Executive Summary
The Republic of Palau is a small island nation of about 350 islands in the western Pacific Ocean, with an estimated population of about 21,000 people. The government is the country’s largest employer, with approximately 30 percent of the workforce, and the tourism sector is Palau’s biggest economic driver, contributing an estimated 40 percent to GDP. GDP in 2021 was $257 million, approximately $14,243 per capita. Palau’s official currency is the U.S. dollar, and the country has three FDIC–insured U.S. banks. Apart from tourism, commercial industries include wholesale/retail trade, business services, commercial fisheries, and construction. Fish, coconuts, breadfruit, bananas, and taro cultivation constitute the subsistence sector, though the country’s agricultural base is small. Palau has a limited export base and production capacity, thus highly vulnerable to external shocks. Primary exports include frozen fish (tuna), tropical aquarium fish, ornamental clams and corals, coconut oil, and handicrafts. Palau continues to rely heavily on imports and continues to run trade deficits ($45.8 million in 2018). The country exports $0.5 million to the United States in 2021.
Palau’s economy remains dependent on donor funding. Since independence, Palau has operated under a Compact of Free Association (COFA) with the United States, which provides it with U.S. direct assistance, subsidies, and other financial support. In 2019, U.S. assistance to Palau was $32 million, roughly one-fourth of government spending. Palau receives additional aid from Australia, Japan, Taiwan, and international organizations such as the World Bank, ADB, and UDP.
Palau’s economy was hit hard by the COVID-19 pandemic, which had a devastating effect on tourism. The economy shrank 8.7% and 19.7% in 2020 and 2021, respectively. To offset COVID-related losses, the ADB provided Palau with $41 million in 2020.
The Foreign Investment Act guides the foreign investment process in Palau, and Foreign Investment Regulations restrict some sectors to Palauan citizens, including wholesale or retail sale of goods, all land and water transportation, travel and tour agencies, and commercial fishing. Other sectors are semi-restricted, requiring a Palauan partner. Foreigners cannot own land in Palau, but they can lease land and own buildings on leased land. While the government welcomes foreign investors, Palau’s investment climate poses challenges. Some U.S. investors have made allegations of corrupt practices when seeking government permits, doing business with local partners, and in public procurement processes. Establishing secure land title may be complicated due to the complexity of Palau’s traditional land ownership system and occasional over-lapping claims. Palau is not a member of the World Intellectual Property Organization, the WTO, or any other organization or convention protecting intellectual property rights. Palau has no bilateral investment protection agreements and is not a member of any free trade associations. Human resource constraints are a challenge for foreign investors and, third country nationals from Bangladesh and the Philippines comprise a large proportion the labor force.
FDI flows accounted for $24 million in 2020, up slightly compared to 2019 ($22 million), despite the pandemic. The stock of FDI grew to $488 million in 2020. Traditionally, FDI has be is mostly directed towards the tourism and real estate sectors. Main investment partners include China, Taiwan, and Singapore.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The government actively seeks foreign direct investment, and the country’s Foreign Investment Board (FIB) is responsible for approving and regulating foreign investment. There are no specific financial incentives extended to foreign investors.
Limits on Foreign Control and Right to Private Ownership and Establishment
The Foreign Investment Regulations detail the significant number of restricted and semi-restricted sectors. Semi-restricted businesses can include foreign ownership, as long as a Palauan citizen also has an ownership interest. These semi-restricted businesses are as follows:
- handicraft and gift shops;
- bakeries;
- bar services;
- operations [selling] products being produced by wholly Palauan-owned manufacturing enterprise;
- equipment rentals for both land and water within the Republic, including equipment for purpose of tourism; and
- any such other businesses, as the Foreign Investment Board may determine.
Sectors not listed as either closed or semi-restricted are presumed to be open for foreign investment. The Foreign Investment Board may, however, amend the semi-restricted sector list for “any such other businesses as the Board may determine.”
Screening of FDI
The FIB must approve all foreign direct investment. In addition to the sector in which the investment will flow, the Board requires a statement of the level of investment (in U.S. dollar amounts), the length of time the investment will be in Palau, the nationality of the investors, and the percent ownership of each investor. The Board may request additional documentation from investors if it has questions about the details of the investment.
Other Investment Policy Reviews
The Government of Palau has not conducted an investment policy review through any organization or institution in the past five years.
2. Bilateral Investment and Taxation Treaties
Bilateral Investment Treaty
Palau has no bilateral investment protection agreements and is not a member of any free trade associations.
Bilateral Taxation Treaty
Palau does not have a bilateral taxation treaty with the United States. The European Union in 2020 added Palau to its list of non-cooperative tax jurisdictions, the “blacklist.”
3. Legal Regime
Transparency of the Regulatory System
Regulatory and accounting systems are largely consistent with international norms. Bureaucratic procedures (e.g. permitting processes, approvals, etc.) may lack transparency and be influenced by cronyism, partly due to the country’s small size and extensive family networks. Proposed laws and regulations are available in draft form for public comment pursuant to the Administration Procedures Act, Title 6 of the Palau National Code. Generally, tax, labor, environment, health and safety, and other laws and policies do not impede investment. There are no informal regulatory processes managed by nongovernmental organizations or private sector associations. The Government of Palau, through the Financial Investment Act and the Environmental Protection Act, requires companies’ ESG disclosure to facilitate transparency and inform the application process in distinguishing between low- and high-end investment.
International Regulatory Considerations
The Pacific Island Forum, of which Palau is a member, has a model regulatory and policy framework focused on competition, fair trading, and consumer protections. Palau is not a WTO member.
Legal System and Judicial Independence
The legal system in Palau is composed of a mix of civil, common, and customary law. Palau also has a specialized Land Court for disputes arising from conflicting claims of land ownership, which is a complex issue in the country. The legal system is patterned on common law proceedings as they exist in the United States. The judiciary comprises a four-member Supreme Court, a Court of Common Pleas, and a Land Court. The Supreme Court has a trial division and an appellate division. Court rulings, legal codes, and public law can be found on their website: http://www.palausupremecourt.net/ .
Laws and Regulations on Foreign Direct Investment
All non-citizens wishing to invest in the Republic of Palau must obtain a Foreign Investment Business License (FIBL). The FIBL is obtained from the Registrar of Foreign Investment in the office of the Attorney General. In coordination with the Investment Promotion Unit at the Ministry of Natural Resources and Commerce, the Ministry of Finance reviews the application and ensures that the business does not fall under the categories of the National Reserved List listed above. The application process usually takes 7-10 working days.
Competition and Anti-Trust Laws
Palau does not currently have any anti-trust legislation, although the Foreign Investment Board considers competition-related concerns in its review process.
Expropriation and Compensation
Although the Palauan constitution provides for the right of the government to condemn land for national interest (“eminent domain”), there are no reported property-expropriation cases. Most of the land is privately owned by Palauan citizens through complex family lineages.
Dispute Settlement
ICSID Convention and New York Convention
Palau is not a member of the International Center for Settlement of Investment Disputes (ICSID).
Investor-State Dispute Settlement
There are no ongoing investment disputes involving the Government of the Republic of Palau and foreign investors. There is a very limited record of foreign investment disputes in Palau due to the small size of foreign investment in the country. The most common type of business disputes is with landowners over land use, and land rights issues, and as there is currently no official dispute resolution procedure, these are frequently resolved informally or only after protracted court disputes.
International Commercial Arbitration and Foreign Courts
The Republic of Palau does not have any alternative dispute resolution (ADR) mechanisms or domestic arbitration bodies available as a means for setting disputes between two private parties.
Bankruptcy Regulations
There is no legal provision for bankruptcy in the Republic of Palau. It ranks 166 out of 190 for resolving insolvency in World Bank’s 2020 Doing Business Report.
4. Industrial Policies
Investment Incentives
The Government of Palau does not offer incentives to domestic or foreign investors.
Foreign Trade Zones/Free Ports/Trade Facilitation
The Free Trade Zone Act of 2003 established the Ngardmau Free Trade Zone Authority. Another “Tax Free Zone” was established in the state of Melekeok, covering a one-mile radius around the Federal capitol building.
Performance and Data Localization Requirements
Palau does not currently have laws or regulations on domestic storage or localization requirements.
The Palau government requires all investors employing non-resident workers to agree to:
Cover the cost of repatriating non-resident workers to the place hired.
Train one or more citizen workers to perform the work for which the non-resident worker is employed.
This requirement is set and evaluated on a case-by-case basis and is usually included as part of a whole package that also includes investment incentives such as favorable taxation statuses. U.S. Citizens do not require a visa to enter Palau and may be employed in Palau without obtaining a work permit or a visa. They must register as a non-resident worker with the Bureau of Immigration annually.
5. Protection of Property Rights
Other than the foreign-ownership restrictions for certain business sectors, there are no restrictions on private entities to engage in all forms of remunerative activity.
Real Property
Establishing secure land title may be complicated due to the complexity of the traditional land ownership system and occasional over-lapping claims. Banks offer mortgages, and the recording system is reliable. The Land Court has primary responsibility to adjudicate disputes over land ownership. Non-Palauans may not purchase land, although they are able to lease for up to 99 years. Non-citizen investors must negotiate lease agreements directly with private owners or the state government.
Intellectual Property Rights
Palau is not a member of the World Intellectual Property Organization (WIPO), the WTO, or any other organization or convention protecting intellectual property right. In general, Palau does not strictly enforce intellectual property rights.
Resources for Rights Holders
Embassy Contact
Mission Deputy
+680-587-2920
Country Resources
For a list or lawyers in Palau, please see: https://pw.usembassy.gov/u-s-citizen-services/attorneys/.
For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.
6. Financial Sector
Capital Markets and Portfolio Investment
There are no stock exchanges or financial regulatory institutions in the country.
Money and Banking System
Palau uses the U.S. dollar and has no central bank. The country has three FDIC–insured banks: Bank of Hawaii, Bank Pacific, and Bank of Guam. All three are publicly owned U.S. companies with headquarters in Guam. There are several smaller private banks and a national bank, the National Development Bank of Palau.
The Palau Financial Institutions Commission is the regulatory body responsible for establishing and maintaining the financial supervisory system in Palau.
Foreign Exchange and Remittances
Foreign Exchange
The government does not impose any restrictions on converting or transferring funds associated with an investment. There have been no reported difficulties in obtaining foreign exchange as most funds are in U.S. dollars. Other than best practices to review suspicious money transfers (e.g. money laundering), there are no restrictions on converting or transferring funds associated with an investment.
Since 2011, Palau has had five successful money laundering cases, thought the risk of money laundering within the country persists, particularly given large real estate transactions, the reliance on cash transactions, and relative low capacity for government regulatory oversight.Remittance Policies
While the government encourages reinvestment of profits locally, there are no laws restricting repatriation of profits, dividends, or other investment capital acquired in Palau.
Sovereign Wealth Funds
Palau has no sovereign wealth fund (SWF) or asset management bureau (AMB), but the Compact of Free Association established a Trust Fund for Palau that is independently overseen by the COFA Trust Fund Board composed 5 members who are appointed by the President of Palau and confirmed by the Senate.
7. State-Owned Enterprises
In Palau, most of the major industries are controlled by state-owned- or quasi-state enterprises. These include the utilities sector, telecommunications, and the national bank. The SOE sector continues to underperform and to impose significant risks and burden on the fiscal system and economy.
Privatization Program
Palau has no on-going privatization program.
8. Responsible Business Conduct
Many businesses provide corporate donations to environmental and social Non-Governmental Organizations (NGOs), and /or engage in environmental corporate social responsibility programs to preserve Palau’s environment and wildlife. Most CSR activities are conducted via donation, partly attributable to the available tax deduction of up to 10 percent of a company’s Gross Revenue for donations to non-profit organizations.
Palau has some basic worker protection laws, including a minimum wage and protections for foreign workers.
Additional Resources
Department of State
Department of the Treasury
Department of Labor
Climate Issues
As an island state, Palau is highly vulnerable to climate chance, and as a result has developed a national Climate Change Policy. Policy objectives include mitigating global climate change by working towards low carbon emission development, maximizing energy efficiency, protecting carbon sinks, and minimizing greenhouse gas emissions. Palau also plans to become the world’s first carbon neutral tourism destination. This project, launched in August 2020, aims to reduce Palau’s carbon footprint both domestically and by foreign tourism, while increasing the production of locally sourced food.
Palau has been a vocal proponent of climate mitigation measures and has several government policies in addition to the Climate Change Policy, that seek to achieve outcomes that preserve biodiversity and other ecological benefits. Although government does not specify any specific expectations on the private sector to contribute to achieving targets and goals, there is spirit of collaboration that exists between the private sector and the government that enables efficiency and progress in environmental protection.
9. Corruption
Corruption remains a challenge to doing business in Palau, despite a robust legal mechanism to detect and prosecute corruption. The Code of Ethics regulates transactions by national and state public employees, officials, and elected officials, as well as persons making campaign contributions. The law prohibits personal gain through governmental transactions, prohibits conflict of interest, restricts incompatible outside employment, prohibits solicitation of gifts and severely restricts the size of campaign contributions, limiting such contributions to Palauan citizens.
The Special Prosecutor Act established the Office of the Special Prosecutor, who has the power to investigate and prosecute the national and state governments, and its officials, for violations of the Constitution and laws of the Republic or for failure to implement such laws. Local media often reports on alleged corruption cases and serves as an informal watchdog. Palau does not appear in Transparency International’s Index of Corruption. There are no formal anti-corruption NGOs or international watchdogs based in Palau.
UN Anticorruption Convention, OECD Convention on Combatting Bribery
Palau acceded to the United Nations Convention against Corruption (UNCAC) in March 2009. It has been a member of the Asian Pacific Group on Money Laundering (APGML) since 2002.
Palau is not a member of the OECD Convention on Combating Bribery.
Resources to Report Corruption
Allegations of corruption can be reported to the Special Prosecutor through the Attorney General’s Office:
Ernestine Rengiil
Attorney General
+680-488-2481
UN Anticorruption Convention, OECD Convention on Combatting Bribery
Palau acceded to the United Nations Convention against Corruption (UNCAC) in March 2009. It has been a member of the Asian Pacific Group on Money Laundering (APGML) since 2002.
Palau is not a member of the OECD Convention on Combating Bribery.
10. Political and Security Environment
Palau is stable, and not prone to political violence. The World Bank placed Palau in the 84th percentile in its 2015 rating of country political stability.
11. Labor Policies and Practices
With an estimated total of 12,500 Palauan nationals in country (including non-working individuals, such as children and elderly) and 4,300 estimated foreign workers, foreign labor comprises a large proportion of Palau’s labor force. Palau has a fairly low unemployment rate across all age categories.
Under the Compact of Free Association, Palauan citizens are entitled to live, attend school, and work in the United States visa-free as “nonimmigrant residents.” Accordingly, many skilled and professional workers migrate to the U.S. for its higher wages and standards of living. Professional, medical, management, and other special labor skills are in high demand in Palau. Given the scarcity of resident qualified workers, Palau allows investors to employ non-resident workers provided they agree to cover the cost of repatriation, that they hire and train at least one citizen to perform the same work.
In October 2013, Palau established the minimum wage for workers. Foreign workers are generally hired on a contract basis with opportunities for annual renewals.
As of 2020, there are no new labor related laws or regulations enacted during the last year as well as no pending draft bills.
12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs
Palau is a member of the Multilateral Investment Guarantee Agency of the World Bank Group.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 3: Sources and Destination of FDI
Data not available.
14. Contact for More Information
David Ryan Sequeira
Deputy Chief of Mission
U.S. Embassy Koror
Republic of Palau
Tel: +680-587-2920 x 2002
SequeiraDR@state.gov