an average of 52 days to register property in Germany.

The German Land Register Act dates back to 1897 and was last amended in 2017.  The land register mirrors private real property rights and provides information on the legal relationship of the estate.  It documents the owner, rights of third persons, liabilities and restrictions and how these rights relate to each other. Any change in property of real estate must be registered in the land registry to make the contract effective.  Land titles are now maintained in an electronic database and can be consulted by persons with a legitimate interest.

Intellectual Property Rights

Germany has a robust regime to protect intellectual property (IP) rights.  Legal structures are strong and enforcement is good. Nonetheless, internet piracy and counterfeit goods remain an issue, and specific infringing websites are included in the 2018 Notorious Markets List.  Germany has been a member of the World Intellectual Property Organization (WIPO) since 1970. The German Central Customs Authority annually publishes statistics on customs seizures of counterfeit and pirated goods.  The statistics for 2018 can be found under: https://www.zoll.de/SharedDocs/Broschueren/DE/Die-Zollverwaltung/jahresstatistik_2018.html?nn=287024  .  

Germany is also a party to the major international intellectual property protection agreements: the Bern Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, the Universal Copyright Convention, the Geneva Phonograms Convention, the Patent Cooperation Treaty, the Brussels Satellite Convention, the Treaty of Rome on Neighboring Rights, and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).  Many of the latest developments in German IP law are derived from European legislation with the objective to make applications less burdensome and allow for European IP protection.

The following types of protection are available:

Copyrights:  National treatment is also granted to foreign copyright holders, including remuneration for private recordings.  Under the World Trade Organization (WTO) TRIPS Agreement, Germany also grants legal protection for U.S. performing artists against the commercial distribution of unauthorized live recordings in Germany.  Germany signed the World Intellectual Property Organization (WIPO)_Copyright Treaty and ratified it in 2003. Most rights holder organizations regard German authorities’ enforcement of intellectual property protections as effective.  In 2008, Germany implemented the EU enforcement directive with a national bill, thereby strengthening the privileges of rights holders and allowing for improved enforcement action.

Trademarks:  Foreigners may register trademarks subject to exactly the same terms as German nationals at the German Patent and Trade Mark Office.  Protection is valid for a period of ten years and can be extended in ten-year periods.

Patents:  Foreigners may register patents subject to the same terms as German nationals at the German Patent and Trade Mark Office.  Patents are granted for technical inventions which are new, involve an inventive step, and are industrially applicable. However, applicants having neither a domicile nor an establishment in Germany must appoint a patent attorney in Germany as a representative filing the patent application.  The documents must be submitted in German or with a translation into German. The duration of a patent is 20 years, beginning on the day following the invention patent application. Patent applicants can request accelerated examination when filing the application provided that the patent application was previously filed at the U.S. patent authority and that at least one claim had been determined to be allowable. There are a number of differences in patent law that a qualified patent attorney can explain to U.S. patent applicants.

Trade Secrets: Both technical and commercial trade secrets are protected in Germany by the Law Against Unfair Competition.  According to the law, the illegal passing of trade secrets to third parties – including the attempt to do so – for reasons related to competition, self-interest, the benefit of a third party, or with the intent to harm the business owner, is punishable with prison sentences of up to three years or a monetary fine.  In severe cases, including commercial-scale theft and those that involve passing trade secrets to foreign countries, courts can impose prison sentences of up to five years or a monetary fine.

U.S. grants of IP rights are valid in the United States only.  U.S. IPR owners should note that the EU operates on a “first-to-file” principle and not on the “first-inventor-to-file” principle, used in the United States.  It is possible to register for trademark and design protection nationally in Germany or with the European Union Trade Mark and/or Registered Community Design. These provide protection for industrial design or trademark in the entire EU market.  Both national trademarks and European Community Trade Marks (CTMs) can be applied for from the U.S. Patent and Trademark Office as part of an international trademark registration system (http://www.uspto.gov  ), or the applicant may apply directly for those trademarks from the European Union Intellectual Property Office (EUIPO) at https://euipo.europa.eu/ohimportal/en/home  .

For patents, the situation is slightly different but protection can still be gained via the U.S. Patent and Trademark Office (USPTO).  Although there is not yet a single EU-wide patent system, the European Patent Office (EPO) does grant individual European patents for the contracting states to the European Patent Convention (EPC), which entered into force in 1977.  The 38 contracting states include the entire EU membership and several additional European countries. As an alternative to filing patents for European protection with the USPTO, the EPO provides a convenient single point to file a patent in as many of these countries as an applicant would like: https://www.epo.org/index.html.

In addition, German law offers the possibility to register designs and utility models.

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/.

Country resources:

For additional information about how to protect intellectual property in Germany, please see Germany Trade & Invest website at http://www.gtai.de/GTAI/Navigation/EN/Invest/Investment-guide/The-legal-framework/patents-licensing-trade-marks.html  .

Statistics on the seizure of counterfeit goods are available through the German Customs Authority (Zoll):

https://www.zoll.de/SharedDocs/Broschueren/DE/Die-Zollverwaltung/jahresstatistik_2018.html?nn=287024  

Investors can identify IP lawyers in AmCham Germany’s Online Services Directory: https://www.amcham.de/services/overview/member-services/address-services-directory/   (under “legal references” select “intellectual property.”)

Businesses can also join the Anti-counterfeiting Association (APM)

http://www.markenpiraterie-apm.de/index.php?article_id=1&clang=1   or the Association for the  Enforcement of Copyrights (GVU) http://www.gvu.de  .

6. Financial Sector

Capital Markets and Portfolio Investment

As an EU member state with a well-developed financial sector, Germany welcomes foreign portfolio investment and has an effective regulatory system.  Germany has a very open economy, routinely ranking among the top countries in the world for exports and inward and outward foreign direct investment.  As a member of the Eurozone, Germany does not have sole national authority over international payments, which are a shared task of the Eurosystem, comprised of the European Central Bank and the national central banks of the 19 member states that are part of the eurozone, including the German Central Bank (Bundesbank).  A European framework for screening of foreign investments, which entered into force in April 2019, provides a basis under European law to restrict capital movements into Germany. Global investors see Germany as a safe place to invest, as the real economy continues to outperform other EU countries and German sovereign bonds retain their “safe haven” status.

Listed companies and market participants in Germany must comply with the Securities Trading Act, which bans insider trading and market manipulation.  Compliance is monitored by the Federal Financial Supervisory Authority (BaFin) while oversight of stock exchanges is the responsibility of the state governments in Germany (with BaFin taking on any international responsibility).  Investment fund management in Germany is regulated by the Capital Investment Code (KAGB), which entered into force on July 22, 2013. The KAGB represents the implementation of additional financial market regulatory reforms, committed to in the aftermath of the global financial crisis.  The law went beyond the minimum requirements of the relevant EU directives and represents a comprehensive overhaul of all existing investment-related regulations in Germany with the aim of creating a system of rules to protect investors while also maintaining systemic financial stability.

Money and Banking System

Although corporate financing via capital markets is on the rise, Germany’s financial system remains mostly bank-based.  Bank loans are still the predominant form of funding for firms, particularly the small- and medium-sized enterprises that comprise Germany’s “Mittelstand,” or mid-sized industrial market leaders.  Credit is available at market-determined rates to both domestic and foreign investors, and a variety of credit instruments are available. Legal, regulatory and accounting systems are generally transparent and consistent with international banking norms.  Germany has a universal banking system regulated by federal authorities, and there have been no reports of a shortage of credit in the German economy. After 2010, Germany banned some forms of speculative trading, most importantly “naked short selling.” In 2013, Germany passed a law requiring banks to separate riskier activities such as proprietary trading into a legally separate, fully capitalized unit that has no guarantee or access to financing from the deposit-taking part of the bank.

Germany supports a worldwide financial transaction tax and is pursuing the introduction of such a tax along with several other Eurozone countries.

Germany has a modern banking sector but is considered “over-banked” resulting in low profit margins and a need for consolidation.  The country’s “three-pillar” banking system consists of private commercial banks, cooperative banks, and public banks (savings banks/Sparkassen and the regional state-owned banks/Landesbanken).  The private bank sector is dominated by Deutsche Bank and Commerzbank, with balance sheets of €1.35 trillion and €462 billion respectively (2018 figures). Commerzbank received €18 billion in financial assistance from the federal government in 2009, for which the government took a 25 percent stake in the bank (now reduced to 15.6 percent).  Deutsche Bank and Commerzbank confirmed in March 2019 that they are in merger talks, with the outcome unclear as of April 2019. A merger of the two institutions would create the Eurozone’s third-largest lender after HSBC and BNP Paribas with roughly €1.9 trillion in assets (USD 2.04 trillion), about 150,000 employees, about one-fifth of the private customers in Germany, but a market value of just €25 billion (USD 28.4 billion).  Germany’s regional state-owned banks (Landesbanken) were among the hardest hit by the global financial crisis and were forced to reduce their business activities but have lately stabilized again.

Foreign Exchange and Remittances

Foreign Exchange

As a member of the Eurozone, Germany uses the euro as its currency, along with 18 other EU countries.  The Eurozone has no restrictions on the transfer or conversion of its currency, and the exchange rate is freely determined in the foreign exchange market.

German authorities respect the independence of the European Central Bank (ECB), and thus have no scope to manipulate the bloc’s exchange rate.  In a February 2019 report, the European Commission (EC) concluded Germany’s persistently high current account surplus – the world’s largest in 2018 at USD 294 billion (7.8 percent of GDP) – “has slightly narrowed since 2016 and is expected to gradually decline due to a pick-up in domestic demand in the coming years whilst remaining at historically high levels over the forecast horizon.”  While low commodity prices and the weak euro exchange rate explain some of the surplus’ increase in 2015-2016, the persistence of Germany’s surplus is a matter of international controversy. German policymakers view the large surplus is the result of market forces rather than active government policies, while the EC and IMF have called on authorities to rebalance towards domestic sources of economic growth by expanding public investment, using available fiscal space, and other policy choices that boost domestic demand.

Germany is a member of the Financial Action Task Force (FATF) and is committed to further strengthening its national system for the prevention, detection and suppression of money laundering and terrorist financing.  In 2017, Germany’s Financial Intelligence Unit (FIU) was restructured and given more staff. It was transferred to the General Customs Directorate in the Federal Ministry of Finance. At the same time, its tasks and competencies were redefined taking into account the provisions of the Fourth EU Money Laundering Directive.  One focus is now on operational and strategic analysis. On June 26, 2017, legislation to implement the Fourth EU Money Laundering Directive and the European Funds Transfers Regulation (Geldtransfer-Verordnung) entered into force.  (The Act amends the German Money Laundering Act (Geldwäschegesetz – GwG) and a number of further laws).

There is no difficulty in obtaining foreign exchange.

Remittance Policies

There are no restrictions or delays on investment remittances or the inflow or outflow of profits.

Germany is the sixth-largest remittance-sending country worldwide.  Migrants in Germany posted USD 22.09 billion (0.6 percent of GDP) abroad in 2018 (World Bank, Bilateral Remittances Matrix 2018).  The most important receiving states for remittances from Germany are EU neighbors such as France, Poland, and Italy. Around USD 8 billion was sent to developing countries, out of which Lebanon, Vietnam, China, Nigeria and Serbia were the biggest receivers.  Remittance flows into Germany amounted to around USD 17.36 billion in 2017, approximately 0.4 percent of Germany’s GDP.

The issue of remittances played a role during the German G20 Presidency.  During its presidency, Germany passed an updated version of its “G20 National Remittance Plan.”  The document states that Germany’s focus will remain on “consumer protection, linking remittances to financial inclusion, creating enabling regulatory frameworks and generating research and data on diaspora and remittances dynamics.” The 2017 “G20 National Remittance Plan” can be found at https://www.gpfi.org/sites/default/files/documents/2017 percent20G20 percent20Financial percent20Inclusion percent20Action percent20Plan percent20final.pdf    

Sovereign Wealth Funds

The German government does not currently have a sovereign wealth fund or an asset management bureau.  Following German reunification, the federal government set up a public agency to manage the privatization of assets held by the former East Germany.  In 2000, the agency, known as TLG Immobilien, underwent a strategic reorientation from a privatization-focused agency to a profit-focused active portfolio manager of commercial and residential property.  In 2012, the federal government sold TLG Immobilien to private investors.

7. State-Owned Enterprises

The formal term for state-owned enterprises (SOEs) in Germany translates as “public funds, institutions, or companies,” and refers to entities whose budget and administration are separate from those of the government, but in which the government has more than 50 percent of the capital shares or voting rights.  Appropriations for SOEs are included in public budgets, and SOEs can take two forms, either public or private law entities. Public law entities are recognized as legal personalities whose goal, tasks, and organization are established and defined via specific acts of legislation, with the best-known example being the publicly-owned promotional bank KfW (Kreditanstalt für Wiederaufbau).  The government can also resort to ownership or participation in an entity governed by private law if the following conditions are met: doing so fulfills an important state interest, there is no better or more economical alternative, the financial responsibility of the federal government is limited, the government has appropriate supervisory influence, yearly reports are published, and such control is approved by the Federal Finance Ministry and the ministry responsible for the subject matter.

Government oversight of SOEs is decentralized and handled by the ministry with the appropriate technical area of expertise.  The primary goal of such involvement is promoting public interests rather than generating profits. The government is required to close its ownership stake in a private entity if tasks change or technological progress provides more effective alternatives, though certain areas, particularly science and culture, remain permanent core government obligations.  German SOEs are subject to the same taxes and the same value added tax rebate policies as their private sector competitors. There are no laws or rules that seek to ensure a primary or leading role for SOEs in certain sectors or industries. Private enterprises have the same access to financing as SOEs, including access to state-owned banks such as KfW.

The Federal Statistics Office maintains a database of SOEs from all three levels of government (federal, state, and municipal) listing a total of 16,833 entities for 2016, or 0.5 percent of the total 3.5 million companies in Germany.  SOEs in 2016 had €547 billion in revenue and €529 billion in expenditures. Almost 40 percent of SOEs’ revenue was generated by water and energy suppliers, 13 percent by health and social services, and 12 percent by transportation-related entities.  Measured by number of companies rather than size, 88 percent of SOEs are owned by municipalities, 10 percent are owned by Germany’s 16 states, and 2 percent are owned by the federal government.

The Federal Finance Ministry is required to publish a detailed annual report on public funds, institutions, and companies in which the federal government has direct participation (including a minority share), or an indirect participation greater than 25 percent and with a nominal capital share worth more than €50,000.  The federal government held a direct participation in 106 companies and an indirect participation in 469 companies at the end of 2016, most prominently Deutsche Bahn (100 percent share), Deutsche Telekom (32 percent share), and Deutsche Post (21 percent share). Federal government ownership is concentrated in the areas of science, infrastructure, administration/increasing efficiency, economic development, defense, development policy, culture.  As the result of federal financial assistance packages from the federally-controlled Financial Market Stability Fund during the global financial crisis of 2008-9, the federal government still has a partial stake in several commercial banks, including a 15.6 percent share in Commerzbank, Germany’s second largest commercial bank. The 2017 annual report (with 2016 data) can be found here:

https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Bundesvermoegen/
Privatisierungs_und_Beteiligungspolitik/Beteiligungspolitik/Beteiligungsberichte/beteiligungsbericht-des-bundes-2017.pdf?__blob=publicationFile&v=7
 

Publicly-owned banks also constitute one of the three pillars of Germany’s banking system (cooperative and commercial banks are the other two).  Germany’s savings banks are mainly owned by the municipalities, while the so-called Landesbanken are typically owned by regional savings bank associations and the state governments.  There are also many state-owned promotional/development banks which have taken on larger governmental roles in financing infrastructure. This increased role removes expenditures from public budgets, particularly helpful in light of Germany’s balanced budget rules, which go into effect for the states in 2020.

A longstanding, prominent case of a partially state-owned enterprise is automotive manufacturer Volkswagen, in which the state of Lower Saxony owns the fourth-largest share in the company at 12.7 percent share, but controls 20 percent of the voting rights.  The so-called Volkswagen Law, passed in 1960, limited individual shareholder’s voting rights in Volkswagen to a maximum of 20 percent regardless of the actual number of shares owned, so that Lower Saxony could veto any takeover attempts. In 2005, the European Commission successfully sued Germany at the European Court of Justice (ECJ), claiming the law impeded the free flow of capital.  The law was subsequently amended to remove the cap on voting rights, but Lower Saxony’s 20 percent share of voting rights was maintained, preserving its ability to block hostile takeovers.

The wholly federal government-owned railway company, Deutsche Bahn, was cleared by the European Commission in 2013 of allegations of abusing its dominant market position after Deutsche Bahn implemented a new, competitive pricing system.  A similar case brought by the German Federal Cartel Office against Deutsche Bahn was terminated in May 2016 after the company implemented a new pricing system.

Privatization Program

Germany does not have any privatization programs at this time.  German authorities treat foreigners equally in privatizations.

8. Responsible Business Conduct

In December 2016, the Federal Government passed the National Action Plan for Business and Human Rights (NAP).  The action plan aims to apply the UN Guiding Principles for Business and Human Rights for the activities of German companies nationally as well as globally in their value and supply chains.  The 2018 coalition agreement for the 19th legislative period between the governing Christian Democratic parties, CDU/CSU, and the Social Democratic Party of Germany (SPD) states its commitment to the action plan, including the principles on public procurement.  It further states that, if the NAP 2020’s effective and comprehensive review comes to the conclusion that the voluntary due diligence approach of enterprises is insufficient, the government will initiate legislation for an EU-wide regulation. The government is currently reviewing and evaluating the German companies’ voluntary measures to respect human rights in their business operations under the NAP.  

Germany adheres to the OECD Guidelines for Multinational Enterprises; the National Contact Point (NCP) is housed in the Federal Ministry of Economic Affairs and Energy.  The NCP is supported by an advisory board composed of several ministries, business organizations, trade unions, and NGOs. This working group usually meets once a year to discuss all Guidelines-related issues.  The German NCP can be contacted through the Ministry’s website: https://www.bmwi.de/Redaktion/EN/Textsammlungen/Foreign-Trade/national-contact-point-ncp.html  .

There is general awareness of environmental, social, and governance issues among both producers and consumers in Germany, and surveys suggest that consumers increasingly care about the ecological and social impacts of the products they purchase.  In order to encourage businesses to factor environmental, social, and governance issues into their decision-making, the government provides information online and in hard copy. The federal government promotes corporate social responsibility (CSR) through awards and prizes, business fairs, and reports and newsletters.  The government also set up so called “sector dialogues” to connect companies and facilitate the exchange of best practices, and offers practice days to help nationally as well as internationally operating small- and medium-sized companies discern and implement their entrepreneurial due diligence under the NAP. To this end it has created a website on CSR in Germany (http://www.csr-in-deutschland.de/EN/Home/home.html   in English). The German government maintains and enforces domestic laws with respect to labor and employment rights, consumer protections, and environmental protections.  The German government does not waive labor and environmental laws to attract investment.

On the business side, the American Chamber of Commerce in Germany (AmCham Germany) is active in promoting standards of ecological, economic, and social responsibility and sustainability within their members’ entrepreneurial actions in keeping with the UN Sustainable Development Goals, adopted in 2015.  AmCham Germany issues publications on selected member companies’ approaches to CSR. Its Corporate Responsibility Committee serves as a platform to exchange best practices, identify trends, and discuss regulatory initiatives. Other business initiatives, platforms, and networks on sustainable corporate conduct and CSR exist.  In addition, Germany’s four leading business organizations regularly provide information on a common CSR internet portal to promote and illustrate companies’ engagement on CSR: www.csrgermany.de  .

Social reporting is voluntary, but publicly listed companies frequently include information on their CSR policies in annual shareholder reports and on their websites.

Civil society groups that work on CSR include 3p Consortium for Sustainable Management, Amnesty International Germany, Bund für Umwelt und Naturschutz Deutschland e. V. (BUND), CorA Corporate Accountability – Netzwerk Unternehmensverantwortung, Forest Stewardship Council (FSC), Germanwatch, Greenpeace Germany, Naturschutzbund Deutschland (NABU), Sneep (Studentisches Netzwerk zu Wirtschafts- und Unternehmensethik), Stiftung Warentest, Südwind – Institut für Ökonomie und Ökumene, TransFair – Verein zur Förderung des Fairen Handels mit der „Dritten Welt“ e. V., Transparency International, Verbraucherzentrale Bundesverband e.V., Bundesverband Die Verbraucher Initiative e.V., and the World Wide Fund for Nature (WWF, known as the „World Wildlife Fund“ in the United States).

9. Corruption

Among industrialized countries, Germany ranks 11th out of 180, according to Transparency International’s 2018 Corruption Perceptions Index.  Some sectors including the automotive industry, construction sector, and public contracting, exhibit political influence and party finance remains only partially transparent.  Nevertheless, U.S. firms have not identified corruption as an impediment to investment in Germany. Germany is a signatory of the OECD Anti-Bribery Convention and a participating member of the OECD Working Group on Bribery.

Over the last two decades, Germany has increased penalties for the bribery of German officials, corrupt practices between companies, and price-fixing by companies competing for public contracts.  It has also strengthened anti-corruption provisions on financial support extended by the official export credit agency and has tightened the rules for public tenders. Government officials are forbidden from accepting gifts linked to their jobs.  Most state governments and local authorities have contact points for whistle-blowing and provisions for rotating personnel in areas prone to corruption. There are serious penalties for bribing officials and price fixing by companies competing for public contracts.

According to the Federal Criminal Office, in 2017, 63 percent of all corruption cases were directed towards the public administration (up from 49 percent in 2016), 22 percent towards the business sector (down from 30 percent in 2016), 12 percent towards law enforcement and judicial authorities (down from 18 percent in 2016), and 3 percent to political officials (same as in 2016).

A prominent corruption case concerns the “BER” Berlin Airport construction project. Proceedings were opened in October 2015 against a manager of the airport operating company. In October 2016, the Cottbus district court sentenced the manager to 3.5 years in prison and a fine of €150,000 (USD 160,000) on the grounds of corruption.  Two leading employees of a technical company working on electricity, heating, and sanitary equipment received suspended jail sentences.

Parliamentarians are subject to financial disclosure laws that require them to publish earnings from outside employment.  Disclosures are available to the public via the Bundestag website (next to the parliamentarians’ biographies) and in the Official Handbook of the Bundestag. Penalties for noncompliance can range from an administrative fine to as much as half of a parliamentarian’s annual salary.

Donations to political parties are legally permitted.  However, if they exceed €50,000, they must be reported to the President of the Bundestag.  Donations of €10,000 or more must be included in the party’s annual accountability report to the President of the Bundestag.

State prosecutors are generally responsible for investigating corruption cases, but not all state governments have prosecutors specializing in corruption.  Germany has successfully prosecuted hundreds of domestic corruption cases over the years, including large scale cases against major companies.

Media reports in recent years about bribery investigations against Siemens, Daimler, Deutsche Telekom, and Ferrostaal increased awareness of the problem of corruption.  As a result, an increasing number of listed companies and multinationals have expanded their compliance departments, tightened internal codes of conduct, established points of conducts, and offered more ethics training to employees.

The Federation of Germany Industries (BDI), the Association of German Chamber of Commerce and Industry (DIHK) and the International Chamber of Commerce (ICC) provide guidelines in paper and electronic format on how to prevent corruption in an effort to convince all including small- and medium- sized companies to catch up.  In addition, BDI provides model texts if companies with two different sets of compliance codes want to do business with each other.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Germany was a signatory to the UN Anti-Corruption Convention in 2003.  The Bundestag ratified the Convention in November 2014.

Germany adheres to the OECD Anti-Bribery Convention which criminalizes bribery of foreign public officials by German citizens and firms.  The necessary tax reform legislation ending the tax write-off for bribes in Germany and abroad became law in 1999. Germany actively enforces the convention and is increasingly better managing the risk of transnational corruption.

Germany participates in the relevant EU anti-corruption measures and signed two EU conventions against corruption.  However, while Germany ratified the Council of Europe Criminal Law Convention on Corruption in 2017, it has not yet ratified the Civil Law Convention on Corruption.

Resources to Report Corruption

There is no central government anti-corruption agency in Germany.

Contact at “watchdog” organization:

Prof. Dr. Edda Muller, Chair
Transparency International Germany
Alte Schonhauser Str. 44, 10119 Berlin
+49 30 549 898 0
office@transparency.de

The Federal Criminal Office publishes an annual report: “Lagebild Korruption” – the latest one covers 2017.

https://www.bka.de/SharedDocs/Downloads/DE/Publikationen/JahresberichteUndLagebilder/
Korruption/korruptionBundeslagebild2017.pdf?__blob=publicationFile&v=6 10
 

10. Political and Security Environment

Political acts of violence against either foreign or domestic business enterprises are extremely rare.  Isolated cases of violence directed at certain minorities and asylum seekers have not targeted U.S. investments or investors.

11. Labor Policies and Practices

The German labor force is generally highly skilled, well-educated, and productive.  Employment in Germany has continued to rise for the thirteenth consecutive year and reached an all-time high of 44.8 million in 2018, an increase of 562,000 (or 1.3 percent) from 2017—the highest level since German reunification in 1990.

Simultaneously, unemployment has fallen by more than half since 2005, and reached in 2018 the lowest average annual value since German reunification.  In 2018, around 2.34 million people were registered as unemployed, corresponding to an unemployment rate of 5.2 percent, according to the Germany Federal Employment Agency.  Using internationally comparable data from the European Union’s statistical office Eurostat, Germany had an average annual unemployment rate of 3.4 percent in 2018, the second lowest rate in the European Union.  All employees are by law covered by the federal unemployment insurance that compensates for the lack of income for up to 24 months.

Germany’s national youth unemployment rate was 6.2 percent in 2018, the lowest in the EU.  The German vocational training system has gained international interest as a key contributor to Germany’s highly skilled workforce and its sustainably low youth unemployment rate. Germany’s so-called “dual vocational training,” a combination of theoretical courses taught at schools and practical application in the workplace, teaches and develops many of the skills employers need.  Each year, there are more than 500,000 apprenticeship positions available in more than 340 recognized training professions, in all sectors of the economy and public administration. Approximately 50 percent of students choose to start an apprenticeship. The government is promoting apprenticeship opportunities, in partnership with industry, through the “National Pact to Promote Training and Young Skilled Workers.”

An element of growing concern for German business is the aging and shrinking of the population, which will result in labor shortages in the future.  Official forecasts at the behest of the Federal Ministry of Labor and Social Affairs predict that the current working age population will shrink by almost 3 million between 2010 and 2030, resulting in an overall shortage of workforce and skilled labor.  Labor bottlenecks already constrain activity in many industries, occupations, and regions. According to the Federal Employment Agency, doctors; medical and geriatric nurses; mechanical, automotive, and electrical engineers; and IT professionals are in particular short supply.  The government has begun to enhance its efforts to ensure an adequate labor supply by improving programs to integrate women, elderly, young people, and foreign nationals into the labor market. The government has also facilitated the immigration of qualified workers.

Labor Relations

Germans consider the cooperation between labor unions and employer associations to be a fundamental principle of their social market economy and believe this has contributed to the country’s resilience during the economic and financial crisis.  Insofar as job security for members is a core objective for German labor unions, unions often show restraint in collective bargaining in weak economic times and often can negotiate higher wages in strong economic conditions. According to the Institute of Economic and Social Research (WSI), the number of workdays lost to labor actions increased significantly to 1 million in 2018, compared to 238,000 in 2017.  WSI assesses this unusual increase was mostly due to the labor conflict in the metal industry, which resulted in a large number of warning strikes at various companies and plants. However, in an international comparison, Germany is in the lower midrange with regards to strike numbers and intensity. All workers have the right to strike, except for civil servants (including teachers and police) and staff in sensitive or essential positions, such as members of the armed forces.

Germany’s constitution, federal legislation, and government regulations contain provisions designed to protect the right of employees to form and join independent unions of their choice. The overwhelming majority of unionized workers are members of one of the eight largest unions — largely grouped by industry or service sector — which are affiliates of the German Trade Union Confederation (Deutscher Gewerkschaftsbund, DGB).  Several smaller unions exist outside the DGB. Overall trade union membership has, however, been in decline over the last several years. In 2016, about 18.5 percent of the workforce and 26 percent of the whole population belonged to unions. Since peaking at around 12 million members shortly after German reunification, total DGB union membership has dropped to 5.9 million, IG Metall being the largest German labor union with 2.3 million members, followed by the influential service sector union Ver.di (1.9 million members).

The constitution and enabling legislation protect the right to collective bargaining, and agreements are legally binding to the parties.  In 2017, over three quarters (78 percent) of non-self-employed workers were directly or indirectly covered by a collective wage agreement, 59 percent of the labor force in the western part of the country and approximately 47 percent in the East.  On average, collective bargaining agreements in Germany were valid for 25 months in 2017.

By law, workers can elect a works council in any private company employing at least five people.  The rights of the works council include the right to be informed, to be consulted, and to participate in company decisions.  Works councils often help labor and management to settle problems before they become disputes and disrupt work. In addition, “co-determination” laws give the workforce in medium-sized or large companies (corporations, limited liability companies, partnerships limited by shares, co-operatives, and mutual insurance companies) significant voting representation on the firms’ supervisory boards.  This co-determination in the supervisory board extends to all company activities.

The strong collectively negotiated wage increases in 2018 and the rise of the federal Germany-wide statutory minimum wage to €9.19 (USD 10.32) on January 1, 2019, led to 3.1 percent nominal wage increase, the highest in Germany for eight years.

Labor costs increased by 2.6 percent in 2017.  With an average labor cost of €34.10 (USD 42.24) per hour, Germany ranked fifth among the 28 EU-members states (EU average: €26.80/USD 33.20) in 2017.  Since the introduction of the European common currency, the increases of the unit labor cost in Germany remained significantly below EU average.

12. OPIC and Other Investment Insurance Programs

OPIC programs were available for the new states of eastern Germany for several years during the early 1990s following reunification, but were later suspended due to economic and political progress which caused the region to “graduate” from OPIC coverage.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 €3,386,000 million 2017 $3,677,439 https://data.worldbank.org/country/germany?view=chart  
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2016 €54,810 2017 $136,128 BEA data available at https://apps.bea.gov/international/factsheet/  
Host country’s FDI in the United States ($M USD, stock positions) 2016 €223,813 million 2017 $405,552 BEA data available at https://apps.bea.gov/international/factsheet/  
Total inbound stock of FDI as % host GDP 2016 €21.7Amt 2017 27.2% UNCTAD data available athttps://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx    

* Source for Host Country Data: Federal Statistical Office DESTATIS, Bundesbank; http://www.bundesbank.de   (German Central Bank, 2017 data to be published in April 2019, only available in €)


Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $950,837 100% Total Outward $1,606,120 100%
Netherlands $181,080 19.0% United States $267,769 16.7%
Luxembourg $164,449 17.3% Netherlands $202,022 12.6%
United States $93,572 9.8% Luxembourg $191,449 11.9%
United Kingdom $83,299 8.8% United Kingdom $149,184 9.3%
Switzerland $79,499 8.4% France $90,077 5.6%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $12,173,972 100% All Countries $1,266,593 100% All Countries $2,192,351 100%
Luxembourg $680,807 5.6% Luxembourg $566,381 44.7% France $317,050 14.5%
France $416,561 3.4% United States $161,234 12.7% United States $250,607 11.4%
United States $411,841 3.4% Ireland $113,430 9.0% Netherlands $232,576 10.6%
Netherlands $277,569 2.3% France $99,512 7.9% United Kingdom $153,672 7.0%
United Kingdom $211,076 1.7% United Kingdom $57,404 4.5% Italy $139,334 6.4%

14. Contact for More Information

Economic Section
Pariser Platz 2, 14191 Berlin, Germany
+49-(0)30-8305-2940
Email: feedback@usembassy.de

Italy

Executive Summary

Italy’s economy, the eighth largest in the world, is fully diversified, and dominated by small and medium-sized firms (SMEs), which comprise 99.9 percent of Italian businesses.  Italy is an original member of the 19-nation Eurozone. Germany, France, the United States, the United Kingdom, Spain, and Switzerland are Italy’s most important trading partners, with China continuing to gain ground.  Tourism is an important source of external revenue, as are exports of pharmaceutical products, furniture, industrial machinery and machine tools, electrical appliances, automobiles and auto parts, food, and wine, as well as textiles/fashion.  Italy continues to attract less foreign direct investment than many industrialized nations. Italy does not share a bilateral investment treaty with the United States.

Italy’s relatively affluent domestic market, access to the European Common Market, proximity to emerging economies in North Africa and the Middle East, and assorted centers of excellence in scientific and information technology research, remain attractive to many investors.  The government remains open to foreign investment in shares of Italian companies and continues to make information available online to prospective investors. The Italian government’s efforts to implement new investment promotion policies to position Italy as a desirable investment destination have been undermined in part by Italy’s slow economic growth and lack of consistent progress on structural reforms that could reduce lengthy and often inconsistent legal and regulatory procedures, unpredictable tax structure, and layered bureaucracy.  

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 53 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2018 51 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2018 31 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country (M USD, stock positions) 2017 $30,708 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 $31,020 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

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

EU and Italian antitrust laws provide Italian authorities with the right to review mergers and acquisitions for market dominance.  In addition, the Italian government may block mergers and acquisitions involving foreign firms under the “Golden Power” law if the transactions appear to raise national security concerns.  This law was enacted in 2012 and further implemented with decrees in 2015, 2017, and 2019.  The Golden Power law allows the Government of Italy (GOI) to block foreign acquisition of companies operating in strategic sectors (identified as defense/national security, energy, transportation, telecommunications, critical infrastructure, sensitive technology, and nuclear and space technology).  On March 26, 2019 the GOI issued a decree expanding the Golden Power authority to cover the purchase of goods and services related to the planning, realization, maintenance, and management of broadband communications networks using 5G technology.  Per Italian law, Parliament must confirm the decree within 60 days. The GOI’s Golden Power authority always applies in cases involving the sectors above in which the potential purchaser is a non-EU company; it is extended to EU companies if the target of the acquisition is involved in defense/national security activities.  In this respect, the GOI has a say regarding the ownership of private companies as well as ones in which the government has a stake. This law replaced the “Golden Share” which the GOI previously held in former state-owned firms that were partially privatized in the 1990s and 2000s. The law also allows the State to maintain oversight over entire strategic sectors as opposed to individual companies, and by replacing the Golden Share legislation, has enabled Italy to address accusations the Golden Shares violated European treaties.   An interagency group led by the Prime Minister’s office reviews acquisition applications and prepares the dossiers/ recommendations for the Council of Ministers’ decision.   

According to the latest figures available from the Italian Trade Agency (ITA), foreign investors own significant shares of 12,768 Italian companies.  These companies employed 1,211,872 workers with overall sales of EUR 573.6 billion. ITA operates under the umbrella of the Italian Ministry of Economic Development.

The Italian Trade Agency (ITA) operates Invest in Italy: http://www.investinitaly.com/en/.   The Foreign Investments Attraction Department is a dedicated unit of ITA for facilitating the establishment and the development of foreign companies in Italy.  As of April 2019, ITA maintained a presence in 65 countries to assist foreign investors.  

Invitalia is the national agency for inward investment and economic development, owned by the Italian Ministry of Economy and Finance.  The agency focuses on strategic sectors for development and employment.  It places an emphasis on southern Italy, where investment and development lag in comparison to the rest of the country.  Invitalia finances projects both large and small, targeting entrepreneurs with concrete development plans, especially in innovative and high-added-value sectors.  For more information, see https://www.invitalia.it/eng  .  The Ministry of Economic Development also has a program to attract innovative investments: https://www.mise.gov.it  

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

Limits on Foreign Control and Right to Private Ownership and Establishment

Under EU treaties and OECD obligations, Italy is generally obliged to provide national treatment to U.S. investors established in Italy or in another EU member state.  

EU and Italian antitrust laws provide Italian national local authorities with the right to review mergers and acquisitions over a certain financial threshold.  The Italian government may block mergers and acquisitions involving foreign firms if national security concerns are raised or on the principle of reciprocity if the government of the foreign firm applies discriminatory measures against Italian firms.  Foreign investors in the defense or aircraft manufacturing sectors are more likely to encounter resistance from the many ministries involved in reviewing foreign acquisitions.  

Italy maintains a formal national security screening process for inbound foreign investment in the sectors of defense/national security, transportation, energy, telecommunications, critical infrastructure, sensitive technology, and nuclear and space technology under its “Golden Power” legislation, and where there may be market concentration (antitrust) issues.  Italy’s Golden Power legislation was expanded on March 26, 2019 to include the purchase of goods and services related to the planning, realization, maintenance, and management of broadband communications networks using 5G technology. (Per Italian law Parliament must confirm the law within 60 days for it to remain in force.) To our knowledge, U.S. investors have not been disadvantaged relative to other foreign investors under the mechanisms described above.

Other Investment Policy Reviews

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

Business Facilitation

Italy has a business registration website, available in Italian and English, administered through the Union of Italian Chambers of Commerce: http://www.registroimprese.it.    The online business registration process is clear and complete.  Foreign companies may use the online process. Before registering a company online, applicants must obtain a certified e-mail address and digital signature, a process that may take up to five days.  A notary is required to certify the documentation. The precise steps required for the registration process depend on the type of business being registered. The minimum capital requirement also varies by type of business.  Generally, companies must obtain a value-added tax account number (partita IVA) from the Italian Revenue Agency, register with the social security agency Istituto Nazionale della Previdenza Sociale (INPS), verify adequate capital and insurance coverage with the Italian workers’ compensation agency Istituto Nazionale per L’Assicurazione contro gli Infortuni sul Lavoro (INAIL), and notify the regional office of the Ministry of Labor.  According to the World Bank Doing Business Index 2018, Italy is ranked 67 out of 190 countries in terms of the ease of starting a business: it takes six procedures and six days to start a business in Italy.  Additional licenses may be required, depending on the type of business to be conducted.

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

Outward Investment

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

2. Bilateral Investment Agreements and Taxation Treaties

BITs or FTAs

The United States and Italy do not share a bilateral investment treaty (BIT).

Italy has bilateral investment agreements with the following countries (for more information and text of the agreements, see http://investmentpolicyhub.unctad.org/IIA/CountryBits/103  ):

Albania, Algeria, Angola, Argentina, Armenia, Bahrain, Bangladesh, Barbados, Belarus, Belize (signed, not in force), Bolivia, Bosnia and Herzegovina, Brazil (signed, not in force), Cameroon, Cape Verde (signed, not in force), Chad, Chile, China, Congo, Cote d’Ivoire (signed, not in force),  Cuba, Democratic Republic of Congo (signed, not in force), Djibouti, Dominican Republic, Ecuador, Egypt, Eritrea, Ethiopia, Gabon, Georgia, Ghana (signed, not in force), Guatemala, Guinea, Hong Kong, Iran, Jamaica, Jordan, Kazakhstan, Kenya, DPR of Korea (signed, not in force), Republic of Kuwait, Lebanon, Libya, Macedonia FYR,  Malawi, Malaysia, Malta (signed, not in force), Mauritania, Mexico, Moldova, Republic of Mongolia, Morocco, Mozambique, Namibia, Nicaragua, Nigeria, Oman, Pakistan, Panama, Paraguay, Peru, Philippines, Qatar, Russian Federation, Saudi Arabia, Senegal, Serbia (signed, not in force), South Africa, Sri Lanka, Sudan (signed, not in force), Syrian Arab Republic, Tanzania, United Republic of Tunisia, Turkey, Turkmenistan (signed, not in force), United Arab Emirates, Uruguay, Uzbekistan, Venezuela (signed, not in force), Vietnam, Yemen, Zambia, Zimbabwe (signed, not in force).

Italy has not ratified a BIT since 2009 and has not negotiated a BIT since 2014.  Since 2009, investment treaty negotiations fall within the competence of the EU: http://ec.europa.eu/trade/policy/accessing-markets/investment/  .

As an EU member, Italy’s FTA negotiations are likewise handled at the EU level:  http://ec.europa.eu/trade/policy/  .

Bilateral Taxation Treaties:

Italy shares a bilateral taxation treaty with the United States.  The text of the treaty is available at https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z  .

Italy ranked 51 out of 190 countries in the World Bank’s 2018 Ease of Doing Business Report.  Several U.S. multinationals have sought U.S. Embassy assistance in dealing with Italy’s tax enforcement, with some expressing concerns that the Italian Revenue Agency unfairly targets large companies.  According to the companies, Italian tax investigations may question corporate accounting practices deemed legitimate in other EU Member States, creating inconsistencies and uncertainty.

3. Legal Regime

Transparency of the Regulatory System

Regulatory authority exists at the national, regional, and municipal level.  All applicable regulations could potentially be relevant for foreign investors.  Regulations are developed at the national level by the GOI and individual ministries, as well as independent regulatory authorities.  Regional and municipal authorities issue regulations at the sub-national level.  Draft regulations may be posted for public comment, but there is generally no requirement to do so. Final national-level regulations are in general published in the Gazzetta Ufficiale (and only become effective upon publication).  Regulatory agencies may publish summaries of received comments.  No major regulatory reform was undertaken in 2018.  Aggrieved parties may challenge regulations in court.  Public finances and debt obligations are transparent and are publicly available through banking channels such as the Bank of Italy.

International Regulatory Considerations

Italy is a member of the European Union (EU).  EU directives are brought into force in Italy through implementing national legislation.  In some areas, EU procedures require member states to notify the European Commission (EC) before implementing national-level regulations.  Italy has on occasion failed to notify the EC and/or WTO of draft regulations in a timely way. For example, in 2017 Italy adopted Country of Origin Labelling requirements for a range of products including rice, wheat used to make pasta, and certain tomato-based products.  Italy’s Economic Development Minister and Agriculture Minister publicly stated these measures would support the “Made in Italy” brand and make Italian products more competitive. Though the requirements were widely regarded as a Technical Barrier to Trade (TBT), Italy failed to notify the WTO in advance of implementing these regulations.  Italy is a signatory to the WTO’s Trade Facilitation Agreement (TFA) and has implemented all developed-country obligations.

Legal System and Judicial Independence

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

Regulations can be appealed in the court system.  

Laws and Regulations on Foreign Direct Investment

Italy is bound by EU laws on FDI.

Competition and Anti-Trust Laws

The Italian Competition Authority (AGCM) is responsible for reviewing transactions for competition-related concerns.  AGCM may examine transactions that restrict competition in Italy as well as in the broader EU market. As a member of the EU, Italy is also subject to interventions by the European Commission Competition Directorate (DG COMP).

Expropriation and Compensation

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

Dispute Settlement

ICSID Convention and New York Convention

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

Italian law recognizes and enforces foreign court judgments.   

Investor-State Dispute Settlement

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

Italy has had very few investment disputes involving a U.S. person in the last 10 years.  The U.S. Embassy identified less than five such active disputes at the time of the drafting of this report.  No cases have been terminated or resolved; all remain pending. Italy does not have a history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

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

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

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

Bankruptcy Regulations

Italy’s bankruptcy regulations are somewhat analogous to U.S. Chapter 11 restructuring, and allow firms and their creditors to reach a solution without declaring bankruptcy.  In recent years, the judiciary’s role in bankruptcy proceedings has been reduced in an attempt to simplify and expedite proceedings. In 2015, the Italian parliament passed a package of changes to the bankruptcy law, including measures to ease access to interim credit for bankrupt companies and to restructure debts.  Additional changes were approved in 2017 (juridical liquidation, early warning, simplified process, arrangement with creditors, insolvency of affiliated companies as a group, and reorganization of indebtedness rules). The measures aim to reduce the number of bankruptcies, limit the impact on the local economy, and facilitate the settlement of corporate disputes outside of the court system.  The reform follows on the 2015 reform of insolvency procedures. The legislative “implementation decree” for the 2017 bankruptcy reform was issued in early 2019. In the World Bank’s Doing Business Report 2018, Italy ranks 22 out of 190 economies in the category of Ease of Resolving Insolvency.

4. Industrial Policies

Investment Incentives

The GOI offers modest incentives to encourage private sector investment in targeted sectors (e.g., innovative companies) and economically depressed regions, particularly in southern Italy. The incentives are available to eligible foreign investors as well.  Incentives include grants, low-interest loans, deductions and tax credits. Some incentive programs have a cost cap, which may prevent otherwise eligible companies from receiving the incentive benefits once the cap is reached. The GOI applies cost caps on a non-discriminatory basis, typically based on the order that applications were filed.  The government does not have a practice of issuing guarantees or jointly financing foreign direct investment projects.

Italy provides an incentive for investments by SMEs in new machinery and capital equipment (“New Sabatini Law”), available to eligible companies regardless of nationality.  This investment incentive provides financing, subject to an annual cost cap. Sector-specific investment incentives are also available in targeted sectors.

In January 2018, the GOI also provided “super amortization” and “hyper amortization” (essentially, generous tax deductions) on investments in special areas of the economy.  Of these only “hyper amortization” was renewed in the 2019 budget law. The GOI is considering reintroducing the “super amortization” by decree law in the second half of 2019 in order to stimulate investment.  The GOI has not yet renewed the broader “Industry 4.0” initiative launched by the previous government in 2017 to improve the Italian industrial sector’s competitiveness through a combination of policy measures and research and infrastructure funding.

The Italian tax system does not generally discriminate between foreign and domestic investors, though a digital services tax approved in principle by the Parliament in December 2018, but not yet implemented, would primarily impact U.S. companies.  The corporate income tax (IRES) rate is 24 percent. In addition, companies may be subject to a regional tax on productive activities (IRAP) at a 3.9 percent rate. The World Bank estimates Italy’s total tax rate as a percent of commercial profits at 53.1 percent in 2018, higher than the OECD high-income average of 39.8 percent.  

Several U.S. multinationals have sought U.S. Embassy assistance in dealing with Italy’s tax enforcement, with some expressing concerns that the Italian Revenue Agency unfairly targeted large companies.  According to the companies, Italian tax investigations may focus on corporate accounting practices deemed legitimate in other EU Member States, creating inconsistencies and uncertainty.

Foreign Trade Zones/Free Ports/Trade Facilitation

The main free trade zone in Italy is located in Trieste, in the northeast.  The goods may undergo transformation free of any customs restraints. An absolute exemption is granted from any duties on products coming from a third country and re-exported to a non-EU country.  Legislation to create other FTZs in Genoa and Naples exists, but has yet to be implemented. A free trade zone operated in Venice for a period but is currently being restructured.

Italy’s “Decree for the South” law (Law 91 of 2017) foresees eight Special Economic Zones (ZES – Zone Economica Speciale) managed by port authorities in Italy’s less-developed south and islands (the regions of Abruzzo, Basilicata, Calabria, Campania, Molise, Puglia, Sardinia and Sicily).  Investors will be able to access up to EUR 50 million in tax breaks, hiring incentives, reduced bureaucracy, and reimbursement of the IRAP regional business tax, covered by national allotments of EUR 250 million for 2019 and 2020.  The GOI announced plans to increase the allotment by another EUR 300 million, but the increase has not passed into law yet. The Region of Campania approved the strategic plan for implementing the law on March 28, 2018, but the plan still awaits final approval from the Chamber of Deputies to become operational. The Naples ZES will encompass over 54 million square meters of land in the ports of Naples, Salerno and Castellamare di Stabia, as well as industrial areas and transport hubs in 37 cities and towns in Campania.  Incentives are not automatic, as investments will be approved by local government bodies in a procedure governed by the Port Authority of the Central Tyrrhenian Sea.  The Campania Region forecasts that the ZES will create and/or save between 15 and 30 thousand jobs. A proposed ZES encompassing the port cities of Bari and Brindisi on the Adriatic is expected to finish the approval procedure in 2019, followed by a ZES planned around the transshipment port of Gioia Tauro in Calabria and the other five zones: eastern Sicily (Augusta, Catania, and Siracusa), western Sicily (Palermo), Sardinia (Cagliari), ZES Ionica (Taranto in Puglia and the region of Basilicata), and a ZES to be shared between the ports in Abruzzo and Molise.

A special free trade zone was established in late 2015 in the areas within the Emilia-Romagna region that were hit by a May 2012 earthquake and by a January 2014 flood.  The measure aimed to assist the recovery of these areas through tax exemptions amounting to EUR 39.6 million for the years 2015 and 2016 for small enterprises headquartered in these areas.

Currently, goods of foreign origin may be brought into Italy without payment of taxes or duties, as long as the material is to be used in the production or assembly of a product that will be exported.  The free-trade zone law also allows a company of any nationality to employ workers of the same nationality under that country’s labor laws and social security systems.

Performance and Data Localization Requirements

Italy does not mandate local employment.  Non-EU nationals who would like to establish a business in Italy must have a valid residency permit or be nationals of a country with reciprocal arrangements, such as a bilateral investment agreement, as described at: https://www.esteri.it/mae/en/servizi/stranieri/  .

Work permits and visas are readily available and do not inhibit the mobility of foreign investors.  As a member of the Schengen Area, Italy typically allows short-term visits (up to 90 days) without a visa.  The Italian Ministry of Foreign Affairs has specific information about visa requirements: http://vistoperitalia.esteri.it/home/en  .

As a member of the EU, Italy does not follow forced localization policies in which foreign investors must use domestic content in goods or technology.  Italy does not have enforcement procedures for investment performance requirements. Italy does not require local data storage. Companies transmitting customer or other business-related data within or outside of the EU must comply with relevant EU privacy regulations.

5. Protection of Property Rights

Real Property

According to the World Bank, Italy ranks 23 worldwide out of 190 economies for the ease of registering property.  Real property registration takes an average of 16 days, requires four procedures, and costs an average of 4.4 percent of the value of the property.  Real property rights are enforced in Italian courts. Mortgages and judgment liens against property exist in Italy and the recording system is reliable.  Although Italy does not publish official statistics on property with titling issues, Post estimates that less than 10 percent of the land in Italy does not have clear title.  Italian law includes provisions whereby peaceful and uninterrupted possession of real property for a period of 20 years can, under certain circumstances, allow the occupying party to take title to a property.

Intellectual Property Rights

Italy was removed from the USTR’s Special 301 Watch List in 2014 after the Italian Communications Authority’s (AGCOM’s) issuance of a new regulation to combat digital copyright theft.  The regulation created a process by which rights holders can report online infringements to AGCOM, which can then block access to domestic and international sites hosting infringing content.  This negated the need for lengthy litigation, which had been required previously. The system was further strengthened in 2018, when authorities adopted new measures to prevent previously blocked websites from becoming accessible again under different domain names.

Authorities also continue to pursue trademark violations.  In 2017, the last year for which statistics are available, customs and the tax police jointly seized almost 32 million counterfeit items (excluding food and beverages, tobacco, and medical products), worth almost EUR 295 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/  .

6. Financial Sector

Capital Markets and Portfolio Investment

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

Italy’s conservative regulatory system somewhat limits portfolio investment.  Italy’s financial markets are regulated by the Italian securities regulator (CONSOB), Italy’s central bank (the Bank of Italy), and the Institute for the Supervision of Insurance (IVASS).  CONSOB supervises and regulates Italy’s securities markets (e.g., the Milan Stock Exchange). The European Central Bank (ECB) assumed direct supervisory responsibilities for the 12 largest Italian banks in 2019 and indirect supervision for less significant Italian banks through the Bank of Italy.  IVASS supervises and regulates insurance companies. Liquidity in the primary markets (e.g., the Milan exchanges) is sufficient to enter and exit sizeable positions, though Italian capital markets are small by international standards. Liquidity may be limited for certain less-frequently traded investments (e.g., bonds traded on the secondary and OTC markets).  

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

In 2009, the United States and Italy enacted an income tax agreement to prevent double-taxation of each other’s nationals and firms, and to improve information sharing between tax authorities.

In 2014 the United States and Italy signed an intergovernmental agreement to implement provisions of the U.S. law known as FATCA (Foreign Account Tax Compliance Act), that allows for the automatic exchange of information between tax authorities.  This automatic exchange of information takes place on the basis of reciprocity, and includes accounts held in the United States by persons resident in Italy and those held in Italy by U.S. citizens and residents.

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

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

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

Credit is allocated on market terms, with foreign investors eligible to receive credit in Italy.  In general, credit in Italy remains largely bank-driven. In practice, foreigners may encounter limited access to finance, as Italian banks may be reluctant to lend to prospective borrowers (even Italians) absent a preexisting relationship.  Although a wide array of credit instruments are available, bank credit remains constrained following the financial crisis. Weak demand, combined with risk aversion by banks, continues to constrain lending. The latest business surveys indicate that credit conditions are easing, yet availability of credit remains constrained, especially for smaller firms.    

Money and Banking System

Despite isolated problems at individual Italian banks, the banking system remains sound and capital ratios exceed regulatory thresholds.  However, Italian banks’ profit margins have suffered since 2011 as a result of tightening European supervisory standards and requirements to increase banks’ capital.  The recession brought a pronounced worsening of the quality of banks’ assets, which further dampened banks’ profitability. The ratio of non-performing loans (NPLs) to total outstanding loans decreased significantly since its height in 2017.  Currently net NPLs stand at EUR 33 billion. The GOI is also taking steps to facilitate acquisitions of NPLs by outside investors. In December 2016, the GOI created a EUR 20 billion bank rescue fund to assist struggling Italian banks in need of liquidity or capital support.  Italy’s fourth-largest bank, Monte dei Paschi di Siena (MPS), became the first bank to avail itself of this fund in January. The GOI also facilitated the sale of two struggling “Veneto banks” (Banca Popolare di Vicenza and Veneto Banca) to Intesa San Paolo in mid-2017. In January 2019, Banca Carige, the smallest Italian bank under ECB supervision, was put under special administration.  

Italy’s central bank, the Bank of Italy (BOI), is a member of the euro system and the European Central Bank (ECB).  In addition to ECB supervision of larger Italian banks, BOI maintains strict supervisory standards. The Italian banking system weathered the 2007-2013 financial crisis without resorting to government intervention.

The banking system in Italy has consolidated since the financial crisis, though additional consolidation is needed, according to the OECD and ECB.  In 2017, the Italian banking landscape included 70 banking groups (comprising 129 banks), 393 banks not belonging to a banking group, and 82 branches of foreign banks.  The GOI is taking further steps to encourage consolidation and facilitate acquisitions by outside investors. The Italian banking sector remains overly concentrated on physical bank branches for delivering services, further contributing to sector-wide inefficiency and low profitability.  Electronic banking is available in Italy, but adoption remains below euro-zone averages and non-cash transactions are relatively uncommon.

The London Stock Exchange owns Italy’s only stock exchange: the Milan Stock Exchange (Borsa Italiana).  The exchange is relatively small — 357 listed companies and a market capitalization of only 33.5 percent of GDP as of December 2018.  Although the exchange remains primarily a source of capital for larger Italian firms, Borsa Italiana created “AIM Italia” in 2012 as an alternative exchange with streamlined filing and reporting requirements to encourage SMEs to seek equity financing.  Additionally, the GOI recognizes Italian firms remain overly reliant on bank financing, and has initiated some programs to encourage alternative forms of financing, including venture capital and corporate bonds. While financial experts have held that slow CONSOB processes and cultural biases against private equity have limited equity financing in Italy, panelists at the March 2019 annual meeting of the Italian Association of Private Equity, Venture Capital, and Private Debt (AIFI) said investment by private equity funds in Italy rose by 98 percent from 2017 to 2018, totaling EUR 9,788 million —still a low figure given the size of Italy’s economy.

The Italian Companies and Stock Exchange Commission (CONSOB), is the Italian securities regulatory body: http://www.consob.it  .

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

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

Any investor (Italian or foreign) acquiring a stake in excess of two percent of a publicly traded Italian corporation must inform CONSOB, but does not need its approval.  Any Italian or foreign investor seeking to acquire or increase its stake in an Italian bank equal to or greater than ten percent must receive prior authorization from the Bank of Italy (BOI).  Acquisitions of holdings that would change the controlling interest of a banking group must be communicated to the BOI at least 30 days in advance of the closing of the transactions. Approval and advance authorization by the Italian Insurance Supervisory Authority IVASS are required for any significant acquisition in ownership, portfolio transfer, or merger of insurers or reinsurers.   Regulators retain the discretion to reject proposed acquisitions on prudential grounds (e.g., insufficient capital in the merged entity).

The Ministry of Economy and Finance has indicated its interest in blockchain technologies, but this discussion remains in the formative stages.  Blockchain technologies are not currently being used in banking transactions, nor have any banks announced their intention to start using them.  However, in late 2018, the Association of Italian Banks (ABI) tested blockchain technology in a project associated with check clearing.

Foreign Exchange and Remittances

Foreign Exchange Policies

In accordance with EU directives, Italy has no foreign exchange controls.  In December 2018 Parliament passed a decree which imposed a 1.5 percent tax on remittances sent outside of the EU via money transfer.  The government estimates that the tax on remittances to countries outside of the EU will raise several hundred million euros per year. There are no restrictions on currency transfers; there are only reporting requirements.  Banks are required to report any transaction over EUR 1,000 due to money laundering and terrorism financing concerns. Profits, payments, and currency transfers may be freely repatriated. Residents and non-residents may hold foreign exchange accounts.  In 2016, the GOI raised the limit on cash payments for goods or services to EUR 3,000. Payments above this amount must be made electronically. Enforcement remains uneven. The rule exempts e-money services, banks, and other financial institutions, but not payment services companies.

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

Remittance Policies

There are no limitations on remittances, though transactions above EUR 1,000 must be reported.

According to the Financial Action Task Force, Italy has a strong legal and institutional framework to fight money laundering and terrorist financing and authorities have a good understanding of the risks the country faces.  There are areas where improvements are needed, such as its money-laundering investigative and prosecutorial action on risks associated with self-laundering, stand-alone money laundering, and foreign predicate offenses, and the abuse of legal persons.

Sovereign Wealth Funds

The state-owned national development bank Cassa Depositi e Prestiti (CDP) launched a strategic wealth fund in 2011, now called CDP Equity (formerly Fondo Strategico Italiano – FSI).  CDP Equity has EUR 3.5 billion in capital, and has invested EUR 3.7 billion in eleven portfolio companies.  CDP Equity generally adopts a passive role by purchasing minority interests as a non-managerial investor. It does not hold a majority stake in any of its portfolio companies.  CDP Equity invests solely in Italian companies with the goal of furthering the expansion of companies in growth sectors—though some of these investment decisions are political. CDP Equity provides information on its funding, investment policies, criteria, and procedures on its website (http://en.cdpequity.it/  ).  CDP Equity is open to capital investments from outside institutional investors, including foreign investors.  CDP Equity is a member of the International Working Group of Sovereign Wealth Funds and follows the Santiago Principles.  

7. State-Owned Enterprises

The Italian government has in the past owned and operated a number of monopoly or dominant companies in certain strategic sectors.  However, beginning in the 1990s and through the early 2000s, the government began to privatize most of these state-owned enterprises (SOEs).  Notwithstanding this privatization effort, the GOI retains 100 percent ownership of the national railroad company (Ferrovie dello Stato) and road network company (ANAS), both of which merged in January 2018.  The GOI holds a 99.56 percent share of RAI, the national radio and television broadcasting network; and retains a controlling interest, either directly and/or through the state-controlled sovereign wealth fund Cassa Depositi e Prestiti (CDP), in companies such as shipbuilder Fincantieri (71.6 percent), postal and financial services provider Poste Italiane (65 percent), electricity provider ENEL (23.6 percent), oil and gas major Eni (30 percent), defense conglomerate Leonardo-Finmeccanica (30.2 percent), natural gas transmission company Snam (30.1 percent), as well as electricity transmission provider Terna (29.85 percent).

However, these companies are operating in a competitive environment (domestically and internationally) and are increasingly responsive to market-driven decision-making rather than GOI demands.  In addition, many of the state-controlled entities are publicly traded, which provides additional transparency and corporate governance obligations, including equitable treatment for non-governmental minority shareholders.  Italy’s parastatals (CDP, Ferrovie dello Stato, Eni, ENEL, ENAV, Poste Italiane and Leonardo) generated EUR 2.4 billion return on investment in 2018 for the GOI. The largest contributor was CDP (EUR 1.256 billion) and the second largest was Eni (EUR 671 million).

SOEs are subject to the same tax treatment and budget constraints as fully private firms.  Additionally, industries with SOEs remain open to private competition.

As an EU member, Italy is covered by EU government procurement rules.  

Privatization Program

The Italian government committed to privatize EUR 16 billion in state-owned assets in 2016 and 2017, planning for EUR 8 billion in each year, although privatizations have not reached these targets.  The privatizations fall into two categories: minority stakes in SOEs and underutilized real estate holdings. In 2016, the GOI sold a minority stake in the air traffic controller (ENAV). Revenues in 2016 were well below expectations due to the unfavorable markets that discouraged other privatizations and resulted in the postponement of the planned privatization of a minority share of the national rail network (Ferrovie dello Stato) as well as the national postal provider (Poste Italiane).  At the end of 2018, the government set a revenue target for 2019 equal to 1 percent of GDP (approximately EUR 18 billion).

The GOI solicits and actively encourages foreign investors to participate in its privatizations, which are non-discriminatory and transparent.  The GOI sells SOE shares through the Milan Stock Exchange (Borsa Italiana), while real estate sales are conducted through public bidding processes (typically online).  The Italian Public Property Agency (Agenzia del Demanio) administers real estate sales: https://venditaimmobili.agenziademanio.it/AsteDemanio/sito.php  .  The Agency has created a centralized registry with information on individual parcels for sale or long-term lease: http://www.investinitalyrealestate.com/en/  .

8. Responsible Business Conduct

There is a general awareness of societal expectations and standards for responsible business conduct (RBC).  Enforcement is generally fair, though the slow pace of civil justice may delay individuals’ ability to seek effective redress for adverse business impacts.  In addition, EU laws and standards on RBC apply in Italy. In the event Italian courts fail to protect an individual’s rights under EU law, it is possible to seek redress to the European Court of Justice (ECJ).

CONSOB has enacted corporate governance, accounting, and executive compensation standards to protect shareholders.  Information on corporate governance standards is available at: http://www.consob.it/c/portal/layout?p_l_id=892052&p_v_l_s_g_id=0  .  

As an OECD member Italy supports and promotes the OECD Guidelines for Multinational Enterprises (“Guidelines”), which are recommendations by governments to multinational enterprises for conducting a risk-based due diligence approach to achieve responsible business conduct (RBC).  The Guidelines provide voluntary principles and standards in a variety of areas including employment and industrial relations, human rights, environment, information disclosure, competition, consumer protection, taxation, and science and technology. (See: OECD Guidelines: http://www.oecd.org/dataoecd/12/21/1903291.pdf )

The Italian National Contact Point (NCP) for the Guidelines is located in the Ministry of Economic Development.  The NCP promotes the Guidelines; disseminates related information; and encourages collaboration among national and international institutions, the business community, and civil society.  The NCP also promotes Italy’s National Action Plan on Corporate Social Responsibility which is available online. For the key link, see: Italian NCP: http://pcnitalia.sviluppoeconomico.gov.it/en  /.

Independent NGOs are able to operate freely in Italy.  Additionally, Italy’s three largest trade union confederations actively promote and monitor RBCs.  They serve on the advisory body to Italy’s National Contact Point (NCP) for the OECD Guidelines for Multinational Enterprises.  Unions are able to work freely in Italy.

Italy encourages responsible supply chains and has provided operational guidelines for Italian businesses to assist them in supply chain due diligence.  Italy is a member of the Extractive Industries Transparency Initiative (EITI). The Italian Ministry of Foreign Affairs works internationally to promote the adoption of best practices.

9. Corruption

Corruption and organized crime continue to be significant impediments to investment and economic growth in parts of Italy, despite efforts by successive governments to reduce risks. Italian law provides criminal penalties for corruption by officials.  The government has usually implemented these laws effectively, but officials sometimes have engaged in corrupt practices with impunity.  While anti-corruption laws and trials garner headlines, they have been only somewhat effective in stopping corruption.  Italy has steadily improved in Transparency International’s Corruption Perceptions Index, in overall rank and score every year since 2014, yet ranked 53 in the 2018 index.

In October 2012, as part of an anti-corruption package, a new National Anti-Corruption Authority (ANAC) was created.  The 2012 anti-corruption law has subsequently been strengthened by further provisions. In November 2017 the government approved legislation to protect both public and private sector employees who report illicit conduct in the workplace (i.e. whistleblowing).  The legislation helped protect employees who denounce illicit conduct to the National Anti-Corruption Authority or to enforcement agencies from retaliation. In December 2018 Italy’s Parliament passed an anti-corruption bill that introduced new provisions to combat corruption in the public sector and regulate campaign finance.  The measures in the bill changed the statute of limitations for corruption-related crimes as well as other crimes and made it more difficult for a person to “run out the clock” on their case.  Italy’s anti-money-laundering laws also apply to public officials, defined as any person who has been entrusted with important political functions, as well as their immediate family members. (This encompasses anyone from the head of state to members of the executive body in state-owned companies.)

U.S. individuals and firms operating or investing in foreign markets should take the time to become familiar with the anticorruption laws of both the foreign country and the United States in order to comply with them and, where appropriate, they should seek the advice of legal counsel.  While the U.S. Embassy has not received specific complaints of corruption from U.S. companies operating in Italy, commercial and economic officers are familiar with high-profile cases that may impact U.S. companies. The Embassy has received requests for assistance from companies facing a lack of transparency and complicated bureaucracy, particularly in the sphere of government procurement and specifically in the aerospace industry.  There have been no reports of government failure to protect NGOs that investigate corruption (such as Transparency International Italy).

Italy has signed and ratified the UN Anticorruption Convention and the OECD Convention on Combatting Bribery.

Resources to Report Corruption:

Autorità Nazionale Anticorruzione (ANAC)
Via Marco Minghetti, 10 – 00187 Roma
Phone: +39 06 367231
Fax: +39 06 36723274
Email: protocollo@pec.anticorruzione.it
Contact Info page: http://www.anticorruzione.it/portal/public/classic/MenuServizio/Contatti  
ANAC’s whistleblowing web page is:  http://www.anticorruzione.it/portal/public/classic/Servizi/ServiziOnline/SegnalazioneWhistleblowing  

Transparency International Italia
P.le Carlo Maciachini 11
20159 Milano – Italy
T: +39 02 40093560
F: +39 02 406829
Email: info@transparency.it
General web site: www.transparency.it  
Corruption Specific: https://www.transparency.it/alac/  

10. Political and Security Environment

Politically motivated violence in Italy is rare and most often connected to Italian internal developments or social issues.  Italian authorities and foreign diplomatic facilities have found bombs outside public buildings, have received bomb threats, and have been targets of letter bombs, fire bombs and Molotov cocktails in the past several years. These attacks have generally occurred at night, and they have not targeted or injured U.S. citizens.  Political violence is not a threat to foreign investments in Italy, but corruption, especially associated with organized crime, can be a major hindrance, particularly in the south.

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

11. Labor Policies and Practices

As a result of its longest and deepest recession since World War II, Italy’s unemployment rate peaked at 13.1 percent in November 2014.  Italy’s unemployment rate has since ebbed, but has remained high at 10.5 percent in January 2019 and above the Eurozone average of 7.6 percent.  Despite the recent improvement, the GOI and the European Commission continue to forecast Italy’s unemployment rate will remain in double digits until 2020, as employers increasingly seek to improve worker productivity and increase hours for existing workers, rather than hire additional workers.  The youth unemployment rate more than doubled during the financial crisis, exceeding 43 percent in 2014. Though youth unemployment has since declined, it remains elevated at 33.0 percent in January 2019 and is one of the highest among EU members. The Central Institute of Statistics estimates there are 2.2 million young Italians not enrolled in education, employment or training (NEETs), more than 22 percent of all young Italians, which is one of the highest percentages in the EU.  Long-term unemployment is also elevated, leading to a permanent reduction in human capital and earnings potential.

Italy’s labor force participation rates are among the lowest in the EU, particularly among women, the young, and the elderly, and in the south.  Low labor force participation has been partially attributable to the informal economy, which Italy’s statistics agency estimates as at least 12 percent of Italian GDP.  January 2019 marked the highest labor force participation rate in Italy since the data series began in 2004: 65.7 percent of working-age Italians. 

The productivity of Italy’s labor force is also below the EU average.  Many Italian employers report an inability to find qualified candidates for highly-skilled vacancies, demonstrating significant skills mismatches in the Italian labor market.  Many well-educated Italians find more attractive career opportunities outside of Italy, with large numbers of Italians taking advantage of EU agreements on freedom of movement to work in the United Kingdom, Switzerland, or Germany.  There is no reliable measure of Italians working overseas, as many expatriate workers do not report their whereabouts to the Italian government. Skilled labor shortages are a particular problem in Italy’s industrialized north.

On paper, companies may bring in a non-EU employee after the government-run employment office has certified that no qualified, unemployed Italian is available to fill the position.  In reality, the cumbersome and lengthy process acts as a deterrent to foreign firms seeking to comply with the law; language barriers also prevent outsiders from competing for Italian positions.  Work visas are subject to annual quotas, although intra-company transfers are exempt from quota limitations.

In 2018 the newly-elected government majority introduced the so-called “Dignity Decree,” which rolled back some key structural reforms to Italy’s labor market adopted as part of the Jobs Act by the previous center-left government.  The Dignity Decree extended incentives to hire people under 35 years old, set limits on short-term contracts, and made it more costly to fire workers. 

Indefinite employment contracts signed before March 2015 are governed by the June 2012 labor regime, which allows firms to conduct layoffs and firings with lump sum payments.  Under the 2012 system, according to Article 18 of the workers’ statute of 1970, judges can order reinstatement of dismissed employees (with back pay) if they find the dismissal was a pretext for discriminatory or disciplinary dismissal.  In practice, dismissed employees reserved the right to challenge their dismissal indefinitely, often using the threat of protracted legal proceedings or an adverse court ruling to negotiate additional severance packages with employers.

However, indefinite employment contracts signed after March 2015 are governed by the rules established under the “Jobs Act” labor market reforms, which provide for employment contracts with protections increasing with job tenure.  During the first 36 months of employment, firms may dismiss employees for bona fide economic reasons.  Under the Jobs Act regime, dismissed employees must appeal their dismissal within 60 days and reinstatements are limited. 

Regardless of the reason for termination of employment, all former employees are entitled to receive mandatory severance payments from their employer (TFR – trattamento di fine rapporto), equal to 7.4 percent of the employee’s annual gross compensation for each year worked.

Other Jobs Act measures enacted in 2015 include universal unemployment and maternity benefits, as well as a reduced number of official labor contract templates (from 42 to six).  The GOI’s unemployment insurance (NASPI) provides up to six months of coverage for laid-off workers.  The GOI also provides worker retraining and job placement assistance, but services vary by region and implementation of national active labor market policies remains in progress.

Italy also offers other social safety net protections to all residents, designed to tackle poverty.  The previous government implemented an anti-poverty plan (Reddito di Inclusione, or “Inclusion Income”) aimed at providing some financial relief and training to homeless individuals and people with income below the poverty level.  In the 2019 budget, the current government introduced the so-called Citizenship Income (Reddito di Cittadinanza), which will replace and broaden the Inclusion Income program. The Citizenship Income program is aimed at providing a basic income of €780 a month to eligible citizens; the GOI estimates that one million workers are potentially eligible for this benefit.  The program also gives active support in finding a job to a portion of those receiving the Citizenship Income. The annual cost of the program is estimated to be €6 billion a year.

The 2019 budget and the associated decree and law also implemented an early retirement scheme (a.k.a. Quota 100) changing the  pension law and permitting earlier retirement for eligible workers with 62 years of age and 38 years of work seniority.

Other Jobs Act measures, including a statutory minimum wage, have not yet been implemented, although in July 2018 a national minimum wage bill was introduced in Parliament.  Italy does not currently have a national minimum wage, as wages are set through sector-wide collective bargaining. An agency for Job Training and Placement (ANPAL) was established in 2016 to coordinate with Italian regions, which after the defeat of the December 2016 constitutional reform referendum, remain in charge of implementation of many labor policies.  ANPAL is following the implementation of the Assegno di Riallocazione (the “reallocation check”, an initiative related to the Jobs Act aimed at providing unemployment benefits to workers willing to move to a different part of the country), and the related special wage guarantee fund (Cassa Integrazione Straordinaria) and retraining to find a new job.  The “reallocation check” funds are disbursed to the agency in charge of the retraining and job placement only after the candidate gets a new job.  Citizenship Income and ANPAL are expected to play a key role in helping eligible workers who are willing to work to find a job.

Historical regional labor market disparities remain unchanged, with the southern third of the country posting a significantly higher unemployment rate (e.g., more than 25 percent in Calabria) than northern and central Italy (e.g., approximately 4 percent in Bolzano).  Despite these differences, internal migration within Italy remains modest, while industry-wide national collective bargaining agreements set equal wages across the entire country. Immigrants from Eastern Europe and North Africa often are drawn to the north by the opportunities created there by shortages of unskilled and semi-skilled labor.

Italy is an International Labor Organization (ILO) member country.  Italy does not waive existing labor laws in order to attract or retain investments.  Terms and conditions of employment are periodically fixed by collective labor agreements in different professions.  Most Italian unions are grouped into four major national confederations: the General Italian Confederation of Labor (CGIL), the Italian Confederation of Workers’ Unions (CISL), the Italian Union of Labor (UIL), and the General Union of Labor (UGL).  The first three organizations are affiliated with the International Confederation of Free Trade Unions (ICFTU), while UGL has been associated with the World Confederation of Labor (WCL). The confederations negotiate national-level collective bargaining agreements with employer associations, which are binding on all employers in a sector or industry irrespective of geographical location.

Collective bargaining is widespread in Italy, occurring at the national-level (primarily to reflect inflation and cost-of-living adjustments) and industry-level (to reflect productivity and profitability).  Firm-level collective bargaining is limited.  The Italian Constitution provides that unions may reach collective agreements that are binding on all workers.  There are no official estimates of the percentage of the economy covered by collective bargaining agreements.  A 2014 estimate from union officials projected collective bargaining coverage at 80 percent (for national-level bargaining), with less coverage for industry-level agreements and minimal coverage for company-level agreements.

Collective agreements may last up to three years, though recent practice is to renew collective agreements annually.  Collective bargaining establishes the minimum standards for employment, though employers retain the discretion to apply more favorable treatment to some employees covered by the agreement. 

Labor disputes are handled through the civil court system, though they are subject to specific procedures.  Before entering the civil court system, parties must first attempt to resolve their disputes through conciliation (administered by the local office of the Ministry of Labor) and/or through specific union-agreed dispute resolution procedures.

In cases of proposed mass layoffs or facility closures, the Ministry of Economic Development may convene a tripartite negotiation (Ministry, company, and union representatives) to attempt to reach a mutually acceptable agreement to avoid the layoff or closure.

There have been no recent strikes that posed investment risks.  The Italian Constitution recognizes an employee’s right to strike.  Strikes are permitted in practice, but are typically short-term (e.g., one working day) to draw attention to specific areas of concern.  In addition, workers (or former employees) commonly participate in demonstrations to show opposition to proposed job cuts or facility closings, but these demonstrations have not threatened investments.  In addition, frequent strikes by employees of local transportation providers may limit citizens’ mobility. 

12. OPIC and Other Investment Insurance Programs

OPIC does not currently operate programs in Italy.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 €1,757,000 2017 $1,935,000 www.worldbank.org/en/country  
Foreign Direct Investment Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $12,203 2017 $30,708 BEA data available at http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Host country’s FDI in the United States ($M USD, stock positions) 2017 $33,430 2017 $35,672 BEA data available at http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm  
Total inbound stock of FDI as % host GDP 2017 24.8% 2017 21.7% N/A

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


Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $420,437 100% Total Outward $557,022 100%
Luxembourg $88,638 21% Netherlands $63,550 11%
Netherlands $80,143 19% Luxembourg $47,074 9%
France $70,327 17% Germany $43,195 8%
United Kingdom $53,678 13% United States $40,279 7%
Germany $37,285 9% Spain $36,247 7%
“0” reflects amounts rounded to +/- USD 500,000.

The 2017 IMF statistics above show Italy’s largest investment partners to be within the European Union and the United States.  This is consistent with Italy being fully integrated with its EU partners and the United States. Note: Foreign direct investment data can vary widely by source, reflecting different definitions used.  End note.


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Coun-tries $1,658,786 100% All Countries $1,018,524 100% All Countries $640,262 100%
Luxem-bourg $690,512 42% Luxem-bourg $665,672 65% France $104,049 16%
France $183,100 11% Ireland $131,735 13% Spain $99,870 16%
Ireland $148,185 8% France $79,051 8% United States $93,628 15%
United States $130,736 6% United States $37,108 4% Germany $61,778 10%
Spain $104,489 5% United Kingdom $32,263 3% Nether-lands $48,967 8%

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

14. Contact for More Information

Unit 9500
Attn:  Economic Section
DPO AE 09624
Tel:  +39 06 4674 2107
Email:  
RomeECON@state.gov  

Mexico

Executive Summary

Mexico is one of the United States’ top trade and investment partners.  Bilateral trade grew 650 percent 1993-2018 and Mexico is the United States’ second largest export market and third largest trading partner.  The United States is Mexico’s top source of foreign direct investment (FDI) with USD 12.3 billion (2018 flows) or 39 percent of all inflows to Mexico.

The Mexican economy has averaged 2.6 percent economic growth (GDP) 1994-2017.  Mexico has benefited since the 1994 Tequila Crisis from credible economic management that has allowed the country to weather a period of low oil prices and significant global volatility.  The fiscally prudent 2019 budget targets a one percent primary surplus, and the new government has upheld the Central Bank’s (Bank of Mexico) independence. Inflation at end-2018 was 4.8 percent, an improvement from 6.6 percent at the end of 2017, but still above the Bank of Mexico’s target of 3 percent due to peso depreciation against the U.S. Dollar and higher retail fuel prices caused by government efforts to stimulate competition in that sector.

The United States-Mexico-Canada (USMCA) trade agreement ratification prospects for 2019 and a historic change in the Mexican government December 1, 2018 remain key sources of investment uncertainty.  The new administration has signaled its commitment to prudent fiscal and monetary policies since taking office. Still, conflicting policies, programs, and communication from the new administration have contributed to ongoing uncertainties, especially related to energy sector reforms and the financial health of state-owned oil company Pemex.  Most financial institutions, including the Bank of Mexico, have revised downward Mexico’s GDP growth expectations for 2019 to 1.6 percent (Banxico consensus). Major credit rating agencies have downgraded or put on a negative outlook Mexico’s sovereign and some institutional ratings.

The administration followed through on its campaign promises to cancel the new airport project, cut government employees’ salaries, suspend all energy auctions, and weaken autonomous institutions.  Uncertainty about contract enforcement, insecurity, and corruption also continue to hinder Mexican economic growth. These factors raise the cost of doing business in Mexico significantly.

Table 1:  Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 138 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 54 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 56 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $109,700 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2018 $8,610 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Mexico is open to foreign direct investment (FDI) in the vast majority of economic sectors and has consistently been one of the largest emerging market recipients of FDI.  Mexico’s macroeconomic stability, large domestic market, growing consumer base, rising skilled labor pool, welcoming business climate, and proximity to the United States all help attract foreign investors.

Historically, the United States has been one of the largest sources of FDI in Mexico.  According to Mexico’s Secretariat of Economy, FDI flows to Mexico from the United States totaled USD 12.3 billion in 2018, nearly 39 percent of all inflows to Mexico (USD 31.6 billion).  The automotive, aerospace, telecommunications, financial services, and electronics sectors typically receive large amounts of FDI. Most foreign investment flows to northern states near the U.S. border, where most maquiladoras (export-oriented manufacturing and assembly plants) are located, or to Mexico City and the nearby “El Bajio” (e.g. Guanajuato, Queretaro, etc.) region.  In the past, foreign investors have overlooked Mexico’s southern states, although that may change if the new administration’s focus on attracting investment to the region gain traction.

The 1993 Foreign Investment Law, last updated in March 2017, governs foreign investment in Mexico.  The law is consistent with the foreign investment chapter of NAFTA. It provides national treatment, eliminates performance requirements for most foreign investment projects, and liberalizes criteria for automatic approval of foreign investment.  The Foreign Investment Law provides details on which business sectors are open to foreign investors and to what extent. Mexico is also a party to several Organization for Economic Cooperation and Development (OECD) agreements covering foreign investment, notably the Codes of Liberalization of Capital Movements and the National Treatment Instrument.

The new administration stopped funding ProMexico, the government’s investment promotion agency, and is integrating its components into other ministries and offices.  PROMTEL, the government agency charged with encouraging investment in the telecom sector, is expected to continue operations with a more limited mandate. Its first director and four other senior staff recently left the agency.  In April 2019, the government sent robust participation to the 11th CEO Dialogue and Business Summit for Investment in Mexico sponsored by the U.S. Chamber of Commerce and its Mexican equivalent, CCE. Cabinet-level officials conveyed the Mexican government’s economic development and investment priorities to dozens of CEOs and business leaders.

Limits on Foreign Control and Right to Private Ownership and Establishment

Mexico reserves certain sectors, in whole or in part, for the State including:  petroleum and other hydrocarbons; control of the national electric system, radioactive materials, telegraphic and postal services; nuclear energy generation; coinage and printing of money; and control, supervision, and surveillance of ports of entry.  Certain professional and technical services, development banks, and the land transportation of passengers, tourists, and cargo (not including courier and parcel services) are reserved entirely for Mexican nationals. See section six for restrictions on foreign ownership of certain real estate.

Reforms in the energy, power generation, telecommunications, and retail fuel sales sectors have liberalized access for foreign investors.  While reforms have not led to the privatization of state-owned enterprises such as Pemex or the Federal Electricity Commission (CFE), they have allowed private firms to participate.

Hydrocarbons:  Private companies participate in hydrocarbon exploration and extraction activities through contracts with the government under four categories:  competitive contracts, joint ventures, profit sharing agreements, and license contracts. All contracts must include a clause stating subsoil hydrocarbons are owned by the State.  The government has held four separate bid sessions allowing private companies to bid on exploration and development of oil and gas resources in blocks around the country. In 2017, Mexico successfully auctioned 70 land, shallow, and deep water blocks with significant interest from international oil companies.  The Lopez Obrador administration decided to suspend all future auctions until 2022.

Telecommunications:  Mexican law states telecommunications and broadcasting activities are public services and the government will at all times maintain ownership of the radio spectrum.

Aviation:  The Foreign Investment Law limited foreign ownership of national air transportation to 25 percent until March 2017, when the limit was increased to 49 percent.

Under existing NAFTA provisions, U.S. and Canadian investors receive national and most-favored-nation treatment in setting up operations or acquiring firms in Mexico.  Exceptions exist for investments restricted under NAFTA. Currently, the United States, Canada, and Mexico have the right to settle any dispute or claim under NAFTA through international arbitration.  Local Mexican governments must also accord national treatment to investors from NAFTA countries.

Approximately 95 percent of all foreign investment transactions do not require government approval.  Foreign investments that require government authorization and do not exceed USD 165 million are automatically approved, unless the proposed investment is in a legally reserved sector.

The National Foreign Investment Commission under the Secretariat of the Economy is the government authority that determines whether an investment in restricted sectors may move forward.  The Commission has 45 business days after submission of an investment request to make a decision. Criteria for approval include employment and training considerations, and contributions to technology, productivity, and competitiveness.  The Commission may reject applications to acquire Mexican companies for national security reasons. The Secretariat of Foreign Relations (SRE) must issue a permit for foreigners to establish or change the nature of Mexican companies.

Other Investment Policy Reviews

The World Trade Organization (WTO) completed a trade policy review of Mexico in February 2017 covering the period to year-end 2016.  The review noted the positive contributions of reforms implemented 2013-2016 and cited Mexico’s development of “Digital Windows” for clearing customs procedures as a significant new development since the last review.

The full review can be accessed via:  https://www.wto.org/english/tratop_e/tpr_e/tp452_e.htm  .

Business Facilitation

According to the World Bank, on average registering a foreign-owned company in Mexico requires 11 procedures and 31 days.  In 2016, then-President Pena Nieto signed a law creating a new category of simplified businesses called Sociedad for Acciones Simplificadas (SAS).  Owners of SASs will be able to register a new company online in 24 hours.  The Government of Mexico maintains a business registration website:  www.tuempresa.gob.mx  .  Companies operating in Mexico must register with the tax authority (Servicio de Administration y Tributaria or SAT), the Secretariat of the Economy, and the Public Registry.  Additionally, companies engaging in international trade must register with the Registry of Importers, while foreign-owned companies must register with the National Registry of Foreign Investments.

Outward Investment

In the past, ProMexico was responsible for promoting Mexican outward investment and provided assistance to Mexican firms acquiring or establishing joint ventures with foreign firms, participating in international tenders, and establishing franchise operations, among other services.  Various offices at the Secretariat of Economy and the Secretariat of Foreign Affairs now handle these issues. Mexico does not restrict domestic investors from investing abroad.

2. Bilateral Investment Agreements and Taxation Treaties

Bilateral Investment Treaties

On November 30, 2018, leaders of the United States, Mexico, and Canada signed a trade agreement to replace and modernize NAFTA – the United States-Mexico-Canada Agreement.  The agreement is now pending ratification by all three countries’ legislatures. The agreement contains an investment chapter.

Mexico has signed 13 FTAs covering 50 countries and 32 Reciprocal Investment Promotion and Protection Agreements covering 33 countries.  Mexico is a member of Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which entered into force December 30, 2018.  Mexico currently has 29 Bilateral Investment Treaties in force. Mexico and the European Union signed an agreement in principle to revise its FTA.

Bilateral Taxation Treaties

The United States-Mexico Income Tax Convention, which came into effect January 1, 1994, governs bilateral taxation between the two nations.  Mexico has negotiated double taxation agreements with 55 countries. Recent reductions in U.S. corporate tax rates may drive a future change to the Mexican fiscal code, but there is no formal legislation under consideration.

3. Legal Regime

International Regulatory Considerations

Generally speaking, the Mexican government has established legal, regulatory, and accounting systems that are transparent and consistent with international norms.  Still, the Lopez Obrador administration has publicly questioned the value of specific anti-trust and energy regulators. Furthermore, corruption continues to affect equal enforcement of some regulations.  The Lopez Obrador administration has an ambitious plan to centralize government procurement in an effort to root out corruption and generate efficiencies.  The administration estimates it can save up to USD 25 billion annually by consolidating government purchases in the Mexican Secretariat of Finance (Hacienda).  Under the current decentralized process, more than 70 percent of government contracts are sole-sourced, interagency consolidated purchases are uncommon, and the entire process is susceptible to corruption.  The Mexican government’s budget is published online and readily available.  The Bank of Mexico also publishes and maintains data about the country’s finances and debt obligations.

The Federal Commission on Regulatory Improvement (COFEMER), within the Secretariat of Economy, is the agency responsible for streamlining federal and sub-national regulation and reducing the regulatory burden on business.  Mexican law requires Secretariats and regulatory agencies to conduct impact assessments of proposed regulations. Assessments are made available for public comment via COFEMER’s website: www.cofemer.gob.mx  .  The official gazette of state and federal laws currently in force in Mexico is publicly available via:  http://www.ordenjuridico.gob.mx/  .

Mexico’s antitrust agency, the Federal Commission for Economic Competition (COFECE), plays a key role protecting, promoting, and ensuring a competitive free market in Mexico.  COFECE is responsible for eliminating barriers both to competition and free market entry across the economy (except for the telecommunications sector, which is governed by its own competition authority) and for identifying and regulating access to essential production inputs.

In addition to COFECE, the Energy Regulatory Commission (CRE) and National Hydrocarbon Commission (CNH) are both technically-oriented independent agencies that play important roles in regulating the energy and hydrocarbons sectors.  CRE regulates national electricity generation, coverage, distribution, and commercialization, as well as the transportation, distribution, and storage of oil, gas, and biofuels. CNH supervises and regulates oil and gas exploration and production and issues oil and gas upstream (exploration/production) concessions.

Investors are increasingly concerned the administration is undermining confidence in the “rules of the game,” particularly in the energy sector, by weakening the political autonomy of COFECE, CNH, and CRE.  The administration appointed four of seven CRE commissioners over the Senate’s objections, which voted twice to reject the nominees in part due to concerns their appointments would erode the CRE’s political autonomy.  The administration’s budget cuts resulted in significant layoffs, which has reportedly hampered the agencies’ ability to carry out its work, a key factor in investment decisions.

The Secretariat of Public Administration has made considerable strides in improving transparency in government, including government contracting and involvement of the private sector in enhancing transparency and fighting corruption.  The Mexican government has established four internet sites to increase transparency of government processes and to establish guidelines for the conduct of government officials: (1) Normateca (http://normatecainterna.sep.gob.mx  ) provides information on government regulations; (2) Compranet (https://compranet.funcionpublica.gob.mx  ) displays federal government procurement actions on-line; (3) Tramitanet (www.tramitanetmexico.com  ) permits electronic processing of transactions within the bureaucracy; and (4) Declaranet (https://declaranet.gob.mx/  ) allows federal employees to file income taxes online.

Legal System and Judicial Independence

Since the Spanish conquest in the 1500s, Mexico has had an inquisitorial system adopted from Europe in which proceedings were largely carried out in writing and sealed from public view.  Mexico amended its Constitution in 2008 to facilitate change to an oral accusatorial criminal justice system to better combat corruption, encourage transparency and efficiency, while ensuring respect for the fundamental rights of both the victim and the accused.  An ensuing National Code of Criminal Procedure passed in 2014, and is applicable to all 32 states. The national procedural code is coupled with each state’s criminal code to provide the legal framework for the new accusatorial system, which allows for oral, public trials with the right of the defendant to face his/her accuser and challenge evidence presented against him/her, right to counsel, due process and other guarantees.  Mexico fully adopted the new accusatorial criminal justice system at the state and federal levels in June 2016.

Mexico’s Commercial Code, which dates back to 1889, was most recently updated in 2014.  All commercial activities must abide by this code and other applicable mercantile laws, including commercial contracts and commercial dispute settlement measures.  Mexico has multiple specialized courts regarding fiscal, labor, economic competition, broadcasting, telecommunications, and agrarian law.

The judicial branch is nominally independent from the executive.  Following a reform passed in February 2014, the Attorney General’s Office (Procuraduria General de la Republica or PGR) became autonomous of the executive branch, as the Prosecutor General’s Office (Fiscalia General de la Republica or FGR).  The Mexican Senate confirmed Mexico’s first Fiscal on January 18, 2019.  The Fiscal will serve a nine-year term, intended to insulate his office from the executive branch, whose members serve six-year terms.

Laws and Regulations on Foreign Direct Investment

Mexico’s Foreign Investment Law sets the rules governing foreign investment into the country.  The National Commission for Foreign Investments, formed by several cabinet-level ministries including Interior (SEGOB), Foreign Relations (SRE), Finance (Hacienda), Economy (SE), and Social Development (SEDESOL), establishes the criteria for administering investment rules.

Competition and Anti-Trust Laws

Mexico has two constitutionally autonomous regulators to govern matters of competition – the Federal Telecommunications Institute (IFT) and the Federal Commission for Economic Competition (COFECE).  IFT governs broadcasting and telecommunications, while COFECE regulates all other sectors. For more information on competition issues in Mexico, please visit COFECE’s bilingual website at: www.cofece.mx  .

Expropriation and Compensation

Mexico may not expropriate property under NAFTA, except for public purpose and on a non-discriminatory basis.  Expropriations are governed by international law and require rapid fair market value compensation, including accrued interest.  Investors have the right to international arbitration for violations of this or any other rights included in the investment chapter of NAFTA.

Dispute Settlement

ICSID Convention and New York Convention

Mexico ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) in 1971 and has codified this into domestic law.  Mexico is also a signatory to the Inter-American Convention on International Commercial Arbitration (1975 Panama Convention) and the 1933 Montevideo Convention on the Rights and Duties of States.  Mexico is not a member of the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention), even though many of the investment agreements signed by Mexico include ICSID arbitration as a dispute settlement option.

Investor-State Dispute Settlement

Chapters 11, 19, and 20 of the existing NAFTA cover international dispute resolution.  Chapter 11 allows a NAFTA Party investor to seek monetary damages for violations of its provisions.  Investors may initiate arbitration against the NAFTA Party under the rules of the United Nations Commission on International Trade Law (UNCITRAL Model Law) or through the ICSID Convention.  A NAFTA investor may also choose to use the domestic court system to litigate their case. The USMCA contains revisions to these chapters, but will not enter into force until all three countries have ratified the agreement.

Since NAFTA’s inception, there have been 17 cases filed against Mexico by U.S. and Canadian investors who allege expropriation and/or other violations of Mexico’s NAFTA obligations.  Details of the cases can be found at: https://www.state.gov/s/l/c3742.htm.

International Commercial Arbitration and Foreign Courts

The Arbitration Center of Mexico (CAM) is a specialized, private institution administering commercial arbitration as an alternative dispute resolution mechanism.  The average duration of an arbitration process conducted by CAM is 14 months. The Commercial Code dictates an arbitral award, regardless of the country where it originated, must be recognized as binding.  The award must be enforced after a formal written petition is presented to a judge.

The internal laws of both Pemex and CFE state all national disputes of any nature will have to be resolved by federal courts.  State-owned Enterprises (SOEs) and their productive subsidiaries may opt for alternative dispute settlement mechanisms under applicable commercial legislation and international treaties of which Mexico is a signatory.  When contracts are executed in a foreign country, Pemex and CFE have the option to follow procedures governed by non-Mexican law, to use foreign courts, or to participate in arbitration.

Bankruptcy Regulations

Mexico’s Reorganization and Bankruptcy Law (Ley de Concursos Mercantiles) governs bankruptcy and insolvency.  Congress approved modifications in 2014 in order to shorten procedural filing times and convey greater juridical certainty to all parties, including creditors.  Declaring bankruptcy is legal in Mexico and it may be granted to a private citizen, a business, or an individual business partner. Debtors, creditors, or the Attorney General can file a bankruptcy claim.  Mexico ranked 32 out of 190 countries for resolving insolvency in the World Bank’s 2019 Doing Business report. The average bankruptcy filing takes 1.8 years to be resolved and recovers 64.7 cents per USD, which compares favorably to average recovery in Latin America and the Caribbean of just 30.9 cents per USD.  “Buró de Crédito” is Mexico’s main credit bureau.  More information on credit reports and ratings can be found at:  http://www.burodecredito.com.mx/  .

4. Industrial Policies

Investment Incentives

Land grants or discounts, tax deductions, and technology, innovation, and workforce development funding are commonly used incentives.  Additional federal foreign trade incentives include: (1) IMMEX: a promotion which allows manufacturing sector companies to temporarily import inputs without paying general import tax and value added tax; (2) Import tax rebates on goods incorporated into products destined for export; and (3) Sectoral promotion programs allowing for preferential ad-valorem tariffs on imports of selected inputs.  Industries typically receiving sectoral promotion benefits are footwear, mining, chemicals, steel, textiles, apparel, and electronics.

Foreign Trade Zones/Free Ports/Trade Facilitation

The new administration launched a two-year program in January 2019 that established a border economic zone (BEZ) in 43 municipalities in six northern border states within 15.5 miles from the U.S. border.  The BEZ program entails: 1) a fiscal stimulus decree reducing the Value Added Tax (VAT) from 16 percent to 8 percent and the Income Tax (ISR) from 30 percent to 20 percent, 2) a minimum wage increase to MXN 176.72 (USD 8.75) per day, and 3) the gradual harmonization of gasoline, diesel, natural gas, and electricity rates with neighboring U.S. states.  The purpose of the BEZ program is to boost investment, promote productivity, and create more jobs in the region.  Interested businesses or individuals must apply to the government’s “Beneficiary Registry” by March 31 demonstrating income from border business activities comprise at least 90 percent of total income.  The company headquarters or branch must be located in the border region for at least 18 months prior to the application.  Sectors excluded from the preferential ISR rate include financial institutions, the agricultural sector, and export manufacturing companies (maquilas).

Separately, the administration announced plans to review and possibly end the Special Economic Zones (SEZs) program throughout the country.

Performance and Data Localization Requirements

Mexican labor law requires at least 90 percent of a company’s employees be Mexican nationals.  Employers can hire foreign workers in specialized positions as long as foreigners do not exceed 10 percent of all workers in that specialized category.  Mexico does not follow a “forced localization” policy—foreign investors are not required by law to use domestic content in goods or technology. However, investors intending to produce goods in Mexico for export to the United States should take note of the rules of origin prescriptions contained within NAFTA if they wish to benefit from NAFTA treatment.

Mexico does not have any policy of forced localization for data storage, nor must foreign information technology (IT) providers turn over source code or provide backdoors into hardware or software.  Within the constraints of the Federal Law on the Protection of Personal Data, Mexico does not impede companies from freely transmitting customer or other business-related data outside the country.

5. Protection of Property Rights

Real Property

Mexico ranked 103 out of 190 countries for ease of registering property in the World Bank’s 2019 Doing Business report, falling four places from its 2018 report.  Article 27 of the Mexican Constitution guarantees the inviolable right to private property. Expropriation can only occur for public use and with due compensation.  Mexico has four categories of land tenure: private ownership, communal tenure (ejido), publicly owned, and ineligible for sale or transfer.

Mexico prohibits foreigners from acquiring title to residential real estate in so-called “restricted zones” within 50 kilometers (approximately 30 miles) of the nation’s coast and 100 kilometers (approximately 60 miles) of the borders.  “Restricted zones” cover roughly 40 percent of Mexico’s territory. Foreigners may acquire the effective use of residential property in “restricted zones” through the establishment of an extendable trust (fideicomiso) arranged through a Mexican financial institution.  Under this trust, the foreign investor obtains all property use rights, including the right to develop, sell, and transfer the property.  Real estate investors should be careful in performing due diligence to ensure that there are no other claimants to the property being purchased.  In some cases, fideicomiso arrangements have led to legal challenges.  U.S.-issued title insurance is available in Mexico and U.S. title insurers operate here.

Additionally, U.S. lending institutions have begun issuing mortgages to U.S. citizens purchasing real estate in Mexico.  The Public Register for Business and Property (Registro Publico de la Propiedad y de Comercio) maintains publicly available information online regarding land ownership, liens, mortgages, restrictions, etc.

Tenants and squatters are protected under Mexican law.  Property owners who encounter problems with tenants or squatters are advised to seek professional legal advice, as the legal process of eviction is complex.

Mexico has a nascent but growing financial securitization market for real estate and infrastructure investments, which investors can access via the purchase/sale of Fideocomisos de Infraestructura y Bienes Raíces (FIBRAs) and Certificates of Capital Development (CKDs) listed on Mexico’s BMV stock exchange.

Intellectual Property Rights

Intellectual Property Rights in Mexico are covered by the Industrial Property Law (Ley de la Propiedad Industrial) and the Federal Copyright Law (Ley Federal del Derecho de Autor).  Responsibility for the protection of IPR is spread across several government authorities.  The Office of the Attorney General (PGR) oversees a specialized unit that prosecutes IPR crimes.  The Mexican Institute of Industrial Property (IMPI), the equivalent to the U.S. Patent and Trademark Office, administers patent and trademark registrations, and handles administrative enforcement cases of IPR infringement.  The National Institute of Copyright (INDAUTOR) handles copyright registrations and mediates certain types of copyright disputes, while the Federal Commission for the Prevention from Sanitary Risks (COFEPRIS) regulates pharmaceuticals, medical devices, and processed foods.  The Mexican Customs Service’s mandate includes ensuring illegal goods do not cross Mexico’s borders.

The process for trademark registration in Mexico normally takes six to eight months.  The registration process begins by filing an application with IMPI, which is published in the Official Gazette.  IMPI first undertakes a formalities examination, followed by a substantive examination to determine if the application and supporting documentation fulfills the requirements established by law and regulation to grant the trademark registration.  Once the determination is made, IMPI then publishes the registration in the Official Gazette. A trademark registration in Mexico is valid for 10 years from the filing date, and is renewable for 10-year periods. Any party can challenge a trademark registration through the new opposition system, or post-grant through a cancellation proceeding.  IMPI employs the following administrative procedures: nullity, expiration, opposition, cancellation, trademark, patent and copyright (trade-based) infringement. Once IMPI issues a decision, the affected party may challenge it through an internal reconsideration process or go directly to the Specialized IP Court for a nullity trial. An aggrieved party can then file an appeal with a Federal Appeal Court based on the Specialized IP Court’s decision.  In cases with an identifiable constitutional challenge, the plaintiff may file an appeal before the Supreme Court of Justice.

The USPTO has a Patent Prosecution Highway (PPH) agreement with IMPI.  Under the PPH, an applicant receiving a ruling from either IMPI or the USPTO that at least one claim in an application is patentable may request that the other office expedite examination of the corresponding application.  The PPH leverages fast-track patent examination procedures already available in both offices to allow applicants in both countries to obtain corresponding patents faster and more efficiently. The PPH permits USPTO and IMPI to benefit from work previously done by the other office, which reduces the examination workload and improves patent quality.

Mexico is plagued by widespread commercial-scale infringement that results in significant losses to Mexican, U.S., and other IPR owners.  There are many issues that have made it difficult to improve IPR enforcement in Mexico, including legislative loopholes; lack of coordination between federal, state, and municipal authorities; a cumbersome and lengthy judicial process; and widespread cultural acceptance of piracy and counterfeiting.  In addition, the involvement of transnational criminal organizations (TCOs), which control the piracy and counterfeiting markets in parts of Mexico, continue to impede federal government efforts to improve IPR enforcement. TCO involvement has further illustrated the link between IPR crimes and illicit trafficking of other contraband, including arms and drugs.

Mexico remained on the Watch List in the 2019 Special 301 report.  Obstacles to U.S. trade include the wide availability of pirated and counterfeit goods in both physical and virtual notorious markets.  The 2018 USTR Out-Of-Cycle Review of Notorious Markets listed two Mexican markets: Tepito in Mexico City and San Juan de Dios in Guadalajara.

Mexico is a signatory to numerous international IP treaties, including the Paris Convention for the Protection of Industrial Property, the Bern Convention for the Protection of Literary and Artistic Works, and the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights.

Resources for Rights Holders

  • Intellectual Property Rights Attaché for Mexico, Central America and the Caribbean

U.S. Trade Center
Liverpool No. 31 Col. Juárez
C.P. 06600 Mexico City
Tel: (52) 55 5080 2189

  • National Institute of Copyright (INDAUTOR)

Puebla No. 143
Col. Roma, Del. Cuauhtémoc
06700 México, D.F.
Tel: (52) 55 3601 8270
Fax: (52) 55 3601 8214
Web: http://www.indautor.gob.mx/  

  • Mexican Institute of Industrial Property (IMPI)

Periférico Sur No. 3106
Piso 9, Col. Jardines del Pedregal
Mexico, D.F., C.P. 01900
Tel: (52 55) 56 24 04 01 / 04
(52 55) 53 34 07 00
Fax: (52 55) 56 24 04 06
Web: http://www.impi.gob.mx/  

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

6. Financial Sector

Capital Markets and Portfolio Investment

The Mexican government is generally open to foreign portfolio investments, and foreign investors trade actively in various public and private asset classes.  Foreign entities may freely invest in federal government securities. The Foreign Investment Law establishes foreign investors may hold 100 percent of the capital stock of any Mexican corporation or partnership, except in those few areas expressly subject to limitations under that law.  Foreign investors may also purchase non-voting shares through mutual funds, trusts, offshore funds, and American Depositary Receipts. They also have the right to buy directly limited or nonvoting shares as well as free subscription shares, or “B” shares, which carry voting rights. Foreigners may purchase an interest in “A” shares, which are normally reserved for Mexican citizens, through a neutral fund operated by one of Mexico’s six development banks.  Finally, Mexico offers federal, state, and local governments bonds that are rated by international credit rating agencies. The market for these securities has expanded rapidly in past years and foreign investors hold a significant stake of total federal issuances. However, foreigners are limited in their ability to purchase sub-sovereign state and municipal debt. Liquidity across asset classes is relatively deep.

Mexico established a fiscally transparent trust structure known as a FICAP in 2006 to allow venture and private equity funds to incorporate locally.  The Securities Market Law (Ley de Mercado de Valores) established the creation of three special investment vehicles which can provide more corporate and economic rights to shareholders than a normal corporation.  These categories are: (1) Investment Promotion Corporation (Sociedad Anonima de Promotora de Inversion or SAPI); (2) Stock Exchange Investment Promotion Corporation (Sociedad Anonima Promotora de Inversion Bursatil or SAPIB); and (3) Stock Exchange Corporation (Sociedad Anonima Bursatil or SAB).  Mexico also has a growing real estate investment trust market, locally referred to as Fideicomisos de Infraestructura y Bienes Raíces (FIBRAS) as well as FIBRAS-E, which allow for investment in non-real estate investment projects.  FIBRAS are regulated under Articles 187 and 188 of Mexican Federal Income Tax Law.

Money and Banking System

Financial sector reforms signed into law in 2014 have improved regulation and supervision of financial intermediaries and have fostered greater competition between financial services providers.  While access to financial services – particularly personal credit for formal sector workers – has expanded in the past four years, bank and credit penetration in Mexico remains low compared to OECD and emerging market peers.  Coupled with sound macroeconomic fundamentals, reforms have created a positive environment for the financial sector and capital markets. According to the National Banking Commission (CNBV), the banking system remains healthy and well capitalized.  Non-performing loans have fallen sixty percent since 2001 and now account for 2.1 percent of all loans.

Mexico’s banking sector is heavily concentrated and majority foreign-owned:  the seven largest banks control 85 percent of system assets and foreign-owned institutions control 70 percent of total assets.  Under NAFTA’s national treatment guarantee, U.S. securities firms and investment funds, acting through local subsidiaries, have the right to engage in the full range of activities permitted in Mexico.

Banco de Mexico (Banxico), Mexico’s central bank, maintains independence in operations and management by constitutional mandate.  Its main function is to provide domestic currency to the Mexican economy and to safeguard the Mexican Peso’s purchasing power by gearing monetary policy toward meeting a 3 percent inflation target over the medium term.

Mexico’s Financial Technology (FinTech) law came into effect in March 2018, creating a broad rubric for the development and regulation of innovative financial technologies.  Although investors await important secondary regulations that will fully define the rules of the game for FinTech firms, the law covers both cryptocurrencies and a regulatory “sandbox” for start-ups to test the viability of products, placing Mexico among the FinTech policy vanguard.

Foreign Exchange and Remittances

Foreign Exchange

The Government of Mexico maintains a free-floating exchange rate.

Mexico maintains open conversion and transfer policies.  In general, capital and investment transactions, remittance of profits, dividends, royalties, technical service fees, and travel expenses are handled at market-determined exchange rates.  Mexican Peso (MXN)/USD exchange is available on same day, 24- and 48-hour settlement bases. In order to prevent money-laundering transactions, Mexico imposes limits on USD cash deposits. Border- and tourist-area businesses may deposit more than USD 14,000 per month subject to reporting rules and providing justification for their need to conduct USD cash transactions.  Individuals are subject to a USD 4,000 per month USD cash deposit limit. In 2016, Banxico launched a central clearing house to allow for USD clearing services wholly within Mexico, which should improve clearing services significantly for domestic companies with USD income.

Remittance Policies

There have been no recent changes in Mexico’s remittance policies.  Mexico continues to maintain open conversion and transfer policies.

Sovereign Wealth Funds

The Mexican Petroleum Fund for Stability and Development (FMP) was created as part of 2013 budgetary reforms.  Housed in Banxico, the fund distributes oil revenues to the national budget and a long-term savings account. The FMP incorporates the Santiago Principles for transparency, placing it among the most transparent Sovereign Wealth Funds in the world.  Both Banxico and Mexico’s Supreme Federal Auditor regularly audit the fund. Mexico is also a member of the International Working Group of Sovereign Wealth Funds. The Fund is expected to receive MXN 520.6 billion (approximately USD 26 billion) in income in 2019.  The FMP is required to publish quarterly and annual reports, which can be found at www.fmped.org.mx  .

7. State-Owned Enterprises

There are two main SOEs in Mexico, both of them in the energy sector.  Petroleos Mexicanos (Pemex) is in charge of running the hydrocarbons (oil and gas) sector, which includes upstream, mid-stream, and downstream operations.  Pemex historically contributed one-third of the Mexican government’s budget, but falling output and global oil prices alongside improved revenue collection from other sources have diminished this amount over the past decade to about eight percent.  The Federal Electricity Commission (CFE) is the other main state-owned company and is in charge of the electricity sector. While the Mexican government maintains state ownership, the latest constitutional reforms granted Pemex and CFE management and budget autonomy and greater flexibility to engage in private contracting.

Pemex

As a result of Mexico’s historic energy reform, the private sector is now able to compete with Pemex or enter into competitive contracts, joint ventures, profit sharing agreements, and license contracts with Pemex for hydrocarbon exploration and extraction.  Liberalization of the retail fuel sales market, which Mexico completed in 2017, created significant opportunities for foreign businesses. Given Pemex frequently raises debt in international markets, its financial statements are regularly audited. The Natural Resource Governance Institute considers Pemex to be the second most transparent state-owned oil company after Norway’s Statoil.  Pemex’s nine-person Board of Directors contains five government ministers and four independent councilors. The administration has identified increasing Pemex’s oil, natural gas, and refined fuels production as its chief priority for Mexico’s hydrocarbon sector.

CFE

Changes to the Mexican constitution in 2013 and 2014 opened power generation and commercial supply to the private sector, allowing companies to compete with CFE.  Mexico has held three long-term power auctions since the reforms, in which over 40 contracts were awarded for 7,451 megawatts of energy supply and clean energy certificates.  CFE will remain the sole provider of distribution services and will own all distribution assets. The 2014 energy reform separated CFE from the National Energy Control Center (CENACE), which now controls the national wholesale electricity market and ensures non-discriminatory access to the grid for competitors.  Independent power generators were authorized to operate in 1992, but were required to sell their output to CFE or use it to self-supply. Under the reform, private power generators may now install and manage interconnections with CFE’s existing state-owned distribution infrastructure. The reform also requires the government to implement a National Program for the Sustainable Use of Energy as a transition strategy to encourage clean technology and fuel development and reduce pollutant emissions.  The administration has identified increasing CFE-owned power generation as its top priority for the utility, breaking from the firm’s recent practice of contracting private firms to build, own, and operate generation facilities. It has publicly called for private investors to “voluntarily renegotiate” gas supply contracts with CFE, which has raised significant concerns among investors about contract sanctity.

The main non-market-based advantage CFE and Pemex receive vis-a-vis private businesses in Mexico is related to access to capital.  In addition to receiving direct budget support from the Secretariat of Finance, both entities also receive implicit credit guarantees from the federal government.  As such, both are able to borrow funds on public markets at below the market rate their corporate risk profiles would normally suggest.

Privatization Program

Mexico’s 2014 energy reforms liberalized access to these sectors but did not privatize state owned enterprises.

8. Responsible Business Conduct

Mexico’s private and public sectors have worked to promote and develop corporate social responsibility (CSR) during the past decade.  CSR in Mexico began as a philanthropic effort. It has evolved gradually to a more holistic approach, trying to match international standards such as the OECD Guidelines for Multinational Enterprises and the United Nations Global Compact.

Responsible business conduct reporting has made progress in the last few years with more companies developing a corporate responsibility strategy.  The government has also made an effort to implement CSR in state owned companies such as Pemex, which has published corporate responsibility reports since 1999.  Recognizing the importance of CSR issues, the Mexican Stock Exchange (Bolsa Mexicana de Valores) launched a sustainable companies index, which allows investors to specifically invest in those companies deemed to meet internationally accepted criteria for good corporate governance.

In October 2017, Mexico became the 53rd member of the Extractive Industries Transparency Initiative (EITI), which represents an important milestone in its effort to establish transparency and public trust in its energy sector.

9. Corruption

Corruption exists in many forms in Mexican government and society, including corruption in the public sector (e.g., demand for bribes or kickbacks by government officials) and private sector (e.g., fraud, falsifying claims, etc.), as well as conflict of interest issues, which are not well defined in the Mexican legal framework.  A key pillar of President Lopez Obrador’s presidential campaign was combatting corruption at all levels of government.

Still, a significant concern is the complicity of government and law enforcement officials with criminal elements.  While public and private sector corruption is found in many countries, the collaboration of government actors (often due to intimidation and threats) with criminal organizations poses serious challenges for the rule of law in Mexico.  Some of the most common reports of official corruption involve government officials stealing from public coffers or demanding bribes in exchange for awarding public contracts. The current administration supported anti-corruption reforms (detailed below) and judicial proceedings in several high-profile corruption cases, including former governors.  However, Mexican civil society assert that the government must take more effective and frequent action to address corruption.

As described in Section 4, Mexico adopted a constitutional reform in 2014 to transform the current Office of the Attorney General into an Independent Prosecutor General’s office in order to shore up its independence.  President Lopez Obrador’s choice for Prosecutor General was confirmed by the Mexican Senate January 18, 2019. In 2015, Mexico passed a constitutional reform creating the National Anti-Corruption System (SNA) with an anti-corruption prosecutor and a citizens’ participation committee to oversee efforts.  The system is designed to provide a comprehensive framework for the prevention, investigation, and prosecution of corruption cases, including delineating acts of corruption considered criminal acts under the law. The legal framework establishes a basis for holding private actors and private firms legally liable for acts of corruption involving public officials and encourages private firms to develop internal codes of conduct.  Implementation of the mandatory state-level anti-corruption legislation varies. .

The new laws mandate a redesign of the Secretariat of Public Administration to give it additional auditing and investigative functions and capacities in combatting public sector corruption.  The Mexican Congress approved legislation to change economic institutions, assigning new responsibilities and in some instances creating new entities.  Reforms to the federal government’s structure included the creation of a General Coordination of Development Programs to manage the newly created federal state coordinators (“superdelegates”) in charge of federal programs in each state.  The law also created the Secretariat of Public Security and Citizen Protection, and significantly expanded the power of the president’s Legal Advisory Office (Consejería Jurídica) to name and remove each federal agency’s legal advisor and clear all executive branch legal reforms before their submission to Congress.  The law eliminated financial units from ministries, with the exception of the Secretariat of Finance (SHCP), the army (SEDENA), and the navy (SEMAR), and transferred control of contracting offices in other ministries to the SHCP.  Separately, the law replaced the previous Secretariat of Social Development (SEDESOL) with a Welfare Secretariat in charge of coordinating social policies, including those developed by other agencies such as health, education, and culture.  The Labor Secretariat gained additional tools to foster collective bargaining, union democracy, and to meet International Labor Organization (ILO) obligations.

Four opposition parties filed a legal challenge with the Supreme Court, which agreed January 18 to hear constitutional challenges to the law.  The legal challenge contends the reforms infringe on state powers and violate the balance of powers stipulated in the constitution.

Mexico ratified the OECD Convention on Combating Bribery and passed its implementing legislation in May 1999.  The legislation includes provisions making it a criminal offense to bribe foreign officials. Mexico is also a party to the Organization of American States (OAS) Convention against Corruption and has signed and ratified the United Nations Convention against Corruption.  The government has enacted or proposed strict laws attacking corruption and bribery, with average penalties of five to 10 years in prison.

Mexico is a member of the Open Government Partnership and enacted a Transparency and Access to Public Information Act in 2015, which revised the existing legal framework to expand national access to information.  Transparency in public administration at the federal level has noticeably improved, but access to information at the state and local level has been slow. According to Transparency International’s 2018 Corruption Perception Index, Mexico ranked 138 of 180 nations, and has fallen every year since 2012.  Civil society organizations focused on fighting corruption are increasingly influential at the federal level, but are few in number and less powerful at the state and local levels.

The World Economic Forum (WEF) Global Competitiveness Report for 2016-2017 found corruption is “the most problematic factor for doing business” in Mexico.  For example, the WEF notes bribes to facilitate procurement of necessary permits or government contracts can increase business costs by 10 percent. Business representatives, including from U.S. firms believe public funds are often diverted to private companies and individuals due to corruption and perceive favoritism to be widespread among government procurement officials.  The GAN Business Anti-Corruption Portal states compliance with procurement regulations by state bodies in Mexico is unreliable and that corruption is extensive, despite laws covering conflicts of interest, competitive bidding, and company blacklisting procedures.

The U.S. Embassy has engaged in a broad-based effort to work with Mexican agencies and civil society organizations in developing mechanisms to fight corruption and increase transparency and fair play in government procurement.  Efforts with specific business impact include government procurement best practices training and technical assistance under the U.S. Trade and Development Agency’s Global Procurement Initiative. In addition, USAID is working with SFP and Transparency International to drive adoption of the internationally accepted Open Contracting Data Standard (OCDS), as well as technical assistance to upgrade the Mexican government procurement system, CompraNet, to be based on OCDS and international best practices.  (CompraNet is also described in the regulatory transparency portion of Section 3, above.)

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Mexico ratified the UN Convention Against Corruption in 2004.  It ratified the OECD Anti-Bribery Convention in 1999.

Resources to Report Corruption

Contact at government agency:

Secretariat of Public Administration
Miguel Laurent 235, Mexico City
52-55-2000-1060

Contact at “watchdog” organization:

Transparencia Mexicana
Dulce Olivia 73, Mexico City
52-55-5659-4714
Email: info@tm.org.mx

10. Political and Security Environment

Mass demonstrations are common in the larger metropolitan areas and in the southern Mexican states of Guerrero and Oaxaca.  While political violence is rare, drug and organized crime-related violence has increased significantly in recent years.

The USD 2.7 billion Merida Initiative, launched by Presidents Calderon and Bush in 2008 and supported by bipartisan leaders in Congress, remains our primary mechanism to support Mexico in addressing significant security challenges at an institutional level.  Merida Initiative programs aim to strengthen Mexico’s security and judicial institutions by applying international standards of certification and accreditation to personnel and institutions across the criminal justice system, from the accreditation of police academies and corrections facilities to advanced training for judges, prosecutors, criminal analysts, and forensic lab technicians.  In addition, Merida Initiative programs have expanded over the past year in the areas of border security and counternarcotics, in line with new priorities set out by the Trump administration.

Companies have reported general security concerns remain an issue for companies looking to invest in the country.  The American Chamber of Commerce in Mexico estimates in a biannual report that security costs business as much as 5 percent of operating budgets.  Many companies choose to take extra precautions for the protection of their executives. They also report increasing security costs for shipments of goods.  The Overseas Security Advisory Council (OSAC) monitors and reports on regional security for U.S. businesses operating overseas. OSAC constituency is available to any U.S.-owned, not-for-profit organization, or any enterprise incorporated in the United States (parent company, not subsidiaries or divisions) doing business overseas (https://www.osac.gov/  ).

The Department of State maintains a Travel Advisory for U.S. citizens traveling and living in Mexico, available at https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories/mexico-travel-advisory.html

11. Labor Policies and Practices

Mexico’s 57.4 percent rate of informality remains higher than countries with similar GDP per capita levels.  High informality, defined as those working in unregistered firms or without social security protection, distorts labor market dynamics, contributes to persistent wage depression, drags overall productivity, and slows economic growth.  Mexico’s efforts to increase formality over the past four years reduced the rate by 2.4 percentage points, a modest decrease given the scope of the problem. In the formal economy, there is a general surplus of labor but a shortage of technically skilled workers and engineers.  Manufacturing companies, particularly along the U.S.-Mexico border and in the states of Aguascalientes, Guanajuato, Jalisco, and Querétaro, report labor shortages and an inability to retain staff.

Mexico’s labor relations system has been widely criticized as skewed to represent the interests of employers and the government at the expense of workers.  Mexico’s legal framework governing collective bargaining created the possibility of negotiation and registration of initial collective bargaining agreements without the support or knowledge of the covered workers.  These agreements are commonly known as protection contracts and constitute a gap in practice with international labor standards regarding freedom of association. The percentage of the economy covered by collective bargaining agreements is between five and 10 percent.

The first element of a labor justice reform package was passed into law February 24, 2017, replacing biased tripartite dispute resolution entities (Conciliation and Arbitration Boards) with independent judicial bodies.  In terms of labor dispute resolution mechanisms, the Conciliation and Arbitration Boards (CABs) previously adjudicated all individual and collective labor conflicts. The constitutional labor reform requires complementary revisions to the existing labor law.  The lower house of the Mexican Congress approved a bill with the requisite revisions in April 2019. Full congressional approval is expected once the Senate has also considered the bill.

Labor experts predict approval and implementation of the labor reform legislation, as required under the United States-Mexico-Canada Agreement (USMCA), will likely result in a greater level of labor actionas well as inter-union and intra-union competition.  Employer association and organized labor representatives agree, but differ on how much and how quickly labor actions will spread. The increasingly friendly political and legal environment for independent unions is already changing the way established unions manage disputes with employers, prompting more authentic collective bargaining.  As independent unions compete with corporatist unions to represent worker interests, workers are likely to be further emboldened in demanding higher wages.

According to the International Labor Organization (ILO), government enforcement was reasonably effective in enforcing labor laws in large and medium-sized companies, especially in factories run by U.S. companies and in other industries under federal jurisdiction.  Enforcement was inadequate in many small companies and in the agriculture and construction sectors, and it was nearly absent in the informal sector. Workers organizations have made numerous complaints of poor working conditions in maquiladoras and in the agricultural production industry.  Low wages, poor labor conditions, long work hours, unjustified dismissals, lack of social security benefits and safety in the workplace, and lack of freedom of association were among the most common complaints.

12. OPIC and Other Investment Insurance Programs

Mexico and Overseas Private Investment Corporation (OPIC) finalized in 2004 the agreement enabling OPIC programs and services within the country.  Since then, OPIC has provided over USD 1 billion in financing and political risk insurance to support to more than 22 projects in Mexico. OPIC has announced a drive to catalyze an additional USD 1 billion in investments in Mexico and Central America by 2021.  In December 2018 OPIC announced the possibility of expanding its funding opportunities in Mexico to upwards of USD 5 billion. For more information on OPIC’s projects in Mexico, please consult OPIC’s website at https://www.opic.gov .

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $1,220,000 2017 $1,150,000 www.worldbank.org/en/country  

https://inegi.org.mx/  

Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 N/A* 2017 $109,600 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2018 N/A* 2017 $18,000 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2018 N/A* 2017 49.5% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

*Mexico does not report total FDI stock, only flows of FDI.  https://datos.gob.mx/busca/organization/se  


Table 3:  Sources and Destination of FDI

The data included in the IMF’s Coordinated Direct Investment Survey is consistent with Mexican government data.

Direct Investment from/in Counterpart Economy Data, 2017
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $490,574 100% Total Outward $172,919 100%
United States $215,899 44% United States $73,199 42%
Netherlands $83,214 17% Netherlands $36,498 21%
Spain $53,483 11% United Kingdom $10,362 6%
United Kingdom $23,845 4.9% Brazil $9,532 5.5%
Canada $18,034 3.7% Spain $9,475 5.47%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4:  Sources of Portfolio Investment

The data included in the IMF’s Coordinated Portfolio Investment Survey (CPIS) is consistent with Mexican government data.

Portfolio Investment Assets, June 2018
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $62,148 100% All Countries $39,738 100% All Countries $22,410 100%
United States $28,487 45.8% Not specified $21,340 54% United States $17,441 78%
Not specified $24,204 39% United States $11,046 28% Not specified $2,864 13%
Ireland $2,631 4.2% Ireland $2,631 6.7% Brazil $1,617 7%
Luxembourg $2,376 3.8% Luxembourg $2,376 6% Colombia $70 .3%
Brazil $1,655 2.7% United Kingdom $601 1.5% Netherlands $52 .2%

14. Contact for More Information

Economic Section
Paseo de la Reforma 305, Colonia Cuauhtémoc, Mexico, D.F.  06500
Mexico City
Email: EconDL@state.gov
+52 55 5080 2000

Poland

Executive Summary

In the thirty years since Poland discarded communism and the fifteen years since it joined the European Union (EU), Poland’s investment climate has continued to grow in attractiveness to foreign investors, including U.S. investors.  Poland’s economy has experienced a long period of uninterrupted economic expansion since 1992. In 2018, Poland’s economy again gained momentum with approximately 5 percent growth as consumption continued to increase and spending of EU funds accelerated public investment.  Most economists, however, predict a slowdown in 2019 to around 4 percent gross domestic product (GDP) growth. Poland moved from middle to high-income status according to the FTSE Russell’s annual classification report. However, some proposed economic legislation continued to dampen optimism in some sectors (e.g. retail, media, energy, digital services), and investors have 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.  

Prospects for future growth, driven by domestic demand and inflows of EU funds from the 2014-2020 financial framework, will continue to attract investors seeking access to Poland’s dynamic market of over 38 million people, and to the broader EU market of over 500 million.  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 6 billion by the national bank of Poland in 2017, although including indirect investment flows through subsidiaries may place it as high as USD 43 billion, according to the American Chamber of Commerce in Poland.  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), are Poland’s fastest-growing sectors for foreign investment.  The government seeks to promote domestic production and technology transfer opportunities in awarding military tenders. There are also some investment and export opportunities in the energy sector—both immediate (natural gas), and longer term (nuclear, energy grid upgrades, and offshore wind)—as Poland seeks to diversify its energy mix and reduce air pollution.

Defense is another promising sector for U.S. exports. The Polish government is actively modernizing its military inventory, presenting good opportunities for U.S. defense industry. In 2018, it 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.  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.  The government has proposed a new law to protect household consumers from rising electricity prices, but the bill was at odds with the European Commission (EC) for the lack of notification of what amounted to state aid measures. 

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.  Some examples include a one-time bank holiday (to celebrate 100 years of Poland regaining independence) with less than a month warning, and a major tax overhaul passed 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 three 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.  

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 24 percent decrease in Poland’s Cohesion funds in the next cycle. Also, 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 2018 60/100

36 of 180

http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 33 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 41.70 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 USD 12,604 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 USD 12,730 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 2017, according to IMF and National Bank of Poland data, Poland attracted around USD 239 billion (cumulative) in foreign direct investment (FDI), principally from Western Europe and the United States. In 2017, reinvested profits 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 may operate an average of one Sunday a month, and in 2020 a total ban will be in effect (with the exception of seven Sundays).  Polish authorities have publicly favored introducing a digital services tax. Since no draft has been released, the details of such a tax are unknown, but it would affect mainly foreign digital companies.

There is a variety of Polish agencies involved in investment promotion:

  • The Ministry of Entrepreneurship and Technology 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 Polish Chamber of Commerce in the United States (POLCHAM USA), located in Washington, D.C., promotes the strengthening of economic and trade relationships between the United States and Poland.  It is an independent, non-profit organization. https://polchamusa.org/  

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 January 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.

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 Entrepreneurship and Technology 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 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 that can be amended at any time, but is updated at least once a year, usually in January. 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 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 25,575,542) 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 Polish government has drafted an amendment to extend the list of state companies with restrictions on selling shares and to increase the powers of the Prime Minister in the area of state property management.  The companies slated for additional restrictions are pipeline operator PERN, postal service Poczta Polska, aviation group PGL, railway system  PKP and the Special Purpose Vehicle in charge of building Poland’s planned central airport.  The amendment also sanctions possible mergers of such entities.

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.  In 2016-18, 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.

In Poland, business activity may be conducted in 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 Entrepreneurship and Technology: 

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 2019 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 PSA will enter into force in March 2020.

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 2020, 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 that a business will need to file with in order to register in the KRS:

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, 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 Entrepreneurship and Technology have   significantly reformed Poland’s economic diplomacy. The Polish Information and Foreign Investment Agency (PAIiIZ) was reformed in February 2017 to be 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 offices offer a range of services to include: finding potential partners for Polish manufacturers/exporters; providing information on business opportunities; assisting in the organization of business trips and study tours; and assisting in initiating first contacts between interested local importers, distributors or wholesalers and Polish manufacturers or service providers.  The Agency implements pro-export projects such as the Polish Tech Bridges dedicated to expansion of innovative Polish SMEs.  PAIH has a number of investment/export-oriented government programs specially developed to promote Polish companies abroad such as Go China, Go India, Go Africa, Go ASEAN and Go Arctic.  Vietnam and Iran are also priority investment and export destinations for Poland, though trade with Iran has dropped off since the re-imposition of U.S. sanctions. 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. . PAIH is responsible for the promotion of Poland at the EXPO Dubai 2020. 

The national development bank BGK (Bank Gospodarstwa Krajowego) offers support for goods with a Polish component and depending on the credit can be a minimum of 30-40 percent of net contract revenue.  BGK offers a number of short-term credit instruments like documentary letters of credit for post-financing. BGK offers direct credit for importers to purchase investment goods and services. The Export Credit Insurance Corporation KUKE insures the BGK-issued credit, including for companies from countries with higher trade risk.

2. Bilateral Investment Agreements and Taxation Treaties

Poland has concluded bilateral investment agreements with the following countries: Albania (1993); Argentina (1992); Australia (1992); Azerbaijan (1999); Bangladesh (1999); Belarus (1993); Canada (1990); Chile (2000); China (1989); Egypt (1998); India (1997 – terminated in March 2017;   a 15 year sunset clause applies); Indonesia (1993); Iran (2001; although Poland supports international sanctions regimes); Israel (1992); Jordan; Kazakhstan (1995); Kuwait (1993); Macedonia (1997); Malaysia (1994); Moldova (1995); Mongolia (1996); Morocco (1995); Norway (1990); Serbia and Montenegro (1997); Singapore (1993); Slovakia (1996 termination under consultations); South Korea (1990); Switzerland (1990); Thailand (1993); Tunisia (1993); Turkey (1994); Ukraine (1993); United Arab Emirates (1994); the United States (1994); Uruguay (1994); Uzbekistan (1995); Vietnam (1994).

As of March 2019, Poland has terminated or is in the process of termination of all bilateral BITs with EU member states except with Slovakia (consultations on the termination process are in progress).

The United States and Poland signed a Treaty Concerning Business and Economic Relations in 1990 that was amended and ratified in October 2004 due to Poland’s entrance into the EU.  A current list of all Poland’s BITs, including the documents themselves, can be found at: http://investmentpolicyhub.unctad.org/IIA/CountryBits/168#iiaInnerMenu  

Poland has signed Double Tax Treaties with over 80 countries.  The United States shares a double taxation treaty with Poland; an updated bilateral tax treaty was signed in February 2013 and is awaiting U.S. ratification.  The Agreement between the United States of America and the Republic of Poland on Social Security (“Totalization Treaty”) prevents double taxation, enables resumption of payments to suspended beneficiaries, and allows transfer of benefit eligibility.

In 2018, the Polish tax system again underwent significant changes. The most important changes involved:

  1. rules for mandatory disclosure;
  2. major changes to processes for “withholding tax”;
  3. introduction of a nine percent CIT for some companies;
  4. incentives for registering intellectual property, a.k.a. “IP Box” (See Section 5 for more details);
  5. new rules for accounting for tax loss;
  6. additional cost on accounting of hypothetical interest;
  7. an exit tax on both corporations and individuals; and
  8. additional liabilities for tax evasion.

More information can be found at http://taxsummaries.pwc.com/ID/Poland-Overview    

Some U.S. investors have expressed concern that Poland’s tax authorities do not always consistently uphold presumably binding tax decisions and sometimes seek retroactive payments after a reversal.  Investors have reported an increase of inspections and more aggressive tax auditing, including on transfer pricing. The double taxation treaty does not cover stock options as part of remuneration packages, according to some investors.

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 decision, 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 Entrepreneurship and Technology.  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 years.  The government introduced a central online system to provide access to the general public to regulatory impact assessment (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 can 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., 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 external audit agency (NIK) reports.  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, http://legislacja.rcl.gov.pl/   and Parliament’s webpage: http://www.sejm.gov.pl/Sejm8.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. Poland’s supreme audit institution (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 budget encompasses only part of the public finances sector.  In 2018, Poland continued its work to reform the budgetary process to increase the effectiveness and efficiency of spending and to simplify the budget structure. The completion of the first stage of these efforts is expected by the end of 2019.

International Regulatory Considerations  

Since Poland’s EU accession (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 Commission (EC) for the lack of notification of what amounted to state aid measures before they took effect.  The Polish energy market regulator (URE) also criticized the proposed bill for household power bills not reflecting the market rate and claimed the proposed law threatened URE’s independence.

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 the 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 is a member-founder of International Organization for Standardization (ISO) and a member of International Electro-technical Commission (IEC) since 1923.

PKN also cooperates with ASTM International (American Society for Testing and Materials) (ASTM) International and the World Trade Organization’s WTO Agreement on Technical Barriers to Trade (WTO/TBT).  Poland has been a member of WTO since July 1, 1995, and was a member of GATT since 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 Agreement on Technical Barriers to Trade 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

During the year the government continued to implement and introduce new measures related to the judiciary that drew strong criticism from some legal experts, NGOs, and international organizations.  Some observers have criticized in particular the introduction of an extraordinary appeal mechanism in the recently enacted Supreme Court Law, which they believe could affect economic interests, in that final judgments issued since 1997 could be challenged and overturned in whole or in part over the next three years, including some long-standing judgments on which economic actors have relied.  As of February 6, 2019, the Justice Minister has submitted five extraordinary complaints to the Chamber. The first complaints are to be reviewed on April 3.

In December 2017, the European Commission triggered a disciplinary proceeding under Article 7 of the Lisbon Treaty for what it considered “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.

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 in response to the December 2017 European Commission rule of law recommendation and infringement procedure. In December 2017, the European Commission triggered a disciplinary proceeding under Article 7 of the Lisbon Treaty for what  the Commission considered determined 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. 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 August 2, 2018, the Polish Supreme Court ruled to suspend further implementation of the mandatory retirement age provisions of the amended Supreme Court law, and requested that the European Court of Justice rule on whether these provisions comply with EU law. The Polish President Andrzej Duda refused to acknowledge the Supreme Court’s suspension of the mandatory retirement provisions. On September 24, the European Commission referred the country’s amended Supreme Court law to the European Court of Justice (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.”  The European Commission asked the ECJ to review the law and order interim measures to restore the Supreme Court to its composition before the revised law was implemented. In September and October, the president continued to implement the amended Supreme Court law by appointing judges to the newly created disciplinary and extraordinary appeals chambers and to positions vacated by voluntarily retired judges. Some judicial experts, NGOs, and international organizations saw the Polish President’s appointments as an attempt to preempt any adverse ruling by the ECJ. On October 19, the ECJ issued an interim injunction requiring the government to reinstate those judges who had been retired under the amended law.  On November 19, 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. By the end of 2018, the ECJ had not announced a date for considering the European Commission’s case against Poland’s Supreme Court law.

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 International Court of Justice (ICJ), 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 in intellectual property right matters), 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. One of the reasons for delays in the recognition of judgments of foreign courts is 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 set to change to be in line with EU norms in 2019 with implementation of EU directive 2019/1.

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:

In 2015, the President of UOKiK was granted the power to impose significant  fines on people in management positions in companies that violate the prohibition of anticompetitive agreements.  The recently adopted 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 526,000) and, in the case of managers in the financial sector, up to PLN 5 million (approx. USD 1.32 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 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 UNCTAD database   lists four cases involving a U.S. party.  The majority of Poland’s investment disputes are with other EU member states.  According to the UNCTAD database, over the last decade, there have been some 19 known disputes with other 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, however, in practice; 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 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,  is 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 5 million zloty (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.

In 2018, the Court of Arbitration at the Polish Chamber of Commerce in Warsaw, the biggest permanent arbitration court in Poland, adjusted its arbitration rules to the latest international standards, implementing new provisions on expedited procedure. In recent years, numerous efforts have been made to increase use of of arbitration in Poland.  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.

On April 3, 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 25 for ease of resolving insolvency in the World Bank’s Doing Business report 2019.  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  

4. Industrial Policies

Poland’s Plan for Responsible Development identifies eight industries for development and incentives: aviation, defense, automotive parts manufacturing, ship building, information technology, chemical, furniture manufacturing and food processing.  The full text of the plan can be found at this link: https://www.miir.gov.pl/strony/strategia-na-rzecz-odpowiedzialnego-rozwoju/plan-na-rzecz-odpowiedzialnego-rozwoju/  .  Poland encourages energy sector development through its energy policy, outlined in the November 2018 published draft report “Polish Energy Policy to 2040.”   While the strategy has not yet been finalized, the government has generally followed the directions of development in the policy. The draft policy can be found at:   http://www.me.gov.pl/Energetyka/Polityka+energetyczna  . The draft policy  foresees a primary role for fossil fuels until 2040 as well as  strong growth in electricity production. The construction of the first nuclear plant is planned by 2033, until then coal is to remain the main fuel for electricity generation.  The draft policy foresees a large potential for the development of offshore wind power generation, but the policy remains skeptical of onshore wind. . Poland plans to adopt a  National Energy and Climate Plan by the end of 2019, in line with the EU Regulation on the Governance of the Energy and Climate Action.

Investment Incentives

A company investing in Poland, either foreign or domestic, may receive assistance from the Polish government.  Foreign investors have the potential to access certain incentives such as: income tax and real estate tax exemptions; investment grants of up to 50 percent of investment costs (70 percent for small and medium-sized enterprises); grants for research and development; grants for other activities such as environmental protection, training, logistics, or use of renewable energy sources.

Large priority sector investments may qualify for the “Program for Supporting Investment of Considerable Importance for the Polish Economy for 2011-2020” which provides grants to large investments that create jobs in sectors including automotive, electronics, aviation, biotechnology, R&D, agriculture and food processing, and services (finance, information and communication, professional business services). Companies can learn more at: https://www.miir.gov.pl/strony/zadania/wsparcie-przedsiebiorczosci/program-wspierania-inwestycji-o-istotnym-znaczeniu-dla-gospodarki-polskiej-na-lata-2011-2023/  

The Polish Investment Zone (PSI), the new system of tax incentives for investors replacing the previous system of special economic zones (SEZ), was launched September 5, 2018.  Under the new law on the “Polish Investment Zone,” companies can apply for a corporate income tax (CIT) exemption for a new investment to be placed anywhere in Poland. The CIT exemption is calculated based on the value of the investment multiplied by the percentage of the public aid amount allocated for a given region based on its level of development (set percentage).  The CIT exemption is for 10-15 years, depending on the location of the investment. Special treatment is available for investment in new business services and research and development. A point system determines eligibility for the incentives.

The deadline for utilizing available tax credits from the previous SEZ system is the end of 2026 (previously 2020).  The new regulations also contain important changes for entities already operating in SEZs, even if they do not plan new investment projects.  This includes the possibility of losing the right to tax incentives in the event of fraud or tax evasion. Investors should consider carefully the potential benefits of the CIT exemption in assessing new investments or expansion of existing investments in Poland.

More information on government financial support:

The Polish government is seeking to increase Poland’s economic competitiveness by shifting toward a knowledge-based economy.  The government has targeted public and private sector investment in research and development (R&D) to increase to 1.7 percent of GDP by 2020.  During 2014 – 20 Poland will receive approximately USD 88.85 billion in EU Structural and Cohesion funds dedicated to R&D. Businesses may also take advantage of the EU primary research funding program, Horizon 2020.

More information:

The Second Law on Innovation (commonly referred to as the “Big Law on Innovation”) entered into force on January 1, 2018.  Some of its provisions include:

  1. Tax credits for R&D raising the level of tax benefits up to 100 percent for both personal costs and for SMEs and large companies (raised from 50 percent in 2017),
  2. The extension of the catalog of eligible costs of non-durable materials,
  3. Clarification of labor costs and expert opinions as well as consulting services,
  4. Extension of the partial exemption from double taxation of limited partnerships and joint-stock limited companies (for the period of 2016-2023) This is an important incentive for potential investors because it gives startups better access to financing from venture capital funds,
  5. Enabling the use of concessions by companies also benefiting from incentives in Special Economic Zones,
  6. A tax credit of 150 percent for enterprises with Research and Development Center (RDC) status.  The enterprises with this status can also benefit from additional eligible deductions (depreciation of buildings, places and expert reports made by entities other than research units – up to 10 percent of revenues).

As of January 1, 2019, the Innovation Box or IP Box reduces the tax rate applicable to an income derived from IP rights to 5 percent.  Taxpayers applying the IP Box shall be entitled to benefit from the tax preference until a given right expires (in case of a patented invention – 20 years).  In order to benefit from the program, taxpayers will be obliged to separately account for the relevant income. Foreign investors may take advantage of this benefit as long as the relevant IP is registered in Poland.  

The Polish government does not issue sovereign guarantees for FDI projects.  Co-financing may be possible for partnering on large FDI projects, such as the planned central airport project or a possible nuclear project.  For example, the state-owned Polish Development Fund (along with Singaporean and Australian partners) plans to purchase 30 percent of the soon-to-be-expanded Gdansk Deepwater Container Terminal.

Foreign Trade Zones/Free Ports/Trade Facilitation

Foreign-owned firms have the same opportunities as Polish firms to benefit from foreign trade zones (FTZs), free ports, and special economic zones.  The 2004 Customs Law regulates operation of FTZs in Poland. The Minister of Finance and the Minister of Investment and Development establish duty-free zones.  The Ministers designate the zone’s managing authorities, usually provincial governors who issue operating permits to interested companies for a given zone.

Most activity in FTZs involves storage, packaging, and repackaging.  As of March 2018, there were seven FTZs: Gliwice, near Poland’s southern border; Terespol, near Poland’s border with Belarus; Mszczonow, near Warsaw; Warsaw’s Frederic Chopin International Airport; Szczecin; Swinoujscie; and Gdansk.  Duty-free shops are available only for travelers to non-EU countries.

There are fourteen bonded warehouses:  Bydgoszcz-Biale Blota; Krakow-Balice; Wroclaw-Strachowice; Katowice-Pyrzowice; Gdansk-Trojmiasto; Lodz; Braniewo; Poznan-Lawica; Rzeszow-Jasionka, Warszawa-Modlin, Lublin, Szczecin-Goleniow; Radom, Olsztyn-Mazury. Commercial companies can operate bonded warehouses.  Customs and storage facilities must operate pursuant to custom authorities’ permission. Only legal persons established in the EU can receive authorization to operate a customs warehouse.

Performance and Data Localization Requirements

Poland has no policy of “forced localization” designed to force foreign investors to use domestic content in goods or technology.  Investment incentives apply equally to foreign and domestic firms. Over 40 percent of firms in Special Economic Zones are Polish. There is little data on localization requirements in Poland and there are no requirements for foreign information technology (IT) providers to turn over source code and/or provide access to surveillance (backdoors into hardware and software or turn over keys for encryption).  Exceptions exist in sectors where data are important for national security such as critical telecommunications infrastructure and in gambling. The cross-border transfer rules in Poland are reasonable and follow international best practices, although some companies have criticized registration requirements as cumbersome. In Poland, the Telecommunications Law (Act of 16 July 2004 – (unified text, Journal of Laws 2018, item 1954) includes data retention provisions.  The data retention period is 12 months.

In the telecommunication sector, the Office of Electronic Communication (UKE) ensures telecommunication operators fulfill their obligations.  In radio and television, National Broadcasting Council (KRRiT) acts as the regulator. Polish regulations protect an individual’s personal data that are collected in Poland regardless of where the data are physically stored.  The Personal Data Protection Office (UODO) enforces personal data regulation.

Post is not aware of excessively onerous visa, residence, work permit, or similar requirements inhibiting mobility of foreign investors and their employees, though investors regularly note long processing times due to understaffing at regional employment offices.  Generally, Poland does not mandate local employment, but there are a few regulations that place de facto restrictions e.g. a certain number of board members of insurance companies must speak Polish.

Polish law limits non-EU citizens to 49 percent ownership of a company’s capital shares in the air transport, radio and television broadcasting, sectors as well as airport and seaport operations.  There are also legal limits on foreign ownership of farm and forest lands as outlined in Section 2 of this report under Limits on Foreign Control and Right to Private Ownership and Establishment.  Pursuant to the Broadcasting Law, a TV broadcasting company may only receive a license if the voting share of its foreign owners does not exceed 49 percent and if they hold permanent residence in Poland.  In the insurance sector, at least two members of management boards, including the chair, must speak Polish.

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), whose function 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 2017, Warsaw city authorities began implementing a 2015 law that critics stated might extinguish potential claims by private individuals of public properties seized during the Second World War or the communist era if no one comes forward to pursue a restitution claim within six months after publication of the affected property. Any potential claimants who come forward will have an additional three months to establish their claim after the initial six-month period.  The city began publishing lists in February 2017, and is expected to continue to publish similar property cases going forward.  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.

On October 11, 2017, the Ministry of Justice announced comprehensive private property restitution draft legislation that would block any physical return of former properties, provide compensation of 20-25 percent of the property’s value at the time of taking in cash or government bonds, and set a one-year claims filing period.  The legislation drew intense media coverage and public scrutiny, and critics argued the legislation would exclude potential foreign claimants, many of whom are Holocaust survivors or their heirs.  As of March 2019, the Justice Ministry had not submitted the draft legislation to the Council of Ministers (cabinet) for review and approval. 

The agricultural land law bans sale of Agricultural Property Agency (APA) (state-owned) farmland for five years.  The impact of the five-year ban is not significant, as at present more than 90 percent of all agricultural land is already privately owned.  State-owned farm land will be available only under long-term lease for farmers who want to enlarge their farms, to a maximum of 300 hectares (new and old land combined size).  Foreigners can (and do) lease agricultural land. The agricultural land law also imposed restrictions on the sale of privately owned farm land, and gives the APA preemptive right to purchase in case of land sales by a private owner.  Official statistics on the impact of the new law on prices and turnover of land is not available. Recently, the government announced plans to loosen these regulations. The Law on Forest Land similarly prevents Polish and foreign investors from purchasing privately-held forests and gives state-owned forestry agency (Lasy Panstwowe) preemptive right to buy privately-held forests, though the government may be considering relaxing some restrictions.

Intellectual Property Rights

The Polish intellectual property rights (IPR) law is stricter than European Commission directives require.  Enforcement is good and improving across all IP types.  Physical piracy (e.g., optical discs) is not a problem in Poland.  However, online piracy continues to be widespread, despite progress in enforcement, and a popular cyberlocker platform in Poland is listed on the 2018 Notorious Markets List.  Poland does not appear in the USTR’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 present motions to prosecutors.  Rights holders express concern that penalties for digital IPR infringement are not high enough to deter violators.  In an effort to address these concerns, the Polish government established a national IPR strategy for 2015-17. 

A new act passed on June 15, 2018, which implements EU Directive 2014/26/EU on the collective management of copyright and related rights and the granting of multi-territorial licenses regarding rights to music for online use on the internal market.  The purpose of the bill is comprehensive regulation of the activities of collective management organizations in Poland. It will replace the existing provisions in this area, ex. chapters 12 and 12 (1) of the Copyright and Related Rights Act. Additional harmonization with existing regulations, such as the Act on the Protection of Databases and the Act on Copyright and Related Rights, is to be carried out in 2019.  On March 11, 2019, the Polish President signed amendments to the Act on Industrial Property Law (“IPL”). Many adjustments resulted from the implementation of EU Trademark Directive 2015/2436. The amendments entered into force on March 12, 2019. IPL introduced, inter alia, the abandonment of the graphical representation requirement, introduction of 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 infringements of trademark protection rights.

New tax incentives for intellectual property known collectively as “IP Box” or “Innovation Box” were included in the November 2018 tax amendment.  See Section 4 Investment Incentives.  

Polish customs tracks seizures of counterfeit goods but failed to provide this information for the reporting period.  

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  

6. Financial Sector

Capital Markets and Portfolio Investment

The Polish regulatory system is effective in encouraging and facilitating portfolio investment.  Both foreign and domestic investors may place funds in demand and time deposits, stocks, bonds, futures, and derivatives.  Poland’s equity markets facilitate the free flow of financial resources. Poland’s stock market is the largest and most developed in Central Europe.  In September 2018, it was reclassified as developed market status by FTSE Russell’s country classification report. The stock market’s capitalization amounts to around 35 percent of GDP, but management want to increase it  increase it to 50 percent in 2023. Although the Warsaw Stock Exchange (WSE) is itself a publicly traded company with shares listed on its own exchange after its partial privatization in 2010, the state retains a significant percentage of shares which allows it to control the company.  WSE has become a hub for foreign institutional investors targeting equity investments in the region. In addition to the equity market, Poland has a wholesale market dedicated to the trading of treasury bills and bonds (Treasury BondSpot Poland). This treasury market is an integral part of the Primary Dealers System organized by the Finance Ministry and part of the pan-European bond platform.  Wholesale treasury bonds and bills denominated in PLN and some securities denominated in Euros are traded on the Treasury BondSpot market. Non-government bonds are traded on Catalyst, a WSE managed platform.  The capital market is a source of funding for Polish companies.  While securities markets continue to play a subordinate role to banks in the provision of finance, the need for medium-term financial support for the modernization of the electricity and gas sectors is likely to lead to an increase in the importance of the corporate bond market.  The Polish government acknowledges the capital market’s role in the economy in its development plan.  Foreigners may invest in listed Polish shares, but they are subject to some restrictions in buying large packages of shares.  Liquidity remains tight on the exchange.

The Capital Markets Development published in 2018 identifies 20 key barriers and offers 60 solutions.  Some key challenges include low levels of savings and investment, insufficient efficiency, transparency and liquidity of many market segments, and lack of taxation incentives for issuers and investors.  The primary aim of the strategy is to improve access of Polish enterprises to financing. The strategy focuses on strengthening trust in the market, improving the protection of individual investors, the stabilization of the regulatory and supervisory environment and the use of competitive new technologies.  The strategy will not become a law, however, it will set the direction for further regulatory proposals. Poland is one of the most rigorously supervised capital markets in Europe according to the European Commission.

The Employee Capital Plans program  (PPK)—which is designed to increase household saving to augment individual incomes in retirement—could provide a boost to Poland’s capital markets and reduce dependence on foreign saving as a source for investment financing.

High-risk venture capital funds are becoming an increasingly important segment of the capital market.  According to Bain and Company/CEE, PE/VC investments in Poland in 2018 dropped to EUR 2.0 billion from EUR 2.2 billion in 2017.  The market is still shallow and one major transaction may affect the value of the market in a given year. The funds remain active and Poland is a leader in this respect in Central and Eastern Europe.

Poland provides full IMF Article VIII convertibility for current transactions.  Banks can and do lend to foreign and domestic companies. Companies can and do borrow abroad and issue commercial paper, but the market is less robust than in Western European countries or the United States.  The Act on Investment Funds allows for open-end, closed-end, and mixed investment funds, and the development of securitization instruments in Poland. In general, no special restrictions apply to foreign investors purchasing Polish securities.

Credit allocation is on market terms.  The government maintains some programs offering below-market rate loans to certain domestic groups, such as farmers and homeowners.  Foreign investors and domestic investors have equal access to Polish financial markets. Private Polish investment is usually financed from retained earnings and credits, while foreign investors utilize funds obtained outside of Poland as well as retained earnings.  Polish firms raise capital in Poland and abroad. Inflation remained below the National Bank of Poland’s medium-term target rate of 2.5 percent in 2018. The Monetary Policy Council maintains a dovish tone, saying they expect to raise raises in late 2020 at the earliest.

Confidence in the banking regulator was shaken in 2018 by allegations of corruption that led to the resignation of the head of the Polish Financial Supervisory Authority (KNF).  Recent changes in the governance structure of the KNF are aimed at increasing cross governmental coordination and a better-targeted response in case of financial shocks, while achieving greater institutional effectiveness through enhanced resource allocation.  A legislative amendment improved funding of the KNF by granting greater budgetary independence. It also enlarged the composition of the Authority, increasing the number of government representatives, but only four out of nine voting members are designated by the government.  Additionally, KNF’s supplementary powers increased, allowing it to authorize the swift acquisition of a failing or likely to fail lender by a stronger financial institution.

Money and Banking System

The banking sector plays a dominant role in the financial system, accounting for about 70 percent of financial sector assets.  The sector is predominantly privately owned, with the state controlling about one third of the banking sector and the biggest insurance company. Poland had 34 locally incorporated commercial banks at the end of August 2018, according to the KNF.  The number of locally-incorporated banks has been declining over the last five years. Poland’s 550 cooperative banks play a secondary role in the financial system, but are widespread. The state owns eight banks (up from five in February 2016). Over the last few years, growing capital requirements, lower prospects for profit generation and uncertainty about legislation addressing foreign currency mortgages has pushed banks towards mergers and acquisitions.  The KNF welcomes this consolidation process, seeing is as “natural” way to create an efficient banking sector.

The Polish National Bank (NBP) is Poland’s central bank.  At the end of 2018, the banking sector was overall well capitalized and solid.  Poland’s banking sector meets European Banking Authority regulatory requirements. The share of non-performing loans is close to the EU average and recently has been falling.  Between January-June 2018 non-performing loans were seven percent of portfolios. According to S&P Rating Agency, Poland’s central bank is willing and able to provide liquidity support to the banking sector, in local and foreign currencies, if needed.

The banking sector is liquid, profitable and major banks are well capitalized. This was confirmed by a stress test undertaken by the European Banking Authority in November 2018.  Two Polish banks were among the most stress-resistant of all 50 banks participating in the test. Profitability increased slightly in 2018 as a result of rapid GDP growth, a pickup in investments and low provisioning costs, and remained at a reasonable level (ROE at 7.5 percent after nine months of 2018).  Nevertheless, profits remain under pressure due to low interest rates, the unsolved issue of conversion of Swiss Francs mortgage portfolios into PLN, and a special levy on financial institutions (0.44 percent of the value of assets excluding equity and Polish sovereign bonds).

In general, supervision and risk management contained excessive risk-taking.  Since 2015, the Polish government established an active campaign aiming to increase the market share of national financial institutions.  In 2017, for the first time Polish investors’ share in the banking sector has reached over 50 percent of the sector’s total assets, and exceeded the foreign share in the sector.  The State controls about 40 percent of total assets, including the two largest banks in Poland. These two lenders control about one third of the market. Rating agencies warn that an increasing state share in the banking sector might impact competitiveness and profits in the whole financial sector. There is concern that lending decisions at state-owned banks could come under political pressure, especially after allegations of questionable loans being issued by a newly state-owned bank in 2018.  Nevertheless, Poland’s strong fundamentals and the size of its internal market mean that many foreign banks will want to retain their positions.

The financial regulator has restricted the availability of loans in Euros or Swiss Francs in order to minimize the banking system’s exposure to exchange risk resulting from fluctuations.  Only individuals who earn salaries denominated in these currencies continue to enjoy easy access to loans in foreign currencies

The national bank (NBP) did not provide information on correspondent banking relationships in 2018.  In 2017, NBP had relationships with 25 banks commercial and central banks, and was not concerned about losing any of them.   

Foreign Exchange and Remittances

Foreign Exchange

Poland is not a member of the Eurozone; its currency is the Polish Zloty.  The current government has shown little desire to adopt the euro (EUR). The Polish Zloty (PLN) is a floating currency; it has largely tracked the EUR at approximately PLN 4.2-4.3 to EUR 1 in recent years and PLN 3.77 to UDS 1.  Foreign exchange is available through commercial banks and exchange offices. Payments and remittances in convertible currency may be made and received through a bank authorized to engage in foreign exchange transactions, and most banks have authorization.  Foreign investors have not complained of significant difficulties or delays in remitting investment returns such as dividends, return of capital, interest and principal on private foreign debt, lease payments, royalties, or management fees. Foreign currencies can freely be used for settling accounts.

Poland provides full IMF Article VIII convertibility for current transactions.  Polish Foreign Exchange Law, as amended, fully conforms to OECD Codes of Liberalization of Capital Movements and Current Invisible Operations.  In general, foreign exchange transactions with the EU, OECD, and European Economic Area (EEA) are accorded equal treatment and are not restricted.

Except in limited cases which require a permit, foreigners may convert or transfer currency to make payments abroad for goods or services and may transfer abroad their shares of after-tax profit from operations in Poland.  In general, foreign investors may freely withdraw their capital from Poland, however, the November 2018 tax bill included an exit tax (see Section 2). Full repatriation of profits and dividend payments is allowed without obtaining a permit.  However, a Polish company (including a Polish subsidiary of a foreign company) must pay withholding taxes to Polish tax authorities on distributable dividends unless a double taxation treaty is in effect, which is the case for the United States.  Changes to the withholding tax in the 2018 tax bill increased the bureaucratic burden for some foreign investors (see Section 2). The United States and Poland signed an updated bilateral tax treaty in February 2013 that the United States has not yet ratified.  As a rule, a company headquartered outside of Poland is subject to corporate income tax on income earned in Poland, under the same rules as Polish companies.

Foreign exchange (FX) regulations require non-bank entities dealing in foreign exchange or acting as a currency exchange bureau to submit reports electronically to the National Bank of Poland (NBP) at http://sprawozdawczosc.nbp.pl  .  An exporter may open foreign exchange accounts in the currency the exporter chooses.

Remittance Policies

Poland does not prohibit remittance through legal parallel markets utilizing convertible negotiable instruments (such as dollar-denominated Polish bonds in lieu of immediate payment in dollars).  As a practical matter, such payment methods are rarely, if ever, used.

Sovereign Wealth Funds

The Polish government does not maintain a Sovereign Wealth Fund.  However, the government established the Polish Development Fund (PFR), an umbrella organization pooling resources of several governmental agencies and departments, including EU funds. A strategy for the Fund was adopted in September 2016, and it was registered in February 2017 at which point the Ministry of Economic Development took supervision over the Fund (this ministry was re-named the Investment and Development Ministry in 2018).  PFR supports the implementation of the Responsible Development Strategy.

The PFR operates as a group of state-owned banks and insurers, investment bodies, and promotion agencies.  The budget of PFR group initially reached PLN 14 billion, which managers estimate is sufficient to raise capital worth PLN 90-100 billion.  Various actors within the organization can invest through acquisition of shares, through direct financing, seed funding, and co-financing venture capital.  Depending on the instruments, PFR expects different rates of return. PFR intends to launch a new fund of funds in 2018 with the aim of financing capital investments valued at PLN 50-100 million (USD 14.7 – 29.4 million).  In March 2019, the Entrepreneurship Ministry presented a draft law, which aimed at formalizing and improving the cooperation of institutions that make up the PFR Group, strengthen the position of the Fund’s president and secure additional funding from the Finance Ministry.  The group will have one common strategy. An almost four-fold increase in the share capital will enable PFR to significantly increase the scale of investment in innovation, infrastructure and help Polish companies expand into foreign markets. While supporting overseas expansion of Polish companies, the fund’s mission is domestic.  Until now, the group’s operations had been based on the strategy of responsible development, not legal regulations.

7. State-Owned Enterprises

State owned enterprises (SOEs) exist mainly in the chemical, defense, energy, transport, and financial sectors.  The government intends to keep majority share ownership and/or state-control of economically and strategically important firms, and is expanding the role of the state in the economy.  Some U.S. investors have recently expressed concern that the government favors SOEs by offering loans from the national budget as a capital injection and unfairly favoring SOEs in investment disputes.  Since Poland’s EU accession, government activity favoring state-owned firms has received careful scrutiny from Brussels. Since the Law and Justice government came to power in 2015, there has been a considerable increase in turnover in managerial positions of state-owned companies (although this has also occurred in previously changes of government, but to a lesser degree) and  increased focus on building national champions in strategic industries to be able to compete internationally. SOEs are governed by a board of directors and most pay an annual dividend to the government, as well as prepare and disclose annual reports.

Companies classified as “important for the economy” are under the supervision of the Council of Ministers.  The list of such companies is under this link: https://bip.kprm.gov.pl/kpr/bip-kancelarii-prezesa/podmioty-nadzorowane-pr/4884,lead.html  

Among them are companies of “strategic importance” whose shares cannot be sold, including:  Grupa Azoty SA, Grupa LOTOS SA, KGHM Polska Miedz SA, Energa SA.

The government sees SOEs as drivers and leaders of its innovation policy agenda; in the last few years state ownership in the banking and energy sectors was significantly increased.  For example, several energy SOEs established a company to develop electro mobility. So far the SOEs’ performance remained overall strong and broadly similar to that of private companies.  However, international evidence suggests that a dominant role of SOEs can pose fiscal, financial, and macro-stability risks.

As of March  2019, there were over 370 companies in partnership with state authorities.  Among them there are companies under bankruptcy, in liquidation and companies where the State Treasury held residual shares.  Here is a link to the list of companies, including information under the control of which ministry they fall: http://nadzor.kprm.gov.pl/spolki-z-udzialem-skarbu-panstwa  

The value of stock owned by the state in publicly-held companies, many of which are the biggest companies in their sectors, was worth over USD 30 billion (PLN 113 billion) in 2017.  The same standards are generally applied to private and public companies with respect to access to markets, credit, and other business operations such as licenses and supplies. Government officials occasionally exercise discretionary authority to assist SOEs.  In general, SOEs are expected to pay their own way, finance their operations, and fund further expansion through profits generated from their own operations.

On November 27 2018, the Council of Ministers adopted a bill on the management of state-owned property.  It introduced new procedures and modifies s some provisions related to the reform of state-owned property management system, which was introduced on  January 1, 2017. The list of companies in which shares and rights from Treasury shares are not subject to sale will be expanded to include: PERN SA, Poczta Polska SA, Polska Grupa Lotnicza SA, and Polskie Koleje Panstwowe SA.  In order to provide a source of financing for the tasks bestowed to the PM by the bill’s provisions, including the purchase and subscription of shares in companies, the draft provides for the creation of a new public special purpose fund – the Capital Investment Fund managed by the PM’s office and financed by dividends from state controlled companies.

OECD Guidelines on Corporate Governance of SOEs

In Poland, the same rules apply to SOEs and publicly listed companies unless statutes provide otherwise.  The state exercises its influence through its rights as a shareholder in proportion to the number of voting shares it holds (or through shareholder proxies).  In some cases, a SOE is afforded special rights as specified in the company’s articles, and in compliance with Polish and EU laws. In some non-strategic companies, the state exercises special rights as a result of its majority ownership but not as a result of any specific strategic interest.  Despite some of these specific rights, the state’s aim is to create long-term value for shareholders of its listed companies by adhering to the OECD SOE Guidelines. State representatives who sit on supervisory boards must comply with the Commercial Companies Code and are expected to act in the best interests of the company and its shareholders.  In 2018, the European Commission noted that “Polska Fundacja Narodowa” (an organization established to promote Polish culture worldwide and funded by Polish SOEs funded) was involved in the organization and financing of the campaign supporting the controversial judiciary changes by the government. The commission stated this was broadly against OECD recommendations on SOE involvement in financing political activities.

SOE employees can designate two fifths of the Supervisory Board’s members.  In addition, according to Poland’s privatization law, in wholly state-owned enterprises with more than 500 employees, the employees are allowed to elect one member of the Management Board.  SOEs are subject to a series of additional disclosure requirements above those set forth in the Company Law. The supervising ministry prepares specific guidelines on annual financial reporting to explain and clarify these requirements.  SOEs must prepare detailed reports on management board activity, plus a report on previous financial year activity, and a report on the result of the examination of financial reports. In practice, detailed reporting data for non-listed SOEs is not easily accessible.  State representatives to supervisory boards have to go through examinations to be able to apply for a board position. Many majorstate-controlled companies are listed on the Warsaw Stock Exchange and are subject to the “Code of Best Practice for WSE Listed Companies.”

On September 30, 2015, the Act on Control of Certain Investments entered into force.  The law creates mechanisms to protect against hostile takeovers of companies operating in strategic sectors (gas, power generation, chemical, petrochemical and defense sectors) of the Polish economy (see Section 2 on Investment Screening), most of which are SOEs or state-controlled.

The SOE governance law of 2017 is being implemented gradually.  The framework formally keeps the oversight of the SOE supervision centralized, while transferring the responsibilities from the Ministry of the Treasury to the Prime Minister’s Office (PMO).  However, the supervision has been delegated to line ministries, some of which (e.g. the Ministry of Energy) set their own supervisory guidelines. In October 2017, the PMO issued supervisory guidelines as a reference framework for line ministries.  In 2018, oversight of over 30 important SOEs was transferred to the Chancellery of the Prime Minister.

Privatization Program

A possible merger of two major energy sector companies (PKN Orlen and Lotos) was announced in March 2018.  The Polish government has completed the privatization of most of the SOEs it deems not to be of national strategic importance.  With few exceptions, the Polish government has invited foreign investors to participate in major privatization projects. In general, privatization bidding criteria have been clear and the process transparent.

The majority of the SOEs classified as “economically important” and “strategically important” is in the energy, mining, and financial sectors.  The government intends to keep majority share ownership of these firms, or to sell tranches of shares in a manner that maintains state control. The government is currently focused on consolidating and improving the efficiency of the remaining SOEs.

8. Responsible Business Conduct

Starting in  2018, around 300 Polish companies were obligated to publish to a non-financial information statement alongside their business activity report – this was tied to the  January 26, 2017, amendment of the Act on Accounting, which implements the directive 2014/95/UE into Polish law. The rules of the act concern companies that fulfill two out of the three following criteria: the average annual number of employed persons numbers over 500 individuals; the company’s balance sheet totals to over 85 million Polish zlotys (approx. USD 30 million), or the gross earnings from the sale of commodities and products for the fiscal year amount to 170 million zlotys (aaprox. USD 46 million).  Despite this new requirement, companies often voluntarily compile CSR activity reports based on international reporting standards.

Poland’s Ministry of Investment and Development supports implementation of responsible business conduct (RBC) and corporate social responsibility (CSR) programs.  A working group responsible for CSR issues has existed since 2015 to provide recommendations concerning the implementation directions of CSR standards with regards to the Strategy for Responsible Development.  The group consists of representatives of federal and local governments, trade unions and employer organizations and representatives of social organizations and scientific institutions.  

In May 2018, the Advisory Board for Sustainable Development and Corporate Social Responsibility, an auxiliary body of the Minister of Investment and Economic Development was created.  The chief function of the Advisory Board is to create space for dialogue and exchange of experiences between the public administration, social partners, NGOs and the academic environment in the field of corporate social responsibility (CSR/RBC).  Experts cooperate within 5 working group: 1) Innovation for CSR and sustainable development; 2) Business and human rights; 3) Sustainable production and consumption; 4)Socially responsible administration, and; 5)Socially responsible universities.  The Advisory Board issues recommendations concerning implementation of the CSR/RBC policy, in particular taking into account the objectives of the Strategy for Responsible Development – a strategic national policy document.

In 2017, on the initiative of the then existent Ministry of Economic Development, a partnership was established for the translation into Polish of the Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector.  The parties involved included representatives of the business sector, industry organizations and non-governmental organizations. The Polish version of the Guidelines was announced on the June 29, 2018. The document available on the OECD NCP website   is a practical tool explaining how to implement the principles of due diligence, taking into account risks related, among others, to child labor, forced labor, water use, hazardous waste, etc.

In December 2018, the Midterm report from the implementation of National Action Plan for UN Business and Human Rights Guidelines was adopted by the Council of Ministries.  Below is the link this document: https://www.gov.pl/documents/1149181/1150183/Raport_ percentC5 percent9Ar percentC3 percentB3dokresowy_z_realizacji_KPD.pdf/029a9586-2f1a-e655-4d18-00b6abe4a5a1  

In May 2017, the Council of Ministers adopted the National Action Plan (NAP) for the Implementation of the United Nations Guiding Principles on Business and Human Rights 2017-2020 (UNBHR-GPs).  

Independent organizations including non-governmental organizations (NGOs), business and employee associations promote CSR in Poland.  The Responsible Business Forum (RBF), founded in 2000, is the oldest and largest NGO in Poland focusing on corporate social responsibility:  http://odpowiedzialnybiznes.pl/english/  .  CSR Watch Coalition Poland, part of the OECD Watch international network aims to advance respect for human rights in the context of business activity in Poland in line with the spirit of the UNBHR-GPs and the OECD Guidelines for Multinational Enterprises (MNEs):http://pihrb.org/koalicja/  

Poland maintains a National Contact Point (NCP) for OECD MNE Guidelines: https://www.miir.gov.pl/strony/zadania/wsparcie-przedsiebiorczosci/spoleczna-odpowiedzialnosc-przedsiebiorstw-csr/krajowy-punkt-kontaktowy-oecd/  

The NCP promotes the OECD MNE Guidelines through seminars and workshops.  Investors can obtain information about the Guidelines and their implementation through Regional Investor Assistance Centers.

Poland is not a member of the Extractive Industries Transparency Initiative (EITI) or the Voluntary Principles on Security and Human Rights.  The primary extractive industries in Poland are coal and copper mining.  Onshore, there is also hydrocarbon extraction, primarily conventional natural gas, with limited exploration for shale gas.  The Polish government exercises legal authority and receives revenues from the extraction of natural resources and from infrastructure related to extractive industries such as oil and gas pipelines through a concessions-granting system, and in most cases through shareholder rights in state-owned enterprises.  The Polish government  has two revenue streams from natural resources: 1) from concession licenses; and 2) from corporate taxes on the concession holders.  License and tax revenues apply equally to both state-owned and private companies.  Natural resources are brought to market through market-based mechanisms by both state-owned enterprises and private companies.

9. Corruption

Resources to Report 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 2018, the Transparency International (TI) index of perceived public corruption ranked Poland as the 36th (the same as in 2017) 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)

Ujazdowskie 9, 00-583 Warszawa
+48 800 808 808
kontakt@cba.gov.pl
www.cba.gov.pl  ; link: Zglos Korupcje (report corruption)

The Batory Foundation, Public Integrity Program serves as a non-governmental watchdog organization.  The foundation can be reached by whistleblowers at +48 (22) 536 0257 or op@batory.org.pl.

10. Political and Security Environment

Poland is a politically stable country.  Constitutional transfers of power are orderly.  The last presidential elections took place in May 2015 and parliamentary elections took place in October 2015; observers considered both elections free and fair.  The new government formed in November 2015. There was a change of the Prime Minister in December 2017 and a major government reshuffle in January 2018. Local elections took place in October 2018. Elections to the European Parliaments will take place in May 2019.  The next parliamentary elections are scheduled for the fall of 2019. The next presidential election is scheduled for May 2020.

There have been no confirmed incidents of politically motivated violence toward foreign investment projects in recent years.  Poland has neither insurgent groups nor belligerent neighbors.  The Overseas Private Investment Corporation (OPIC) provides political risk insurance for Poland but it is not frequently used, as competitive private sector financing and insurance are readily available.

11. Labor Policies and Practices

Poland has a well-educated, skilled labor force.  Productivity, however, remains below OECD averages but is rising rapidly and unit costs are competitive.  In the last quarter of 2018, according to the Polish Central Statistical Office (GUS) the average gross wage in Poland was PLN 4,864 (approx. USD 1,293 per month)  compared to 4,517 (approx. USD 1,200) in the last quarter of 2017.  Poland’s economy employed roughly 16.617 million people in the third quarter of 2018. Eurostat measured total Polish unemployment at 3.7 percent, with youth unemployment at 11.5 percent in December 2018.  GUS reports unemployment rates differently and tends to be higher than Eurostat figures.  Unemployment varied substantially between regions, the highest rate (9.9 percent according to GUS ) in the north-eastern part of Poland (Warmia and Mazury), and the lowest at 3.2 percent  (GUS ) in the western province of Wielkopolska, in the third quarter of 2018.  Unemployment was lowest in major urban areas. Polish workers are usually eager to work for foreign companies, in Poland and abroad.  Since Poland joined the EU, up to two million Poles have sought work in other EU member states.

A January 2018 revision of the Law on Promoting Employment and Labor Market Institutions introduced greater regulatory control over the “simplified procedure” of hiring foreigners from six countries (Ukraine, Belarus, Georgia, Armenia, Moldova and Russia), which allows foreigners from these countries to work in Poland without a work permit for six months.  According to the Ministry of Family, Labor and Social Policy, 1.6 million “simplified procedure” work declarations were registered in 2018, of which almost 1.5 million were for Ukrainian workers (compared to 1.7 million a year earlier). Under the revised procedure, local authorities may verify if potential employers have actual job positions for potential foreigner workers.  The law also authorizes local authorities to refuse declarations from employers with a history of abuse, as well as to ban employers previously convicted of human trafficking from hiring foreign workers. The January 2018 revision of the law on promoting employment and labor market institutions introduced also a new type of work permit for foreign workers – the so-called seasonal work permit, which allow for legal work up to nine months in  agriculture, horticulture and tourism and similar industries. The Ministry of Family, Labor and Social Policy statistics show that during 2018 121,436 seasonal work permits of this type were issued, of which 119,929 went to Ukrainians. Ministry of Family, Labor and Social Policy statistics also show that in 2018, 238,334 thousand Ukrainians received  work permits, compared with 192, 547 in 2017.

At the same time, the Ministry of Family, Labor and Social Policy statistics show a growing number of work permits issued to workers from South and East Asia.  For example, the number of work permits for the Nepalese workers has grown from 7,000 in 2017 to 19,912 in 2018. While the the number of work permits for Bengali workers increased from 2,412 in 2017 to 8,341 in 2018.

Despite this influx of foreign workers, Polish companies suffer from a shortage of qualified workers.  The most sought-after specialists are engineers, IT specialists, salespersons, project managers, and technical advisors.  Manufacturing companies seek welders, bricklayers, and machinery operators.  Employment has expanded in service industries such as information technology, manufacturing, administrative and support service activities.  The business process outsourcing industry in Poland has experienced dynamic growth.  The state-owned sector employs about a quarter of the work force, although employment in coal mining and steel are declining.

In 2017, a retirement law entered into force that lowered the minimum retirement age for men (from 67 to 65) and for women (from 67 to 60).  The Parliament passed a bill on December 15, 2017, abolishing the limit beyond which Poles do not pay pension or disability contributions, a move which would have  increased social insurance contributions by 5.4 billion PLN/year (USD 1.5 billion). The Constitutional Court ruled the law unconstitutional on November 14, 2018.

Labor laws differentiate between layoffs and dismissal for cause (firing).  In the case of layoffs (when workers are dismissed for economic reasons in companies which employ more than 20 employees), employers are required to offer severance pay.   In the case of dismissal for cause, the labor law does not require severance pay.

Most workers hired under labor contracts have the legal right to establish and join independent trade unions and to bargain collectively.  On July 25, 2018, the president signed the revision of the law on trade unions to expand the right to form a union to persons who entered into an employment relationship based on a civil law contract and to persons who were self-employed.  The law is the result of the 2015 the Constitutional Court ruling that found any limitation to the freedom of association violates the constitution, and required the government and parliament to amend the law on trade unions.  Trade union influence is declining, though unions remain powerful among miners, shipyard workers, government employees, and  teachers.

The Polish labor code outlines employee and employer rights in all sectors, both public and private, and has been gradually revised to adapt to EU standards.  However, employers tend to use temporary and contract workers for jobs that are not temporary in nature.  Employers have used  short-term contracts because they allow firing with two weeks’ notice and without consulting trade unions. Employers also tend to use civil instead of labor contracts because of ease of hiring and firing, even in situations where work performed meets all requirements of a regular labor contract.

Polish law requires equal pay for equal work and equal treatment with respect to signing labor contracts, employment conditions, promotion, and access to training.  The law defines equal treatment as nondiscrimination in any way, directly or indirectly on the grounds of gender, age, disability, race, religion, nationality, political opinion, ethnic origin, denomination, sexual orientation, whether or not the person is employed temporarily or permanently, full time or part time.

The 1991 Law on Conflict Resolution defines the mechanism for labor dispute resolution.  It consists of four stages: first, the employer is obliged to conduct negotiations with employees; the second stage is a mediation process, including an independent mediator; if an agreement is not reached through mediation, the third stage is arbitration, which takes place at the regional court; the fourth stage of conflict resolution is a strike.

The Polish government adheres to the International Labor Organization’s (ILO) core conventions and generally complies with international labor standards.  However, there are several gaps in enforcing these standards, including legal restrictions on the rights of workers to form and join independent unions.  Cumbersome procedures make it difficult for workers to meet all of the technical requirements for a legal strike.  The law prohibits collective bargaining for key civil servants, appointed or elected employees of state and municipal bodies, court judges, and prosecutors.  There were some limitations with respect to identification of victims of forced labor.  Despite prohibitions against discrimination with respect to employment or occupation, such discrimination occurs. Authorities do not consistently enforce minimum wage, hours of work, and occupational health and safety, either in the formal or informal sectors.

The National Labor Inspectorate (NLI) is responsible for identifying possible labor violations; it may issue fines and notify the prosecutor’s office in cases of severe violations.  According to  labor unions, however, the NLI does not have adequate tools to hold violators accountable and the small fines imposed as punishment are an ineffective deterrent to most employers.

The United States has no FTA or preference program (such as GSP) with Poland that includes labor standards.

12. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) provides political risk insurance for U.S. companies investing in Poland against political violence, expropriation, and inconvertibility of local currency.  OPIC offers medium and long-term financing in Poland through its direct loan and guarantee programs. Direct loans are reserved for U.S. businesses or cooperatives. Loan guarantees are issued to U.S. lending institutions.  

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

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

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2017 $518,587 2017 $526,466 http://www.worldbank.org/en/country  
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $5,729 2017 $12,604 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) 2017 $812.6 2017 ** BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 46.0 2017 48.5 UNCTAD data available at

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

* In Poland the National Bank of Poland (NBP) collects data on FDI. Annual FDI report/data are published at the end of the following year. GDP data are published by the Central Statistical Office. Final annual data are available at the end of May of the following year.

**Data are suppressed to avoid disclosure of data of individual companies


Table 3: Sources and Destination of FDI (as of end of 2017)

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 239,624 100% Total Outward 30,322 100%
Netherlands 46,157 19.3% Luxemburg 6,615 21.8%
Germany 41,883 17.5% Czech Republic 3,282 10.8%
Luxemburg 33,186 13.8% Switzerland 2,459 8.1%
France 21,972 9.2% Netherlands 2,372 7.8%
Spain 14,438 X% Cyprus 2,233 7.4%
“0” reflects amounts rounded to +/- USD 500,000.

Results of table are consistent with the data of the National Bank of Poland (NBP).  NBP publishes FDI data in October/November.

A number of foreign countries register businesses in the Netherlands, Luxemburg and Cyprus hence results for these countries include investments from other countries/economies.


Table 4: Sources of Portfolio Investment (as of June 2018)

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 37,685 100% All Countries 24,017 100% All Countries 13,669 100%
Luxemburg 6,251 17% Luxemburg 5,262 4% U.S. 2,860 21%
Intl Orgs 2,557 7% Germany 1,017 3% Intl Orgs 2,557 19%
France 1,509 4% Ireland 683 3% Sweden 1,200 9%
Germany 1,349 4% Austria 665 3% Luxemburg 989 7%
Sweden 1,240 3% Italy 644 3% France 903 7%

Note: NBP publishes only total amounts of portfolio investment assets.

Results of table are consistent with the data of the National Bank of Poland (NBP). NBP publishes FDI data in October/November.

A number of foreign countries register businesses in the Netherlands, Luxemburg or Cyprus hence results for these countries include investments from other countries/economies.

14. Contact for More Information

Trade and Investment Officer
Ul. Ujazdowskie 29/31, 00-540, Warsaw, Poland
+48 22 504 2000
ICSPoland@state.gov

Romania

Executive Summary

Romania welcomes all forms of foreign investment.  The government provides national treatment for foreign investors and does not differentiate treatment by 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, telecommunication, energy, services, manufacturing, consumer products sectors, and banking.

The investment climate in Romania is a mixed picture, and potential investors should undertake due diligence when considering any investment.  The March 2019 EU Country Report for Romania points to persistent legislative instability, unpredictable decision-making, low institutional quality, and the continued weakening of the fight against corruption as factors eroding investor confidence.  The EU 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, efforts to undermine Romania’s anti-corruption prosecutors and weaken judicial independence have shaken investor confidence in the government’s commitment to combat corruption.  Political rhetoric has reportedly taken an increasingly nationalist tone, with political leaders occasionally accusing foreign companies of not paying taxes, taking advantage of Romanian workers and resources, and sponsoring anti-government protests.

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 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 in December 2017 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.  Since 2017, frequent government changes have led to rapidly changing policies and priorities that can serve to complicate the business climate.  Romania has made significant strides to combat corruption, but corruption remains an ongoing challenge and recent actions by the government could have in fact hindered anti-corruption efforts.  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. On March 29, the Government of Romania softened the bank tax, upholding taxes on energy and telecommunication companies.

Although women in Romania have equal access under the law to investment development and protections, women have been reported to face societal challenges.  The problem is worse in rural areas and for Roma women. According to the World Bank, almost half of rural women in Romania have not completed upper secondary education and 43 percent are in the poorest quintile.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 61 of 180

(down 2 spots)

http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 52 of 190

(down 7 spots)

http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 49 of 126

(down 7 spots)

https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2017 USD 3.6 billion http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 USD 10,000 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 has helped solidify institutional reform.  Conversely, 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.  Allegedly, in past cases, governments in Romania have allowed political interests or budgetary imperatives to supersede accepted business practices in harmful ways to investor interests.

The energy sector has suffered from recent changes.  In 2018, offshore companies benefited from a streamlined permitting process, but were hit with a windfall profit tax that previously applied only to onshore production.  Additionally, in February 2018 the reference price for natural gas royalties was changed from the Romanian market price to the Vienna Central European Gas Hub (CEGH) price, resulting in a significant increase in royalties.  Energy producers have expressed concern about additional regulatory requirements in EO114, which caps the price of wholesale natural gas, among other modifications. Business associations, including the American Chamber of Commerce in Romania (AmCham), the Foreign Investor Council (FIC), and the Coalition for Romania’s Development, have criticized EO114’s new taxes and how it reverses natural gas market liberalization.

Investments involving public authorities can be more complicated than investments or joint ventures with private Romanian companies.  Some allegations cite that large deals involving the government – particularly public-private partnerships and privatizations of key SOEs – can be stymied by vested political and economic interests, or delayed due to a lack of coordination between government ministries.

In May 2018, the Public-Private Partnership (PPP) Law was revised through emergency ordinance (EO) and responsibility for PPPs of national interest was shifted to the National Strategy and Prognosis Commission.  PPPs of regional or local interest are governed by local authorities. The initiative of implementing a project through a PPP lies exclusively with the public partner. The contribution of the public partner can be in cash, provided the public contribution complies with state aid rules and with public finance legislation.  The public partner can cover costs for stages prior to project implementation, including feasibility studies, and can assume payment obligations or provide guarantees to the project company. According to the PPP law, the public partner initiates the PPP project and awards it according to public procurement rules. Implementation of the PPP legislation will be of considerable interest to investors over the next few years.  The EO is subject to parliamentary review.

In April 2018, the Foreign Investors Council (FIC) issued an open letter to the government and Parliament underscoring business climate uncertainty from the government’s failure to finalize EO 79.  In 2017, EO 79 shifted the burden of mandatory payroll deductions for pensions, healthcare, and income taxes from employers to employees. Parliament has yet to confirm or modify the law, leaving employers uncertain.  To avoid reductions in employee net pay, many companies voluntarily increased salaries to offset employee losses. Other companies, wary of further possible changes, offered monthly bonuses rather than formally amending contracts.

As an example of changes to the taxation regime and ongoing systemic tax disputes between the government and foreign investors, the Ministry of Health (MOH) announced February 2018 an increase in “the clawback tax” for Q4 2017, from 19.42 percent to 23.45 percent.  Pharmaceutical companies pay the clawback tax on all sales of drugs reimbursed through the public health system. The MOH calculates the tax to recover the cost for reimbursed drug sales in the previous quarter that exceed its budget. The pharmaceutical industry, both generic and innovative, immediately decried the tax increase.  Industry sees itself as financing the growth in drug consumption in Romania while the MOH’s budget has remained flat since 2011. The International Innovative Pharmaceutical Producers Association (ARPIM) issued a press release noting that from 2013-2017, pharmaceuticals paid USD 1.75 billion in clawback taxes, exceeding one year of the MOH’s annual budget for drugs in the public health system.  Since implementation of the clawback tax in 2009, the pharmaceutical industry has suggested numerous solutions to address the lack of predictability and transparency in the National Health Insurance House’s computations, but the GOR has shown no interest in increasing government spending for medicine to reduce the tax burden on private companies.

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 2019 Economic Freedom Report indicates that secured interests in private property are recognized.  The Report also notes declines in judicial effectiveness and investment freedom, which outweigh improvements in property rights, the tax burden, and government spending.  The Report identifies labor shortages and political instability as the greatest economic risks.

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 2019 Doing Business Report and Doing Business in the European Union Report indicates that Romania ranks below the EU average in the ease of starting a business, dealing with construction permits and setting up utility services.  Starting a business was made more cumbersome by introducing fiscal risk assessment criteria for value-added tax applications, thereby increasing the time required to register as a value-added taxpayer. Numerous international bodies including the European Commission, the Group of States Against Corruption, the Venice Commission, and Transparency International have expressed concern about what has been seen as an attempt to roll-back anti-corruption efforts and called on the Romanian government to focus on strengthening anti-corruption efforts, including introducing stronger corporate ethics standards and implementing existing anti-corruption legislation.  No substantive progress has been made in these areas.

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 within the Ministry of Business Climate, Trade, and Entrepreneurship and an investment promotion department in the Ministry of Economy.  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 6 procedures and 35 days to establish a foreign-owned limited liability company (LLC) in Romania, compared to the regional average for Europe and Central Asia of 5 procedures and 13 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 5 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 certain hard currencies including: Euros, U.S. dollars, Swiss francs and Romanian Leu.  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. Currently only some 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.  According to the World Bank Doing Business Report, women are able to register a LLC with the same amount of time, cost, and number of procedures as men.

Outward Investment

There are no restrictions on outward investment.  There are no incentives for outward investment.

2. Bilateral Investment Agreements and Taxation Treaties

The U.S.-Romanian Bilateral Investment Treaty (BIT) on the Reciprocal Encouragement and Protection of Investment (signed in May 1992 and ratified by the U.S. in 1994) guarantees national treatment for U.S. and Romanian investors.  The agreement provides a dispute resolution mechanism, liberal capital transfer, prompt and adequate compensation in the event of an expropriation, and the avoidance of trade-distorting performance requirements. In 2004 the U.S. government negotiated a political understanding with the EU and eight accession countries, including Romania, to cover any possible inconsistencies between pre-existing BITs and the countries’ impending EU obligations.  A resulting revised BIT was ratified by the U.S. Senate and the Romanian Parliament in 2004, and went into effect on February 9, 2007. Other bilateral trade agreements with third countries were terminated upon Romania’s EU accession. Romania has a bilateral taxation treaty with the United States; the treaty was signed in 1973 and entered into force in 1974. It is available at https://www.irs.gov/pub/irs-trty/romania.pdf .

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.  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.  In January 2018, the Public Consultation Ministry was downgraded to a directorate within the Ministry of Labor and Social Justice. Except for occasional mentions in the Single Registry of Transparency of Interests (RUTI), the Ministry has had no recorded activity.  The ruling coalition has now installed its third Prime Minister in fourteen months, which has resulted in frequent changes to government leadership, including cabinet members, mid-level officials and associated staff, and changes to some agencies’ jurisdictions. This lack of both personnel and institutional stability has raised concern among the business community.

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, there is no penalty or sanction if the public authority does not follow the Sunshine Law’s public consultation timelines. There have been cases when the public authorities have set deadlines much shorter than the standards set forth in the law.  There were no transparency enforcement regulatory reforms announced or implemented in 2018.

International Regulatory Considerations

As an EU member state, Romanian legislation is largely driven by the EU acquis, the body of EU legislation.  European Commission (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.  Nevertheless, implementation of these laws and regulations is often reported to be delayed or 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.

In 2010, Romania passed a judicial reform law with the objective of improving the speed and efficiency of judicial processes, including provisions to reduce delays between hearings.  The Mediation Law, revised in October 2012, provides alternative dispute resolution options. The new Criminal Code, that includes provisions applicable to the economic felonies, came into effect in February 2014.  In 2018, Parliamentary leaders announced plans to amend both. The 2003 Fiscal Code and Fiscal Procedure Code, amended several times since their passage, was revised in January 2019. Fiscal legislation is revised frequently, according to some, oftentimes without due consideration of data-driven assessment of the economic impact.

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 take-over 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 11,230) and EUR 50,000 (USD 56,150). 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. 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) in order 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 March 2019 EU Country Report for Romania notes that the share of negotiated public procurement procedures without prior publication was among the highest in the EU: 21 percent in 2018, up from 17 percent in 2017.  Approximately 34 percent of contracts awarded by public institutions in 2018 were single bids, down from 40 percent in 2017. This raised concerns among businesses about corruption in public procurement, which reduces competition and decreases efficiency of public spending.  The ongoing transition to a new e-procurement system, have laid the foundation for more transparency in the procurement process. EO 46 passed in May 2018 and Government Decision (GD) 502 passed in July 2018 created the legal framework for a National Centralized Procurement Office.  The European Semester report recommends that, before expanding centralized procurement to more complex products, Romania should solidify experience in the procurement of simple products subject to demand aggregation.

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. Five 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 2019 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 26 percent of the claim. Arbitration awards are enforceable through Romanian courts under circumstances similar to those in other European 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.  Nonetheless, 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 35.8 cents on the dollar. Globally, Romania ranks 52nd of 190 economies on the ease of resolving insolvency.

4. Industrial Policies

Investment Incentives

Currently, customs and tax incentives are available to investors in six free trade zones.  State aid is available for investments in free trade zones under EU regional development assistance rules.  In 2018, the government amended the state aid program for large investments instituted under GD 807/2014, lowering the investment threshold to EUR 1 million and moving away from the calls for applications approach.  Investors can apply at any time, and applications are reviewed on a first-come first-served basis. As of December 31, 2018, of the 62 applications submitted in 2018, 19 were approved, 30 had been rejected, and the rest were under review.  Large companies may receive aid of up to 50 percent of their eligible costs. The ceiling is 35 percent in the counties of Ilfov, Timis, Arad, Caras Severin, and Hunedoara while in Bucharest the ceiling is 10 percent. The ceiling for small and medium-sized enterprises (SMEs) is 10 percent higher than permissible aid for large companies, and for the smallest category of companies, the ceiling is 20 percentage points higher.  Prospective investors are advised to thoroughly investigate and verify the status of state incentives.

In 2007, Romania adopted EU regulations on regional investment aid, and instituted state aid schemes for large investments, SMEs, and job creation.  Both Romanian and EU state aid regulations aim to limit state aid in any form, such as direct state subsidies, debt rescheduling schemes, debt for equity swaps, or discounted land prices.  The EC must be notified of, and approve, GOR state aid that exceeds the pre-approved monetary threshold for the corresponding category of aid. To benefit from the remaining state aid schemes, the applicant must secure financing that is separate from any public support for at least 25 percent of the eligible costs, either through his own resources or through external financing, and must document this financing in strict accordance with Ministry of Finance guidelines.  Amendments made in 2010 to the state aid scheme for regional projects score applications based not only on the economics of the project, but also on the GDP per capita and unemployment rate for the county of intended investment. When granting state aid, the Ministry of Finance requires that the state revenues through taxes equals the state aid granted. Numerous foreign and American firms have successfully applied for and received Romanian State Aid.

The renewable energy support through Green Certificate System, part of the Renewable Energy Law, provided incentives for certain types of renewable energy.  The support is not available for renewable energy investments made after January 1, 2017, but investors that qualified under the support system can trade certificates until 2032.  The Green Certificates are traded in parallel with the energy produced. Although the Green Certificates are intended to provide an additional source of revenue for renewable energy producers, repeated revisions to the support system including deferring release of the certificates, and lowering the mandatory green certificate quota that consumers and suppliers have to acquire have created instability in the renewables investment climate.  Energy intensive industrial consumers receive exemptions from acquiring green certificates. In March 2017, the government revised the renewable energy support legislation. The changes include extending the validity of tradable green certificates to allow trading until 2032 and requires green certificates trading to be done anonymously, with the intention of balancing the market for all green certificates sellers.

As an EU member state, Romania must receive EC approval for any state aid it grants that is not covered by the EU’s block exemption regulations.  The Romanian Competition Council acts as a clearinghouse for the exchange of information between the Romanian authorities and the EC. The failure of state aid grantors to notify the EC properly of aid associated with privatizations has resulted in the Commission launching formal investigations into several privatizations.  Investors should ensure that the government entities with which they work fully understand and fulfill their duty to notify competition authorities. Investors may wish to consult with EU and Romanian competition authorities in advance, to ensure a proper understanding of notification requirements.

Companies operating in Romania can also apply for aid under EU-funded programs that are co-financed by Romania.  When planning a project, prospective applicants must bear in mind that the project cannot start before the financing agreement is finalized; the application, selection, and negotiation process can be lengthy.  Applicants also must secure financing for non-eligible expenses and for their co-financing of the eligible expenses. Finally, reimbursement of eligible expenses – which must be financed upfront by the investor – is often very slow.  Procurements financed by EU-funded programs above a certain monetary threshold must comply with public procurement legislation. In an effort to increase the rate of EU funds absorption, Romania has amended regulations to allow applicants to use the assets financed under EU-funded programs as collateral.  Allegedly, understaffing and a lack of expertise on the part of GOR management entities, cumbersome procedures, and applicants’ difficulty obtaining private financing still remain significant obstacles to improved EU funds absorption and project implementation by Romania.

Foreign Trade Zones/Free Ports/Trade Facilitation

Free Trade Zones (FTZs) received legal authority in Romania in 1992.  General provisions include unrestricted entry and re-export of goods, and exemption from customs duties.  The law further permits the leasing or transfer of buildings or land for terms of up to 50 years to corporations or natural persons, regardless of nationality.  Foreign-owned firms have the same investment opportunities as Romanian entities in FTZs.

Currently there are six FTZs, primarily located on the Danube River or close to the Black Sea: Sulina, Constanta-Sud Agigea, Galati, Braila, Curtici-Arad, and Giurgiu.  The administrator of each FTZ is responsible for all commercial activities performed within the zone. FTZs are under the authority of the Ministry of Transportation.

Performance and Data Localization Requirements

The government generally does not mandate local employment.  The notable exception is the Offshore Law (Law 256/2018), which requires that at least 25 percent of the employees of offshore titleholders have to be Romanian citizens with fiscal residence in Romania.  There are no excessively onerous visa, residence, work permit, or similar requirements inhibiting mobility of foreign investors or their employees. There are no government-imposed conditions on permission to invest.  The government does not require investors to establish or maintain data storage in Romania. Romania neither follows nor is there legislation requiring a “forced localization” policy for goods, technology or data. Romania does not have requirements for foreign IT providers to turn over source code or provide access for government surveillance.  Romania’s Constitutional Court has twice ruled such specific legislative drafts are unconstitutional. There are no measures that prevent or unduly impede companies from freely transmitting customer or other business-related data outside the country. There are no performance requirements imposed as a condition for establishing, maintaining or expanding an investment.

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.  Mortgage loans are offered by commercial banks, specialized mortgage banks, and non-bank mortgage credit institutions. Romania’s mortgage market is now almost entirely private. The state-owned National Savings Bank, CEC Bank, also offers mortgage loans.  Since 2000, Romania has had in place the Electronic Archives of Security Interests in Movable Property (AEGRM) that represents the national recording system for the priority of mortgages structured by entities and assets, ensuring 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, 12.5 million (31 percent) of the estimated real estate assets (land and buildings) were registered in the cadaster registry as of March 2019.

Romania has made marginal improvement in implementing digital records of real estate assets, including land.  The 2019 World Bank Doing Business report ranks Romania 44 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 U.S. Trade Representative (USTR) Special 301 Watch List in 2019.  It also hosts illicit infringing websites that are included in the 2018 Notorious Markets List.  As elsewhere in the EU, Internet piracy – both Torrent site peer-to-peer (P2P) file sharing and business-to-consumer piracy – remains the top intellectual property rights (IPR) concern.  Despite the low priority placed on IPR enforcement at the policy level, cooperation between law enforcement authorities, including prosecutors and police officers, and intellectual property-based private industry continues at the working level.  This has led to innovative approaches to prosecuting IPR crimes within this constrained legal and fiscal environment: in order 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 a lack of social harm was often previously cited as a reason for dismissing IPR cases.

Romania’s Customs Authority reported the seizure of approximately 703,221 pieces of counterfeited goods in 2018 compared to 1.4 million pieces of counterfeit goods in 2017 and 1.52 million pieces in 2016.  The declining trend continues at an accelerated pace, in line with growing purchasing power and demand for genuine physical goods. Sweets, cigarettes, clothing, and footwear accounted for the majority of those seizures.  The amount of seized pharmaceuticals had fallen from 370 pieces in 2016 to zero in 2017 and 2018. According to both the National Customs Authority and the national police, the vast majority of counterfeit goods seized in Romania originate in China.

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 to protect patents, trademarks, and copyrights.  Romania has signed the Internet Convention to protect online authorship. While Romania’s IPR legal framework is generally good, enforcement remains weak and ineffective, especially in the area of internet piracy. The once-flagrant trade of retail pirated goods has largely been eliminated, but unlicensed use of software and personal use of pirated audio-video products remains high.  While Romania has passed broad IPR protection enforcement provisions, as required by the WTO, judicial enforcement remains lax.

Romania is on the Special 301 Watch List primarily due to weak enforcement efforts against online copyright piracy.  Customs officers have ex-officio powers and so can seize counterfeit goods and, after the rights holder inspects the goods and drafts a declaration, destroy them.  The government is responsible for paying for the storage and destruction of the counterfeit goods. Counterfeit goods are not prevalent in the local market.

Patents

Romania is a party to the Paris Convention for the Protection of Industrial Property and subscribes to all of its amendments.  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 Protection Convention since 2002. Patent registration 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

In 1998, Romania passed a trademark and geographic indications law, which was amended in 2010 to make it fully consistent with equivalent EU legislation.  Romania is a signatory to the Madrid Agreement relating to the international registration of trademarks and the Geneva Treaty on Trademarks. Trademark registrations are valid for ten years from the date of application and renewable.  Since 2014, trademark registrations can be filed online. In 2007, Romania ratified the Singapore Treaty on the Law of Trademarks.

Copyrights

Romania is a member of the Bern Convention on Copyrights.  The Romanian Parliament has ratified the latest versions of the Bern and Rome Conventions.  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/ .

6. Financial Sector

Capital Markets and Portfolio Investment

Romania welcomes portfolio investment.  In September 2016, the FTSE included Romania on its “Watch List” for a possible upgrade to “Emerging Market” status.  Currently, FTSE states that Romania’s single outstanding criterion is liquidity to support sizable global investments.  The Financial Regulatory Agency (ASF) is responsible for regulating the securities market. The ASF implements the registration and licensing of brokers and financial intermediaries, the filing and approval of prospectuses, and the approval of market mechanisms.

The Bucharest Stock Exchange (BVB) resumed operations in 1995 after a hiatus of nearly 50 years.  The BVB operates a two-tier system. The main market consists of 85 companies. The official index, BET, is based on a basket of the 10 most active stocks listed.  BET-TR is the total return on market capitalization index, adjusted for the dividends distributed by the companies included in the index. Since 2015, the BVB also has an alternative trading system (ATS-AeRO) with 292 listed companies targeting small and medium size enterprises (SMEs), requiring more relaxed listing criteria.  The BVB allows trade in corporate, municipal, and international bonds. Starting July 2015, investors can use gross basis trade settlement, and beginning March 2015, trades can be settled in two net settlement cycles. The BVB’s integrated group includes trading, clearing, settlement, and registry systems. The BVB’s Alternative Trading System (ATS) allows trading in local currency of 15 foreign stocks listed on international capital markets.

Despite a diversified securities listing, the situation on the international capital and financial markets has adversely affected the Romanian capital market, and liquidity remains low.  Neither the government nor the Central Bank imposes restrictions on payments and transfers. The red tape associated with capital market access, still high trading fees, and inconsistent enforcement of corporate governance rules have kept Romania within the frontier market tier.  Country funds, hedge funds and venture capital funds continue to participate in the capital markets. Minority shareholders have the right to participate in any capital increase. Romanian capital market regulation is now EU-consistent, with accounting regulations incorporating EC Directives IV and VII.

Money and Banking System

There are 34 banks and credit cooperative national unions currently operating in Romania.  The largest is the privately-owned Transylvania Bank (16.5 percent market share), followed by Austrian-owned Romanian Commercial Bank (BCR, 15.1 percent); French-owned Romanian Bank for Development (BRD-Société Générale, 12 percent); Italian-owned UniCredit (9.2 percent); and Austrian-owned Raiffeisen (8.5 percent).

The banking system is stable and well-provisioned relative to its European peers.  According to the National Bank of Romania, as of December 2018, non-performing loans accounted for 4.95 percent of total bank loans.  As of December 2018, the solvency rate of the banking system was 19.66 percent, which has remained steady over recent years.

The GOR has encouraged foreign investment in the banking sector, and there are no restrictions on mergers and acquisitions.  The only remaining state-owned banks are the National Savings Bank (CEC Bank) and EximBank, comprising 8.1 percent of the market combined.  Parliament is considering draft legislation to establish a state-owned development bank that would focus on SME financing and large infrastructure projects.

While the National Bank of Romania must authorize all new non-EU banking entities, banks and non-banking financial institutions already approved in other EU countries need only notify the National Bank of Romania of plans to provide local services based on the EU passport.

The Romanian Association of Banks has promoted a dialogue with interested parties – institutions, representatives of consumers’ associations, businesses, and the media –to improve the legal framework to allow adoption of digital technologies in the financial and banking sectors.  The current stance of Romania’s regulators toward bitcoin and digital currencies is one of caution. The National Bank of Romania is reserved about crypto currencies and has issued several statements warning users about digital currencies.

Foreign Exchange and Remittances

Foreign Exchange

Romania does not restrict the conversion or transfer of funds associated with direct investment.  All profits made by foreign investors in Romania may be converted into another currency and transferred abroad at the market exchange rate after payment of taxes.

Romania’s national currency, the Leu, is freely convertible in current account transactions, in accordance with the International Monetary Fund’s (IMF) Article VII.

Remittance Policies

There is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital gains, returns on intellectual property, or imported inputs.  Proceeds from the sales of shares, bonds, or other securities, as well as from the conclusion of an investment, can be repatriated.

Romania implemented regulations liberalizing foreign exchange markets in 1997.  The inter-bank electronic settlement system became fully operational in 2006, eliminating past procedural delays in processing capital outflows.  Commission fees for real-time electronic banking settlements have gradually been reduced.

Capital inflows are also free from restraint.  Romania concluded capital account liberalization in September 2006, with the decision to permit non-residents and residents abroad to purchase derivatives, treasury bills, and other monetary instruments.

Sovereign Wealth Funds

Romania is in the process of establishing a sovereign wealth fund.  In November 2018, the GOR approved the legal framework to establish a Sovereign Development and Investment Fund (SDIF).  On March 10, the Ministry of Finance (MOF) published a draft government decision to transfer the most profitable SOEs, along with government equity in privatized energy companies, to the SDIF.  SDIF management could sell equity or assets of SOEs in which the government is majority owner without complying with the Privatization Law.  SDIF management would also have the discretion to use revenue from dividends and sales of assets to fund public or private companies, public-private partnerships (PPPs), or other government-backed projects.

7. State-Owned Enterprises

According to the World Bank, there are approximately 1,200 state-owned enterprises (SOEs) in Romania, of which around 300 are majority-owned by the Romanian government.  There is no published list of all SOEs since some are subordinated to the national government and some to local authorities.  SOEs are governed by executive boards under the supervision of administration boards. The 2016 Corporate Governance Code (Law 111) improved implementation of corporate governance in SOEs. However, the government exempted several SOEs from the Code in 2017, and implementation of the Code remains incomplete.

SOEs are required by law to publish an annual report.  Majority state-owned companies that are publicly listed, as well as state-owned banks, are required to be independently audited.  The Corporate Governance Code (enacted through Emergency Ordinance 109 / 2011 and revised through Law 111 / 2016) does not have language requirements for SOE executive and non-executive board members.  Enforcement of the Corporate Governance Code has been uneven; many SOEs are currently managed by interim boards, often with politically appointed members that lack sector and business expertise. The March 2019 EU Country Report for Romania noted that corporate governance legislation applicable to SOEs is robust but only sparsely applied.  Appointments of interim boards are a recurrent practice, departing from the spirit of corporate governance laws.

Privatization Program

The Ministry of Energy oversees energy generation and distribution assets, and uranium and coal mining.  The Ministry of Economy has authority over state-controlled natural gas carrier Transgaz, national electricity carrier Transelectrica, national salt company Salrom, national waters company SNAM, and copper mining company Cuprumin.  The Ministry of Transportation (MOT) has authority over the entities in the transportation sector, including rail carrier CFR Marfa. Romania’s privatization law permits the responsible authority to hire an agent to handle the entire privatization process, though ultimate decision-making authority remains with the government.  Joint ventures between state-owned energy companies and private investors for electric power production have been stalled due to decreasing energy consumption and declining energy prices.

The terms of Romania’s 2013-2015 precautionary stand-by agreement with the IMF included the sale of minority stakes in several state-owned energy companies through initial public offerings (IPOs) and secondary public offerings (SPOs) on the Bucharest Stock Exchange (BVB).  To date, successful transactions have included a 15 percent SPO for natural gas transmission operator Transgaz in April 2013 (following a 10 percent IPO in November 2007), an IPO for 10 percent stake in nuclear power producer Nuclearelectrica in September 2013, an IPO for a 15 percent stake in natural gas producer Romgaz in October 2013, and an IPO on the BVB and London Stock Exchange for the majority privatization of state-controlled electricity distributor Electrica in June 2014.  Privatization has stalled since 2014. The government has repeatedly postponed IPOs for hydropower producer Hidroelectrica and integrated coal mining and coal-fired power production company Oltenia Energy Complex.

Romania has implemented the Electricity Directive and the Gas Directive of the EU’s Third Energy Package, introducing a structural separation between transmission system operator activities, and generation, production and supply activities.  Ownership unbundling rules apply to investors with participation in energy transmission, generation, production, and/or supply activities. According to the Third Energy Package directives, the same entity cannot control generation, production and/or supply activities, and at the same time control or exercise any right over a transmission system operator (TSO).  Furthermore, the same entity cannot control a TSO and simultaneously control or exercise any right over generation, production and/or supply activities. Consequently, the Ministry of Economy oversees the national natural gas carrier Transgaz and national electricity carrier Transelectrica, while the Ministry of Energy has authority over state-controlled electricity producers.  Prospective investors are strongly advised to conduct thorough due diligence before any acquisition, particularly of state-owned assets.

As a member of the EU, Romania is required to notify the European Commission’s General Directorate for Competition regarding significant privatizations and related state aid.  Prospective investors should seek assistance from legal counsel to ensure compliance with relevant legislation. The state aid schemes aim to enhance regional development and job creation through financial support for new jobs or investment in new manufacturing assets.  The Ministry of Finance issues public calls for applications under the schemes. GOR failure to consult with and then properly formally notify the EC has resulted in delays and complications in some previous privatizations.

Private enterprises compete with public enterprises under the same terms and conditions with respect to market access and credit.  Energy production, transportation, and mining are majority state-owned sectors, and the government retains a monopoly on electricity and natural gas transmission.

Investors receiving state aid, whose investments have been affected by the global economic crisis, have found renegotiation of their state aid agreements to be cumbersome, in part due to local authorities’ failure to acknowledge that market conditions have changed.  Some investors have experienced problems due to the occasional failure of GOR entities to fully honor contractual obligations following conclusion of privatization agreements.