BMGT 496 - Business Ethics - Final Exam
twinkletoes
BMGT496-Week8ResourcesandCitations.pdf
4/23/2021 Week 8 Discussion - BMGT 496 7383 Business Ethics (2212)
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Week 8 Discussion
BMGT 496 7383 Business Ethics (2212)
Week 8 Discussion
Topic Threads Posts Last Post
Must post first.
Discussion Instructions
Please refer to the Discussion Grading Rubric
and Discussion module for details regarding
how your performance will be
assessed. NOTE: Please be certain to read
the entire discussion assignment since in
some cases there is more than one question
you need to discuss, respond to, or address.
Be sure that you have answered the entire
question!
Paraphrase rather than use direct quotes and
provide the page or paragraph number of the
resource. Review the Learn to Use APA so
you understand how to cite and reference the
eBook, which you are required to use to
support the reasoning for what is presented in
the discussion questions below. Cite the
source materials used.
How to Do Well in Discussions
Make your initial post responding to
the below question by Saturday, and
comment on at least two of your
classmates’ posts by Tuesday. Posting
late may lose you points.
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Topic Threads Posts Last Post
Respond to the specific questions
posed in the discussion.
Be sure to base your initial post and
responses on course materials, and use
7th ed. APA citations in every post.
Post your responses over three days
and you respond to more than two
students to receive full credit for the
frequency of participation.
Write clearly and proofread; errors can
lose you points.
Quality of posts, citations, frequency,
and timeliness of posts all factor into
your discussion grade.
Initial Discussion Question Post
This posting should be a minimum of one
short paragraph and a maximum of two
paragraphs. Word totals for this post should
be in the 200–350-word range. Explain 'why'
with supporting evidence and concepts from
the course materials. Include in-text citations
and associated references in a reference list.
The use of the course materials is required.
Responses to Classmates’ Posts for Each
Discussion Question
After you have created your initial post, look
over the discussion posts of your classmates,
and give at least two responses to different
classmates (one per classmate) as outlined in
the Discussion Grading Rubric. Two responses
for this discussion question is the minimum
and will not earn full credit for frequency.
A response posting should be a minimum of
one short paragraph. Word totals for these
posts should be in the 75–150-word range.
4/23/2021 Week 8 Discussion - BMGT 496 7383 Business Ethics (2212)
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Topic Threads Posts Last Post
The goal of your response posts is to extend
the discussion or pose new possibilities or
ideas not previously voiced using the course
materials. Your goal should be to motivate
the group discussion and present a creative
approach to the topic. Do not merely agree
or disagree, repeat what a classmate stated or
what you have already stated. Explain the
'why and how' with supporting evidence and
concepts from the course materials. Include
in-text citations and associated reference
within a reference list. The use of the course
materials is required.
Self-Plagiarism: Self-plagiarism is the act of
reusing significant, identical or nearly identical
portions of one's own work. You cannot re-
use any portion of a paper or other graded
work that was submitted to another class
even if you are retaking this course. You also
will not reuse any portion of previously
submitted work in this class without prior
instructor approval. A zero will be assigned to
the assignment if self-plagiarized.
Discussion #1
Government Regulation
Government regulation varies by industry and
jurisdiction. Some states have more
requirements over others and in certain
states, products are more heavily regulated. In
turn, this may result in the product become
more expensive to those consumers or the
consumer may have more rights to file a civil
lawsuit if the product is harmful. What role
should the government have in regulating
business ethics?
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Last Visited Apr 23, 2021 5:38 PM
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and reply to other threads
Activity Details
4/23/2021 20 Essential Tips for Doing Business with India – Australia India Institute
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20 Essential Tips for Doing Business with India
Almost every enterprise in the West is looking at collaboration and business links with India – but it is not easy, it requires
patience and a lot of understanding. Even a non-resident Indian can find the landscape different. Here are some tips that
might help your, but keep in mind you will find many variations and contradictions of these points in the very diverse and
exciting India market.
1. The language barrier is real
India has some 26 major languages, but your Indian counterpart will almost certainly speak English, which itself is a problem
– it creates the illusion of communication and understanding. Many of us speak English and think western – your Indian
partner speaks English and thinks Indian, so take care to build real understanding. Also keep in mind there are “many
Indians” with many different languages and ways of thinking.
2. You are in a different culture
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Visitors to most of Asia and China are visually reminded that they are in a vastly different culture. But often, especially in
offices, India can appear quite westernised and individuals also give that impression. It’s better to open your mind and see
things and people more clearly, looking beyond the surface level “westernisation”. Exploring cultural differences expands
your horizons.
3. Dealing with non-conformity
Indian culture provides masses of room for non-conformists. Diversity of dress, styles of doing business and differing
reactions to personal contact are to be expected over there. Your host might want to talk about diet or spirituality instead of
your product and it is wise (and fun) to go with the flow.
4. Avoid stereotyping
India might be the most diverse country on earth. Religions, beliefs, languages and culture all immensely varied. Keeping an
open mind will help you avoid jumping to the wrong conclusions. Your host could have spent many years in the USA or the
UK, and have a global outlook – or never have left India and have a regional view.
5. Prepare for the collective
Most westerners come from a culture of the individual, but Indians are firmly placed in a collective culture. A visitor to an
Indian company will often find four or five Indians in the meeting, and often it is not clear who is in charge. Many Indian
leaders will not speak up or even speak at all in these meetings – in the collective someone else does the talking while they do
the evaluating.
6. You need patience
Modern India can be slow or fast and it is hard to know which you will encounter. Sometimes delivery seems to take forever,
yet on other occasions it is faster than the west. This means to succeed you need incredible patience, so don’t send your least
patient executive to India. Being able to respond positively under both slow and fast delivery is the key.
7. You are just one of many
The world is knocking on India’s door. Even if you represent a major company, you are not that important to Indians. The
rest of the world is chasing them too, so they have choices. While most western executives are under head office pressure to
complete the deal, their Indian counterpart faces no such demand and can walk away in most cases.
8. Be prepared for paradox
Visitors can be shocked and unprepared for the speed of modern India. Businesses need to be prepared to deliver on a
product or service immediately and not just have some idea for a future opportunity. Trade missions from around the world
arrive weekly, so they have plenty of choice. Fast and slow, east and west – India is a living paradox.
9. Watch out for religious holidays
A simple point often overlooked – check the calendar for holidays and although they are often fun and informing, it is a hard
time to do business. A holiday listed for one day might run for four, so check it out first.
10. Work harder for specific outcomes
Indians have an acceptance of change hardwired into their psyche – they thrive on it. It also means they are less specific in
plans and contracts, which can be disturbing for newcomers. Getting the specifics set down can take a long time – but be
careful about speaking too bluntly because this can be seen as insulting in a culture of relativity and relationship. And once
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you have “finalised” the deal, expect a continuing run of re-negotiation (in India things are rarely “set in concrete”) which is
consistent with the Indian view of the world and life as constantly changing and vastly unpredictable.
11. Be careful choosing where to base your India push
While Mumbai is the financial capital, it is a tough place and most business people find they have to visit Delhi regularly
anyway. Delhi is more liveable, and is more than a political capital – it is a powerful business city. Alternatively, you could
base yourself where the business opportunities are. Perhaps your best market is in the south? In that case, Chennai becomes
a great choice. Regions have varying strengths, so research is the key. Recent moves to allocate Smart Cities across India can
provide insights into alternative gateways for you.
12. Be prepared for many internal flights
Wherever you are based in India, expect to travel, because there are at least 35 cities where you can do business, and that’s
just the beginning. Plus the importance of meeting face to face is especially true in India.
13. Start and end the day late
Indian breakfast meetings can be set for 10am or even later – they are late starters (even though PM Modi has instructed
Ministers to be at their desks by 9am). But your dinner meeting at the end of the day might not start until 9pm or later.
Hours are long and weekends are for working because “work is life” is the mantra.
14. Things will change at the last minute
Despite your expectation, India runs to its own rhythm. One westerner tried to break convention by running an early
(6.30pm) dinner meeting, and his guests showed up at 9.30pm anyway. Often you will be called minutes before a meeting to
change time or venue – going with the flow is an asset over there.
15. Expect to be interrupted
Indians like to do several things at once, so expect your presentations to be interrupted by other visitors, cell phones, papers
to sign and other distractions. At formal conferences and lunches, cell phones are rarely switched off and often answered at
full voice. Western focus and single-mindedness is not an asset in India. My experience is that although my Indian host
might seem constantly diverted and interrupted during my presentation, not much has been missed as Indians thrive on
multiple tasks at the same time, contrasting with the western single project orientation.
16. Be more formal
Addressing people by a title and their last name is a good policy in a country where status and formality underpin good
manners. Australians, driven by egalitarianism, need to be reminded to focus their attention on the most senior (often also
elderly) person in the room and avoid in-depth chatting to junior staff. Casual forms of address can come later, but only once
you have really got to know the Indian partner very well. On the other hand, things are changing so fast in India…
17. Shaking hands with women
Conventional wisdom is no physical contact whatsoever in a business context, but few people over there seem to really worry.
A good policy is to wait and see if the woman extends her hand, but if you hold your hand out first it is not such a big deal.
Indians are amazingly flexible in these matters, but it is wise to show care.
18. Don’t read anything into the handshake
In the west we tend to read a lot into handshakes – too soft, too firm, too long and so on. Most of your handshakes in India
will be pretty light by western standards, but it is not a sign of lack of interest or indifference. It’s just how it is done over
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there, almost like a formality to get over and done with. You might think about learning how to do the Namaste when
greeting Hindu colleagues.
19. Navigate through the spider web
While the west strives for simplicity and certainty, Indian business leaders know that life is like trying to find your way
through a spider web – where does it begin, where does it lead, who can tell? Consistent with this view, most Indian
corporations offer an incredibly diverse range of products and services – whereas western business tends to focus on just one
area. In most cases Indian companies are willing to buy from you but are also looking for the deal to include some intellectual
property sharing arrangements – think about these before you head over there.
20. Learn the art of flexibility and patience
Being patient and flexible is an asset, even if you come from a country that likes to be blunt, direct and structured. Most
Indian communication is indirect so it can take some time to work out what the real issues are. India is full of surprises and
you cope best through being flexible. Dropping any “one rule for all” approach is a good start.
If you are thinking of going, India’s great thinker Rabindranath Tagore can be your inspiration: “You can’t cross the sea
merely by standing and staring at the water.”
Stephen Manallack is a Director of the EastWest Academy Pty Ltd and compiled the secrets of Indian business success and cross cultural issues while preparing his book for the Indian market, Soft Skills for a Flat World (Tata McGraw-Hill). He has led several trade missions to India and is a Cross-Cultural Trainer.
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4/23/2021 How to do business in India - BBC Worklife
https://www.bbc.com/worklife/article/20150826-the-challenges-of-setting-up-shop-in-india 1/5
How to do business in India
(Image credit: Getty Images)
By Vikram Barhat 26th August 2015
Not so long ago India was sold as a mystical land of ash-smeared holy men, snake charmers and other cultural exotica, all part of the nation’s collective imagery.
But today’s India is a far cry from the stereotypes.
After the US and China, it’s becoming the world’s third-largest economy. India’s meteoric rise has been fuelled by a remarkable shift in its economic fortunes. During a period when growth remained anaemic across much of the industrialised world, India’s gross domestic product grew a staggering 7.2% in 2014 under Prime Minister Narendra Modi's reform-focused government.
Aside from recent stock market jitters, the World Bank pegs India’s GDP growth at 7.5% for 2015. Much of India’s economy is driven by its so-called “demographic dividend”: Nearly two- thirds of India’s 1.2 billion population is under the age of 35, creating one of the largest consumer markets in the world. It’s no surprise it’s attracting businesses the world over, keen to access these new customers.
“India provides a good balance between a fast-growing economy and one that happens to be relatively open and transparent,” said Dhruv Ratra, San Francisco-based CEO of Anglian Omega Network, an umbrella group headquartered in Dubai, UAE, whose business ventures in India include everything from beauty product businesses to commodities and manufacturing.
“With China slowing and providing multiple barriers to entry, and Europe stagnating, there are very few places in the world that provide the opportunities that India does.”
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India's huge youth population are expected to drive forward the economy over the next decade. (Credit: Getty Images)
Behemoths like Amazon, Starbucks, Uber, Foxconn and even the US presidential candidate Donald Trump have expanded their businesses to India, “thereby justifying our views and decisions when we started operations in the country," Ratra added.
There’s no doubt there are many rich investment opportunities in India, but they’re scattered over an obstacle course of opaque rules and regulations.
Business people who have found their way through say it takes a lot more than deep reserves of patience to navigate.
The greasing of palms
India has long struggled with endemic corruption and it’s still a problem. Overt or implied demands ranging from small kickbacks, called “baksheesh,” to large corporate “donations” — common ways to grease the wheels of business fortunes in India — can quickly frustrate foreigners. India still ranks 85 among 175 countries on Transparency International'sCorruption Perception Index.
Corruption or graft is a reality foreign entrepreneurs must accept, but not give into, said Melbourne, Australia-based Stephen Manallack, director at East West Academy Pty Ltd, a cross-border trade and investment advisory service that specialises in doing business in India.
“The issue of corruption has been the elephant in the room for too long and most people are reluctant to discuss it,” said Manallack, author of Riding the Elephant - Doing Business in India.
Dutch national Paul Schuttenbelt, who runs Youth Football International, a football training academy, and the Delhi Youth League, said people won’t ask for pay-offs, but that means that sometimes things just don’t move forwards. “Clearly a lot of middle-men and grounds staff don’t work if you don’t pay them, or give them something.”
A mountain of paperwork
Foreigners who want to set up businesses in India “must remember that paperwork and processing times are still a little tedious even for Indians familiar with the system,” Ratra said.
It takes an average of 30 days just to get a business officially registered, too slow for entrepreneurs used to speedy processing in Canada (five days) or Australia (2.5 days).
British expatriate Vikas Vij experienced this first-hand setting up his event management business, The Ideas Exchange, in Mumbai. “The process for registering a business, becoming service-tax registered, installing telecoms and internet systems is not as simple as we take for granted in the UK,” said Vij, in India since 2008.
4/23/2021 How to do business in India - BBC Worklife
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Vikas Vij, Managing Director at The Ideas Exchange, Mumbai. (Credit: The Ideas Exchange)
The flow of foreign direct investment in India has long been hindered by a complex system of inscrutable regulations.
Canadian businessman Suneet Singh Tuli believes there is a lot more that could be done and wants the Modi government to deliver faster on its pro-business promises. The government should address anomalies of duties to boost manufacturing activity, suggested Tuli, president and CEO of Data Wind, a Canadian tech firm specialising in low-cost digital devices such as tablets and smartphones, which has operations in India. “Greater transparency, good e- governance and stringent graft [corruption] laws could lead to quicker policy decision in procurements.”
A patchwork of tax laws
Few things have dented India’s appeal for foreign business people more than its arduous tax laws. Critics argue that in addition to being out of sync with the global norm, they’re draconian and, in some cases, amount to tax terrorism. India’s highly publicised battles with local subsidiaries of foreign businesses — Vodafone, Nokia, and more recently Nestle, for instance — have drawn media attention and global scrutiny.
“Anomalies in duty structure in relation to import of finished products versus components is a major drawback,” Tuli said, explaining that a patchwork of tax laws across states can soon overwhelm entrepreneurs used to a more uniform set of regulations back home.
Building relationships
Cultural misunderstanding plays a role in almost every case of cross-border business failure, according to Manallack, who places it at the top of his list of challenges.
“Many western business people are not curious about Indian culture,” he said. “Because Indians are so polite and courteous, the westerner thinks that the Indian has adapted to them, but then nothing happens and they wonder why.”
As a society, India is very relationship focused. To complicate matters, it’s many countries within a country.
“India is a collage of extremely diverse groups of people identified by their history, language, religion, caste, and education,” said Ratra. “This is a complicated issue for most outsiders to wrap their heads around.”
While setting up his football academy in India, Schuttenbelt experienced cultural hurdles that frequently foiled what seemed like the perfect setup for scoring a deal. “I would reach
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agreements with the top people of the company, after several meetings, and would walk away thinking I had the deal,” he said. “Eventually, they’d result in nothing.”
Be prepared for transport problems
There has been a surge in bids to improve the country’s creaky infrastructure. Most of the recent infrastructural overhaul has been limited to a handful of big cities — Mumbai, Delhi, Chennai, Kolkata, Bengaluru and Hyderabad.
Compared to rival China, there’s plenty of room for infrastructure growth in India, said Tuli who operates businesses in both countries.
Dhruv Ratra, CEO of Anglian Omega Network, which has business ventures in India (Credit: ©AntimaKhanna.com)
India has only 1,300 km of fast roads compared to 77,000 km in the US, and 112,000 km in China. India doesn’t have any high-speed trains, most averaging under 100km/hour, whereas China has the world’s largest high-speed rail network. Water shortage and power outages are common occurrences and many of the country’s ports still rely on manual labour to move cargo.
Hiring smart
There is a huge gap in the market for skilled professionals. While India has around 487 million workers, more than two-thirds of Indian employers are struggling to find employable workers.
“From my own experience, the fundamental challenge we all face, contrary to popular international opinion, is the difficulty in sourcing the right talent and skill sets to run and scale up a business,” said Vij. “Each year more jobs still go unfilled because the quality of talent does not match.”
The current shortage of employable workers in India is attributed to the fact that only 2.3% of the workforce in India has received formal skills training as compared to 68% in the UK, 75% in Germany, and 52% in the US.
Sticking it out
For most of the first five years of doing business in India, Vij often thought of giving in and going back to the UK, but decided to stick it out for the opportunity and better work-life balance. The decision paid off: “Our trade exhibition, Professional Beauty, became the market leader in the region despite many hurdles and battles,” he said. “This reinforced my thoughts on the value of perseverance in adversity to the extent that we now run that event in four cities around India, and next year will take it to Sri Lanka.”
The key to business survival in India, Vij added, has been a strong streak of stubbornness, an unwillingness to be beaten by anyone or any system. “India has … given me the experience to be successful anywhere in the world,” he said.
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Int. J. of Human Resource Management 14:8 December 2003 1333-1349 13 Routledge g ^ Tiykn&ftancliCnHi
Comparing business ethics in Russia and the US
Rafik I. Beekun, Yvonne Stedham, Jeanne H. Yamamura and Jamal A. Barghouti
Abstract In this comparative survey of seventy-three Russians and ninety-two US managers, we explore differences and similarities in ethical decision-making among respondents from these two countries within a business context. Using Reidenbach and Robin's (1988) multi-criteria ethics instrument, we examined whether business people in Russia and the US differed in their judgement of the ethical content of business decisions. Russia and the US provide an interesting comparison because of the extreme differences in their cultural characteristics as well as in their economies and related business development. Our results indicate that, while Americans, in general, tended to assess certain actions as less ethical when applying utilitarian or justice criteria, the ethical judgements of the two groups differed by situation and by criteria employed.
Keywords Russia; justice; business; ethics; national culture; US; utilitarianism.
With over 150 million potential customers and a country abounding in natural and human resources, Russia has become a magnet for global market activity from many countries, especially the United States (Elenkov, 1997). Doing business in Russia, however, is fraught with difficulties and dangers. US businesses wishing to enter the Russian market need to consider that Russian managers view many practices that are considered moral and ethical in the US culture differently (Tongren et al., 1995). In fact, a US Department of Commerce report has noted that ethical issues, including bribery, extortion, murder and mafia penetration, present a major obstacle that American businesses encounter in Russia (International Trade Administration, 1992). As a Western businessman working in Russia noted recently, 'Business ethics in Russia? I have never heard of it' (Taylor et al., 1997). Conversely, as Russian firms do business with the US, they are finding that Americans practise their 'ethics' very differently, especially with respect to manager-employee salary differentials and job security (Puffer and McCarthy, 1995).
Rafik I. Beekun, Professor of Management and Strategy, University of Nevada, Reno, Managerial Sciences Department 28, Reno, NV 89557-0206, USA (tel: -1-775 784 6993 ext. 303; fax: H-775 784 1769; e-mail: [email protected]). Yvonne Stedham, Professor of Management, University of Nevada, Reno, Managerial Sciences Department 28, University of Nevada, Reno, NV 89557-0206, USA (tel:-1-775 784 6993 ext. 315; fax:-1-775 784 1769; e-mail: [email protected]). Jeanne H. Yamamura, Associate Professor of Accounting, University of Nevada, Reno, Department of Accounting and CIS 26, Reno, NV 89557-0205, USA (tel: -1-775 784 4823; fax: +115 784 8044; e-mail: [email protected]). Jamal A. Barghouti, Senior Staff Engineer, Dubai Petroleum Company, PO Box 2222, Dubai, United Arab Emirates (tel: +9714 301 2269; fax: -1-9714 301 2360; e-mail: [email protected]).
The International Journal of Human Resource Management
ISSN 0958-5192 print/ISSN 1466-4399 online © 2003 Taylor & Francis Ltd
http://www.tandf.co.uk/journals
DOI: 10.1080/0958519032000145783
1334 The International Journal of Human Resource Management
In discussing the ethical differences between Russia and the US, many researchers (Apressyan, 1997; Elenkov, 1997; Jackson et al., 2000; Neimanis, 1997; Puffer and McCarthy, 1995; Ralston et al., 1997) have noted the potential impact of these countries' national cultures on ethics, but none has investigated this issue empirically. Yet, by learning more about the process underlying ethics in both countries, global managers and employees could enhance ethical behaviour across national borders (Pratt et al., 1993; Husted, 2000). Further, as Schein (1997) points out, telling a person in another culture that an action is unethical potentially antagonizes that person. As a result, managers put up with rather than attempt to understand each other. Again, deepening the understanding of the process underlying ethics across national cultures can help us decipher what is going on and avoid offending others. Accordingly, in our study, we explore the relationship between business ethics and the national culture of Russia and the US by determining the level of similarity or dissimilarity in ethical judgements between the two cultural groups.
We shall rely on Hofstede's (1980: 260) definition of national culture; he defines culture as the 'collective programming of the mind which distinguishes the members of one group or category of people from another'. We shall also use Hofstede's (1980) dimensions of national culture to carry out a cross-cultural, comparative survey.
Hofstede's dimensions of culture
Hofstede's dimensions of national culture will be used in our study because he clearly draws the connection between national values and economic activity (Husted, 2000). Hofstede (1980) proposed four dimensions of culture by which nationals from different countries could be commonly ranked. Since culture, in general, represents man's accumulated shared learning in the face of 'problems of external adaptation and internal integration', and since espoused values and assumptions, in particular, form part of his/her cognitive and affective make-up (Schein, 1997), they are likely to be related to decision-making processes (Adler, 2002; Messick and Bazerman, 1996). Overall, the determination of whether certain decisions or actions are ethical is likely to be affected by culture in general and dimensions of national culture specifically.
Hofstede's (1980, 2001) cultural dimensions are power distance, uncertainty avoidance, masculinity/femininity and individualism/collectivism. Table 1 presents the scores for Hofstede's cultural dimensions for Russia and the US.
The US differs from Russia on all four cultural dimensions, but we chose to focus on only two dimensions in this study. We focused on individualism/collectivism and power distance for two reasons. First, Elenkov's research (1997) indicated that Americans and Russians differed significantly on individualism/collectivism and power distance. As seen in Table 1, individualism and power distance are the two dimensions where the US and Russia exhibit the largest differences. Russia scored low on individualism.
Table 1 Cultural dimensions
Dimensions of culture US Russia Difference
Power distance Uncertainty avoidance Individualism/collectivism Masculinity/femininity
40 • 46
91 62
89 87 40 50
(49) (41) 51 12
Sources: Elenkov (1997) and Hofstede (1980)
Beekun et al.: Comparing business ethics in Russia and the US 1335
and hence would be considered a collectivistic country; by contrast, the US scored high on individualism and would be considered an individualistic country. Moreover, Russians scored high on power distance as compared to Americans. Second, Hofstede (1980) noted an inverse relationship between individualism/collectivism and power distance, and suggested that both were related to economic wealth. The extreme differences in economic wealth between Russia and the US, historically and in the present, provide fertile ground for exploring national cultural differences in these areas. Further discussion of these dimensions follows.
The individualism/collectivism dimension is a bipolar continuum ranging from individualism to collectivism. Individualism describes the inclination of individuals to pursue their personal interests and those of their immediate family (Hofstede, 1980). Members of a highly individualistic country view themselves as self-reliant, and stress individual action. Value connotations related to work in individualistic countries are that ability is the most important career factor, employees are responsible for themselves and employees' involvement with their company is calculative rather than moral in nature (Hofstede, 2001). Furthermore, individualism implies that societal norms such as value standards should apply to all (universalism), that individuals should be emotionally independent of institutions and organizations and that identity is based on the individual.
As indicated by Puffer and McCarthy (1995), Americans' belief in individualism has developed for over a century. This stems from the fact that early immigrants to America sought a society where personal ability rather than social status or relationships determined one's station in life. Puffer and McCarthy (1995) also indicate that the US's Judaeo-Christian heritage emphasizes hard work and the accumulation of personal wealth as being virtuous and desirable endeavours.
Collectivism, by comparison, describes a culture where individuals are viewed as part of a larger group (an in-group) in which the group members look after one another. Collectivistic cultures protect the interests of their members in return for their loyalty. In such cultures, morality is defined in terms of the benefits for the in-group and implies the maintenance of solidarity (Triandis and Bhawuk, 1997). How are in-groups defined? In-groups are individually centred; thus, they begin with the individual and work their way outwards. The family would provide the first in-group, followed by friends, employers and business partners. Depending on the individual and various societal factors such as the nature of the economy, in-groups may be limited or broadly based. For example, in an underdeveloped economy at the subsistence level, the in-group may be limited to family or family and neighbours. In a highly industrialized society, in-groups may include the workplace and the numerous business relationships encompassed therein. In all cases, in-groups, however defined, will be the focus of the individual's efforts.
Work-related value connotations for collectivistic countries are that the company is responsible for employees, knowing the right people is most important for one's career and employees are morally, rather than calculatively, involved with their companies (Hofstede, 2001). Collective rather than self-orientation, differing value standards for in-groups and out-groups (particularism) and emotional dependence of individuals on institutions and organizations are among the societal norms associated with collectivism.
Unlike America's focus on individualism, Russia's culture has been dominated by ruling elites, including the tsars, landowners and the Communist Party leaders (Puffer and McCarthy, 1995). As a result, Russians have grown accustomed to the lack of individual freedom. For centuries, the Russian Orthodox Church also stressed the importance of subjugation to authority and the subordination of personal interests to the common good. This emphasis upon collectivist values continued under
1336 The International Journal of Human Resource Management
Communist rule where collective rather than personal achievements were rewarded. The pursuit of individual rather than collective wealth and well-being was not only discouraged but viewed as selfish and implicitly unethical (Puffer and McCarthy, 1995). Only in the 1980s have private enterprises become legal in Russia. Overall, Russians have a long tradition of emphasizing collectivism as part of their national culture.
Power distance describes the degree to which the less powerful accept an unequal distribution of power. Hofstede (2001) describes key differences between low and high power distance societies. For instance, whereas low power distance is associated with decentralized decision structures, less concentration of authority and flat organizational pyramids, high power distance is associated with centralized decision structures, much concentration of authority and tall organization pyramids. Managers in low power distance countries rely on personal experience and on subordinates whereas managers in high power distance countries rely on formal rules. Bollinger (1994) ranked Russia as one of the countries stressing high power distance. Again, Russian culture with its emphasis on authority figures, subjugation to the Communist Party elite and deference to the dictates of the Russian Orthodox Church has bred a legacy of high power distance in the populace and in Russian managers and workers (Puffer and McCarthy, 1995). Hence, subordinates in Russian organizations are more likely to tolerate an uneven distribution of power in the organizational chain of command. This perception is important because it does affect behaviour (Elenkov, 1997).
Competing ethical ttieories for business decisions
Ethics are the principles of human conduct regarding either an individual or a group (Shaw, 1999), and 'business ethics' refer to 'What is right and wrong? Good or bad?' in business transactions (Weiss, 1994). The ethical principles that distinguish right from wrong actions are covered by several longstanding normative theories, e.g. justice, relativism, utilitarianism and deontology. These theories can provide potentially conflicting interpretations of what is ethical or unethical, because of the assumptions they make about the processes underlying ethical behaviour. Moreover, prior research (Brady, 1990; Cohen etal., 1996; Hansen, 1992; Hunt and Vitell, 1986; Reidenbach and Robin, 1988, 1990) suggests that individuals making ethical decisions use a varying combination of ethical philosophies or theories.
Ethical theories are either teleological or deontological. The first category maintains that it is not actions themselves but their outcomes or consequences (e.g. profit/loss) that determine whether they are ethical or not. Ethical philosophies that focus on outcome are also referred to as consequentialist (Shaw, 1999). Consequentialist theories differ depending on which stakeholders are of most concern in evaluating the effect or consequences of an action. Consequential judgements may be based on the extent to which an outcome is good for the majority of stakeholders (utilitarianism) or in the interest of the individual making the decision or those with whom he or she identifies, such as the company (egoism) (Jackson et al., 2000).
The second category, deontology, claims that 'the highest norm of morality' lies in the quality of man's actions themselves, their freedom, their genuineness, and considers that what is good for one man is good for all men. One who subscribes to this approach to ethics is called a non-consequentialist. Jackson et al. (2000: 446) describe non- consequential judgements as 'based on prior considerations of an explicit or implicit set of rules or principles which guides conduct. Judgments are based on these "universal" moral principles which do not anticipate the results of a decision'. Eor instance, ethical
Beekun et al.: Comparing business ethics in Russia and the US 1337
judgements may be based on general considerations of what is believed to be 'fair' to all concerned (justice).
In this study, we focus on the utilitarian and justice approaches to ethics for .several reasons. First, Hofstede's individualism/collectivism and power distance dimensions (the two cultural dimensions on which the countries under study differ greatly) can be clearly and easily related to utilitarianism by evaluating the effect or consequences of a decision. Who gains from an action: one person or the majority? The ruling elite or the general population? Second, focusing on justice enables an examination of differing definitions of justice and fairness, particularly when related to individualism/collectivism and power distance. For example, does justice for all mean that a collective outcome is fairer? Or does it simply lead to equal (but not necessarily fair) treatment? Third, using one ethical approach from each theoretical category (deontological vs teleological) allows for a much more parsimonious, yet balanced analysis. We now provide an additional description of the two ethical approaches employed in this study.
Utilitarianism 'is the moral doctrine that we should always act to produce the greatest possible balance of good over bad for everyone affected by our action' (Shaw, 1999: 49). Although utilitarians also gauge an action in terms of its consequences, an action is ethical if it leads to the greatest benefit for the largest number of people. Self-interest is not appropriate since actions are evaluated by how they contribute to the general good. Utilitarianism focuses on social improvement. Actions are ethical if they result in the greatest human welfare.
The principle of justice revolves primarily around fairness and equality. As Weiss (1994) points out, 'the moral authority that decides what is right and wrong concerns the fair and equitable distribution of opportunity and hardship to all'. Rawls (1971) elaborates on the fairness aspect of justice by stating two generally accepted principles. First, fair treatment must be accorded to all individuals. Second, positions and offices must be open to all, and must allow equal access to society's opportunities and encumbrances. Nevertheless, he points out that access to opportunity does not imply uniform distribution of wealth. Additionally, the principle of justice encompasses punishment for misdeeds, especially when unwarranted harm is done.
In this regard, one aspect of justice particularly pertinent to a comparison of the economic systems of the US and Russia is distributive justice. To be considered ethical, this approach suggests that decisions and actions should operate according to three primary principles to ensure a proper distribution of benefits and burdens (Deutsch, 1985; Shaw, 1999). Thus:
• To each an equal share. When a company distributes its yearly bonuses, each eligible party should receive a portion equal to every other eligible party.
• To each according to individual need. Resources should be allocated to individuals or departments in terms of the level of need they experience. According to Deutsch (1985), need is stressed when the welfare of recipients is being targeted, and thus this rule tends to be rejected in the US.
• To each according to individual effort. Everything else being equal, employees should receive pay increases or pay cuts in direct proportion to their level of effort. Only merit matters and no other consideration should be taken into account. Giacobbe-Miller et at.'s (1998) research suggests that US managers view payment based on productivity as being fairer than payment based on either need or equality.
Although Giacobbe-Miller et al. (1998) suggest that more than one of these principles of distributive justice may be in action simultaneously within an individual, research
1338 The International Journal of Human Resource Management
done in the US shows that there is a strong preference for the equity rule (Chen, 1995). By contrast, Giacobbe-Miller et al. indicate that pay systems based on performance, i.e. piece rates, have not been successful in Russia. Further, whereas individualistic cultures such as the US do not embrace the equality rule in pay systems, collectivistic systems such as Russia favour the equality rule because it builds harmony within the group (Chen, 1995).
Hypotheses
Whether justice or utilitarian principles are employed, working across national borders is difficult because cultural misunderstandings are deemed not to be discussable (Schein, 1997). Although the parameters of ethical behaviour are generally well understood, national and ethnic differences rise to the forefront when organizations work with other cultures.
According to Hendry (1999), these differences may stir three types of conflicts. First, the ethical values characterizing the two national cultures may lead to opposite conclusions about what is right or wrong. Second, decision makers from one culture may view something as having major moral implications whereas their peers from another culture view the same item as ethically trivial. Third, decision makers may read a common situation differently even when their national values have some degree of overlap.
We suggest that cultural differences are critical to understanding ethical judgements in different countries. Hofstede discusses the manifestations of culture at different levels of depth: 'values' are invisible and a 'core element of culture'; these invisible values become evident in behaviour; decision making and the resulting actions and behaviour are manifestations of the predominant values in a culture (2001: 10).
Hofstede (2001: 5) defines a value as 'a broad tendency to prefer certain states of affairs over others'. Kluckhohn (1951, 1962) and Rokeach (1972) provide more comprehensive definitions of values. Kluckhohn and Strodtbeck defines a value as 'a conception . . . of the desirable which infiuences the selection from available modes, means and ends of actions' (1961: 395). Rokeach suggests that values describe that 'a specific mode of conduct or end-state of existence is personally and socially preferable to alternative modes of conduct or end-states of existence' (1972: 159-60).
Ethics is implicitly linked to values as ethics describe the ultimate rules governing the assessment of 'what constitutes right or wrong, or good or bad human conduct in a business context' (Shaw, 1999).
Considering these definitions, it becomes clear that a society's core values (a broad tendency to prefer certain states of affairs over others) and ethics (rules governing the assessment of what constitutes right or wrong) are interrelated. In making a decision, values are the foundation for the assessment of the situation and alternative courses of action. We suggest that they are also the foundation of the assessment of whether a course of action is right or wrong.
Hofstede identified cultural dimensions, 'each rooted in a basic problem with which all societies have to cope, but on which their answers vary' (2001: 29). We suggest that their answers vary because of differences in values and ethics.
We chose two culturally diverse countries to investigate the level of similarity or dissimilarity in ethical judgements between two cultural groups. As discussed earlier, persons from an individualistic culture emphasize their families' and their own interests whereas persons from a collectivistic culture focus on actions that lead to the greatest benefit for members of their group. Hence, Russians and Americans attach different
Beekun et al.: Comparing business ethics in Russia and the US 1339
meanings to the concept of justice. Individuals from the US, with its emphasis on individualism and its de-emphasis on power distance, can be expected to stand for justice for the common man independent of his/her socio-economic status. In spite of the transient nature of the new Russia, the coilectivist core of its culture would suggest that justice for the referent's in-group(s) takes precedence over justice for individuals (Chen, 1995).
Further, Puffer (1994) points out that during the communist regime initiative was not only discouraged but often punished. According to the egalitarian principles of communism, 'no one was supposed to sink too low, nor was anyone to rise too high. People who strived to be better than others were seen as taking away the rightful share of others' (Puffer, 1994: 340). As indicated earlier, people from coilectivist cultures tend to prefer equal distributions whereas people from individualist cultures prefer equitable distributions (Chen, 1995). Hence, Russian people can be expected to stress the equality aspect of justice rather than the equity or fairness aspect. Although a primary Communist goal was the removal of status differences to afford more equal access to opportunities to all, it was the Communist Party elite that cornered all the benefits for itself (Puffer and McCarthy, 1995). This process is in stark contrast to the US with its implementation of the Equal Employment Opportunity Commission, affirmative action policies. Project START, etc. In contrast to the Russians, Americans have come to expect both equality and fairness in terms of justice.
Just as for the principle of justice, Americans and Russians differ in their approach to utilitarianism. According to De George (1969), part of the legacy of Marxist-Leninism and the communist approach to ethics is an emphasis on utilitarianism; hence, '[what] leads to communism is good, what hinders it is bad'. In Russia, outcomes are what matter, not the means used to get there. During the more recent transition from socialism, the path to desirable outcomes has become circuitous. The business environment has become quite volatile, with private entrepreneurship being both encouraged and discouraged at the same time (De George, 1999). What will happen to private ownership of property is as yet unclear since many former state structures of distribution are still very much in place. Although we would expect the Russians to continue to emphasize a utilitarian perspective, they are likely to show a concerted disregard for the means to achieve the desired outcomes and to continue to give precedence to collective rather than individual outcomes.
Americans, too, are utilitarians. As the American dictum goes, in the end, 'the one with the most toys wins'. However, with the constant attention they give to due process and the spirit of the law, they tend not to overlook the process used to reach desirable outcomes. Their low power distance leads them to question many an edict (e.g. the military service draft, tax laws, etc.) or to scrutinize an unethical action or event, even if such self-examination is ex post (e.g. the Enron failure, the Clinton affairs, the Lockheed bribery scandal). In the US, opportunity is never granted without accountability. Indeed, ethical behaviour in American businesses is governed by a judicious code of laws that stresses both opportunity and accountability (Puffer and McCarthy, 1995).
Given the differences in their respective national cultures, we expect Russians and Americans to differ in their assessment of the ethical content of business decisions. When either justice or utilitarian criteria are used, we expect the individualistic, low power distance-oriented Americans to judge business decisions as less ethical because of their emphasis on both the equality and fairness aspects of justice and on both process and outcomes in their search for desirable ends.
1340 The International Journal of Human Resource Management
Accordingly, we propose the following hypotheses:
HI: The assessment of the ethical content of business decisions is a function of national culture.
Hla: When applying justice criteria to judge the ethical content of an action or a decision, respondents from the US will judge a decision or action as more unethical than respondents from Russia.
Hlb: When applying utilitarian criteria to judge the ethical content of an action or a decision, respondents from the US will judge an action or decision as more unethical than respondents from Russia.
To be consistent with prior ethics research (Reidenbach and Robin, 1988), the above hypotheses (Hla and Hlb) together suggest that Americans and Russians rely on more than one ethical criterion when assessing the ethical content of an action or decision. However, we are also suggesting that, when each specific ethical criterion they refer to is considered separately, people from different national cultures will vary in their assessment of the ethical content of a course of action or a decision.
Methodology
Sample
Data were collected from a convenience sample of 165 respondents who were invited to participate either as a result of enrolment in selected classes or through contact with one of the researchers working in Russia. Ninety-two respondents were from the US while seventy-three respondents were from Russia. The US participants included Master of Business Administration students at a regional university as well as business professionals. MBA students were included for two reasons. First, MBA students are a commonly used proxy for business people and have been found in prior research to share a high degree of congruence with business professionals (Dubinsky and Rudelius, 1980). Second, and more importantly, the MBA students at this university were full-time executives or business professionals who were attending an evening programme. Demographics indicate that forty-seven of the ninety-two US respondents were executives, mid-level managers or consultants or owners of their own business. Only ten of the ninety-two respondents were in the education field, while only four considered themselves as full-time students. The professionals were primarily from electronics and computers (7), health care (5), consulting (7), software (2), food (2), general merchandise (1), furniture (1), logistics (1) and aerospace (1). Forty-seven of the respondents identified themselves as coming from 'other industries'. Geographically the respondents came from all over the US: Nevada (18), Illinois (7), Virginia (8), California (6), Washington (5), Texas (4), DC (3), New Mexico (3), New York (2), Maryland (2) and Pennsylvania (2). Ten other states had a single respondent. Table 2 provides additional demographic data in terms of the size of the firms that our US respondents worked in. Though small size firms tended to be more frequent, our respondents came from firms of a variety of sizes whether size is measured in terms of sales or number of employees.
The Russian sample included seventy-three managers, supervisors and group leaders working in private industry, government and academic institutions in the cities of Arkhangelsk, Naryan Mar, Saratov, Moscow and Ukhta. All these cities are located in
Beekun et al.: Comparing business ethics in Russia and the US 1341
Table 2 Demographics for US sample: firm sales by firm's number of employees
# % total
Total
Sales
1
2
3
4
5
7
8
9
/
46 50.00 2 2.17 2 2.17 1 1.09 1 1.09 0 0.00 1 1.09 1 1.09
54 58.70
2
2 2.17 1 1.09 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00 3 3.26
Employees
3
0 0.00 1 1.09 3 3.26 0 0.00 0 0.00 0 0.00 1 1.09 1 1.09 6 6.52
4
0 0.00 0 0.00 2 2.17 1 1.09 1 1.09 2 2.17 0 0.00 0 0.00 6 6.52
5
1 1.09 0 0.00 0 0.00 1 1.09 0 0.00 0 0.00 1 1.09 0 0.00 3 3.26
6
3 3.26 0 0.00 0 0.00 1 1.09 0 0.00 0 0.00 9 9.78 7 7.61 20 21.74
Total
52 56.52 4 4.35 7 7.61 4 4.35 2 2.17 2 2.17
12 13.04 9 9.78
92 100.00
Scate for sales For firms with sales $5 million or less, then sales = I; $5 ± 10 million = 2; $10 ± 50 million = 3; $50 ± 100 million = 4; $100 ± 150 million = 5; $150 ± 200 million = 6; $200 ± 250 million = 7; $250 ± 500 million = 8; $500 ± I billion = 8; $1 billion+ = 9. Scate for emptoyees For firm.s with 100 or fewer employees, then employees = 1; 101-150 = 2; 151-250 = 3; 251-500 = 4; 501-1,000 = 5; 1,000+ = 6.
western Russia. Although certain work-related data were requested of all subjects, most refused to provide such information on the basis of security and confidentiality.
Data collection
The instrument used was Reidenbach and Robin's (1988) multi-philosophy, multi-item survey incorporating several ethical perspectives. This multi-philosophy approach enables assessment of both justice and utilitarianism simultaneously while demonstrating improved reliability through the use of multiple items to assess each ethical philosophy (Kerlinger, 1986). Prior validation of the instrument has provided evidence of high reliability and limited convergent validity. In addition, the scales have demonstrated high correlation with a univariate measure of the ethical content of situations. As a result, high construct validity appears to be present. The survey required respondents to rate the action on a seven-point Likert scale in each of three scenarios using the items described in Table 3.
A respondent's reaction to and evaluation of a situation will depend on the nature of the decision or situation (Alexander and Becker, 1978). Thus, the evaluation of the ethical content in the scenarios will vary by situation. Three scenarios developed and validated by Reidenbach and Robin (1988, 1990) are adopted in our survey instrument. They are identified as Bankruptcy, Client Information and Neighbourhood Store,
1342 The International Journal of Human Resource Management
Table 3 Ethics instrument scales
Ethical perspective Items (seven-point Likert scale — 1 to 7)*
Justice Just/unjust Fair/unfair
Utilitarianism Produces greatest utility/produces the least utility Maximizes benefits while minimizes harm/minimizes benefits while
maximizes harm Leads to the greatest good for the greatest number/leads to the least
good for the greatest number
Note 'Generally speaking, in the above bipolar scales, 1 = fair orjust (ethical) whereas 7 = unfair, unjust (unethical).
respectively. The Bankruptcy scenario addresses the sharing of confidential information between parties related by ongoing business transactions, an auditor and his/her clients. The Client Information scenario similarly addresses the sharing of confidential information but between two unrelated parties. The last scenario. Neighbourhood Store, involves an action by one party that impacts on a larger group of unrelated parties. Russia's historical emphasis on the use of confidential information to control the population provides interesting responses to the first two scenarios. The differing identification of the relevant 'in-groups' lays the groundwork for potential differences in responses to the third scenario. Table 4 presents these scenarios.
The survey was completed by Russian participants (in Russian) by means of an on-site administrator and via website access by US participants. The selected scenarios were pilot-tested for relevance with appropriate adjustments made. The Russian instrument was back-translated to ensure equivalence.
Table 4 Scenarios
Scenario I: Bankruptcy Auditor N serves as the auditor for Widget & Co. Widget's market share has declined drastically, and N knows that Widget will soon he bankrupt. Another of N ' s audit clients is Solid Company. While auditing Solid's accounts receivable, N finds Widget & Co. owes Solid $200,000. Action: Auditor N warns client. Solid Company, about Widget's impending bankruptcy.
Scenario 2: Client Information Auditor N is considering a merger with Auditor K. To facilitate the negotiations, K requests access to N's files of client work papers, income tax returns and correspondence. K's clients are not aware of the proposed merger. Action: Auditor N grants K access to the files.
Scenario 3: Neighbourhood Store A retail grocery chain operates several stores throughout the local area including one in the city's ghetto area. Independent studies have shown that the prices do tend to be higher and there is less of a selection of products in this particular store than in the other locations. Action: On the day welfare checks are received in this area of the city, the retailer increases prices on all of his merchandise.
Beekun et al.: Comparing business ethics in Rtissia and the US 1343
Table 5 Correlations between justice and utilitarianism by scenario and by country'
Scenario type Ru.s.ua US Both countries
1 Bankruptcy 2 Client Information 3 Neighbourhood Store All 3 scenarios together
Notci ***Signilicant a\ p < .001;
.5288***
.4272***
.4791***
.5163***
**significaiit at p < .01
.5301***
.7534***
.3102**
.6406**
.5801***
.6234***
.5965***
.6126***
Model
The model in our study was comprised of the following:
1 A dependent variable representing the degree to which the decision contained in each of three business scenarios was judged to be ethical based on two ethics theories, i.e. justice and utilitarianism.
2 An independent variable representing the nationality of the respondent (US vs Russia). 3 A control variable representing scenario type as each of the three different scenarios
used in our analysis described a different situation. Prior research (Cohen et al., 1996; Reidenbach and Robin, 1988) also indicates that judgements may depend on the setting in which they occur.
4 An interaction term between nationality and scenario type. The motivation here is to control for the possibility that the observed scenario effect might be related to the nationality of the respondents.'
Analysis
A repeated measures MANOVA analysis of the model was conducted. The multivariate F-test was considered more appropriate because the dependent variables, justice and utilitarianism, were highly correlated (US: .6406, p < .001; Russia: .5163, p < .001). Table 5 summarizes the correlations between justice and utilitarianism by scenario type for each country.
Univariate F-tests (ANOVAs) were used to compare the responses of the participants with respect to the two ethical orientations. Finally, mean comparisons and /-tests were used to compare the results for the two countries by ethical orientation and scenario.
Results
The multivariate results of the MANOVA test of our overall model indicated that the model was highly significant. Specifically, the hypothesis of no overall nation effect was significantly rejected (Wilks' lambda ¥2.411 = 46.10, p < .001), thus providing support to hypothesis I. The assessment of the ethical content of business decisions differed by national culture. The results for scenario type indicated that its inclusion as a control variable was appropriate (Wilks' lambda F4954 = 19.4, p < .001). The results for the interaction of nation and scenario type indicated that the observed scenario effect was related to the national cultures under study (Wilks' lambda F4,954 = 7.54, p < .001).
Tables 6a and 6b summarize the results of the univariate ANOVAs. In the individual F-tests, similar results were obtained for justice and utilitarianism. Both the nation and
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Table 6(a) Univariate AN OVA for justice
Source
Overall model Error Nation Scenario Nation*scenario
DF
5 478
1 2 2
Sum of squares
213.0 1239.4 87.13 49.84 76.04
Mean square
42.6 2.592
87.13 "24.92 38.0
F value
16.4
33.6 9.6
14.7
P value
.0001
.0001
.0001
.001
Table 6(b) Univariate ANOVAfor utilitarianism
Source
Overall model Error Nation Scenario Nation*scenario
DF
5 478
1 2 2
Sum of squares
347.41 918.53 177.92 149.61
19.87
Mean square
69.5 1.921
177.92 74.81
9.94
F value
36.2
92.59 38.83 5.17
P value
.0001
.0001
.0001
.0001
scenario variables were significant for both ethical philosophies. The interaction effect between nation and scenario also proved to be similarly significant.
When justice criteria are employed, significant differences are found for two of the three scenarios. When utilitarian criteria are employed, significant differences are found for all three scenarios. Table 7 summarizes the results of the T-tests conducted for each ethical dimension by scenario and by country. With respect to our hypotheses, hypothesis la was significantly {p < .01) supported by the results for scenarios 1 and 3. Further, hypothesis Ib was significantly supported with respect to all three scenarios ip<.0\).
Discussion and conclusion
The US and Russia, two fundamentally different countries, fierce enemies during the Cold War, are facing the need to interact effectively in today's global economy.
Table 7 Summary oft-test results for hypotheses la and lb
Justice 1 Bankruptcy 2 Client Information 3 Neighbourhood Store
Utilitarianism 1 Bankruptcy 2 Client Information 3 Neighbourhood Store
A'
72 70 72
70 70 69
Russia
Mean
4.604 6.157 5.514
3.790 4.762 5.044
SD
2.12 1.38 1.54
1.22 1.34 1.23
N
92 92 92
92 92 92
US
Mean
6.136 5.875 6.794
5.214 5.399 6.634
SD
1.59 1.93 0.76
1.76 1.69 0.72
T-score
- 5 . 2 7 1.04
- 6 . 9 5
- 5 . 7 9 - 2 . 5 9 - 1 0 . 2 8
P<
.0001
.3012
.0001
.0001
.0105
.0001
Beekun et al.: Comparing business ethics in Russia and the US 1345
Vogel (1998) discusses globalization and business ethics and suggests that an 'ethics gap' exists between the US and the rest of the world. In particular, the extent of interest in business ethics in the US far exceeds that in any other capitalist country. Russia, a new capitalist country, is struggling with serious ethical issues that have discouraged business people from other countries from investing in Russia. In this study, we explored how Russian and US business people differ in evaluating the ethics of business actions or decisions. We proposed that national cultural differences might be a major contributing factor in the assessment of ethical content. This hypothesis was significantly supported. We also explored differences in the manner in which nationals from these two countries conducted their assessments and uncovered significant differences when justice and utilitarian criteria are used. Furthermore, we found that ethical assessments were situation specific since the type of scenario used in the analysis was also a significant contributing factor and there was a significant interaction between scenario type and national cultures.
Overall, as expected, Americans seem to have stricter guidelines when assessing ethics. For all but one scenario under one ethical orientation, the decisions are seen as clearly unethical by respondents from the US. The single exception was found in scenario 2 (the Client Information scenario). In that scenario, using a justice approach, the Russians judged the action to be more unethical (6.16) than did the Americans (5.87). However, this is the only result that was not significant.
Hypothesis la suggests that respondents from the US will judge a decision as more unethical than respondents from Russia when applying justice criteria. The results for the Client Information scenario do not support that expectation. In contra.st, the Russian respondents' scored this decision as more unethical than the US respondents. Furthermore, Russian respondents judged this scenario as the most unethical across all scenarios and ethical orientations, differing from the US respondents who found scenario 3 (the Neighbourhood Store) to be the most unethical overall. In scenario 2, a person grants access to important, private information about individuals to a third party without the individuals' approval or knowledge. Russia's history of government intrusion in individuals' lives and the gathering of information and intelligence about the citizens with the purpose of using that information to oppress citizens explains to some degree the Russian respondents' reaction to this decision. Having experienced 'big brother' watching may have sensitized Russians to situations where access to information about individuals is provided to a third party without the approval or knowledge of the affected individuals. The lack of a significant difference between the Russian and the US responses is therefore meaningful. Using justice criteria, both Russians and Americans consider the disclosure of confidential information in scenario 2 to be unethical.
Examination of the correlations for the Bankruptcy and Client Information scenarios provides additional insights due to the existence of professional standards governing these areas. In the US, auditors are subject to professional standards addressing both areas. Rule 301 of the AICPA Code of Professional Conduct (American Institute of Certified Public Accountants, 2000) prohibits the disclosure of confidential information without the specific consent of the client. Although the business-persons utilized in this study were not necessarily auditors, it appears that some knowledge of the prohibition is present in the business community. As a result, it could be argued that, because the respondents knew it was considered unethical for the profession, their judgements did not vary regardless of the criteria employed (either justice or utilitarian). The auditing profession in Russia is at an infancy stage, like the still-developing free-market economy. Decisions made by the Russian respondents would not be based on a similar prohibition.
1346 The International Journal of Human Resource Management
Results indicate that the individualistic, low power distance Americans have a perception of justice that differs from that of the Russians. Americans have a broader concept of justice that includes equity or fair treatment as well as equality. Hence, presented with a situation, both standards are used, whereas Russians emphasize equality only. However, Puffer (1994) explains that in Slavic cultures two sets of ethical standards have developed — one for impersonal or official relationships and one for personal relationships. She concludes that 'in Russia, while it would not necessarily be considered unethical to deceive someone in a business transaction to achieve a worthy goal, it would be considered unethical to deceive a friend or trusted colleague'. In the US, deception is considered unethical in business and personal relationships.
This finding sheds further light on our results. The collectivistic Russians judge the scenarios differently based on this double standard. The definition of in-group is limited to personal relationships. Hence, decisions are seen as just and outcomes are seen as ethical as long as that in-group benefits. Further, the higher level of power distance in Russia contradicts the emphasis on equality in a communist system. The fact that our Russian respondents were more accepting of the decisions in the scenarios reflects the fear of authority and extent of passivity carried over from a communist system.
Additional analyses of the results for each country by scenario and by ethical orientation provide additional insight as to the process underlying the ethical assessments. Respondents from both countries tend to judge all scenarios as less ethical when applying justice criteria. This result is interesting because it indicates that the Russian and US respondents were able to apply justice criteria in a similar fashion to the scenarios despite the differences in each country's view of justice.
On an individual scenario basis, the Russian respondents judged the Client Information scenario as the most ethically offensive and the Bankruptcy scenario as least offensive. This result is readily explained by considering the 'in-group' focus of the Russian respondents. In Russia, an individual is expected to support and protect the group. The group of interest would include an auditor and his clients. Thus, warning one client about another client's impending bankruptcy would protect a member of the group. In the Client Information scenario, confidential information about all of the group members was to be revealed to a third party. This would potentially expose the individual group members to risk, since disclosure of confidential information to a third party increases each member's vulnerability.
For the US, respondents considered the Neighbourhood Store scenario to be the most offensive. The US focus on justice for all would condemn raising the prices as an action that benefited a few at the expense of many. Members of individualistic cultures stress the applicability of the same standards and rules at all times.
A deeper scrutiny of the results suggests additional insights. The high and significant correlations among the ethical orientations (justice and utilitarianism) for both countries support Reidenbach and Robin's (1988) contention that, in any given situation, ethical decision making is a fairly complex process. Thus, multiple ethical criteria are used to gauge the ethical content of a decision. Interestingly, in the Client Information scenario, the correlations are very high for the US (r = .7534, p < .001), but less high for Russia (r = .4272, p < .001). This may indicate that the ethical dilemma in this situation is less 'clear-cut' for Americans and that both ethical criteria lead to the same judgement. Conversely, the fact that the correlation between justice and utilitarianism for Russia is the lowest in this scenario (of the three scenarios) may indicate that they were able to see the two ethical approaches as being more distinct in comparison to their American counterparts. Interestingly, the Client Information scenario is the only one where Russians perceived the action taken as less just and more unethical in comparison to Americans; however, this unexpected result was not significant.
Beekun et al.: Comparing business ethics in Russia and the US 1347
The contrasting assessment of the ethical content of the business decisions in this study may also be attributed to the external validity of the instrument for Russian respondents. Given that Reidenbach and Robin (1988) validated their scale in the US, the items used to gauge the ethical stance of the respondents may be culture-bound. Hence, the instrument as a whole may be limited in its ability to capture the ethical process underlying Russian decisions or actions.
The above interpretation of the results of our study must take into account several limitations. First, Hofstede gathered data for his original study in the late 1960s and the early 1970s. The data for Elenkov's Russian dimensions were gathered in the 1990s. Although Hofstede believed the national cultural dimensions to be enduring, the potential exists for the differences identified to include both time and nation differences. Second, respondents chose to participate in the study by completing the survey. To the extent that such self-selection biases the data we gathered, the results may be limited in generalizing to the population of US and Russian business professionals. Third, differences in data collection and respondents' unwillingness to contribute personal information did not allow us to control for demographic or work variables that potentially could have affected our study. More specifically, almost all our Russian respondents were unwilling to include their biographical information for fear of potential misuse. Other Russians declined to even participate in such a survey for nationalistic reasons on the grounds that the data might fall in 'the enemy's hands'. Fourth, the US and Russia are both large countries containing a multitude of subcultures. The convenience nature of our sample restricts our ability to assume that the sample accurately reflects the 'average' Russian or American. As a result, our ability to generalize the results of our study to both populations is limited. Finally, as indicated earlier, our ethics instrument may be culture-bound and may suffer from a lack of face validity for non-US respondents. The fact that there was a significant interaction effect between nation and scenario type suggests the urgent need for developing instruments that not only have external validity, but are also non-idiosyncratic.
In spite of these limitations, several important theoretical and practical conclusions can be drawn from this study. From a theoretical viewpoint, our results imply that national culture factors need to be considered in the study of global ethics. It is unlikely that ethical principles are invariable across cultures and different contexts. Ethics cannot be understood away from their local cultural fabric. Undoubtedly, more research is needed to determine the exact processes governing the relationship between cultural characteristics and investigate how different cultural factors are related to ethical judgement. The results of our study provide evidence that such research would be worthwhile.
Practitioners benefit from the results of this study as both US and Russian practitioners may obtain a deeper understanding of business interactions among managers from the two countries. A Russian judges whether a proposed action may be ethical or not based on the outcomes of the action for the relevant in-group to which he/she belongs. Americans need to convince Russians that their in-group will benefit collectively. Thus, overall, collective outcomes that lean towards equality rather than equity may be the key to mutually satisfactory arrangements. Americans gauge the ethics of a business decision or action ba.sed on a set of rules and standards that are applied to all stakeholders. Although utilitarian like the Russians, Americans pay more attention to process as compared to Russians. Russians need to understand that Americans will seek to apply corporate policy universally and equitably. Such policies may not be appropriate or effective for the Russian subsidiary. Indeed, the Russian executives must then demonstrate to their American counterparts that equity for all the parties involved can be maintained if Russian-specific rules are applied.
Americans must not be too hasty with their Russian counterparts. At present, more uncertainty exists about what constitutes ethical business behaviour in Russia than in the US
1348 The International Journal of Human Resource Management
because of Russia's unique culture and tumultuous history and its slow transition from socialism (Puffer and McCarthy, 1995). The US stance towards ethics is clear; it passed the Foreign Corrupt Practices Act more than a decade ago, and the US Department of Justice has since been assiduously pursuing violators. Unfortunately, in spite of efforts by dedicated businessmen, e.g. the Round Table of Russian Business, to stem the tide of corruption and poor business practices since 1993, one of its leading founders, Ki velidi, was assassinated in the summer of 1995, and Russia remains less effective at controlling corruption. The ethical configuration of a non-communist Russia is still in the making.
Finally, the results of this study confirm Reidenbach and Robin's (1988) finding that ethical decision making is multidimensional in nature. Individuals do not seem to use only one ethical criterion when making ethical assessments. Thus, unidimensional models do not appropriately capture the complexity of ethical decision making and their use may lead to erroneous conclusions.
Notes
1 We wish to thank one of the anonymous reviewers of IJHRM for this suggestion.
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BMGT 496 - Week 8 Citations
(Australia India Institute, 2015)
(Barhat, 2015)
(Beekun, Stedham, Yamamura, & Barghouti, 2003)
(Boeing's Not Alone In Companies That Government Agencies Have Let Self-Regulate, 2019)
(Brusseau, 2012)
(Cassidy, 2019)
(Chapter 3.4: Global Business Ethics, 2012)
(Chari & Phelan, 2015)
(Cook & Connor, 2010)
(Dill, 2017)
(Doing Business in India Guide, 2015)
(Francis, 2019)
(Globalaw Limited, 2016)
(Horowitz, 2018)
(International Bar Association, 2018)
(Kenton, 2021)
(LEA Global, 2015)
(Leskin, 2018)
(McKay, 2012)
(McNamee, 2017)
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(Orr, 2014)
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(U.S. Department of Justice, 2004)
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Ever since the Ethiopian Airlines crash three weeks ago, the Federal Aviation
Administration has been under scrutiny. The agency had delegated to Boeing much of
the testing of its 737 MAX jets. Critics say the FAA let the company basically certify its
own plane. But as NPR's Brian Naylor reports, that sort of thing happens a lot.
BRIAN NAYLOR, BYLINE: The FAA's model of self-regulation has come under attack
from the government's own watchdog, the Government Accountability Office, which,
as far back as the 1990s, criticized the practice. But James Goodwin of the Center for
Progressive Reform, a left-leaning research group, says it's a model that's used
throughout government.
JAMES GOODWIN: I think the American public would be surprised and maybe even
concerned if they knew how widespread the practice of self-regulation was.
NAYLOR: It's especially prevalent in agencies that regulate single industries, like the
FAA with air transport or the Federal Railroad Administration, which allows self-
certification of conductors and engineers on trains. Thomas McGarity of the
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University of Texas Law School says you can also see it at the Department of Interior's
Bureau of Safety and Environmental Enforcement, known as BSEE.
THOMAS MCGARITY: That's the agency that failed pretty badly with the Deepwater
Horizon blowout several years ago. It's a single agency regulator, and it allows owners
of offshore oil rigs to self-certify, do their annual certifications.
NAYLOR: After the blowout, the Obama administration reorganized the agency and
required well operators to hire independent third parties to conduct safety checks.
Now the Trump administration is trying to roll that regulation back. In a video on the
agency's website, BSEE director Scott Angelle said the changes will not harm safety or
the environment.
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SCOTT ANGELLE: I am confident when reviewing the proposed revisions to the rule,
you will likewise conclude BSEE's team of career engineers and regulatory specialists
used a scalpel rather than a chainsaw, seeking to improve public policy.
NAYLOR: Angelle is a former oil pipeline company board member, and his
background illustrates another concern about government agencies relying on
industries to self-regulate. UT's McGarity says there is often a revolving door between
the two.
MCGARITY: That can really make things questionable sometimes because the person
working in the agency may well anticipate that in a few years, he or she will go out and
take a job with that regulated industry.
NAYLOR: Peter Van Doren, a senior fellow at the libertarian Cato Institute, argues
self-regulation has largely gone on unnoticed because, with a few exceptions, it's been
a success.
PETER VAN DOREN: In effect, the delegation of all this to experts and the lack of
second guessing about all this occurred because it was working.
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NAYLOR: The Food and Drug Administration is another agency that relies on industry
- in this case, drug manufacturers - to test their own new drugs, with the data then
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Chapter 14: The Green Office: Economics and the Environment from The Business Ethics
Workshop was adapted by Saylor Academy and is available under a Creative Commons
Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by
the work's original creator or licensor. UMGC has modified this work and it is available under the original license.
Saylor URL: http://www.saylor.org/books Saylor.org 627
Chapter 14
The Green Office: Economics and the Environment
Chapter Overview
Chapter 14 "The Green Office: Economics and the Environment" explores the multiple relations linking
business, the environment, and environmental protection. The question of animal rights is also
considered.
Saylor URL: http://www.saylor.org/books Saylor.org 628
14.1 The Environment
L E A R N I N G O B J E C T I V E S
1. Consider damage done to the environment in a business context.
2. Delineate major legal responses to concerns about the environment.
Cancun
Cancun, Mexico, is paradise: warm climate, Caribbean water, white sand beaches, stunning landscapes,
coral reefs, and a unique lagoon. You can sunbathe, snorkel, parasail, shoot around on jet skis, and drink
Corona without getting carded.
Hordes of vacationers fill the narrow, hotel-lined peninsula—so many that the cars on the one main street
snarl in traffic jams running the length of the tourist kilometers. It’s a jarring contrast: on one side the
placid beaches (until the jet skis get geared up), and on the other there’s the single road about a hundred
yards inland. Horns scream, oil-burning cars and trucks belch pollution, tourists fume. Cancun’s problem
is that it can’t handle its own success. There’s not enough room for roads behind the hotels just like there’s
not enough beach in front to keep the noisy jet skiers segregated from those who want to take in the sun
and sea quietly.
The environment hasn’t been able to bear the success either. According to a report,
The tourist industry extensively damaged the lagoon, obliterated sand dunes, led to the
extinction of varying species of animals and fish, and destroyed the rainforest which surrounds
Cancun. The construction of 120 hotels in 20 years has also endangered breeding areas for
marine turtles, as well as causing large numbers of fish and shellfish to be depleted or
disappear just offshore. [1]
For all its natural beauty, environmentally, Cancun is an ugly place. Those parts of the natural world that
most tourists don’t see (the lagoon, the nearby forest, the fish life near shore) have been sacrificed so a few
executives in suits can make money.
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From its inception, Cancun was a business. The Mexican government built an airport to fly people in, set
up rules to draw investors, and made it (relatively) easy to build hotels on land that only a few coconut
harvesters from the local plantation even knew about. From a business sense, it was a beautiful
proposition: bring people to a place where they can be happy, provide new and more lucrative jobs for the
locals, and build a mountain of profit (mainly for government insiders and friends) along the way.
Everything went according to plan. Those who visit Cancun have a wonderful time (once they finally get
down the road to their hotel). College students live it up during spring break, young couples take their
children to play on the beach, and older couples go down and remember that they do, in fact, love each
other. So fish die, and people get jobs. Forests disappear, and people’s love is kindled. The important
questions about business ethics and the environment are mostly located right at this balance and on these
questions: how many trees may be sacrificed for human jobs? How many animal species can be traded for
people to fall in love?
What Is the Environment?
Harm to the natural world is generally discussed under two terms: the environment and the ecosystem.
The words’ meanings overlap, but one critical aspect of the term ecosystem is the idea of interrelation. An
ecosystem is composed of living and nonliving elements that find a balance allowing for their
continuation. The destruction of the rain forest around Cancun didn’t just put an end to some trees; it also
jeopardized a broader web of life: birds that needed limbs for their nests disappeared when the trees did.
Then, with the sturdy forest gone, Hurricane Gilbert swept through and wiped out much of the lower-level
vegetation. Meanwhile, out in the sea, the disappearance of some small fish meant their predators had
nothing to feed on and they too evaporated. What makes an ecosystem a system is the fact that the various
parts all depend on each other, and damaging one element may also damage and destroy another or many
others.
In the sense that it’s a combination of interdependent elements, the tourist world in Cancun is no
different from the surrounding natural world. As the traffic jams along the peninsula have grown, making
it difficult for people to leave and get back to their hotels, the tourists have started migrating away,
looking elsewhere for their vacation reservations. Of course Cancun isn’t going to disappear, but if you
took that one road completely away, most everything else would go with it. So economic realities can
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resemble environmental ones: once a single part of a functioning system disappears, it’s hard to stop the
effects from falling further down the line.
What Kinds of Damage Can Be Done to the Environment?
Nature is one of nature’s great adversaries. Hurricanes sweeping up through the Caribbean and along the
Eastern Seaboard of the United States wipe out entire ecosystems. Moving inland, warm winters in
northern states like Minnesota can allow some species including deer to reproduce at very high rates,
meaning that the next winter, when conditions return to normal, all available food is eaten rapidly at
winter’s onset and subsequent losses to starvation are massive and extend up the food chain to wolves and
bears. Lengthening the timeline, age-long periods of warming and cooling cause desertification and ice
ages that put ends to giant swaths of habitats and multitudes of species.
While it’s true that damaging the natural world’s ecosystems is one of nature’s great specialties, evidence
also indicates that the human contribution to environmental change has been growing quickly. It’s
impossible to measure everything that has been done, or compare the world today with what would have
been had humans never evolved (or never created an industrialized economy), but one way to get a sense
of the kind of transformations human activity may be imposing on the environment comes from
extinction rates: the speed at which species are disappearing because they no longer find a habitable place
to flourish. According to some studies, the current rate of extinction is around a thousand times higher
than the one derived from examinations of the fossil record, which is to say, before the time parts of the
natural world were being severely trashed by developments like those lining the coast of Cancun,
Mexico. [2]
In an economics and business context, the kinds of damage our industrialized lifestyles most extensively
wreak include:
Air pollution
Water pollution
Soil pollution
Contamination associated with highly toxic materials
Resource depletion
Air pollution is the emission of harmful chemicals and particulate matter into the
air. Photochemical smog—better known simply as smog—is a cocktail of gases and particles reacting with
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sunlight to make visible and poisonous clouds. Car exhaust is a major contributor to this kind of pollution,
so smog can concentrate in urban centers where traffic jams are constant. In Mexico City on bad days, the
smog is so thick it can be hard to see more than ten blocks down a straight street. Because the urban core
is nestled in a mountain valley that blocks out the wind, pollutants don’t blow away as they do in many
places; they get entirely trapped. During the winter, a brown top forms above the skyline, blocking the
view of the surrounding mountain peaks; the cloud is clearly visible from above to those arriving by plane.
After landing, immediately upon exiting the airport into the streets, many visitors note their eyes tearing
up and their throats drying out. In terms of direct bodily harm, Louisiana State University environmental
chemist Barry Dellinger estimates that breathing the air in Mexico’s capital for a day is about the
equivalent of smoking two packs of cigarettes. [3]
This explains why, on the worst days, birds drop out of
the air dead, and one longer-term human effect is increased risk of lung cancer.
Greenhouse gasses, especially carbon dioxide released when oil and coal are burned, absorb and hold heat
from the sun, preventing it from dissipating into space, and thereby creating a greenhouse effect, a
general warming of the environment. Heat is, of course, necessary for life to exist on earth, but fears exist
that the last century of industrialization has raised the levels measurably, and continuing industrial
expansion will speed the process even more. Effects associated with the warming are significant and
include:
Shifts in vegetation, in what grows where
Rising temperatures in lakes, rivers, and oceans, leading to changes in wildlife distribution
Flooding of coastal areas, where many of our cities are located (Cancun could be entirely flooded by only a
small rise in the ocean’s water level.)
Another group of chemicals, chlorofluorocarbons (CFCs), threaten to break down the ozone layer in the
earth’s stratosphere. Currently, that layer blocks harmful ultraviolet radiation from getting through to the
earth’s surface where it could cause skin cancer and disrupt ocean life. Effective international treaties
have limited (though not eliminated) CFC emissions.
Coal-burning plants—many of which produce electricity—release sulfur compounds into the air, which
later mix into water vapor and rain down as sulfuric acid, commonly known as acid rain. Lakes see their
pH level changed with subsequent effects on vegetation and fish. Soil may also be poisoned.
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Air pollution is the most immediate form of environmental poison for most of us, but not the only
significant one. In China, more than 25 percent of surface water is too polluted for swimming or fishing. [4]
Some of those lakes may have been ruined in the same way as Onondaga Lake near Syracuse, New York.
Over a century ago, resorts were built and a fish hatchery flourished on one side of the long lake. The
other side received waste flushed by the surrounding cities and factories. Problems began around 1900
when the fish hatchery could no longer reproduce fish. Soon after, it was necessary to ban ice harvesting
from the lake. In 1940, swimming was banned because of dangerous bacteria, and in 1970, fishing had to
be stopped because of mercury and PCB contamination. The lake was effectively dead. To cite one
example, a single chemical company dumped eighty tons of mercury into the water during its run on the
coast. Recently, the New York state health department loosened restrictions slightly, and people are
advised that they may once again eat fish caught in the lake. Just as long as it’s not more than one per
month. Those who do eat more risk breakdown of their nervous system, collapse of their liver, and teeth
falling out. [5]
Like liquid poisons, solid waste can be dangerous. Paper bags degrade fairly rapidly and cleanly, but
plastic containers remain where they’re left into the indefinite future. The metal of a battery tossed into a
landfill will break down eventually, but not before dropping out poisons including cadmium. Cadmium
weakens the bones in low doses and, if exposure is high, causes death.
At the industrial waste extreme, there are toxins so poisonous they require special packaging to prevent
even minimal exposure more or less forever. The waste from nuclear power plants qualifies. So noxious
are the spent fuel rods that it’s a matter of national debate in America and elsewhere as to where they
should be stored. When the Chernobyl nuclear plant broke open in 1986, it emitted a radioactive cloud
that killed hundreds and forced the permanent evacuation of the closest town, Pripyat. Area wildlife
destruction would require an entire book to document, but as a single example, the surrounding pine
forest turned red and died after absorbing the radiation storm.
Finally, all the environmental damage listed so far has resulted from ruinous substance additions to
natural ecosystems, but environmental damage also runs in the other direction as depletion. Our cars and
factories are sapping the earth of its petroleum reserves. Minerals, including copper, are being mined
toward the point where it will become too expensive to continue digging the small amount that remains
from the ground. The United Nations estimates that fifty thousand square miles of forest are disappearing
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each year, lost to logging, conversion to agriculture, fuel wood collection by rural poor, and forest
fires. [6]
Of course, most of those tree losses can be replanted. On the other hand, species that are driven
out of existence can’t be brought back. As already noted, current rates of extinction are running far above
“background extinction” rates, which are an approximation of how many species, would disappear each
year were the rules of nature left unperturbed.
Conclusion. Technically, there’s no such thing as preserving the environment because left to its own
devices the natural world does an excellent job of wreaking havoc on itself. Disruptions including floods,
combined with wildlife battling for territory and food sources, all that continually sweeps away parts of
nature and makes room for new species and ecosystems. Still, changes wrought by the natural world tend
to be gradual and balanced, and the worry is that our industrialized lifestyle has become so powerful that
nature, at least in certain areas, will no longer be able to compensate and restore any kind of balance. That
concerns has led to both legal efforts, and ethical arguments, in favor of protecting the environment.
The Law
Legal efforts to protect the environment in the United States intensified between 1960 and 1970.
The Environmental Protection Agency (EPA) was established in 1970 to monitor and report on the state of
the environment while establishing and enforcing specific regulations. Well known to most car buyers as
the providers of the mile-per-gallon estimates displayed on the window sticker, the EPA is a large agency
and employs a workforce compatible with its mission, including scientists, legal staffers, and
communications experts.
Other important legal milestones in the field of environmental protection include:
The Clean Air Act of 1963 and its many amendments regulate emissions from industrial plants and
monitor air quality. One measure extends to citizens the right to sue companies for damages if they aren’t
complying with existing regulations: it effectively citizenries’ law enforcement in this area of
environmental protection.
The Clean Water Act, along with other, related legislation, regulates the quality of water in the geographic
world (lakes and rivers), as well as the water we drink and use for industrial purposes. Chemical
composition is important, and temperature also. Thermal pollution occurs when factories pour heated
water back into natural waterways at a rate sufficient to affect the ecosystem.
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The Wilderness Act, along with other legislation, establishes areas of land as protected from development.
Some zones, including the Boundary Waters Canoe Area in northern Minnesota, are reserved for minimal
human interaction (no motors are allowed); other areas are more accessible. All wilderness and national
park areas are regulated to protect natural ecosystems.
The Endangered Species Act and related measures take steps to ensure the survival of species pressed to
near extinction, especially by human intrusion. One example is the bald eagle. Subjected to hunting, loss
of habitat, and poisoning by the pesticide DDT (which caused eagle eggs to crack prematurely), a once
common species was reduced to only a few hundred pairs in the lower forty-eight states. Placed on the
endangered species list in 1967, penalties for hunting were increased significantly. Also, DDT was banned,
and subsequently the eagle made a strong comeback. It is no longer listed as endangered.
The National Environmental Policy Act of 1969 requires that an environmental impact statement be
prepared for many major projects. The word environment in this case means not only the natural world
but also the human one. When a new building is erected in a busy downtown, the environmental impact
statement reports on the effect the building will have on both the natural world (how much new air
pollution will be released from increased traffic, how much water will be necessary for the building’s
plumbing, how much electricity will be used to keep the place cool in the summer) and also the civilized
one (whether there’s enough parking in the area for all the cars that will arrive, whether nearby highways
can handle the traffic and similar). Staying with the natural factors, the statement should consider
impacts—positive and negative—on the local ecosystem as well as strategies for minimizing those impacts
and some consideration of alternatives to the project. The writing and evaluation of these statements can
become sites of conflict between developers on one side and environmental protection organizations on
the other.
Two major additional points about legal approaches to the natural world should be added. First, they can
be expensive; nearly all environmental protection laws impose costs on business and, consequently, make
life for everyone more costly. When developers of downtown buildings have to create a budget for their
environmental impact statements, the expenses get passed on to the people who buy condos in the
building. There’s no doubt that banning the pesticide DDT was good for the eagle, but it made farming—
and therefore the food we eat—more expensive. Further, clean water and air stipulations don’t only affect
consumers by making products more expensive; the environmental responsibility also costs Americans
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jobs every time a factory gets moved to China or some other relatively low-regulation country. Of course,
it’s also true that, as noted earlier, around 25 percent of China’s surface water is poisonous, but for laid-off
workers in the States, it may be hard to worry so much about that.
Second, these American laws, regulations, and agencies don’t make a bit of difference in Cancun, Mexico.
Even though Cancun and America wash back and forth over each other (Cancun’s hotels were
constructed, chiefly, to host American visitors), the rights and responsibilities of legal dominion over the
environment stop and start at places where people need to show their passports. This is representative of
a larger reality: more than most issues in business ethics, arguments pitting economic and human
interests against the natural world are international in nature. The greenhouse gases emitted by cars
caught in Cancun traffic are no different, as far as the earth is concerned, from those gases produced along
clogged Los Angeles freeways.
K E Y T A K E A W A Y S
Ecosystems are natural webs of life in which the parts depend on each other for their continued survival.
In a business context, the major types of pollution include air, water, soil, and contamination associated
with highly toxic materials.
Resource depletion is a type of environmental damage.
Numerous laws regulate the condition and use of the environment in the United States.
R E V I E W Q U E S T I O N S
1. What is an example of an ecosystem?
2. Explain one way that an ecosystem can resemble an economic system.
3. What are some effects of smog?
4. What’s an environmental impact statement?
5. Why are the business ethics of the environment more international in nature than many other subjects?
[1] “Cancun Tourism,” TED, Trade & Environment Database, case no. 86, accessed June 8,
2011, http://www1.american.edu/TED/cancun.htm.
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[2] Kent Holsinger, “Patterns of Biological Extinction,” lecture notes, University of Connecticut, August 31, 2009,
accessed June 8, 2011,http://darwin.eeb.uconn.edu/eeb310/lecture-notes/extinctions/node1.html.
[3] “Is Air Pollution Killing You?” Ivanhoe Newswire, May 2009, accessed June 8,
2011,http://www.ivanhoe.com/science/story/2009/05/572a.html.
[4] “More than 25% of China’s Surface Water Contaminated,” China Daily, July 26, 2010, accessed June 8,
2011, http://www.chinadaily.com.cn/china/2010-07/26/content_11051350.htm.
[5] The Upstate Freshwater Institute Onondaga Lake page, October 22, 2010, accessed June 8,
2011, http://www.upstatefreshwater.org/html/onondaga_lake.html; “2010–2011 Health Advisories: Chemicals in
Sportfish and Game,” New York State Department of Health, 2011, accessed June 8,
2011, http://static.ongov.net/WEP/wepdf/2009_AMP-
FINAL/Library/11_SupportingDocs/L11.10.11_HealthAdvisory2010-2011.pdf.
[6] Rhett A. Butler, “World Deforestation Rates and Forest Cover Statistics, 2000–2005,”Mongabay.com,
November 16, 2005, accessed June 8, 2011,http://news.mongabay.com/2005/1115-forests.html.
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14.2 Ethical Approaches to Environmental Protection
L E A R N I N G O B J E C T I V E S
1. Outline five attitudes toward environmental protection.
2. Consider who should pay for environmental protection and cleanup.
The Range of Approaches to Cancun
Cancun is an environmental sacrifice made in exchange for tourist dollars. The unique lagoon, for
example, dividing the hotel strip from the mainland was devastated by the project. To construct the
roadwork leading around the hotels, the original developers raised the earth level, which blocked the
ocean’s high tide from washing over into the lagoon and refreshing its waters. Quickly, the living water
pool supporting a complex and unique ecosystem clogged with algae and became a stinky bog. No one
cared too much since that was the street side, and visitors had come for the ocean.
Still, one hotel developer decided to get involved. Ricardo Legorreta who designed the Camino Real Hotel
(today named Dreams Resort) said this about his early 1970s project: “Cancun is more water than land.
The Hotel Camino Real site was originally 70 percent water. It had been filled during the urbanization
process. I wanted to return the site to its original status, so we built the guest room block on solid rock
and the public areas on piles, and then excavated what was originally the lagoon. The difference in tide
levels provides the necessary water circulation to keep the new lagoon clean.” [1]
Specific numbers aren’t available, but plainly it costs more to dig out the ground and then build on piles
than it does to just build on the ground. To save the lagoon, the owners of the Camino Real spent some
money.
Was it worth it? The answer depends initially on the ethical attitude taken toward the environment
generally; it depends on how much, and how, value is assigned to the natural world. Reasonable ethical
cases can be made for the full range of environmental protection, from none (total exploitation of the
natural world to satisfy immediate human desires) to complete protection (reserving wildlife areas for
freedom from any human interference). The main positions are the following and will be elaborated
individually:
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The environment shouldn’t be protected.
The environment should be protected in the name of serving human welfare.
The environment should be protected in the name of serving future generations’ welfare.
The environment should be protected in the name of serving animal welfare.
The environment should be protected for its own sake.
The Environment Shouldn’t Be Protected
Should individuals and businesses use the natural world for our own purposes and without concern for its
welfare or continuation? The “yes” answer traces back to an attitude called free use, which pictures the
natural world as entirely dedicated to serving immediate human needs and desires. The air and water and
all natural resources are understood as belonging to everyone in the sense that all individuals have full
ownership of, and may use, all resources belonging to them as they see fit. The air blowing above your
land and any water rolling through it are yours, and you may breathe them or drink them or dump into
them as you like. This attitude, finally, has both historical and ethical components.
The history of free use starts with the fact that the very idea of the natural world as needing protection at
all is very recent. For almost all human history, putting the words environment and protection together
meant finding ways that we could be protected from it instead of protecting it from us. This is very easy to
see along Europe’s Mediterranean coast. As opposed to Cancun where all the buildings are pushed right
up to the Caribbean and open to the water, the stone constructions of Europe’s old coastal towns are
huddled together and open away from the sea. Modern and recently built hotels obscure this to some
extent, but anyone walking from the coast back toward the city centers sees how all the old buildings turn
away from the water as though the builders feared nature, which, in fact, they did.
They were afraid because the wind and storms blowing off the sea actually threatened their existences; it
capsized their boats and sent water pouring through roofs and food supplies. Going further, not only is it
the case that until very recently nature threatened us much more than we threatened it, but in those cases
where humans did succeed in doing some damage, nature bounced right back. After a tremendously
successful fishing year, for example, the supply of food swimming off the coastlines of the Mediterranean
was somewhat depleted, but the next season things would return to normal. It’s only today, with giant
motorized boats pulling huge nets behind, that we’ve been able to truly fish out some parts of the sea. The
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larger historical point is that until, say, the nineteenth century, even if every human on the planet had
united in a project to ruin nature irrevocably, not much would’ve happened. In that kind of reality, the
idea of free use of our natural resources makes sense.
Today, at a time when our power over nature is significant, there are two basic arguments in favor of free
use:
1. The domination and progress argument
2. The geological time argument
The domination and progress argument begins by refusing to place any necessary and intrinsic value in
the natural world: there’s no autonomous worth in the water, plants, and animals surrounding us.
Because they have no independent value, those who abuse and ruin nature can’t be automatically accused
of an ethical violation: nothing intrinsically valuable has been damaged. Just as few people object when a
dandelion is pulled from a front yard, so too there’s no necessary objection to the air being ruined by our
cars.
Connected with this disavowal of intrinsic value in nature’s elements, there’s high confidence in our
ability to generate technological advances that will enable human civilization to flourish on the earth no
matter how contaminated and depleted. When we’ve drilled the last drop of the petroleum we need to
heat our homes and produce electricity to power our computers, we can trust our scientists to find new
energy sources to keep everything going. Possibly solar energy technologies will leap forward, or the long-
sought key to nuclear fission will be found in a research lab. As for worries about the loss of wildlife and
greenery, that can be rectified with genetic engineering, or by simply doing without them. Even without
human interference, species are disappearing every day; going without a few more may not ultimately be
important.
Further, it should be remembered that there are many natural entities we’re happy to do without. No one
bemoans the extinction of the virus called variola, which caused smallpox. That disease was responsible
for the death of hundreds of millions of humans, and for much of history has been one of the world’s most
terrifying scourges. In the 1970s, the virus was certified extinct by the World Health Organization. No one
misses it; not even the most devoted advocate of natural ecosystems stood up against the human abuse
and final eradication of the virus. Finally, if we can destroy one part of the natural world without remorse,
can’t that attitude be extended? No one is promoting reckless or wanton destruction, but as far as those
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parts of nature required to live well, can’t we just take what we need until it runs out and then move on to
something else?
To a certain extent, this approach is visible in Cancun, Mexico. The tourist strip has reached saturation
and the natural world in the area—at least those parts tourists won’t pay to see—has been decimated. So
what are developers doing? Moving down the coast. The new hotspot is called Playa del Carmen.
Extending south from Cancun along the shoreline, developers are gobbling up land and laying out luxury
hotels at a nonstop rate and with environmental effects frequently (not in every case) similar to those
defining Cancun. What happens when the entire area from Cancun to Chetumal is cemented over? There’s
more shoreline to be found in Belize, and on Mexico’s Pacific coast, and then down in Guatemala.
What happens when all shoreline runs out? There’s a lot of it around the world, but when the end comes,
it’ll also probably be true that we won’t need a real natural world to have a natural world, at least those
parts of it that we enjoy. Already today at Typhoon Lagoon in Disney World, six-foot waves roll down for
surfers. And visitors to the Grand Canyon face a curious choice: they can take the trouble to actually walk
out and visit the Grand Canyon, or, more comfortably, they may opt to see it in an impressive IMAX
theater presentation. There’s no reason still more aspects of the natural world, like the warm breezes and
evening perfection of Cancun, couldn’t be reproduced in a warehouse. Of course there are people who
insist that they want the real thing when it comes to nature, but there were also once people who insisted
that they couldn’t enjoy a newspaper or book if it wasn’t printed on real paper.
Next, moving on to the other of the two arguments in favor of free use, there’s the idea that we might as
well use everything without anxiety because, in the end, we really can’t seriously affect the natural world
anyway. This sounds silly at first; it seems clear that we can and do wreak havoc: species disappear and
natural ecosystems are reduced to dead zones. However, it must be noted that our human view of the
world is myopic. That’s not our fault, just an effect of the way we experience time. For us, a hundred years
is, in fact, a long time. In terms of geological time, however, the entire experience of all humanity on this
earth is just the wink of an eye. Geological time understands time’s passing not relative to human lives but
in terms of the physical history of the earth. According to that measure, the existence of the human
species has been brief, and the kinds of changes we’re experiencing in the natural world pale beside the
swings the earth is capable of producing. We worry, for example, about global warming, meaning the
earth’s temperature jumping a few degrees, and while this change may be seismically important for us, it’s
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nothing new to the earth. As Robert Laughlin, winner of the Nobel Prize in physics, points out in an article
set under the provocative announcement “The Earth Doesn’t Care if You Drive a Hybrid,” six million years
ago the Mediterranean Sea went bone dry. Eighty-five million years before that there were alligators in the
Arctic, and two-hundred million years before that Europe was a desert. Comparatively, human
industrialization has changed nothing. [2]
This geological view of time cashes out as an ethical justification for free use of the natural world for a
reason nearly the opposite of the first. The argument for free use supported by convictions about
domination and progress borders on arrogance: it’s that the natural world is unimportant, and any
problems caused by our abusing it will be resolved by intelligence and technological advance.
Alternatively, and within the argument based on geological time, our lives, deeds, and abilities are so
trivial that it’s absurd to imagine that we could seriously change the flow of nature’s development even if
we tried. We could melt nuclear reactors left and right, and a hundred million years from now it wouldn’t
make a bit of difference. That means, finally, that the idea of preserving the environment isn’t nobility: it’s
vanity.
The Environment Should Be Protected in the Name of Serving Human
Welfare
The free-use argument in favor of total environmental exploitation posits no value in the natural world. In
and of itself, it’s worthless. Even if this premise is accepted, however, there may still be reason to take
steps in favor of preservation and protection. It could be that the ecosystems around us should be
safeguarded not for them, but for us. The reasoning here is that we as a society will live better and happier
when lakes are suitable for swimming, when air cleans our lungs instead of gumming them up, when a
drive on the freeway with the car window down doesn’t leave your face feeling greasy. Human happiness,
ultimately, hinges to some extent on our own natural and animal nature. We too, we must remember, are
part of the ecosystem. Many of the things we do each day—walk, breathe, find shelter from the elements—
are no different from the activities of creatures in the natural world. When that world is clean and
functioning well, consequently, we fit into it well.
Wrapping this perspective into an ethical theory, utilitarianism—the affirmation that the ethically good is
those acts increasing human happiness—functions effectively. For visitors to Cancun, it seems difficult to
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deny that their trip will be more enjoyable if the air they breathe is fresh and briny instead of stinky and
gaseous as it was in some places when the lagoon had decayed into a pestilent swamp. Understood in this
way, we could congratulate Architect Legorreta for his expensive decision to carve out a space for the tides
to reenter and refresh the inland lake. It’s not, the argument goes, that he should be thanked for rescuing
an ecosystem, but that by rescuing the ecosystem he made human life more agreeable.
Another way to justify environmental protection in the name of human and civilized life runs through a
rights-based argument. Starting from the principle of the right to pursue happiness, a case could be built
that without a flourishing natural world, the pursuit will fail. If it’s true that we need a livable
environment, one where our health—our breathing, drinking, and eating—is guaranteed, then
industrialists and resort developers who don’t ensure that their waste and contamination are controlled
aren’t just polluting; they’re violating the fundamental rights of everyone sharing the planet.
Bringing this rights-based argument to Cancun and Legorreta’s dredging of the lagoon, it’s possible to
conclude that he absorbed a pressing responsibility to do what he did: in the name of protecting the right
of others to live healthy lives, it was necessary to renew the dead water. Again, it must be emphasized that
the responsibility isn’t to the water or the animals thriving in its ecosystem. They’re irrelevant, and there’s
no obligation to protect them. What matters is human existence; the obligation is to human rights and our
dependence on the natural world to exercise those rights.
The Environment Should Be Protected in the Name of Serving Future
Generations’ Welfare
The idea that the environment should be protected so that future generations may live in it and have the
choices we do today is based on a notion of social fairness. Typically in ethics, we think of fairness in
terms of individuals. When applying for a job at a Cancun hotel, fairness is the imperative that all those
applying get equal consideration, are subjected to similar criteria for selection, and the selection is based
on ability to perform job-related duties. When, on the other hand, the principle of fairness extends to the
broad social level, what’s meant is that groups taken as a whole are treated equitably.
One hypothetical way to present this notion of intergenerational fairness with respect to the environment
and its protection is through the previously discussed notion of the veil of ignorance—that is, the idea that
you imagine yourself as removed from today’s world and then reinserted at some future point, one
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randomly assigned. You may come back tomorrow, next year, next decade, or a hundred years down the
line. If, the reasoning goes, that’s your situation, and then very possibly you’re going to urge
contemporary societies to protect the environment so that it’ll be there for you when your time comes
around, whenever that might be. Stated slightly differently, it’s a lot easier to wreck the environment when
you don’t have to think about others. Fairness, however, obligates us to think of others, including future
others, and the veil of ignorance provides one way of considering their rights on a par with the ones we
enjoy now.
What does this mean in terms of Cancun? We should enjoy paradise there, no doubt, but we should also
ensure that it’ll be as beautiful for our children (or any randomly selected future generation) as it is for us.
In this case, the re dredging of the lagoon serves that purpose. By helping maintain the status quo in
terms of the natural ecosystems surrounding the hotels, it also helps to maintain the possibility of
enjoying that section of the Caribbean into the indefinite future.
There’s also a utilitarian argument that fits underneath and justifies the position that our environment
should be protected in the name of future generations. This theory grades acts ethically in terms of their
consequences for social happiness, and with those consequences projected forward in time. To the extent
possible, the utilitarian mind-set demands that we account for the welfare of future generations when we
act today. Of course the future is an unknown, and that tends to weigh decisions toward their effects on
the present since those are more easily foreseen. Still, it’s not difficult to persuade most people that future
members of our world will be happier and their lives fuller and more rewarding if they’re born onto an at
least partially green earth.
The Environment Should Be Protected in the Name of Serving Animal
Welfare
One of the more frequently voiced lines of reasoning in favor of ecosystem preservation starts with a
fundamental shift from the previous arguments. Those arguments place all intrinsic value
in human existence: to the extent we decide to preserve the natural world, we do so because it’s good for
us. Preservation satisfies our ethical duties to ourselves or to those human generations yet to come. What
now changes is that the natural world’s creatures get endowed with a value independent of humans, and
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that value endures whether or not we enjoy or need to fit into a web of healthy, clean ecosystems. Animals
matter, in other words, regardless of whether they matter for us.
Ethically, the endowment of nonhuman animals with intrinsic worth is to treat them, to some extent, or in
some significant way, as human. This treatment is a subject of tremendous controversy, one orbiting
around the following two questions:
Are nonhuman animals worthy of moral consideration? What do they do, what qualities do they possess
that lead us to believe they should have rights and impose obligations on you and me?
Granting that nonhuman animals do hold value in themselves and impose obligations on humans by their
very existence, how far do the obligations go? If we’re given a choice on a speeding highway between
running over a squirrel and hitting a person, do we have a moral obligation to avoid the person (and run
down the squirrel)? If we do, then it seems that the intrinsic worth of an animal is less than that of a
human being, but how much less?
Questions about whether animals have rights and impose obligations are among the most important in
the field of environmental ethics. They will be explored in their own section of discussion that follows. In
this section, it will simply be accepted that nonhuman animals do, in fact, have autonomous moral
standing. It immediately follows that their protection is, to some extent, a responsibility.
In terms of an ethics of duties, the obligation to protect animal life could be conceived as a form of the
duty to beneficence, a duty to help those who we are able to aid, assuming the cost to ourselves is not
disproportionately high. Protecting animals is something we do for the same reason we protect people in
need. Alternatively, in terms of the utilitarian principle that we act to decrease suffering in the world
(which is a way of increasing happiness), the argument could be mounted that animals are, in fact,
capable of suffering, and therefore we should act to minimize that sensation just as we do in the human
realm. Finally, rights theory—the notion that we’re free and should not impinge on the freedom of
others—translates into a demand that we treat the natural world with respect and with an eye to its
preservation in order to guarantee that nonhuman animals may continue to pursue their own ends just as
we demand that we humans be allowed to pursue ours.
With the obligation for the protection of—or at least noninterference with—nonhuman animals
established, the way opens to extend the conservation to the natural world generally. Because animals
depend on their habitat to express their existence, because their instincts and needs suggest that they may
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be free only within their natural environment, the first responsibility derived from the human obligation
to animals is one to protect their wild and natural surroundings. As an important note here, that habitat—
the air all animals breathe, the water where fish swim, the earth housing burrowing animals—is not
protected for its own sake, only as an effect of recognizing the creatures of the natural realm as dignified
and worthy of our deference.
What does this dignity conferred on animal life mean for Cancun? The dredging and revivifying of the
lagoon by Legorreta fulfills an obligation under this conception of the human relation to the natural
world. It’s a different obligation from those developed in the previous cases, however. Before, the lagoon
was cleansed in the name of improving the Cancun experience for vacationers; here, it’s cleansed so that it
may once again support the land and aquatic life that once called the place home. As for whether that
improves the vacation experience, there’s no reason to ask; it’s only necessary to know that saving animals
probably requires saving their home.
The Entire Environmental Web Should Be Protected for Its Own Sake
The environment as a whole, the total ecosystem including all animal and plant life on Earth—along with
the air, water, and soil supporting existence—should be protected according to a number of ethical
arguments:
The least difficult to persuasively make is the case that the obligation flows from human welfare: we’re
happier when our planet is healthy.
It’s more difficult, but still very possible, to make a reasonable case that the obligation to protection
attaches to the autonomous value and rights of nonhuman animals. In order to protect all of them, the
reasoning goes, we should preserve all elements of the natural world to the extent possible because we
can’t be sure which ones may, in fact, play an important role in the existence of one or another kind of
creature.
Finally, the most difficult case to make is that humans are obligated to protect the total environment—all
water and air, every tree and animal—because all of it and every single part holds autonomous value. This
Earth-wide value translates into an Earth-wide obligation: the planet—understood as the network of life
happening above and under its surface—becomes something like a single living organism we humans
must protect.
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What distinguishes the third argument from the previous two is that we don’t save the greater natural
ecosystem in the name of something else (human welfare or habitat preservation for nonhuman animals)
but for itself.
It’s easy to trivialize the view that every element of the natural world demands respect and therefore some
degree of protection. Do we really want to say that a child experimenting out in the driveway with worms,
or pulling up plants to see the roots is failing a moral obligation to the living world? What about the
coconut trees felled to make room for Cancun’s hotels? Perhaps if they were unique trees, or if a certain
species of bird depended on precisely those limbs and no others for its survival, but do we want to go
further and say that the standard trees—a few hundred out of millions in the world—should give
developers pause before the cement trucks come wheeling in? For many, it will be easier to conclude that
if a good project is planned—if there’s money to be earned and progress to be made—then we can cut
down a few anonymous trees that happen to be standing in the way and get on with our human living.
On the other hand, sitting on the sand in Cancun, it’s difficult to avoid sensing a happening majesty: not a
reason to pull out your camera and snap, but a living experience that can only be had by a natural being
participating, breathing air as the wind blows across the beach, or swimming in the crisp water. There
may be a kind of aesthetic imperative here, a coherent demand for respect that we feel with our own
natural bodies. The argument isn’t that the entire natural ecosystem should be preserved because it feels
good for us to jump in the ocean water—it feels good to jump in the shower too—the idea is that through
our bodies we experience a substance and value of nature that requires our deference. Called
the aesthetic argument in favor of nature’s dignity, and consequently in favor of the moral obligation to
protect it, there may be no proper explanation or reasoning, it may only be something that you know if
you’re in the right place at the right time, like Cancun in the morning.
The response to the aesthetic argument is that we can’t base ethics on a feeling.
If We Decide to Protect the Environment, Who Pays?
Much of the stress applied to, and the destruction wrought on the environment around Cancun could be
reversed. That costs money, though. Determining exactly how much is a task for biologists and
economists to work out. The question for ethical consideration is, who should pay? These are three basic
answers:
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1. Those who contaminated the natural world
2. Those who enjoy the natural world
3. Those who are most able
The answer that the costs should be borne by those who damaged nature in the first place means sending
the bill to developers and resort owners, to all those whose ambition to make money on tourism got roads
paved, forests cleared, and foundations laid. Intuitively, placing the obligation for environmental cleanup
on developers may make the most sense, and in terms of ethical theory, it fits in well with the basic duty to
reparation, the responsibility to compensate others when we harm them. In this case, the harm has been
done to those others who enjoy and depend on the natural world, and one immediate way to compensate
them is to repair the damage. A good model for this could be Legorreta’s work, the expense taken to raise
a portion of a hotel and so once again allow tide water to freshen the lagoon. Similar steps could be taken
to restore parts of the ruined coral reef and to replant the forest behind the hotel area.
The plan makes sense, but there’s a glaring problem: times change. Back when Cancun was originally
being laid out in the 1960s, ecological concerns were not as visible and widely recognized as they are
today. That doesn’t erase the fact that most hotel companies in Cancun laid waste to whatever stood in the
way of their building, but it does allow them to note that they are being asked to pay today for actions that
most everyone thought were just fine back when they were done. It’s not clear, finally, how fair it is to ask
developers to pay for a cleanup that no one envisioned would be necessary back when the construction
initiated.
The proposal that those who enjoy and depend on the natural world should bear primary responsibility
for protecting and renewing it also makes good sense. This reasoning is to some extent implemented in
America’s natural parks where fees are charged for entry. Those revenues go to support the work of the
forestry service that’s required to ensure that visitors to those parks—and the infrastructure they need to
enjoy their time there—don’t do harm to the ecosystems they’re coming to see, and also to ensure that
harm done by others (air pollution, for example, emitted by nearby factories) is cleansed by nature’s
organic processes.
On a much larger scale, a global one, this logic is also displayed in some international attempts to limit the
emission of greenhouse gasses. The specific economics and policy are complicated and involve financial
devices including carbon credits and similar, but at bottom what’s happening is that governments are
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getting together and deciding that we all benefit from (or even need) reduced emissions of waste into the
air. From there, attempts are made to negotiate contributions various countries can make to the reduction
effort. As for the cost, most economists agree that the expense of pollution control measures will, for the
most part, be passed along as hikes in the cost of consumer goods. Everyone, in other words, will pay,
which matches up with the affirmation that everyone benefits.
Finally, the response that those most able to pay should bear the brunt of the cost for protecting the
natural world is a political as much as an environmental posture. One possibility would be a surtax levied
on wealthy members of society, with the money channeled toward environmental efforts. This strategy
may find a solid footing on utilitarian grounds where acts benefitting the overall welfare remain good even
if they’re burdensome or unfair to specific individuals. What would be necessary is to demonstrate that
the sum total of human (and, potentially, nonhuman animal) happiness would be increased by more than
the accumulated displeasure of those suffering the tax increase.
K E Y T A K E A W A Y S
The attitude that the environment shouldn’t be protected has both historical and ethical roots.
Confidence in the human ability to control the environment diminishes concerns about protecting its
current state.
The power of nature viewed over the very long term diminishes concerns about protecting its current
state.
Environmental protection in the name of serving human welfare values the natural world because it’s
valuable for us.
Environmental protection in the name of serving future generations’ welfare derives from a notion of
social fairness.
Environmental protection in the name of serving animal welfare connects with a notion of moral
autonomy in nonhuman animals.
Environmental protection for its own sake values the entire set of the world’s ecosystems.
If the environment is protected, the costs may be made the responsibility of various parties.
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R E V I E W Q U E S T I O N S
1. Briefly, what is the history of the free-use attitude toward the natural world?
2. How can technology make environmental protection a wasted effort?
3. How can the idea of geological time become an argument against taking expensive steps to protect the
natural world?
4. What are some reasons why our ethical obligations to ourselves may lead us to protect the natural
world?
5. What is the difference between protecting the natural world because we humans are valuable, and
because animals are valuable?
6. What kind of experiences with nature may result in the sensation that, as an interdependent whole, the
natural world holds value?
7. If the decision is made to protect nature, who are some individuals or groups that might be asked to pay
the cost?
[1] Ricardo Legorreta, Wayne Attoe, Sydney Brisker, and Hal Box, The Architecture of Ricardo Legorreta (Austin:
University of Texas Press, 1990), 108.
[2] George Will, “The Earth Doesn’t Care: About What Is Done to or for It,” Newsweek, September 12, 2010,
accessed June 8, 2011,http://www.newsweek.com/2010/09/12/george-will-earth-doesn-t-care-what-is-done-to-
it.html?from=rss.
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14.3 Three Models of Environmental Protection for Businesses
L E A R N I N G O B J E C T I V E
1. Outline three business responses to environmental responsibility.
The Role of Businesses in Environmental Protection
Protecting the environment is itself a business, and many organizations, especially nonprofits, take that as
their guiding purpose. The World Wildlife Fund, the Audubon Society, and National Geographic
exemplify this. Their direct influence over the natural world, however, is slight when compared against all
the globe’s for-profit companies chugging away in the name of earning money. Whether the place is
Cancun, or China, or the United States, the condition of the natural world depends significantly on what
profit-making companies are doing, the way they’re working, the kinds of goods they’re producing, and
the attitude they’re taking toward the natural world. Three common attitudes are
1. accelerate and innovate,
2. monetize and count,
3. express corporate responsibility.
4.
Business and Environmental Protection: Accelerate and Innovate
There’s a subtle difference between environmental conservation and protection. Conservation means
leaving things as they are. Protection opens the possibility of changing the natural world in the name of
defending it. One way for a business to embrace the protection of nature is through technological advance.
New discoveries, the hope is, can simultaneously allow people to live better, and live better with the
natural world. Looking at a stained paradise like Cancun, the attitude isn’t so much worry that we’re
ruining the world and won’t be able to restore a healthy balance, it’s more industrially optimistic: by
pushing the accelerator, by innovating faster we’ll resolve the very environmental problems we’ve created.
Examples of the progressive approach to environmental protection—as opposed to the conservative one—
include solar and wind power generation. Both are available to us only because of the explosion of
technology and knowledge the industrialized, contaminating world allows. Because of them, we can today
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imagine a world using energy at current rates without doing current levels of environmental damage.
Here’s a statement of that aim from a wind power company’s web page: “Our goal has always been to
produce a utility-scale wind turbine that does not need subsidies in order to compete in electricity
markets.” [1]
The idea, in other words, is that electricity produced by this company’s windmills will be as cheap (or
cheaper) than that produced from fossil fuels, including coal. To reach that point, the development of very
strong yet lightweight materials has been necessary, along with other technological advances. If they
continue, it may be that American energy consumption can remain high, while pollution emitted from
coal-burning electricity plants diminishes. One point, finally, that the wind turbine company web page
doesn’t underline quite so darkly is that they’ll make a lot of money along the way if everything goes
according to plan. This incentive is also typical of an accelerate-and-innovate approach: not only should
industrialization go forward faster in the name of saving the environment, so too should
entrepreneurialism and profit.
In broad terms, the business attitude toward employing innovation to protect the environment
acknowledges that human activity on earth has done environmental damage, and that matters. The
damage is undesirable and should be reversed. The way to reverse, however, isn’t to go backward by doing
things like reducing our energy use to previous levels. Instead, we keep doing what we’re doing, just
faster. The same industrialization that caused the problem will pull us out.
Business and Environmental Protections: Monetize and Count
A cost-benefit analysis is, theoretically, a straightforward way of determining whether an action should be
undertaken. The effort and expense of doing something is toted on one side, and the benefits received are
summed on the other. If the benefits are greater than the costs, we go ahead; if not, we don’t. Everyone
performs cost-benefit analyses all the time. At dinner, children decide whether a dessert brownie is worth
the cost of swallowing thirty peas. Adults decide whether the fun of a few beers tonight is worth a
hangover tomorrow or, more significantly, whether getting to live in one of the larger homes farther out of
town is worth an extra half-hour in the car driving to work every morning.
Setting a cost-benefit analysis between a business and the environment means adding the costs of
eliminating pollution on one side and weighing it against the benefits of a cleaner world. The ethical
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theory underneath this balancing approach to business and nature is utilitarianism. The right act is the
one most increasing society’s overall happiness (or most decreasing unhappiness), with happiness
measured in this case in terms of the net benefits a society receives after the costs of an action have been
deducted.
The most nettlesome problem for businesses adopting a cost-benefit approach to managing
environmental protection is implementation. It’s hard to know exactly what all the costs are on the
business side, and what all the benefits are on nature’s side. Then, even if all the costs and benefits are
confidently listed, it’s equally (or more) difficult to weigh them against each other. According to a report
promulgated by the nonprofit Environmental Defense Fund, North Carolina’s coal-fired electricity plants
could install smokestack scrubbers to significantly reduce contaminating emissions. The cost would be
$450 million. The benefits received as a result of the cleaner air would total $3.5 billion. [2]
This seems like
a no-brainer. The problem is that when you dig a bit into the report’s details, it’s not entirely clear that the
benefits derived from cleaner air add up to $3.5 billion. More troubling, it looks like it’s hard to put any
price tag at all on them. Here are a few examples:
According to the report, “It is estimated that pollution from power plants triggers more than 200,000
asthma attacks across the state each year and more than 1,800 premature deaths.” The word estimated is
important. Further, how do you put a dollar total on an asthma attack or a death?
According to the report, “One should be able to see out 93 miles on an average day in the Smoky
Mountains, but now air pollution has reduced this to an average of 22 miles.” How do you put a dollar
total on a view?
According to the report, “Air pollution contributes to significant declines in populations of dogwood,
spruce, fir, beech, and other tree species.” What is “significant?” What’s the dollar value of a dogwood? [3]
The list of items goes on, but the point is clear. A cost-benefit analysis makes excellent sense in theory, but
it’s as difficult to execute as it is to assign numbers to human experiences. If the attempt is nonetheless
made, the technical term for the assigning is monetization.
A final set of hurtles to clear on the way to implementing a cost-benefit approach to business and the
environment involves formalizing mechanisms for paying the costs. Two common mechanisms are
regulation and incentives.
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Regulations are imposed by federal or local governments and come in various forms. Most directly, and
staying with electrical plants in Carolina, the plants could be required to install smokestack scrubbers.
Costs of the installation would, to some significant extent, be passed on to consumers as rate hikes, and
the benefits of cleaner air would be enjoyed by all. It’s worth noting here that the contamination
producers in question—coal-burning electricity plants—are pretty much stuck where they are in
geographic terms. You can’t produce electricity in China and sell it in the States. Other kinds of
businesses, however, may be able to avoid regulations by packing up and heading elsewhere. This, of
course, complicates the already knotted attempt to tote up the benefits and costs of environmental
protection.
A more flexible manner of regulating air and other types of pollution involves the sale of permits. There
are multiple ways of mounting a permit trade, but as a general sketch, the government sets an upper limit
to the amount of air pollution produced by all industry, and sells (or gives) permits to specific operating
businesses. In their turn, these permits may be bought and sold. So an electric company may find that it
makes economic sense to install scrubbers (limiting its pollution output) and then sell the remaining
pollution amount on its license to another company that finds the cost of limiting its emissions to be very
high. One advantage of this approach is that, while it does limit total contamination, it allows for the fact
that it’s easier for some polluters than others to cut back.
As opposed to regulations that essentially force businesses to meet social pollution goals, incentives seek
the same results cooperatively. For example, tax incentives could be offered for environmental protection
efforts; money paid for the scrubbers a company places in their smokestacks may be deducted from taxes
at a very high rate. Similarly, matching funds may be offered by government agencies: for every dollar the
company spends, the government—which in this case means you and I and everyone who pays taxes—
chips in one also.
Alternatively, government agencies including the Environmental Protection Agency may provide public
recognition to anti-contamination efforts undertaken by a business, and in the hands of a strong
marketing department those awards may be converted into positive public relations, new consumers, and
extra profits that offset the original pollution control costs.
Specific awards tied to government agencies may not even be necessary; the incentive can be drawn from
a broad range of sources. A good example comes from the Washington Post. A long and generally quite
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positive news story recounts Wal-Mart’s efforts to encourage suppliers in China to increase energy
efficiency while decreasing their pollution output. Basically, Wal-Mart told suppliers that they need to
clean up or they’ll get replaced. According to the account, not only is the effort bearing fruit, but it’s
working better than government regulations designed to achieve similar ends: “In many cases, Wal-Mart
is first trying to bring firms up to government standards. Suppliers may not care about government fines,
but they care about orders from the buyers.” [4]
As for Wal-Mart, their cause is served by the free publicity of the story when it’s distributed to almost a
million newspaper readers in the Washington, DC, area and then projected broadly on the Internet.
Further down the line, the good publicity ended up getting cited here. Going back to the specific
newspaper story, it finishes with a clear acknowledgment of the public relations dynamic. These are the
article’s last lines: “Wal-Mart sees this not just as good practice but also good marketing. ‘We hope to get
more customers,’ said Barry Friedman, vice president for corporate affairs in Beijing. ‘We’re not doing it
solely out of the goodness of our hearts.’” [5]
One notable problem with the incentive approach is identical to its strength: since participation is
voluntary, some heavy polluters may choose not to get involved.
As a final point about incentives, many industrial plants already receive incentives to not protect the
environment. To the extent they’re allowed to simply jet sulfur and other contamination into the air, they
are, in effect, forcing society generally to pay part of their cost of production. Every time someone in
Carolina falls ill with an asthma attack, the consequences are suffered by that individual while the profits
from electricity sales go to the electric company. As previously discussed, these externalities—these costs
of production borne by third parties—actually encourage businesses to follow any route possible to make
outsiders pay the costs of their operations. One route that’s frequently possible, especially for heavy
industry, involves letting others deal with their runoff and waste.
Business and Environmental Protections: Corporate Social Responsibility
The third posture an organization may adopt toward environmental protection falls under the heading of
corporate social responsibility. The attitude here is that companies, especially large, public corporations,
should humanize their existences: an attempt should be made to see the corporation, in a certain sense, as
an individual person. Instead of being a mindless machine built to stamp out profits, the business is re-
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envisioned as a seat of economic and moral responsibility. Responding to ethical worries isn’t someone
else’s concern (say, the government’s, which acts by imposing regulations), instead, large companies
including Wal-Mart take a leading role in addressing ethical issues.
The Washington Post’s flattering presentation of Wal-Mart in China fits well here. The story actually
presents Wal-Mart as transitioning from a vision of itself as a pure profit enterprise to one exercising
corporate citizenship. Originally,
Wal-Mart only cared about price and quality, so that encouraged suppliers to race to the
bottom on environmental standards. They could lose contracts because competition was so
fierce on price.
Now, however,
Wal-Mart held a conference in Beijing for suppliers to urge them to pay attention not only to
price but also to “sustainability,” which has become a touchstone. [6]
Sustainability means acting to protect the environment and the people surrounding an operation so that
they may continue to contribute to the profit-making enterprise. As a quick example, a logging operation
that clear-cuts forests isn’t sustainable: when all the trees are gone, there’s no way for the company to
make any more money. Similarly in human terms, companies depending on manual labor need their
employees to be healthy. If a factory’s air pollution makes everyone sick, no one will be able to come in to
work.
For Wal-Mart in China, one step toward sustainability involved energy efficiency. A supplier installed
modern shrink-wrapping machines to replace work previously done by people wielding over-the-counter
hair dryers. In theoretical terms at least, the use of less energy will help the supplier continue to produce
even as worldwide petroleum supplies dwindle and energy costs increase. Steps were also taken, as the
newspaper story notes, to limit water pollution: “Lutex says it treats four tons of wastewater that it used to
dump into the municipal sewage line. That water was supposed to be treated by the city, but like three-
quarters or more of China’s wastewater, it almost certainly wasn’t.” [7]
More examples of Wal-Mart suppliers making environmentally conscious decisions dot the newspaper
story, and in every case these actions may be understood as serving the long-term viability of the
supplier’s operations.
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Stakeholder theory is another way of presenting corporate social responsibility. The idea here is that
corporate leaders must make decisions representing the interests not only of shareholders (the
corporation’s owners) but also of all those who have a stake in what the enterprise is doing: the company
exists for their benefit too. Along these lines, Wal-Mart encouraged farmers in China to abandon the use
of toxic pesticides. The corporation contracted with farmers under the condition that they use only
organic means to kill pests and then allowed their products to be sold with a label noting their Wal-Mart-
confirmed clean production. The real lives of locals who eat that food and live on the now less-
contaminated land are markedly improved. As another farming-related example of dedication to the well-
being of the Chinese making up their manufacturing base, Wal-Mart sought “to help hundreds of small
farmers build rudimentary greenhouses, made of wood and plastic sheeting, in which they grow oranges
in midwinter to sell to Wal-Mart’s direct farm program. Zhang Fengquan is one of those farmers; he
gathers more than three tons of nectarines from more than 400 trees in his greenhouse. Asked what he
did during the winter before the greenhouse was built, he said he worked as a seasonal laborer. Or played
the popular Chinese board game mah-jongg.” [8]
In both cases, Wal-Mart is not simply abandoning its workers (or its suppliers’ workers) once they punch
out. As stakeholders in the company, Wal-Mart executives feel a responsibility to defend employees’ well-
being just as they feel a responsibility to bring good products to market in the name of profit.
The fact that Wal-Mart’s recent actions in China can be presented as examples of a corporation expressing
a sense of responsibility for the people and their natural world that goes beyond immediate profit doesn’t
mean that profit disappears from the equation. Shareholders are stakeholders too. And while corporate
attitudes of social responsibility may well result in an increasingly protected environment, and while that
protection may actually help the bottom line in some cases, there’s no guarantee that the basic economic
tension between making money and environmental welfare will be resolved.
Conclusion. Businesses can react to a world of environmental concern by trusting in technological
innovation, by trusting in governmental regulation, and by trusting in a concept of corporate
responsibility. It is currently uncertain which, if any, of these postures will most effectively respond to
society’s environmental preoccupations.
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K E Y T A K E A W A Y S
One business response to concerns about the environment is to participate in the process of
technological innovation to produce cleaner, more efficient ways of living.
One business response to concerns about the environment is to participate in, and act on cost-benefit
studies of environmental protection.
One business response to concerns about the environment is to express corporate responsibility: to
make the business a seat of economic and ethical decisions.
R E V I E W Q U E S T I O N S
1. What’s the difference between environmental protection and environmental conservation?
2. How has industrialization caused environmental problems? How can it resolve those problems?
3. What is a cost-benefit analysis?
4. With respect to the environment, how can a cost-benefit analysis be used to answer questions about
business and environmental protection?
5. What is practical problem with the execution of a cost-benefit analysis strategy for responding to
environmental problems?
6. What’s the difference between a corporation guided by profit and one guided by a sense of social
responsibility?
7. Why might a stakeholder theory of corporate decision making be good for the environment?
[1] The Wind Turbine Company home page, accessed June 8, 2011,http://www.windturbinecompany.com.
[2] “The North Carolina Clean Smokestacks Plan,” Environmental Defense Fund, March 2001, accessed June 8,
2011, http://apps.edf.org/documents/700_NCsmokestacks.PDF.
[3] “The North Carolina Clean Smokestacks Plan,” Environmental Defense Fund, March 2001, accessed June 8,
2011, http://apps.edf.org/documents/700_NCsmokestacks.PDF.
[4] Steve Mufson, “Wal-Mart Presses Vendors in China to Meet Higher Standards,” Washington Post, February 26,
2010, accessed June 8, 2011,http://www.washingtonpost.com/wp-
dyn/content/article/2010/02/26/AR2010022603339_pf.html.
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[5] Steve Mufson, “Wal-Mart Presses Vendors in China to Meet Higher Standards,” Washington Post, February 26,
2010, accessed June 8, 2011,http://www.washingtonpost.com/wp-
dyn/content/article/2010/02/26/AR2010022603339_pf.html.
[6] Steve Mufson, “Wal-Mart Presses Vendors in China to Meet Higher Standards,” Washington Post, February 26,
2010, accessed June 8, 2011,http://www.washingtonpost.com/wp-
dyn/content/article/2010/02/26/AR2010022603339_pf.html.
[7] Steve Mufson, “Wal-Mart Presses Vendors in China to Meet Higher Standards,” Washington Post, February 26,
2010, accessed June 8, 2011,http://www.washingtonpost.com/wp-
dyn/content/article/2010/02/26/AR2010022603339_pf.html.
[8] Steve Mufson, “Wal-Mart Presses Vendors in China to Meet Higher Standards,” Washington Post, February 26,
2010, accessed June 8, 2011,http://www.washingtonpost.com/wp-
dyn/content/article/2010/02/26/AR2010022603339_pf.html.
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14.4 Animal Rights
L E A R N I N G O B J E C T I V E S
1. Elaborate arguments in favor of and against the proposition that animals have ethical rights.
2. Distinguish questions about animal rights from ones about animal suffering.
Do Animals Have Rights?
Were these a textbook in environmental ethics, two further questions would be added to this subsection’s
title: which rights, which animals? It’s clear that chimps and dolphins are different from worms and, even
lower, single-cell organisms. The former give coherent evidence of having some level of conscious
understanding of their worlds; the latter seem to be little more than reactionary vessels: they get a
stimulus, they react, and that’s it. Questions about where the line should be drawn between these two
extremes, and by what criteria, fit within a more specialized study of the environment. In business ethics,
attention fixes on the larger question of whether animals can be understood as possessing ethical rights as
we customarily understand the term.
There are two principal arguments in favor of understanding at least higher-order nonhuman animals as
endowed with rights:
1. The cognitive awareness and interest argument
2. The suffering argument
And there are three arguments against:
1. The lack of expression argument
2. The absence of duties argument
3. The anthropomorphism suspicion argument
The cognitive awareness and interest argument in favor of concluding that animals do have ethical
rights begins by accumulating evidence that nonhuman animals are aware of what’s going on around
them and do in fact have an interest in how things go. As for showing that animals are aware and
interested, in higher species evidence comes from what animals do. Most dogs learn in some sense the
rules of the house; they squeal when kicked and (after a few occurrences) tend to avoid doing whatever it
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was that got them the boot. Analogously, anyone who’s visited Sea World has seen dolphins respond to
orders, and seemingly understand that responding well is in their interest because they get a fish to eat
afterward.
If these deductions of animal awareness and interest are on target, the way opens to granting the animals
an autonomous moral value and standing. Maybe their ethical value should be inferior to humans who
demonstrate sophisticated understanding of their environment, themselves, and their interests, but any
understanding at all does bring animals into the realm of ethics because determinations about whose
interests should be served in any particular situation are what ethical discussions concern. The reason we
have ethics is to help those who have specific interests have them satisfied in ways that don’t interfere
with others and their attempts to satisfy their distinct interests. So if we’re going to have ethical principles
at all, then they should apply to dogs and dolphins because they’re involved in the messy conflicts about
who gets what in the world.
Putting the same argument slightly differently, when the owner of a company decides how much of the
year-end profits should go to employees as bonuses, that’s ethics because the interests of the owner and
the employees are being weighed. So too when decisions are made at Sea World about how often and how
intensely animals should be put to work in entertainment programs: the interests of profits (and human
welfare) are being weighed against the interests of individual dolphins. As soon as that happens, the
dolphins are granted an ethical standing.
The suffering argument in favor of concluding that animals do have ethical rights fits neatly inside
utilitarian theory. Within this ethical universe, the reason we have ethical rules is to maximize happiness
and minimize suffering. So the first step to take here is to determine whether dogs and similar animals do,
in fact, suffer. Of course no dog complains with words, but no baby does either, and no one doubts that
babies suffer when, for example, they’re hungry (and whining). When dogs would be expected to suffer,
when they get slapped in the snout, they too exhibit clear signs of distress. Further, biological studies have
shown that pain-associated elements of some animal nervous systems resemble the human version. Of
course dogs may not suffer on the emotional level (if you separate a male and female pair, there may not
be any heartbreak), and it’s true that absolute proof remains elusive, but for many observers there’s good
evidence that some animals do, in fact, feel pain. If, then, it’s accepted that animals suffer, they ought to
be included in our utilitarian considerations by definition because the theory directs us to act in ways that
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maximize happiness and minimize suffering. It should be noted that the theory can be adjusted to include
only human happiness and suffering, but there’s no necessary reason for that, and as long as there’s not,
the establishment of animal suffering is enough to make a reasonable case that they are entities within the
ethical world, and ones that require respect.
On the other side, the arguments against granting animals a moral standing in the world begin with
the lack of expression argument. Animals, the reasoning goes, may display behaviors indicating an
awareness of the world and the ability to suffer, but that’s not enough to merit autonomous moral
standing. To truly have rights, they must be claimed. An explicit and demonstrated awareness must exist
of what ethics are, and why rules for action are attached to them. Without that, what separates animals
from a sunflower? Like dogs, sunflowers react to their environment; they bend and twist to face the sun.
Further, like dogs, sunflowers betray signs of suffering: when they don’t get enough water they shrivel.
Granting, finally, animals rights based on their displaying some reactions to their world isn’t enough to
earn a moral identity. Or if it is, then we end up in a silly situation where we have to grant sunflowers
moral autonomy. Finally, because animals can’t truly explain morality and demand rights, they have
none.
Another way to deny animal rights runs through the absence of duties argument. Since animals don’t
have duties, they can’t have rights. All ethics, the argument goes, is a two-way street. To have rights you
must also have responsibilities; to claim protection against injury from others, you must also display
consideration before injuring others. The first question to ask, consequently, in trying to determine
whether animals should have rights is whether they have or could have responsibilities. For the most part,
the answer seems to lean toward no. Were a bear to escape its enclosure in the zoo and attack a harmless
child, few would blame the bear in any moral sense; almost no one would believe the animal was guilty of
anything other than following its instincts. People don’t expect wild animals to distinguish between their
own interest and instinct on one side, and doing what’s right on the other. We don’t even expect that
they can do that, and if they can’t, then they can’t participate in an ethical world any more than trees and
other natural creatures that go through every day pursuing their own survival and little more.
The last argument against granting moral autonomy or value to animals is a suspicion of
anthropomorphism. Anthropomorphism is the attribution of human qualities to nonhuman things.
When we look at dogs and cats at home, or chimpanzees on TV, it’s difficult to miss the human
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resemblance, the blinking, alert eyes, and the legs stretching after a nap, the howls when you accidentally
step on a tail, the hunger for food, the thirst and need to drink. In all these ways, common animals are
very similar to humans. Given these indisputable similarities, it’s easy to imagine that others must exist
also. If animals look like we do (eyes, mouth, and nose), and if they eat and drink as we do, it’s natural to
assume they feel as we do: they suffer sadness and boredom; they need affection and are happy being
cuddled. And from there it’s natural to imagine that they think as we do, too. Not on the same level of
sophistication, but, yes, they feel loyalty and experience similar inclinations. All this is false reasoning,
however. Just because something looks human on the outside doesn’t mean it experiences some kind of
human sentiments on the inside. Dolls, for example, look human but feel nothing.
Transferring this possibility of drawing false conclusions from superficial resemblances over to the
question about animal rights, the suspicion is that people are getting fooled. Animals may react in ways
that look like pain to us but aren’t pain to them. Animals may appear to need affection and construct
relationships tinted with loyalty and some rudimentary morality, but all that may be just us imposing our
reality where it doesn’t actually exist. If that’s what’s happening, then animals shouldn’t have rights
because all the qualities those rights are based on—having interests, feeling pain and affection—are
invented for them by us.
Corresponding with this argument, it’s hard not to notice how quickly we rush to the defense of animals
that look cute and vaguely human, but few seem very enthusiastic about helping moles and catfish.
Dividing Questions about Animal Rights from Ones about Animal Suffering
The debate about whether animals should be understood as possessing rights within the ethical universe
is distinct from the one about whether they should be subjected to suffering. If animals do have rights,
then it quickly follows that their suffering should be objectionable. Even if animals aren’t granted any kind
of autonomous ethical existence, however, there remains a debate about the extent to which their
suffering should be considered acceptable.
Assuming some nonhuman animals do, in fact, suffer, there are two major business-related areas where
the suffering is especially notable:
Research
Consumer goods
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The case of research—especially medical and drug development—provides some obvious justification for
making animals suffer. One example involves a jaw implant brought to market by the firm Vitek. After
implantation in human patients, the device fragmented, causing extensive and painful problems. Later
studies indicated that had the implant been tested in animals first, the defect would’ve been discovered
and the human costs and pain avoided. [1]
From here, it’s easy to form an argument that if significant
human suffering can be avoided by imposing on animals, then the route should be followed. Certainly
many would be persuaded if it could be proven that the net animal suffering would be inferior to that
caused in humans. (As an amplifying note, some make the case that testing on humans can be justified
using the same reasoning: if imposing significant suffering on a few subjects will later help many cure a
serious disease, then the action should be taken.)
The case of animal testing in the name of perfecting consumer goods is less easily defended. A New York
Times story chronicles a dispute between the Perdue chicken company and a group of animal rights
activists. The activists got enough money together to purchase a newspaper ad decrying poultry farm
conditions. It portrayed chickens as crowded together so tightly that they end up fiercely attacking and
eating each other. Even when not fighting, they wallow in disease and convulse in mass
hysteria. [2]
Though Perdue denied the ad’s claims, many believe that animals of all kinds are subjected to
extreme pain in the name of producing everything from cosmetics, to dinner, to Spanish bullfights. When
animals are made to suffer for human comfort or pleasure—whether the result is nice makeup, or a tasty
veal dish, or an enthralling bullfight—two arguments quickly arise against subjecting animals to the
painful treatment. The utilitarian principle that pain in the world should be minimized may be applied.
Also, a duty to refrain from cruelty may be cited and found persuasive.
K E Y T A K E A W A Y S
Cognitive awareness and directed interest by animals may be sufficient to grant them autonomous
ethical rights.
Accepting that animals suffer may be sufficient to grant them autonomous ethical rights.
The fact that animals do not explicitly claim ethical rights may be sufficient to deny them those rights.
The fact that animals don’t have duties may be sufficient to deny them ethical rights.
Anthropomorphism may lead to erroneously seeing animals as possessing autonomous ethical value.
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The question about whether animal treatment causing suffering is ethically acceptable may be managed
independently of the question about whether animals possess rights.
R E V I E W Q U E S T I O N S
1. What are the basic steps of the cognitive awareness and interest argument?
2. What are the basic steps of the suffering argument?
3. What are the basic steps of the lack of expression argument?
4. What are the basic steps of the absence of duties argument?
5. What are the basic steps of the anthropomorphism suspicion argument?
6. In ethical terms, how is animal suffering for research reasons distinct from the suffering of a Spanish
bullfight?
[1] Lauren Myers, “Animal Testing Necessary in Medical Research,” Daily Wildcat, November 6, 2007, accessed
June 8, 2011, http://wildcat.arizona.edu/2.2255/animal-testing-necessary-in-medical-research-1.169288.
[2] Barnaby Feder, “Pressuring Perdue,” New York Times, November 26, 1989, accessed June 8,
2011, http://www.nytimes.com/1989/11/26/magazine/pressuring- perdue.html.
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14.5 Case Studies
Yahoo! Answers: Why Should We Save the Planet?
Some people argue that there’s no ethical requirement to protect the environment because the natural
world has no intrinsic value. Against that ethical posture, here are four broad justifications for
environmental protection. Each begins with a distinct and fundamental evaluation:
1. The environment should be protected in the name of serving human welfare, which is intrinsically
valuable.
2. The environment should be protected in the name of serving future generations because they’re valuable
and merit intergenerational fairness.
3. The environment should be protected to serve animal welfare because there’s an independent value in the
existence and lives of animals.
4. The entire environmental web should be protected for its own sake because the planet’s collection of
ecosystems is intrinsically valuable.
On a Yahoo! forum page, a student named redbeard_90 posts the question “why should we save the
planet?” and partially explains this way: “With the entire constant talk of ‘saving the planet’ and stopping
global warming, should we actually try to stop it? Perhaps in a way, this is humans transforming the
planet to better suit us?” [1]
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Q U E S T I O N S
1. It sounds like redbeard_90 might think that humans doing damage to the environment is OK
because it’s just a symptom of “humans transforming the planet to better suit us.”
o Where is redbeard_90 placing value?
o What might redbeard_90’s attitude be toward the free use conception of the human relation
with the environment?
o What is the domination and progress argument against worrying about saving the planet? How
could that argument fit together with what redbeard_90 wrote?
2. The response by a woman named Super Nova includes this reasoning: “We should try to save
the planet because there would be less people with health problems. Did you know that there
are more people with respiratory problems because of all the air pollution contributing to it?
Also, we should think about future generations on Earth and how it would affect our future.
Also, global warming is affecting our essential natural resources like food and lakes are drying up
and it is causing more droughts in the world.”
The overall tone of her answer is strong with conviction.
o It sounds like Super Nova wants to save the planet. What values sit underneath her desire? Why
does she think environmental protection is important?
o Does it sound like she believes nature in itself has value? Why or why not?
3. The poster named Luke writes an animated response, including these sentences:
The first thing we need to do is help make some changes in our national mind set from
one that lets us believe that our earth can recover from anything, to one that lets us
believe that our earth could use a little help.
Developing cleaner ways to produce electricity is not going to hurt a thing; if it does
nothing but make the air we breathe cleaner it works for me.
Developing alternative fuels to power our transportation needs, again won’t hurt a thing,
reduce the demand for oil you reduce the price we pay for it, I think everyone can say
“that works for me” to this.
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I’m a global warming advocate but, not because of some unfounded fear of Doomsday
but (as you may have guessed by now) because it won’t hurt a thing to help our earth
recover from years of industrial plunder.
o Some people are worried about human welfare, some people care a lot about the welfare of the
planet, some people mix a little of both. Where would you say Luke comes down? Justify by
specific reference to his words.
o Some people who are concerned about the earth’s welfare are most interested in helping
nonhuman animals; others are more interested in the natural world in its totality. Where would
you say Luke comes down here? Why?
o Environmental conservation efforts can be conservative in the sense that they try to undo
damage to the earth by limiting industrialization. The idea of environmental protection leaves
open the possibility of using industrial advances—the same forces that have been contaminating
the earth—to help resolve the problem. Does Luke sound more like a conservationist or a
protector? Explain.
4. The poster named scottsdalehigh64 is the most intense. He’s also fairly experienced: assuming
his username is true and he graduated high school in 1964, he’s about retirement age now. He
writes, “There is an alternate question: Why do we think we have a right to be so destructive to
other life forms on the planet? Perhaps the best answer is that we want to leave a good place to
live for the species that are left when we go extinct.”
Unlike most of the other posters, he doesn’t include any personal note or “best wishes” type
line in his response. He’s focused and intense.
o How much value does scottsdalehigh64 place in human existence?
o Where does he place value? What does scottsdalehigh64 think is worth aiding and protecting?
o Just from his words, how do you imagine scottsdalehigh64 would define “a good place to live?”
5. Scottsdalehigh64 doesn’t seem to like those who are “destructive to other life forms on the
planet.”
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o Could an argument be built that, in preparing for our own eventual extinction, we should make
sure that we eliminate all life-forms that are destructive to other life forms? What would that
elimination mean? What would need to be done? How could it be justified?
o In a newspaper column, the philosopher Jeff McMahan appears to tentatively endorse
scottsdalehigh64’s vision. He proposes that we “arrange the gradual extinction of carnivorous
species, replacing them with new herbivorous ones.” [2]
If, in fact, we decided to wipe out meat-
eating animals and leave the world to plants and plant eaters, would we be valuing most highly
ourselves? Nonhuman animals? The entire natural world? Something else? Explain your
response.
6. An excited poster, KiRa01, announces, “Just live like there’s no tomorrow!!!!”
With respect to the environment, justify his attitude in ethical terms.
Going Green
Fifty years ago airports were designed to reward fliers with architecture as striking as the new experience
of flight was rare and exciting. From those early days, only a few airports remain unspoiled by renovation
and expansion. The Long Beach Airport south of Los Angeles is a survivor. The low lines of midcentury
modern architecture captivate today’s visitors just as they did the first ones. The restaurant overlooking
the tarmac remains as elegant and perfectly simple as always. Walking the concourse, it’s easy to imagine
men in ties and women and children in their Sunday clothes waiting for a plane while uniformed porters
manage their suitcases.
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Flying is different today—no longer exciting and rare, it’s just frustrating and crowded. Recognizing that
reality, when the large European nations combined to form an airplane manufacturer, they didn’t choose
a distinguished and elevated name for their enterprise, they just called it Airbus: a company that makes
buses that happen to go up and down.
Airplanes are tremendously polluting. In the United States, large passenger flights account for about 3
percent of released greenhouse gasses. That doesn’t sound like much, but when you compare the number
of flights with car trips, it’s clear that each airplane is billowing massive carbon dioxide. And the problem
is only getting worse, at least on the tourism front. Over the course of the next decade, global tourism will
double to about 1.6 billion people annually.
Tourists aren’t the only fliers. Planes are also taken by people heading to other cities to talk about tourism.
One of them, Achim Steiner, is the executive director of the United Nations Environment Program. At a
recent conference in Spain, he said, “Tourism is an extraordinary growth industry, it’s the responsibility of
operators—from hoteliers to travel companies—as well as governments to ensure that sites are
sustainable.” [3]
Sustainability has at least two sides. On one side, there’s the economic reality: revenue provided by
visitors pays for needed services. An example comes from the Masai Mara park reserve in Kenya. In
villages surrounding the park, schools were forced to close when political unrest scared away the tourists
and their money. On the other side, sustainability also means environmental protection. According to
Steiner, there’s the possibility that “Masai Mara could be overused to the point where it loses its value.”
Q U E S T I O N S
1. According to Steiner, “Hoteliers, travel companies, and governments are responsible” for
ensuring the sustainability of sites including Masai Mara. In most discussions about paying the
costs of a clean environment, three groups are signaled:
o Those who contaminate the natural world
o Those who enjoy the natural world
o Those who are most able to pay
How do each of these three fit into Steiner’s vision?
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2. Airplane exhaust contributes significantly to the damage currently being done to the
environment. Steiner rode an airplane to a city to talk about that damage.
o What is a cost-benefit analysis?
o How could a cost-benefit analysis be used to show that his boarding the plane and going was
actually an environmentally respectable act?
3. Fifty years ago, airplanes contributed almost no pollution to the environment because so few
could afford to fly. One way to limit the amount of pollution into the air is through incentives. In
the airplane case, a large tax could be attached to an airline ticket, thus providing an incentive to
tourists to stay home or use alternate sources of transportation. Of course, for the very wealthy,
the tax will be more absorbable and, presumably, airplane travel would tend toward its origins:
flying would be something the rich do.
How could a utilitarian analysis be used to justify the action of, in essence, reserving plane flying
for the rich in the name of helping the environment?
4. The airport at Long Beach is a low-ranking historical treasure. Tourists will never flock to see it,
but it does incarnate and vivify a time in the recent past. The airport at Long Beach is also a
business. That may lead its directors to initiate remodeling and expansion plans that will destroy
the airport’s original essence.
o Is preserving the natural world like the preservation of a historical architectural treasure? If so,
why? If not, why not?
o Using standard arguments against the business responsibility to preserve the natural world (free
use, domination and progress, geological time), make the case that progress should be allowed
to destroy the Long Beach Airport’s historical authenticity if that course of action is profitable.
o Using standard arguments in favor of the business responsibility to preserve the natural world
(preservation for human welfare, for future generations, for the sake of the thing itself), make
the case that the Long Beach Airport should be preserved.
o If the airport is preserved, who should pay? Why?
5. In ethical terms, make the case that it’s more important to preserve the Masai Mara park reserve in
Kenya than the Long Beach Airport.
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IBM and IBM
Bernadette Patrick moved away from her home in Endicott, New York, saying this about the town: “It was
very neighborly and well kept, with lots of kids and families. Then all of a sudden it seemed like they put a
skull and crossbones on all the doors. It was like a scene from a science fiction movie.” [4]
The science fiction part is the large, white metal boxes attached to Endicott homes. With tubes burrowing
down in the earth and shooting up high into the air, they’re wired to pump air from below and jet it above.
The idea is to disperse toxic vapors rising up through the ground. The vapor’s source is industrial solvents
poured down drains and dripped out of leaky pipes at the local IBM factory over the course of its seventy-
five-year history.
Those seventy-five years have otherwise been good ones. IBM money and jobs drove the small town
forward. As Wanda Hudak put it, “The IBM plant paid for a lot of college educations and cottages at Perch
Pond.” [5]
The good feelings ended when a company IBM hired started showing up at people’s homes to
test the air and offer to install the mechanical ventilation systems.
Q U E S T I O N S
1. IBM is paying millions for cleanup efforts. They’re installing air cleaners on homes and pumping
contaminated groundwater to the surface for safe disposal. An IBM spokesman said this about
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the toxic pollution, “None of it was done intentionally, but we still are sticking around to take
care of it. We feel obligated legally, ethically. We are not going anywhere.” [6]
o Make the ethical case that those who contaminated the environment—IBM—should pay all the
cleanup costs.
o Make the case that those who benefit from a clean environment—the locals who work at the
company and those who don’t—should pay for the cleanup.
2. When the extent of the environmental pollution became clear, it was also evident that the cleanup
would be tremendously expensive. In general terms, how could a cost-benefit analysis be mounted to
decide between going forward with the environmental cleanup or closing the factory, shuttering the
town, and moving on?
3. One critical element of the notion of corporate social responsibility is the idea of sustainability.
o In both environmental and economic senses, what is sustainability?
o What would be sustained by a cleanup in this case? How?
4. One critical element of the notion of corporate social responsibility is the idea of stakeholder
theory.
o Who are the obvious stakeholders in this case?
o Thinking about the situation from the directorship of IBM, what are the company’s
responsibilities to each of the stakeholders?
5. The IBM of Endicott, New York, is an IBM of the past, one focused on factories and making
business machines like typewriters and photocopiers. The IBM of today leaves most hard
manufacturing to foreign firms in low-cost countries. What IBM now wants to do now, according
to their advertising, is “build a smarter planet.” That means solving problems like this one
reported by CNN:
Stockholm bogs down in rush-hour traffic. A series of bridges connecting Sweden’s capital
creates bottlenecks that cause gridlock and air pollution, waste millions of gallons of fuel,
hamper public transportation, and endanger pedestrians. [7]
The solution? Swede governmental officers decided on a congestion fee, on charging vehicles
money for entering the city at peak traffic times. The aim was to seriously reduce the number of
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cars downtown at rush hours. That’s easier said than done, however. Stopping people at toll
booths would just make the problem worse: it would add yet another air-polluting stop to the
traffic through town. So IBM was hired to produce camera technology allowing license plate
numbers to be recorded and recognized automatically. Then monthly bills were generated and
mailed out to the car owners. As CNN reported, these were the results:
Traffic fell 35 percent almost immediately and stayed down 22 percent—and not just at
peak times or solely downtown. Emissions also dropped by 14 percent. The streets
became more pedestrian friendly, and the buses began finishing their routes so quickly
that the city had to rewrite the schedules. The fee schedule makes it obvious when traffic
will be the worst, so drivers who trek in during peak hours know they’ll pay more for what
will probably be a maddening experience. As a result, people seem to be cutting out
unnecessary trips: bundling afterschool pickups, say, with visits to the grocery store. In
short, Swedes are driving smarter. [8]
When IBM protects the environment by cleaning up Endicott, they’re losing money; when IBM
protects the environment by selling smart systems to the Swedes, they’re profiting.
o Make the case that, ethically, IBM’s actions in Endicott are nobler than the actions in Sweden.
o Make the case that, ethically, IBM’s actions in Sweden are nobler than the actions in Endicott.
6. In the world of business ethics and the environment, one of the more spirited debates is this:
should we slow down technology and industrialization to use less and pollute less, or speed up
industrialization and technology in the hope that we’ll discover solutions to the environmental
problems caused by industrialization and technology?
o How does the case of IBM incarnate that debate?
o Does the decision about where you come down depend on where you place value (human
welfare versus environmental welfare)? Explain.
7. With respect to the environment and money, there are two formulas for thinking about IBM’s
project in Sweden:
a. The aim was to clean up the environment, and money happened to be made along
the way.
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b. The aim was to make money, and cleaning up the environment happened to be a good strategy
for profit.
In terms of basic values and ethics, outline the difference between these two visions.
Thinking about ethics and IBM in Endicott and in Sweden, what’s more important: the intentions of
a company when it acts, or the consequences of the actions? Explain.
Windmills and Condors
The wind farms of Northern California produce clean electricity. Every light bulb illuminated by the giant
turbines represents less destruction of the earth by mining and drilling operations and less contamination
of the air by coal- and oil-fired power plants. It also represents fewer California Condors.
The spinning blades of the windmills erected in spots including the Altamont Pass are proving deadly for
the rare birds, which are a kind of vulture. Here’s a reaction by the environmental writer and activist Jim
Wiegand: “For all the ‘green energy’ believers out there, this is a video you have to see. Each year across
America thousands of eagles, hawks, owls, falcons, vultures and condors perish at green energy wind
farms. This video will open your eyes and your mind when you see how easily a soaring vulture is smashed
by the innocent looking blades of a prop wind turbine.” [9]
Fatal Accident with Vulture on a Windmill
The video shows a large and calm vulture cycling slowly around a modern wind turbine and then getting
struck by one of the spinning blades. The bird drops out of the air. Left on the ground beside the towering
contraption, it drags and struggles to flap its broken wing.
Imag e rem
oved due
to c opyr
ight issue
s.
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Q U E S T I O N S
1. Unlike single-cell creatures, vultures seem to have awareness and interest in their environment.
They notice distressed animals, circle patiently, and in the end descend to eat the carcass.
o How can this behavior be translated into an argument that animals have ethical rights?
o How can the claim that aware and interested vultures have independent ethical rights be
mustered into an argument against installing wind turbines in areas that threaten vultures, no
matter how much clean electrical energy they may generate?
2. If you have a chance to see the video and watch the fallen bird struggling and dying on the
ground, do the images change your feelings about the importance of protecting this creature?
o Assume the bird writhing on the ground is, in fact, suffering in a way not completely unlike
human suffering. How can this behavior be translated into an argument that animals have
ethical rights?
o Make the case that the video doesn’t allow the conclusion that birds suffer.
3. Assume that, for whatever reason, you’re convinced that those condors being cut down by
California wind turbines have ethical rights comparable with the ones we deposit in human
animals. Can you nonetheless outline an argument in favor of continued windmill use because of
the clean energy it provides?
o Make your case by appeal to a utilitarian argument.
o Make your case by appeal to a cost-benefit analysis.
o Make your case by appealing to the idea that the environment should be protected in its
entirety because, as an interlocked set of ecosystems, it holds autonomous value.
4. If you can make the case that some nonhuman animals that have autonomous ethical rights should be
allowed to meet their end in the name of clean energy, could you make the same argument for human
animals? Imagine, for example, that actually constructing these wind turbines leads to high worker
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fatalities, say, 10 times higher than any other kind of work. Could those deaths be justified ethically in
the name of clean energy? Why or why not?
The PETA Homepage
People for the Ethical Treatment of Animals are possibly the most active animal-rights organization in the
United States. On the day this case study was written, the organization’s home page featured pictures of a
sad-eyed Dalmatian, a noble elephant, and a cuddly rabbit. There was also a tease to a story set
underneath a picture of smiling, former President Clinton. It read, “What’s the secret behind this former
president’s newly trim waistline, enhanced energy, and improved cardiovascular health? A vegan diet!
Read more.” [10]
Q U E S T I O N S
1. A vegan diet excludes all products derived from animals and promotes plant-based eating. In this PETA
ad, what values probably underlie the strategy (is the appeal to protect animals made in the name of
human welfare, animal welfare, or general environmental welfare)? Justify.
2. What is anthropomorphism? How could the phenomenon of anthropomorphism lead someone to posit
autonomous ethical dignity, and rights, in nonhuman animals that really shouldn’t be considered worth
protecting any more than trees?
Ima ge r
emo ved
due to co
pyri ght
issu es.
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3. From the description provided of the PETA home page, how could it be described as inviting
anthropomorphism?
4. Were you in charge at PETA, an organization fighting for animal an right that depends on
donations, would you use the phenomenon of anthropomorphism to boost your organization’s
revenue?
o What is an argument in favor of the strategy?
o What is an argument against the strategy?
[1] “Why Should We Save the Planet?,” Yahoo! Answers, accessed June 8,
2011,http://answers.yahoo.com/question/index?qid=20080610193018AA7IQt2.
[2] Jeff McMahan, “The Meat Eaters,” New York Times, September 19, 2010, accessed June 8,
2011, http://opinionator.blogs.nytimes.com/2010/09/19/the-meat-eaters.
[3] James Kanter, “How Do You Measure Green Tourism?,” New York Times, October 6, 2008, accessed June 8,
2011, http://green.blogs.nytimes.com/2008/10/06/is-there-any-such-thing-as-green-tourism.
[4] Janet Gramza, “Life in the Plume: IBM’s Pollution Haunts a Village,” Post-Standard, January 11, 2009, accessed
June 8, 2011,http://www.syracuse.com/specialreports/index.ssf/2009/01/life_in_the_plume_ibms_polluti.html.
[5] Janet Gramza, “Life in the Plume: IBM’s Pollution Haunts a Village,” Post-Standard, January 11, 2009, accessed
June 8, 2011,http://www.syracuse.com/specialreports/index.ssf/2009/01/life_in_the_plume_ibms_polluti.html.
[6] Janet Gramza, “Life in the Plume: IBM’s Pollution Haunts a Village,” Post-Standard, January 11, 2009, accessed
June 8, 2011,http://www.syracuse.com/specialreports/index.ssf/2009/01/life_in_the_plume_ibms_polluti.html.
[7] Jeffrey M. O’Brien, “IBM’s Grand Plan to Save the Planet,” CNN Money, April 21, 2009, accessed June 8,
2011,http://money.cnn.com/2009/04/20/technology/obrien_ibm.fortune/index.htm.
[8] Jeffrey M. O’Brien, “IBM’s Grand Plan to Save the Planet,” CNN Money, April 21, 2009, accessed June 8,
2011,http://money.cnn.com/2009/04/20/technology/obrien_ibm.fortune/index.htm
[9] C. Taibibi, “California Condors, Wind Farms on Collision Course,” Examiner.com, August 30, 2009, accessed June
8, 2011, http://www.examiner.com/wildlife-conservation-in-national/california-condors-wind-farms-on-collision-
course.
Saylor URL: http://www.saylor.org/books Saylor.org 678
[10] Peta.org, “Try Bill Clinton's New Diet!,” accessed June 8,
2011,https://secure.peta.org/site/Advocacy?cmd=display&page=UserAction&id=3315.
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W
Our Columnists
How Did the F.A.A. Allow the Boeing 737 Max
to Fly?
By John Cassidy March 18, 2019
ith virtually every day that has passed since the crash of Ethiopian Airlines Flight 302, which killed a hundred and �fty-
seven people, more disturbing news has emerged. On Sunday, a spokesperson for Ethiopia’s ministry of transport said
that the black box that was recovered from the wreckage of Flight 302 indicated that “clear similarities were noted between
Since the Ethiopian Airlines Flight 302 crash, most of Boeing’s 737 Max planes have been grounded. Photograph by Uwe Deffner / Alamy
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Ethiopian Airlines Flight 302 and Indonesian Lion Air Flight 610,” which crashed last October, killing a hundred and eighty-
nine people.
The plane involved in the Lion Air tragedy was also a Boeing 737 Max 8, and investigators suspect that the cause of that crash was
a malfunctioning automated-�ight-control feature, which caused the aircraft’s nose to dip repeatedly during its initial ascent out of
the airport in Jakarta. The automated-�ight-control feature on the 737 Max, which is called a Maneuvering Characteristics
Augmentation System (����), was designed to prevent a high-speed stall. It works by tilting part of the horizontal stabilizer in
the tail of the plane, and investigators at the Ethiopian crash site have found physical evidence that this part of the plane was,
indeed, con�gured to dive.
Radar data has indicated that both planes jerked up and down in erratic fashion after takeoff. The captain of the Ethiopian
Airlines �ight reported a “�ight control” problem to the air-traffic control tower. Data from the black box of the Lion Air plane
showed that its pilots repeatedly pulled back on the control yoke to try to disengage the ���� and level the �ight path of the plane.
“The pilots fought continuously until the end of the �ight,” an official from the Indonesian National Transportation Safety
Committee said in November, after the plane’s black box was recovered.
This is all frightening enough, and it raises serious questions about why Boeing didn’t tell airlines and pilots much more about the
����—in particular, how to disengage it in an emergency—before the 737 Max was put into service, in 2017. Boeing has
delivered three hundred and seventy-six of these planes to airlines around the world. Practically all of them have now been
grounded out of safety concerns.
Boeing has promised a software �x to address some of the potential problems created by the ����. That’s too little, too late, of
course, and it doesn’t address the even larger issue of how the 737 Max was allowed to �y in the �rst place. On Sunday, the Seattle
Times, the home-town newspaper of Boeing’s commercial division, published the results of a lengthy investigation into the federal
certi�cation of the 737 Max. It found that the F.A.A. outsourced key elements of the certi�cation process to Boeing itself, and
that Boeing’s safety analysis of the new plane contained some serious �aws, including several relating to the ����.
The Boeing analysis “understated the power of the new �ight control system,” the Seattle Times article said. “When the planes
later entered service, ���� was capable of moving the tail more than four times farther than was stated in the initial safety analysis
document.” The Boeing analysis also “failed to account for how the system could reset itself each time a pilot responded, thereby
missing the potential impact of the system repeatedly pushing the airplane’s nose downward.”
In the case of the Lion Air �ight, investigators suspect the ���� was reacting to faulty data gathered from a single �ight sensor
mounted on the fuselage. According to the Seattle Times article, the Boeing analysis assessed the failure of the ���� system as “as
one level below ‘catastrophic.’ But even that ‘hazardous’ danger level should have precluded activation of the system based on input
from a single sensor—and yet that’s how it was designed.”
How can a manufacturer of something as complex and potentially dangerous as a passenger jet be allowed to play such a large role
in deciding whether its product is safe? It turns out that the F.A.A., with congressional approval, has “over the years delegated
increasing authority to Boeing to take on more of the work of certifying the safety of its own airplanes,” the Seattle Times said. In
the case of the 737 Max, which is a longer and more fuel-efficient version of previous 737s, Boeing was particularly eager to get
the plane into service quickly, so it could compete with Airbus’s new A320neo.
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Early on, employees of the F.A.A. and Boeing decided how to divide up the certi�cation work. But, partway through the process,
a former F.A.A. safety engineer told the Seattle Times, “we were asked by management to re-evaluate what would be delegated.
Management thought we had retained too much at the FAA.” The engineer said that “there was constant pressure to re-evaluate
our initial decisions,” and “even after we had reassessed it … there was continued discussion by management about delegating even
more items down to the Boeing Company.”
Even the work that was retained, such as reviewing technical documents provided by Boeing, was sometimes curtailed. “There
wasn’t a complete and proper review of the documents,” the former engineer added. “Review was rushed to reach certain
certi�cation dates.”
The new revelations don’t stop there. “Federal prosecutors and Department of Transportation officials are scrutinizing the
development of Boeing Co.’s 737 MAX jetliners,” the Wall Street Journal reported on Monday. “A grand jury in Washington, D.C.,
issued a broad subpoena dated March 11 to at least one person involved in the 737 MAX’s development, seeking related
documents, including correspondence, emails and other messages,” a source told the paper. (The Justice Department and
Department of Transportation declined to comment on the Journal ’s reporting.)
The criminal investigation began well before the crash of the Ethiopian Airlines Flight. It’s not clear yet whether it is focussing on
the ���� system, the report in the Journal said. But, that article added, “In the U.S., it is highly unusual for federal prosecutors to
investigate details of regulatory approval of commercial aircraft designs, or to use a criminal probe to delve into dealings between
the FAA and the largest aircraft manufacturer the agency oversees. Probes of airliner programs or alleged lapses in federal safety
oversight typically are handled as civil cases, often by the DOT inspector general.”
In a statement to the Seattle Times, Boeing said that the F.A.A. “considered the �nal con�guration and operating parameters of
MCAS during MAX certi�cation, and concluded that it met all certi�cation and regulatory requirements.” The F.A.A., in a
statement issued on Sunday, said that the “737 MAX certi�cation program followed the FAA’s standard certi�cation process.”
Given that two brand-new 737 Maxes have plunged to earth, befuddling their pilots and costing three hundred and forty-six
people their lives, these statements are hardly reassuring. We need to know a lot more about how the F.A.A. allowed this plane to
take to the air.
John Cassidy has been a staff writer at The New Yorker since 1995. He also writes a column about politics, economics, and more for newyorker.com.
More: Boeing Federal Aviation Administration Ethiopia Indonesia
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3.4 Global Business Ethics
L E A R N I N G O B J E C T I V E S
1. Define what global business ethics are, and discover how culture impacts business ethics.
2. Learn how ethical issues impact global business.
3. Iden�fy how companies develop, implement, and enforce ethical standards.
Chapter 1 "Introduction" provided a solid introduction to the concept of global ethics and business.
The relationship between ethics and international business is extensive and is impacted by local
perceptions, values, and beliefs.
Global Business Ethics
The field of ethics is a branch of philosophy that seeks to address questions about morality—that is,
about concepts such as good and bad, right and wrong, justice, and virtue.Wikipedia s.v. “ethics,” last
modified February 13, 2011, accessed February 22, 2011, http://en.wikipedia.org/wiki/Ethics. Ethics
impacts many fields—not just business—including medicine, government, and science, to name a few.
We must first try to understand the “origins of ethics—whether they come from religion, philosophy,
the laws of nature, scientific study, study of political theory relating to ethical norms created in society
or other fields of knowledge.”Wallace R. Baker, “A Reflection on Business Ethics: Implications for the
United Nations Global Compact and Social Engagement and for Academic Research,” April 2007,
accessed February 22, 2011,
http://portal.unesco.org/education/en/files/53748/11840802765Baker.pdf/Baker.pdf. The
description below on the field of ethics shows how people think about ethics in stages, from where
ethical principles come from to how people should apply them to specific tasks or issues.
The field of ethics (or moral philosophy) involves systematizing, defending, and recommending
concepts of right and wrong behavior. Philosophers today usually divide ethical theories into three
general subject areas: metaethics, normative ethics, and applied ethics. Metaethics investigates where
our ethical principles come from, and what they mean. Are they merely social inventions? Do they
involve more than expressions of our individual emotions? Metaethical answers to these questions
focus on the issues of universal truths, the will of God, the role of reason in ethical judgments, and the
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meaning of ethical terms themselves. Normative ethics takes on a more practical task, which is to
arrive at moral standards that regulate right and wrong conduct. This may involve articulating the
good habits that we should acquire, the duties that we should follow, or the consequences of our
behavior on others. Finally, applied ethics involves examining specific controversial issues, such as…
animal rights, environmental concerns…capital punishment, or nuclear war.James Fieser, “Ethics,”
Internet Encyclopedia of Philosophy, last updated May 10, 2009, accessed February 22, 2011,
http://www.iep.utm.edu/ethics.
This approach will be used in this chapter to help you understand global business ethics in a modern
and current sense. As with this chapter’s review of culture, this section on global business ethics is
less about providing you with a tangible list of dos and don’ts than it is about helping you understand
the thinking and critical issues that global managers must deal with on an operational and strategic
basis.
Where Do Our Values Come From?
Just as people look to history to understand political, technical, and social changes, so too do they
look for changes in thinking and philosophy. There’s a history to how thinking has evolved over time.
What may or may not have been acceptable just a hundred years ago may be very different today—
from how people present themselves and how they act and interact to customs, values, and beliefs.
Ethics can be defined as a system of moral standards or values. You know from the discussion in
Section 3.1 "What Is Culture, Anyhow? Values, Customs, and Language" that cultural programming
influences our values. A sense of ethics is determined by a number of social, cultural, and religious
factors; this sense influences us beginning early in childhood. People are taught how to behave by
their families, exposure to education and thinking, and the society in which they live. Ethical behavior
also refers to behavior that is generally accepted within a specific culture. Some behaviors are
universally accepted—for example, people shouldn’t physically hurt other people. Other actions are
less clear, such as discrimination based on age, race, gender, or ethnicity.
Culture impacts how local values influence global business ethics. There are differences in how much
importance cultures place on specific ethical behaviors. For example, bribery remains widespread in
many countries, and while people may not approve of it, they accept it as a necessity of daily life. Each
professional is influenced by the values, social programming, and experiences encountered from
childhood on. These collective factors impact how a person perceives an issue and the related correct
or incorrect behaviors. Even within a specific culture, individuals have different ideas of what
constitutes ethical or unethical behavior. Judgments may differ greatly depending on an individual’s
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social or economic standing, education, and experiences with other cultures and beliefs. Just as in the
example of bribery, it should be noted that there is a difference between ethical behavior and normal
practice. It may be acceptable to discriminate in certain cultures, even if the people in that society
know that it is not right or fair. In global business ethics, people try to understand what the ethical
action is and what the normal practice might be. If these are not consistent, the focus is placed on how
to encourage ethical actions.
While it’s clear that ethics is not religion, values based on religious teachings have influenced our
understanding of ethical behavior. Given the influence of Western thought and philosophy over the
world in the last few centuries, many would say that global business has been heavily impacted by the
mode of thinking that began with the Reformation and post-Enlightenment values, which placed
focus on equality and individual rights. In this mode of thinking, it has become accepted that all
people in any country and of any background are equal and should have equal opportunity.
Companies incorporate this principle in their employment, management, and operational guidelines;
yet enforcing it in global operations can be both tricky and inconsistent.
Did You Know?
What Are the Reformation and Enlightenment?
Modern political and economic philosophies trace their roots back to the Reformation and
Enlightenment. The Reformation was a period of European history in the sixteenth century when
Protestant thinkers, led by Martin Luther, challenged the teachings of the Roman Catholic
Church. As a result of the Reformation, the Catholic Church lost its control over all scientific and
intellectual thought. While there were a number of debates and discussions over the ensuing
decades and century, the Reformation is widely believed to have led to another historical period
called the Age of Enlightenment, which refers to a period in Western philosophical, intellectual,
scientific, and cultural life in the eighteenth century. The Enlightenment, as it is commonly
called, promoted a set of values in which reason, not religion, was advocated as the primary
source for legitimacy and authority. As a result, it is also known as the Age of Reason.
It’s important to understand the impact and influence of these two critical historical periods on
our modern sense of global business ethics. The prevailing corporate values—including those of
institutional and individual equality; the right of every employee to work hard and reap the
rewards, financial and nonfinancial; corporate social responsibility; and the application of science
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and reason to all management and operational processes—have their roots in the thoughts and
values that arose during these periods.
Impact of Ethics on Global Business
At first, it may seem relatively easy to identify unethical behavior. When the topic of business ethics is
raised, most people immediately focus on corruption and bribery. While this is a critical result of
unethical behavior, the concept of business ethics and—in the context of this book—global business
ethics is much broader. It impacts human resources, social responsibility, and the environment. The
areas of business impacted by global perceptions of ethical, moral, and socially responsible behavior
include the following:
Ethics and management
Ethics and corruption
Corporate social responsibility
Ethics and Management Prac�ces
Ethics impacts various aspects of management and operations, including human resources,
marketing, research and development, and even the corporate mission.
The role of ethics in management practices, particularly those practices involving human resources
and employment, differs from culture to culture. Local culture impacts the way people view the
employee-employer relationship. In many cultures, there are no clear social rules preventing
discrimination against people based on age, race, gender, sexual preference, handicap, and so on.
Even when there are formal rules or laws against discrimination, they may not be enforced, as normal
practice may allow people and companies to act in accordance with local cultural and social practices.
Culture can impact how people see the role of one another in the workplace. For example, gender
issues are at times impacted by local perceptions of women in the workplace. So how do companies
handle local customs and values for the treatment of women in the workplace? If you’re a senior
officer of an American company, do you send a woman to Saudi Arabia or Afghanistan to negotiate
with government officials or manage the local office? Does it matter what your industry is or if your
firm is the seller or buyer? In theory, most global firms have clear guidelines articulating
antidiscrimination policies. In reality, global businesses routinely self-censor. Companies often
determine whether a person—based on their gender, ethnicity, or race—can be effective in a specific
culture based on the prevailing values in that culture. The largest and most respected global
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companies, typically the Fortune Global 500, can often make management and employment decisions
regardless of local practices. Most people in each country will want to deal with these large and well-
respected companies. The person representing the larger company brings the clout of their company
to any business interaction. In contrast, lesser-known, midsize, and smaller companies may find that
who their representative is will be more important. Often lacking business recognition in the
marketplace, these smaller and midsize companies have to rely on their corporate representatives to
create the professional image and bond with their in-country counterparts.
Cultural norms may make life difficult for the company as well as the employee. In some cultures,
companies are seen as “guardians” or paternal figures. Any efforts to lay off or fire employees may be
perceived as culturally unethical. In Japan, where lifelong loyalty to the company was expected in
return for lifelong employment, the decade-long recession beginning in the 1990s triggered a change
in attitude. Japanese companies finally began to alter this ethical perception and lay off workers
without being perceived as unethical.
Global corporations are increasingly trying to market their products based not only on the desirability
of the goods but also on their social and environmental merits. Companies whose practices are
considered unethical may find their global performance impacted when people boycott their products.
Most corporations understand this risk. However, ethical questions have grown increasingly
complicated, and the “correct” or ethical choice has, in some cases, become difficult to define.
For example, the pharmaceutical industry is involved in a number of issues that have medical
ethicists squirming. First, there’s the well-publicized issue of cloning. No matter what choice the
companies make about cloning, they are sure to offend a great many consumers. At the same time,
pharmaceutical companies must decide whether to forfeit profits and give away free drugs or cheaper
medicines to impoverished African nations. Pharmaceutical companies that do donate medicines
often promote this practice in their corporate marketing campaigns in hopes that consumers see the
companies in a favorable light.
Tobacco companies are similarly embroiled in a long-term ethical debate. Health advocates around
the world agree that smoking is bad for a person’s long-term health. Yet in many countries, smoking
is not only acceptable but can even confer social status. The United States has banned tobacco
companies from adopting marketing practices that target young consumers by exploiting tobacco’s
social cache. However, many other countries don’t have such regulations. Should tobacco companies
be held responsible for knowingly marketing harmful products to younger audiences in other
countries?
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Ethics and Corrup�on
To begin our discussion of corruption, let’s first define it in a business context. Corruption is “giving
or obtaining advantage through means which are illegitimate, immoral, and/or inconsistent with
one’s duty or the rights of others. Corruption often results from patronage.”BusinessDictionary.com,
s.v. “corruption,” accessed January 9, 2011,
http://www.businessdictionary.com/definition/corruption.html.
Our modern understanding of business ethics notes that following culturally accepted norms is not
always the ethical choice. What may be acceptable at certain points in history, such as racism or
sexism, became unacceptable with the further development of society’s mind-set. What happens when
cultures change but business practices don’t? Does that behavior become unethical, and is the person
engaged in the behavior unethical? In some cultures, there may be conflicts with global business
practices, such as in the area of gift giving, which has evolved into bribery—a form of corruption.
Paying bribes is relatively common in many countries, and bribes often take the form of grease
payments, which are small inducements intended to expedite decisions and transactions. In India
and Mexico, for example, a grease payment may help get your phones installed faster—at home or at
work. Transparency International tracks illicit behavior, such as bribery and embezzlement, in the
public sector in 180 countries by surveying international business executives. It assigns a CPI
(Corruption Perceptions Index) rating to each country. New Zealand, Denmark, Singapore, and
Sweden have the lowest levels of corruption, while the highest levels of corruption are seen in most
African nations, Russia, Myanmar, and Afghanistan.Transparency International, “Corruption
Perceptions Index 2010,” accessed February 22, 2011,
http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results.
Even the most respected of global companies has found itself on the wrong side of the ethics issue and
the law. In 2008, after years of investigation, Siemens agreed to pay more than 1.34 billion euros in
fines to American and European authorities to settle charges that it routinely used bribes and slush
funds to secure huge public-works contracts around the world. “Officials said that Siemens, beginning
in the mid-1990s, used bribes and kickbacks to foreign officials to secure government contracts for
projects like a national identity card project in Argentina, mass transit work in Venezuela, a
nationwide cell phone network in Bangladesh and a United Nations oil-for-food program in Iraq
under Saddam Hussein. ‘Their actions were not an anomaly,’ said Joseph Persichini Jr., the head of
the Washington office of the Federal Bureau of Investigation. ‘They were standard operating
procedures for corporate executives who viewed bribery as a business strategy.’”Eric Lichtblau and
Carter Dougherty, “Siemens to Pay $1.34 Billion in Fines,” New York Times, December 15, 2008,
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accessed February 22, 2011,
http://www.nytimes.com/2008/12/16/business/worldbusiness/16siemens.html.
Ethics in Ac�on
Each year Transparency International analyzes trends in global corruption. The following is an
excerpt from their 2010 Global Corruption Barometer report.
“Corruption has increased over the last three years, say six out of 10 people around the world.
One in four people report paying bribes in the last year. These are the findings of the 2010 Global
Corruption Barometer.
The 2010 Barometer captures the experiences and views of more than 91,500 people in 86
countries and territories, making it the only world-wide public opinion survey on corruption.
Views on corruption were most negative in Western Europe and North America, where 73 per
cent and 67 per cent of people respectively thought corruption had increased over the last three
years.
“The fall-out of the financial crises continues to affect people’s opinions of corruption, particular
in North America and Western Europe. Institutions everywhere must be resolute in their efforts
to restore good governance and trust,” said Huguette Labelle, Chair of Transparency
International.
In the past 12 months one in four people reported paying a bribe to one of nine institutions and
services, from health to education to tax authorities. The police are cited as being the most
frequent recipient of bribes, according to those surveyed. About 30 per cent of those who had
contact with the police reported having paid a bribe.
More than 20 countries have reported significant increases in petty bribery since 2006. The
biggest increases were in Chile, Colombia, Kenya, FYR Macedonia, Nigeria, Poland, Russia,
Senegal and Thailand. More than one in two people in Sub-Saharan Africa reported paying a
bribe—more than anywhere else in the world.
Poorer people are twice as likely to pay bribes for basic services, such as education, than wealthier
people. A third of all people under the age of 30 reported paying a bribe in the past 12 months,
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compared to less than one in five people aged 51 years and over.
Most worrying is the fact that bribes to the police have almost doubled since 2006, and more
people report paying bribes to the judiciary and for registry and permit services than five years
ago.
Sadly, few people trust their governments or politicians. Eight out of 10 say political parties are
corrupt or extremely corrupt, while half the people questioned say their government’s action to
stop corruption is ineffective.
“The message from the 2010 Barometer is that corruption is insidious. It makes people lose faith.
The good news is that people are ready to act,” said Labelle. “Public engagement in the fight
against corruption will force those in authority to act—and will give people further courage to
speak out and stand up for a cleaner, more transparent world.”Transparency International,
“Global Corruption Barometer 2010,” accessed February 22, 2011,
http://www.transparency.org/policy_research/surveys_indices/gcb/2010.
Gift giving in the global business world is used to establish or pay respects to a relationship. Bribery,
on the other hand, is more commonly considered the practice in which an individual would benefit
with little or no benefit to the company. It’s usually paid in relation to winning a business deal,
whereas gift giving is more likely to be ingrained in the culture and not associated with winning a
specific piece of business. Bribery, usually in the form of a cash payment, has reached such high
proportions in some countries that even locals express disgust with the corruption and its impact on
daily life for businesses and consumers.
The practice of using connections to advance business interests exists in just about every country in
the world. However, the extent and manner in which it is institutionalized differs from culture to
culture.
In Western countries, connections are viewed informally and sometimes even with a negative
connotation. In the United States and other similar countries, professionals prefer to imply that they
have achieved success on their own merits and without any connections. Gift giving is not routine in
the United States except during the winter holidays, and even then gift giving involves a modest
expression. Businesses operating in the United States send modest gifts or cards to their customers to
thank them for business loyalty in the previous year. Certain industries, such as finance, even set clear
legal guidelines restricting the value of gifts, typically a maximum of $100.
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In contrast, Asian, Latin American, and Middle Eastern cultures are quick to value connections and
relationships and view them quite positively. Connections are considered essential for success. In
Asia, gift giving is so ingrained in the culture, particularly in Japan and China, that it is formalized
and structured.
For example, gift giving in Japan was for centuries an established practice in society and is still taken
seriously. There are specific guidelines for gift giving depending on the identity of the giver or
recipient, the length of the business relationship, and the number of gifts exchanged. The Japanese
may give gifts out of a sense of obligation and duty as well as to convey feelings such as gratitude and
regret. Therefore, much care is given to the appropriateness of the gift as well as to its aesthetic
beauty. Gift giving has always been widespread in Japan.
Today there are still business gift-giving occasions in Japan, specifically oseibo (year’s end) and
ochugen (midsummer). These are must-give occasions for Japanese businesses. Oseibo gifts are
presented in the first half of December as a token of gratitude for earlier favors and loyalty. This is a
good opportunity to thank clients for their business. Ochugen usually occurs in mid-July in Tokyo
and mid-August in some other regions. Originally an occasion to provide consolation to the families
of those who had died in the first half of the year, ochugen falls two weeks before obon, a holiday
honoring the dead.
Businesses operating in Japan at these times routinely exchange oseibo and ochugen gifts. While a
professional is not obligated to participate, it clearly earns goodwill. At the most senior levels, it is not
uncommon for people to exchange gifts worth $300 or $400. There is an established price level that
one should pay for each corporate level.
Despite these guidelines, gift giving in Japan has occasionally crossed over into bribery. This level of
corruption became more apparent in the 1980s as transparency in global business gained media
attention. Asians tend to take a very different view of accountability than most Westerners. In the
1980s and 1990s, several Japanese CEOs resigned in order to apologize and take responsibility for
their companies’ practices, even when they did not personally engage in the offending practices. This
has become an accepted managerial practice in an effort to preserve the honor of the company. While
Japanese CEOs may not step down as quickly as in the past, the notion of honor remains an
important business characteristic.
Long an established form of relationship development in all business conducted in Asia, the Arab
world, and Africa, gift giving was clearly tipping into outright bribery. In the past two decades, many
countries have placed limits on the types and value of gifts while simultaneously banning bribery in
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any form. In the United States, companies must adhere to the Foreign Corrupt Practices Act, a federal
law that specifically bans any form of bribery. Even foreign companies that are either listed on an
American stock exchange or conduct business with the US government come under the purview of
this law.
There are still global firms that engage in questionable business gift giving; when caught, they face
fines and sanctions. But for the most part, firms continue with business as usual. Changing the
cultural practices of gift giving is an evolving process that will take time, government attention, and
more transparency in the awarding of global business contracts.
Companies and their employees routinely try to balance ethical behavior with business interests.
While corruption is now widely viewed as unethical, firms still lose business to companies that may be
less diligent in adhering to this principle. While the media covers stories of firms that have breached
this ethical conduct, the misconduct of many more companies goes undetected. Businesses, business
schools, and governments are increasingly making efforts to deter firms and professionals from
making and taking bribes. There are still countless less visible gestures that some would argue are
also unethical. For example, imagine that an employee works at a firm that wants to land a contract in
China. A key government official in China finds out that you went to the business school that his
daughter really wants to attend. He asks you to help her in the admission process. Do you? Should
you? Is this just a nice thing to do, or is it a potential conflict of interest if you think the official will
view your company more favorably? This is a gray area of global business ethics. Interestingly, a
professional’s answer to this situation may depend on his or her culture. Cultures that have clear
guidelines for right and wrong behavior may see this situation differently than a culture in which
doing favors is part of the normal practice. A company may declare this inappropriate behavior, but
employees may still do what they think is best for their jobs. Cultures that have a higher tolerance for
ambiguity, as this chapter discusses, may find it easier to navigate the gray areas of ethics—when it is
not so clear.
Most people agree that bribery in any form only increases the cost of doing business—a cost that is
either absorbed by the company or eventually passed on to the buyer or consumer in some form.
While businesses agree that corruption is costly and undesirable, losing profitable business
opportunities to firms that are less ethically motivated can be just as devastating to the bottom line.
Until governments in every country consistently monitor and enforce anticorruption laws, bribery will
remain a real and very challenging issue for global businesses.
Corporate Social Responsibility
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Corporate social responsibility (CSR) is defined as “the corporate conscience, citizenship, social
performance, or sustainable responsible business, and is a form of corporate self-regulation
integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism
whereby business monitors and ensures its active compliance with the spirit of the law, ethical
standards, and international norms.”Wikipedia, s.v. “Corporate social responsibility,” last modified
February 17, 2011, accessed February 22, 2011,
http://en.wikipedia.org/wiki/Corporate_social_responsibility.
CSR emerged more than three decades ago, and it has gained increasing strength over time as
companies seek to generate goodwill with their employees, customers, and stakeholders. “Corporate
social responsibility encompasses not only what companies do with their profits, but also how they
make them. It goes beyond philanthropy and compliance and addresses how companies manage their
economic, social, and environmental impacts, as well as their relationships in all key spheres of
influence: the workplace, the marketplace, the supply chain, the community, and the public policy
realm.”“Defining Corporate Social Responsibility,” Corporate Social Responsibility Initiative, Harvard
Kennedy School, last modified 2008, accessed March 26, 2011, http://www.hks.harvard.edu/m-
rcbg/CSRI/init_define.html. Companies may support nonprofit causes and organizations, global
initiatives, and prevailing themes. Promoting environmentally friendly and green initiatives is an
example of a current prevailing theme.
Coca-Cola is an example of global corporation with a long-term commitment to CSR. In many
developing countries, Coca-Cola promotes local economic development through a combination of
philanthropy and social and economic development. Whether by using environmentally friendly
containers or supporting local education initiatives through its foundation, Coca-Cola is only one of
many global companies that seek to increase their commitment to local markets while enhancing
their brand, corporate image, and reputation by engaging in socially responsible business
practices.“Sustainability,” The Coca-Cola Company, accessed March 27, 2011, http://www.thecoca-
colacompany.com/citizenship/index.html.
Companies use a wide range of strategies to communicate their socially responsible strategies and
programs. Under the auspices of the United Nations, the Global Compact “is a strategic policy
initiative for businesses that are committed to aligning their operations and strategies with ten
universally accepted principles in the areas of human rights, labour, environment and anti-
corruption.”United Nations Global Compact website, accessed January 9, 2011,
http://www.unglobalcompact.org. The Global Compact will be discussed in more detail in Chapter 5
"Global and Regional Economic Cooperation and Integration".
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Enforcement of Ethical Guidelines and Standards
The concept of culture impacting the perception of ethics is one that many businesspeople debate.
While culture does impact business ethics, international companies operate in multiple countries and
need a standard set of global operating guidelines. Professionals engage in unethical behavior
primarily as a result of their own personal ethical values, the corporate culture within a company, or
from unrealistic performance expectations
In the interest of expediency, many governments—the US government included—may not strictly
enforce the rules governing corporate ethics. The practice of gift giving is one aspect of business that
many governments don’t examine too closely. Many companies have routinely used gifts to win favor
from their customers, without engaging in direct bribery. American companies frequently invite
prospective buyers to visit their US facilities or attend company conferences in exotic locales with all
expenses paid. These trips often have perks included. Should such spending be considered sales and
marketing expenses, as they are often booked, or are these companies engaging in questionable
behavior? It’s much harder to answer this question when you consider that most of the company’s
global competitors are likely to engage in similarly aggressive marketing and sales behavior.
Governments often do not enforce laws until it’s politically expedient to do so. Take child labor, for
example. Technically, companies operating in India or Pakistan are not permitted to use child labor in
factories, mines, and other areas of hazardous employment. However, child labor is widespread in
these countries due to deep-rooted social and economic challenges. Local governments are often
unable and unwilling to enforce national rules and regulations. Companies and consumers who
purchase goods made by children are often unaware that these practices remain unchecked.
The Evolu�on of Ethics
Ethics evolves over time. It is difficult for both companies and professionals to operate within one set
of accepted standards or guidelines only to see them gradually evolve or change. For example, bribery
has been an accepted business practice for centuries in Japan and Korea. When these nations
adjusted their practices in order to enter the global system, the questionable practices became illegal.
Hence a Korean businessman who engaged in bribery ten or twenty years ago may not do so today
without finding himself on the other side of the law. Even in the United States, discrimination and
business-regulation laws have changed tremendously over the last several decades. And who can
know what the future holds? Some of the business practices that are commonly accepted today may
be frowned on tomorrow.
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Previous Sec�on Next Sec�on
It’s clear that changing values, as influenced by global media, and changing perceptions and cultures
will impact global ethics. The most challenging aspect is that global business does not have a single
definition of “fair” or “ethical.” While culture influences the definitions of those ideas, many
companies are forced to navigate this sensitive area very carefully, as it impacts both their bottom line
and their reputations.
K E Y TA K E A W AY S
Culture impacts how local values influence the concept of global business ethics. Each professional
is influenced by the values, social programming, and experiences he or she has absorbed since
childhood. These collec�ve factors impact how a person perceives an issue and the related correct
or incorrect behavior. For some cultures, the evolu�on of interna�onal business and culture
some�mes creates a conflict, such as what is seen in gi�-giving prac�ces or views on women in the
workplace.
Ethics impacts global business in the areas of management, corrup�on, and corporate social
responsibility.
E X E R C I S E S
(AACSB: Reflec�ve Thinking, Analy�cal Skills)
1. Define ethics and discuss how it impacts global business.
2. How does culture impact global business ethics?
3. How can global firms develop and enforce ethical guidelines and standards?
Table of Contents
4/23/2021 Economist's View: 'On the Ethics of Redistribution'
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« Overly Optimistic Forecast's Have Caused Poor Fed Communication | Main | 'Jeb Goes Galt' »
Wednesday, September 30, 2015
'On the Ethics of Redistribution'
Curious to hear what people think of this:
On the Ethics of Redistribution, by V. V. Chari and Christopher Phelan, The Region, FRB Minneapolis: When evaluating economic inequality, economists frequently employ the ethical principle referred to as behind-the-veil-of-ignorance. Originated by Nobel Laureate John Harsanyi and philosopher John Rawls, this criterion imagines the social contract that would be developed by a society of risk-averse people who don’t yet know where each of them will end up in that society’s
distribution of income.1 ...
From behind the veil of ignorance, no individual could know into which country (or economic class) he or she will be born. Behind-the-veil, risk- averse people would therefore want to ensure that people born in rich countries do not adopt policies that hurt people born in poor countries. Nevertheless, analysts almost invariably ignore the effects of domestic tax policy on those in other nations. But consistent use of the behind- the-veil criterion would mean that analysts cannot treat people who live in rich, developed economies differently than they treat people who live in poor, less-developed economies. ...
Increasing world trade is an example of the tension between policies that help those in developing countries versus those that help those lower in the income distribution in developed countries. According to a World Bank Study, in the three decades between 1981 and 2010, the rate of extreme poverty in the developing world (subsisting on less than $1.25 per day) has gone down from more than one out of every two citizens to roughly one out of every five, all while the population of the developing
world increased by 59 percent.8 This reduction in extreme poverty represents the single greatest decrease in material human deprivation in history.
But this decrease in extreme poverty in the developing world has coincided with a marked increase in income inequality in the developed world, and the latter has received much more attention, at least from policy analysts in these richer nations.
One possible cause of both trends has been the increase in international trade, which lessens the market value of less-skilled labor in developed
countries while increasing its value in developing countries.9 If one uses a behind-the-veil criterion focused only on developed countries, then the increase in trade has made things worse. If instead one considers the entire world, then the trade increase has made the world phenomenally better. ...
We conclude that using the behind-the-veil-of-ignorance criterion to advocate for redistributive policies within developed countries while ignoring the effect of these policies on people in poor countries violates the criterion itself and is therefore fundamentally misguided.
Many economic analysts use social welfare functions in which, implicitly, only the well-being of domestic residents matters. This type of analysis is acceptable as long as the analyst acknowledges that such a social
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welfare function is not developed from deeper ethical considerations. A giant literature in public finance justifies such social welfare functions by appealing to the veil-of-ignorance. Our point simply is that those who use this criterion should weight the welfare of poor people in Chad, the world’s poorest nation, very heavily. To our knowledge, very little if any of the relevant research does so.
Posted by Mark Thoma on Wednesday, September 30, 2015 at 10:13 AM in Equity, Income Distribution | Permalink Comments (40)
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djb said...
so its ok that he we have more and more extreme inequality in developed countries, because more people in developing countries have been pulled out of extreme poverty
and by implication, that seems to be the only way to wipe out extreme poverty in the poorest nations
or am I just a cynic
Reply Wednesday, September 30, 2015 at 10:38 AM
DrDick said in reply to djb...
Glad that I am not the only one who caught that. It is also the case that while extreme poverty has declined in the underdeveloped world, global inequality has actually increased. They carefully framed that to distract from the realities.
http://www.oxfam.org/sites/www.oxfam.org/files/bp-working-for-few-political- capture-economic-inequality-200114-summ-en.pdf
http://www.globalissues.org/article/26/poverty-facts-and-stats
Reply Wednesday, September 30, 2015 at 11:04 AM
djb said in reply to DrDick...
Its race to the bottom stuff ...this is the shape it takes
Reply Wednesday, September 30, 2015 at 03:14 PM
DrDick said in reply to djb...
Exactly.
Reply Wednesday, September 30, 2015 at 05:02 PM
Mustsign topost said...
what a load of croc, the trade policies pursued keep the poor in developing countries poor and are increasing the poor in developed countries. GDP is not a measure of well- being.
Reply Wednesday, September 30, 2015 at 11:08 AM
ilsm said in reply to Mustsign topost...
Two poles in economics: the North side that cares about distribution for the whole (don't care much for GDP) and the South pole pandering to oligarchs who are running the world and making avarice virtue.
Reply Wednesday, September 30, 2015 at 01:09 PM
Bushan said...
This is probably the best that Minnesota DSGE macro can do... to paint this as a zero
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some game that workers in the developed world have to have stagnating wages for workers in the developing world to increase their standard of living.
Clearly oblivious of the fact that the biggest share of the gains from trade have gone to the 1 percent in the world and increasingly continues to do so.... now explain to me, why that wealth from the 1% percent does not trickle down as most DSGE models predict they should.
Reply Wednesday, September 30, 2015 at 11:09 AM
George H. Blackford said...
I believe the ethical argument here is basically correct except for the fact that the mechanism by which this reduction in poverty in the developing countries has occurred during the past 30 years—namely, through increasing debt relative to income in developed countries as the developed countries run trade deficits—is not only unsustainable in the long run, but leads to heightened domestic and international conflict. There is a more sensible and less dangerous way to accomplish kind of economic development, namely, through producing for domestic consumption. See:
http://rweconomics.com/LTLGAD.htm,
http://rweconomics.com/IVR.htm, and
http://rweconomics.com/Deficit.htm.
Reply Wednesday, September 30, 2015 at 11:14 AM
anne said in reply to George H. Blackford...
Reference links must be separated from any punctuation , or ; or : or . etc... to work.
Reply Wednesday, September 30, 2015 at 11:21 AM
George H. Blackford said in reply to George H. Blackford...
Some people never learn! Sorry about that.
http://rweconomics.com/LTLGAD.htm ,
http://rweconomics.com/IVR.htm , and
http://rweconomics.com/Deficit.htm
Reply Wednesday, September 30, 2015 at 12:03 PM
anne said in reply to George H. Blackford...
Interestingly and carefully presented and argued.
Reply Wednesday, September 30, 2015 at 01:07 PM
ken melvin said...
Under the street lamp.
Reply Wednesday, September 30, 2015 at 11:29 AM
John Williams said...
This explains why the pope, who is from a developing country and is concerned about the world's poor, is such a big fan of capitalism. You can read all about it in Laudato si'.
Reply Wednesday, September 30, 2015 at 11:43 AM
anne said in reply to John Williams...
http://w2.vatican.va/content/francesco/en/encyclicals/documents/papa- francesco_20150524_enciclica-laudato-si.html
May 24, 2015
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Over at the SubStack in the Last Week...
East Asian Miracles: Intro Video :: Econ 135 :: History of Economic Growth: 5.5.1.
DeLongTODAY: Inflation as the Principal Risk? I Do Not See It…
ECON 210a: April 7. Þe Shifting Pace of Growth of Technological & Organizational Knowledge
Over at the SubStack... 2021-03-27 Sa to 2021-04-05 Mo...
Paul Krugman
Krugman Wonks Out: The China Shock and the Climate Shock
Getting Real About Coal and Climate
What’s the Secret of Biden’s Success?
Krugman Wonks Out: The Case for Supercore Inflation
Andrew Yang Hasn’t Done the Math
America Needs to Empower Workers Again
Trump’s Corporate Tax Cut Was a Flop
Marginal Revolution
Do career disruptions matter for the top five percent?
Friday assorted links
From the comments, Zaua on capital gains tax hikes
Canada (oil sands) fact of the day
What are the limits of economies of scope?
Is this really better than borrowing?
Thursday assorted links
Calculated Risk
Unemployment Unions Universities University of Oregon Video Web/Tech Weblogs
Disclaimer
The views expressed on this site are my own and do not necessarily represent the views of the Department of Economics or the University of Oregon.
Mark Thoma Department of Economics University of Oregon
Blog Established March 6, 2005
New Links
How and why economics forgot Keynes’ warnings on panics - FT Alphaville In a new paper (hat-tip to the University of Washington’s Fabio Ghironi for drawing our attention to it), Nobel Prize winning economist George Akerlof does a brilliant job of explaining how and why, in the decades before the financial crash, macroeconomists failed to include any meaningful role of the financial system in their economic models.
The End of Neoliberalism and the Rebirth of History - Joseph E. Stiglitz For 40 years, elites in rich and poor countries alike promised that neoliberal policies would lead to faster economic growth, and that the benefits would trickle down so that everyone, including the poorest, would be better off. Now that the evidence is in, is it any
4/23/2021 Economist's View: 'On the Ethics of Redistribution'
https://economistsview.typepad.com/economistsview/2015/09/on-the-ethics-of-redistribution.html 4/11
OF THE HOLY FATHER FRANCIS
Reply Wednesday, September 30, 2015 at 12:03 PM
anne said in reply to John Williams...
http://www.nytimes.com/2015/06/19/world/europe/pope-francis-in-sweeping- encyclical-calls-for-swift-action-on-climate-change.html
June 18, 2015
Pope Francis, in Sweeping Encyclical, Calls for Swift Action on Climate Change By JIM YARDLEY and LAURIE GOODSTEIN
VATICAN CITY — Pope Francis on Thursday called for a radical transformation of politics, economics and individual lifestyles to confront environmental degradation and climate change, as his much-awaited papal encyclical blended a biting critique of consumerism and irresponsible development with a plea for swift and unified global action.
The vision that Francis outlined in the 184-page encyclical is sweeping in ambition and scope: He described a relentless exploitation and destruction of the environment, for which he blamed apathy, the reckless pursuit of profits, excessive faith in technology and political shortsightedness. The most vulnerable victims are the world’s poorest people, he declared, who are being dislocated and disregarded.
The first pope from the developing world, Francis, an Argentine, used the encyclical — titled “Laudato Si’,” or “Praise Be to You” — to highlight the crisis posed by climate change. He placed most of the blame on fossil fuels and human activity while warning of an “unprecedented destruction of ecosystems, with serious consequence for all of us” if swift action is not taken. Developed, industrialized countries were mostly responsible, he said, and were obligated to help poorer nations confront the crisis.
“Climate change is a global problem with grave implications: environmental, social, economic, political and for the distribution of goods,” he wrote. “It represents one of the principal challenges facing humanity in our day.”
The Vatican released the encyclical at noon on Thursday, following a heavily attended news conference and amid widespread global interest. Vatican officials were infuriated after an Italian magazine on Monday posted a leaked draft of the encyclical online — one that almost exactly matched the final document. The breach led to speculation that opponents of Francis inside the Vatican wanted to embarrass him by undermining the planned rollout.
But on Thursday, religious figures, environmentalists, scientists, elected officials and corporate executives around the world were awaiting the official release of the encyclical, with many of them scheduling later news conferences or preparing statements to discuss it. Media interest was enormous, partly because of Francis’ global popularity, but also because this was the first time that a pope had written an encyclical about environmental damage — and because of the intriguing coalition he is proposing between faith and science.
“Humanity is faced with a crucial challenge that requires the development of adequate policies, which, moreover, are currently being discussed on the global agenda,” Cardinal Peter Turkson said during the morning news conference at the Vatican. “Certainly, Laudato Si’ can and must have an impact on important and urgent decision to be made in this area.”
In the news conference, Cardinal Turkson said that Francis had already noted that humanity had played a role in climate change. He said that there was “heated debate” on the topic and that Francis was not trying to intervene in that.
Francis has made clear that he hopes the encyclical will influence energy and economic policy and stir a global movement. He calls on ordinary people to pressure politicians for change. Bishops and priests around the world are expected to lead discussions on the encyclical in services on Sunday. But Francis is also reaching for a
April 23rd COVID-19 Vaccinations, New Cases, Hospitalizations
April Vehicle Sales Forecast: "Remain Strong"
Q1 GDP Forecasts: Around 7%
A few Comments on March New Home Sales
New Home Sales Increase to 1,021,000 Annual Rate in March; Highest Since 2006
Black Knight: Number of Homeowners in COVID- 19-Related Forbearance Plans Decreased Slightly
Friday: New Home Sales
Mainly Macro
Why neoliberalism’s evolution into a populist plutocracy was inevitable
Two types of recovery from the COVID recession, or how you cannot effectively fight plutocratic populism by returning to the recent past.
Labour should start contesting the Tory record in running the economy
Vines and Willis on the future of macroeconomics
As things stand, the chances of defeating Johnson at the next election are minuscule
The Royal Family is today’s England
Why are the Conservatives so bad at running the economy?
Econbrowser
Donald Trump’s “eighth wonder of the world” shrinks from $10 billion to $674 million
“The Fed and the International Financial System”
Company Price Change Announcements and Future Inflation
Another Minimum Wage Proposal
Retail Sales: Implications for Consumption
Business Cycle Indicators as of Mid-April
Wisconsin Employment: Employment Drop Revised Away
WSJ Econ Blog
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wonder that trust in elites and confidence in democracy have plummeted?
Attack of the Wall Street Snowflakes - Paul Krugmn Why can’t financial tycoons handle criticism?
Is Rising Concentration Hampering Productivity Growth? - FRBSF U.S. productivity is growing slower than in the past. Meanwhile, sales have become increasingly concentrated in the largest businesses. Analysis suggests that IT innovation may have facilitated the rise in concentration by reducing the cost for large firms to enter new markets. This contributed to booming productivity growth from 1995 to 2005. Though large firms are more profitable, their expansion may have increased competition and reduced profit margins within markets. Lower profit margins in a given market could have deterred innovation, eventually lowering growth.
Automation and its enemies - VoxEU Mechanisation during the Industrial Revolution accelerated economic growth and prosperity in the long term, but it was fiercely opposed by workers who did not share in its short-term gains. This column argues that similar forces are at play today. A new revolution in automation is eliciting resistance since it threatens to render jobs redundant. The column proposes policy interventions to raise productivity and prosperity in the short term, to reap the benefits of the new technologies in the long term.
Economy Creates 128,000 Jobs in October; Unemployment Edges Up to 3.6 Percent - Dean Baker Employment rates for prime-age workers (ages 25 to 54) hit a new high for the recovery.
4/23/2021 Economist's View: 'On the Ethics of Redistribution'
https://economistsview.typepad.com/economistsview/2015/09/on-the-ethics-of-redistribution.html 5/11
wider audience when in the first pages of the document he asks “to address every person living on this planet.”
Even before the release, Francis’ unflinching stance against environmental destruction, and his demand for global action, had already thrilled many scientists. In recent weeks, advocates of policies to combat climate change have expressed hope that Francis could lend a “moral dimension” to the debate, because winning scientific arguments was different from moving people to action.
“Within the scientific community, there is almost a code of honor that you will never transgress the red line between pure analysis and moral issues,” said Hans Joachim Schellnhuber, founder and chairman of the Potsdam Institute for Climate Impact Research and a leading European climate scientist. “But we are now in a situation where we have to think about the consequences of our insight for society.” ...
Reply Wednesday, September 30, 2015 at 12:07 PM
ThomasH said...
But notwithstanding the use of this "inadequate" standard, poverty in developed countries did decrease. And it would in no way harm the poor in developing countries if part of the gains in income withing developing countries were redistributed to those in developing counties who have benefited little from globalization.
Reply Wednesday, September 30, 2015 at 11:50 AM
djb said in reply to ThomasH...
I mean this is really "how a race to the bottom" for wages looks like
more jobs in third world countries, at extremely low pay, might bring people out of extreme poverty
but they never should have been in extreme poverty in the first place
and saying the only way this can get accomplished is through have more and more extreme inequality in developed countries is really just an attempt to justify extreme greed
the title
'On the Ethics of Redistribution'
means that they are implying that we would be unethical to want to do anything about extreme inequality in developed countries
because this would keep those people in undeveloped countries from getting out of extreme poverty
Reply Wednesday, September 30, 2015 at 11:58 AM
ilsm said...
US has always been at war with the Shiites.
The failure of US version of FIRE capitalism is not a symptom it is s feature otherwise it would be correction not "redistribution".
The reason correction is discussed at all is system failure.
The distribution system is run for greed which denies needs.
Redistribution is strawman blaming the victims of the corrupt system.
While McCain wants a couple million US ground troops to clean up the mess in the Middle East made by Reagan, Bush I, Bush II and Obomber.
Reply Wednesday, September 30, 2015 at 01:02 PM
anne said in reply to ilsm...
US has always been at war with the Shiites.
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As Home Prices Rise, the Foreclosure Crisis Continues to Recede
WSJ Survey: Oil and Inflation Are Stubborn Disappointments
China Fires the First Shot in a Currency War
FT Alphaville
Snap AV: the Biden tax plan plunge
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The destructive green fantasy of the bitcoin fanatics
Chipotle: minimum wages and extra guacamole
We are at a turning point on tax
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The Upshot
What Teenagers Have Learned From a Tumultuous Time in Politics
What’s Behind the Growth in Alcohol Consumption?
Why the Vaccine Safety Numbers Are Still Fuzzy
Unemployment Is High. Why Are Businesses Struggling to Hire?
It’s Not Just You: Many Are Placing Bets on Summer Travel
How Not to Get Fooled by the New Inflation Numbers
Vaccines Are Effective Against the New York Variant, Studies Find
Bank Underground
What matters to firms? New insights from survey text comments
It’s windy when it’s wet why UK insurers may need to reassess their modelling assumptions
What to expect when they’re expecting
Uncertainty and voting in monetary policy committees
Negotiating nationalisation
Cloudy with a chance of tariffs: the impact of
Did Warren Pass the Medicare Test? I Think So - Paul Krugman Last week I worried that Elizabeth Warren had painted herself into a corner by endorsing the Sanders Medicare- for-all plan. It was becoming obvious that she couldn’t stay vague about the details, especially how to pay for it; and some studies, even by center-left think tanks, suggested that any plan along these lines would require large tax hikes on the middle class. So what would she come up with? Well, the Warren plan is now out. And I’d say that she passed the test.
The United States, Japan, and the Global Economy - Richard Clarida I appreciate this opportunity to speak today at the Japan Society, a respected institution dedicated to studying, advocating, and expanding interactions between the United States and Japan.1 While the society's remit is broad and includes arts, culture, and education, I will, perhaps not surprisingly, focus my remarks on our two economies. Japan is an important economic partner of the United States, and our economies are linked through trade in goods and services as well as capital flows that affect interest rates and other aspects of financial markets. Through these channels, developments in Japan can affect economic conditions in the United States, and vice versa. More broadly, beyond bilateral linkages, economic conditions in United States and Japan are tightly linked to global economic developments, and today I will discuss several of the global factors that are relevant to the outlook for both economies. First, I will review the current U.S. outlook and some key global risks to that outlook that we are monitoring at the Federal Reserve. I will next elaborate on
4/23/2021 Economist's View: 'On the Ethics of Redistribution'
https://economistsview.typepad.com/economistsview/2015/09/on-the-ethics-of-redistribution.html 6/11
[ When was the beginning, though? Could the war have begun in 1953 with the overthrow of the government of Iran?
https://en.wikipedia.org/wiki/1953_Iranian_coup_d%27%C3%A9tat ]
Reply Wednesday, September 30, 2015 at 01:12 PM
ilsm said in reply to anne...
The Shah suppressed the Shiite. Played to the Anglo-Saudi Sunni fear of the less severe side of Islam.
Why Mc Cain wants to wrench Syria into Libya territory......
Assad is minority Shiite.
Reply Wednesday, September 30, 2015 at 02:46 PM
anne said in reply to ilsm...
Nicely and sadly explained.
Reply Wednesday, September 30, 2015 at 04:20 PM
ilsm said...
Plenty of money for war. Notthing for the poor.
"Poverty is a form of violence, the worst kind." Gandhi
Reply Wednesday, September 30, 2015 at 02:48 PM
Arne said...
If I take this on as an opportunity to spend some effort on seeing where I agree:
1. Globalization has (generally) been good for poverty stricken workers in developing nations.
2. Not so much for developed nations.
3. We should be careful about having too narrow a focus (or an only developed world focus) when evaluating the impact of globalization.
4. It is probably true that globalization, as it has been practiced, has been good for the world in general.
So where do disagree? Nothing about their argument says that globalization could not be/have been practiced to mitigate the downside of globalization on workers in developed countries.
Perhaps they ran into word count issues. Perhaps they were so focused on one aspect that they thought that the fact that there are other aspects is just obvious. Perhaps getting paid as consultants all that matters.
Reply Wednesday, September 30, 2015 at 03:06 PM
RW (the other) said...
There are several problems with Chari and Phelan's discussion but there is little point in addressing them because their paper is incoherent.
They state at the beginning, "...the ethical principle referred to as behind-the-veil-of- ignorance. ...this criterion imagines the social contract that would be developed by a society of risk-averse people who don’t yet know where each of them will end up in that society’s distribution of income."
Then add other societies, other nations and other peoples, to the principle in their discussion. There may be arguments justifying all societies as logically unitary but they are certainly not a given and, in any case, the authors do not make them.
The discussion has nothing to do with the veil of ignorance as proposed.
If it did I would argue that ilsm's statement is an apporpriate rebuttal: . The reason correction is discussed at all is system failure.
policy uncertainty on the global economy
What is the relationship between a markets- based measure of leverage and banks’ funding costs?
macroblog
Do Higher Wages Mean Higher Standards of Living?
Is There a Taylor Rule for All Seasons?
Faster Wage Growth for the Lowest-Paid Workers
Is Job Switching on the Decline?
Liberty Street
April Regional Service- Sector Survey Points to A Long-Awaited Rebound
What Is behind the Global Jump in Personal Saving during the Pandemic?
How COVID-19 Affected First-Time Homebuyers
An Update on How Households Are Using Stimulus Checks
Do People View Housing as a Good Investment and Why?
“Excess Savings” Are Not Excessive
The New York Fed DSGE Model Forecast—March 2021
Macro Musings
Storytelling: Friday Chart Edition
The Fed's New Framework
A Twitter Thread on Interest Rate Determination
Make-Up Policy: Where Art Thou?
NGDP Targeting in the United Kingdom
The Public Finance Implications of COVID- 19
Extensions to the NGDP Gap
Macro Musings Podcast
Antonio Fatás on Hysteresis and the Business Cycle
Matteo Maggiori on the Global Capital Allocation Project, Exorbitant Privilege, and Dollar Runs
Scott Skyrm on the Dynamics of the Repo Market in 2021
the channels through which global factors affect domestic economic conditions in the United States and, in some cases, also Japan. I will conclude with some remarks about the monetary policy decision we announced on Wednesday.
Friedrich Hayek and the Price System - Randal Quarles Over the course of this afternoon, you will hear a series of presentations that put Hayek's thinking in the context of contemporary developments and that offer a variety of perspectives on his intellectual legacy. Hayek was a prolific— some might even say profligate—thinker. He was at various times, and in various modes, an early neuropsychologist, an epistemologist, a theoretical economist, a political philosopher, a moral philosopher, a philosopher of science, a historian of ideas, a public intellectual, and a social polemicist. This vast range has caused some to undervalue his contributions as an economist, notwithstanding his eventual Nobel Prize— when Hayek moved to the United States in 1950, the University of Chicago Economics Department would not hire him because, as Milton Friedman said, "At that stage, he really wasn't doing any economics," and Paul Krugman famously said that "the Hayek thing is almost entirely about politics, not economics."2 Others believe his broader thought, while seminal, was inconsistent across these various areas, and Hayek himself never demonstrated how it all hung together. In my contribution to the discussion today, I want to examine a particular example of the lasting effect that Hayek has had on economic thinking—one pertaining to the importance of freely determined prices for
4/23/2021 Economist's View: 'On the Ethics of Redistribution'
https://economistsview.typepad.com/economistsview/2015/09/on-the-ethics-of-redistribution.html 7/11
. The distribution system is run for greed which denies needs.
. Redistribution is strawman blaming the victims of the corrupt system.
"If they can get you asking the wrong questions, they don't have to worry about the answers." --Thomas Pynchon (Gravity's Rainbow)
Reply Wednesday, September 30, 2015 at 04:03 PM
Chris Lowery said...
This piece reminds me a bit of the Bush administration's changing justifications of the Iraq invasion. Globalization was never sold in this country as a means of improving the economic well-being of poor foreigners at the expense of lower-income Americans' jobs. Had that been the argument, it could have been debated on its merits -- though I suspect the debate would have been very short.
Globalization was sold as a means of making the American economy more productive and American workers more prosperous -- we'd give up poor-paying jobs and replace them with higher-paying jobs. Now that the evidence doesn't support that argument, the justification is being changed. I find this highly disingenuous.
As to whether globalization is, on balance, a good thing for poor people in developing countries, that is also a question worthy of honest debate, as in this piece describing the impacts of NAFTA on Mexicans -- http://www.foreignaffairs.com/articles/140351/jorge-g-castaneda/naftas-mixed- record
Reply Wednesday, September 30, 2015 at 04:11 PM
Paine said...
Perfect pit the welfare of the lowest wage rungs against each other across borders
Nice framing
Any attempt to rectify the pure arbitrage in trade profits is made to look like siding with OECD wage earners against chindia
Reply Wednesday, September 30, 2015 at 04:13 PM
Paine said in reply to Paine ...
To develop Emerging social production systems need frontier technique and open markets At home and elsewhere This can be accomplished without intellectual property cartels Tilted forex systems and "creative " tax arbitrage guided "value added " accounting
Reply Wednesday, September 30, 2015 at 04:15 PM
Paine said in reply to Paine ...
Let alone green v brown processes
Reply Wednesday, September 30, 2015 at 04:16 PM
anne said in reply to Paine ...
Perfect, pit the welfare of the lowest wage rungs against each other across borders
Nice framing
Any attempt to rectify the pure arbitrage in trade profits is made to look like siding with OECD wage earners against Chinese and Indians
[ Nicely explained. ]
Reply Wednesday, September 30, 2015 at 04:18 PM
Dorian Cole said...
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Chris Russo on Existing Fed-Treasury Tensions and Potential Solutions for Fixing Them
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Jack Hirshleifer: A Memory
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producing efficient economic outcomes— and consider how Hayek's insights in this area can, in fact, tie together the various strands of his larger philosophy.
Study analyzed tax treaties to assess effect of offshoring on domestic employment - EurekAlert The practice of offshoring--moving some of a company's manufacturing or services overseas to take advantage of lower costs--is on the rise and is a source of ongoing debate. A new study identified a way to determine how U.S. multinational firms' decisions about offshoring affect domestic employment. The study found that, on average, when U.S. multinationals increase employment in their foreign affiliates, they also modestly increase employment in the United States--albeit with substantial dislocation and reallocation of workers. The study was conducted by researchers at Carnegie Mellon University, Georgetown University, and the Federal Reserve Bank of Kansas City. It is published in The Review of Economics and Statistics.
Manufacturing Ain’t Great Again. Why? - Paul Krugman When Donald Trump promised to Make America Great Again, his slogan meant different things to different people. For many supporters it meant restoring the political and social dominance of white people, white men in particular. For others, however, it meant restoring the kind of economy we had a generation or two ago, which offered lots of manly jobs for manly men: farmers, coal miners, manufacturing workers. So it may matter a lot, politically, that Trump has utterly failed to deliver on that front — and that workers are noticing. Now, many of Trump’s economic promises
4/23/2021 Economist's View: 'On the Ethics of Redistribution'
https://economistsview.typepad.com/economistsview/2015/09/on-the-ethics-of-redistribution.html 8/11
Couple of gut reactions: 1. Risk-averse. The gambling atmosphere of the stock market can hardly be called risk-averse. It is more greed / fear overreactions to fundamental valuations.
2. Increases in the price of food in the last 20 years have led to price increases and famine in third world countries.
Reply Wednesday, September 30, 2015 at 05:24 PM
djb said...
time to play name that douche
"I want a government shutdown: Reagan official"
who is the Reagan official??
shockingly the answer is
David Stockman
Reply Wednesday, September 30, 2015 at 06:25 PM
Second Best said...
'From behind the veil of ignorance, no individual could know into which country (or economic class) he or she will be born. Behind-the-veil, risk-averse people would therefore want to ensure that people born in rich countries do not adopt policies that hurt people born in poor countries.'
---
The veil does not presuppose propensity to take risk, everyone behind it would take on some random assigned risk to reflect an entire population including rich and poor countries.
Recently Jamie Dimon lectured the poor in the U.S. on why they are better off than they realize from technological advances. The arrogance has subsumed the super rich so over the top they see themselves inseparable not only from the creation of maximum economic welfare, also from the determination of its consumption value, as if the market had nothing to do with it.
The critical flaw lies in the rich presenting themselves as fungible and interchangeable, as if chosen among many competing for the opportunity. From behind the Nozick veil they pretend to emerge as a winner endowed with the same initial nature as everyone who then nurtures their way to the top on an equal opportunity basis.
Outcomes that preserve status of the super rich are not Nozick outcomes created by opportunity, but the very Rawlsian outcomes decried by Nozick based on a veil that values a higher floor of guaranteed outcomes at the cost of lost opportunity.
Specifically the rich are funded by the 99% at higher opportunity cost of lost jobs and wages than taxes, while the 99% are funded more from taxes on the rich than jobs and income taken from the rich as a means of moving up the ladder.
Reply Wednesday, September 30, 2015 at 06:42 PM
djb said...
they better not be fungible because even the rich wont be able to afford the antifungal medications at this rate
Reply Wednesday, September 30, 2015 at 06:56 PM
DeDude said...
The economy IS consumption. Redistribution from consumer class individuals in rich countries to consumer class individuals in poor countries do NOT help the world economy. It destroys at least as much economic growth in rich countries as it creates in the poor countries (probably more by strengthening the ability of the investor class
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D is for Devastating: A Statistical Error and the Vitamin D Saga
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Stand-up economist: Grading Economics Textbooks on Climate Change
Reply to "Reply to Whitehead" by Desvousges, Mathews and Train: (4) My treatment of the weighted WTP is biased in favor of the DMT (2015) result/conclusion
Reply to "Reply to Whitehead" by Desvousges, Mathews and Train: (2) What is the effect of negative WTP?
Reply to "Reply to Whitehead" by Desvousges, Mathews and Train: (1) Is the log-linear model meaningless?
Reply to "Reply to Whitehead" by Desvousges, Mathews and Train: (6) Are the DMT (2015) data problems typical in other CVM studies?
The Information Value of Pigouvian Pricing
Reply to "Reply to Whitehead" by Desvousges, Mathews and Train (the correction)
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Interview with Esther Duflo: On Experimental Methods and Inequality
were obvious nonsense. The hollowing out of coal country reflected new technologies, like mountaintop removal, which require few workers, plus competition from other energy sources, especially natural gas but increasingly wind and solar power. Coal jobs aren’t coming back, no matter how dirty Trump lets the air get.
It's Time to Go - Dave Giles When I released my first post on the blog on 20th. Febuary 2011 I really wasn't sure what to expect! After all, I was aiming to reach a somewhat niche audience. Well, 949 posts and 7.4 million page-hits later, this blog has greatly exceeded my wildest expectations. However, I'm now retired and I turned 70 three months ago. I've decided to call it quits, and this is my final post. I'd rather make a definite decision about this than have the blog just fizzle into nothingness. For now, the Econometrics Beat blog will remain visible, but it will be closed for further comments and questions.
Prospects for Inflation in a High Pressure Economy: Is the Phillips Curve Dead or Is It Just Hibernating? - Brad DeLong I have some disagreements with this by the smart Sufi, Mishkin, and Hooper: the evidence for "significant nonlinearity" in the Phillips Curve is that the curve flattens when inflation is low, not that it steepens when labor slack is low. There is simply no "strong evidence" of significant steepening with low labor slack. Yes, you can find specifications with a t-statistic of 2 in which this is the case, but you have to work hard to find such specifications, and your results are fragile. The fact is that in the United States between 1957 and 1988—the first half of the last 60 years—the slope of the
4/23/2021 Economist's View: 'On the Ethics of Redistribution'
https://economistsview.typepad.com/economistsview/2015/09/on-the-ethics-of-redistribution.html 9/11
to grab a larger share of the total). The only kind of redistribution that can increase economic growth is redistribution from investor class people to consumer class people.
Reply Wednesday, September 30, 2015 at 06:56 PM
reason said...
The problem is the implication that one implies the other.
Besides which, so long as there are national democracies, the POLICY space is national, so international comparisons are irrelevant.
Reply Thursday, October 01, 2015 at 12:54 AM
reason said...
This is of course the equivalent of the classical political distraction tactic - "let you and him fight" (and let your mutual enemy go free).
Reply Thursday, October 01, 2015 at 12:57 AM
reason said...
There is another aspect here that they do not consider. I have been reading Limits to Growth - the 30 year update - and one point they make is that globalisation ensures that resources will run out everywhere at the same time. That is, globalisation makes it harder for local conservation strategies to work.
Do their "deeper ethical considerations" include the interests of future generations?
Reply Thursday, October 01, 2015 at 01:04 AM
Jeff Martin said...
Longtime reader of this blog, first time commenting....
One of the problems with the application of the Veil of Ignorance to international affairs, economic or otherwise, is that in such applications it runs directly counter to democratic impulses, and generates outcomes adverse to those that would arise through democratic deliberation within individual nations. This is not merely a matter of historical, empirical data, or even counterfactual conjecture, as suggested by one commentator above - if NAFTA, etc. had been debated openly, as this new argument suggests, as a means of reducing extreme global poverty at the cost of exacerbating inequality and extreme poverty domestically, the debate would have been rather short; and even if the establishment had decided to railroad the policy anyway, it would have been in the teeth of ferocious opposition, and at the risk of serious social instability. This is also a structural problem, baked into the theoretical and practical logics of such policy choices: if elected representatives, and the officials they appoint, pursuant to the governing structures of a particular nation, assume this more global perspective, and govern against the concrete material interests of the people they purport to represent, then the very logic of democracy is attenuated. I cannot imagine that anyone would deny this as a point of theory; nor can I imagine that anyone would deny that democracy is looking a bit tattered in the developed world. The theoretical and practical implication of this sort of globalized veil-of-ignorance argument is that the representative function of national and local governments should be diminished, in favour of the 'wisdom' of - let's be honest about the classes we're talking about here - technocrats who simply know better what the world - not their own societies - need, and are determined to give those policies to the world, come what may for their own people.
This is not a recipe for long-term stability, unless the technocratic class imagines itself capable of staving off the revolution indefinitely - whence the Panopticon, I suppose. I'd almost be amused if this argument gained wider circulation; I can already envision the advertisements were globalization to become a political issue: "Candidate X voted for policy Y, which enriched people in nation A at the expense of your father, son, mother, etc., and now says that this very tradeoff is the reason to vote in favour of policy Y." Or some such thing, probably even more incendiary. As I said, it's not a recipe for stability to tell the people that they have to take crappy jobs at crappy wages, while living in the developed world, so that Chad can be marginally less crappy. Some may wish this were not so, but you can choose this sort of ethical
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simplest-possible adaptive-expectations Phillips Curve was -0.54: each one- percentage point fall in unemployment below the estimated natural rate boosted inflation in the subsequent year by 0.54%-points above its contemporary value. Since 1988—in the second half of the past 60 years—the slope of this simplest-possible Phillips curve has been effectively zero: the estimated regression coefficient has been not -0.54 but only -0.03. The most important observations driving the estimated negative slope of the Phillips Curve in the first half of the past sixty years were 1966, 1973, and 1974—inflation jumping up in times of relatively-low unemployment—and 1975, 1981, and 1982— inflation falling in times of relatively-high unemployment. The most important observations driving the estimated zero slope of the Phillips Curve in the second half of the past sixty years have been 2009- 2014: the failure of inflation to fall as the economy took its Great-Recession excursion to a high- unemployment labor market with enormous slack. Yes, if we had analogues of (a) two presidents, Johnson and Nixon, desperate for a persistent high- pressure economy; (b) a Federal Reserve chair like Arthur Burns eager to accommodate presidential demands; (c) the rise of a global monopoly in the economy's key input able to deliver mammoth supply shocks; and (d) a decade of bad luck; then we might see a return to inflation as it was in the (pre-Iran crisis) early and mid- 1970s. But is that really the tail risk we should be focused monomaniacally on? And how is it, exactly, that "the difference between national and city/state results in recent decades can be explained by the
4/23/2021 Economist's View: 'On the Ethics of Redistribution'
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perfectionism, or you can choose democracy, but not both. Given the self-dealing of our actually-existing elites, how they have enriched themselves at every stage of this process, I'll choose more democracy. It's the least-worst option, in the long run.
Reply Thursday, October 01, 2015 at 08:51 AM
children-matter-much said...
There is a fascinating limitation of the rawlsian criterion: that most people care about the interests of their *children* too. And often not much less than their own, or more so.
I am astonished that the rawlsian criterion ignores how important to so many people are the future positions in the income distributon of their children, and I think nobody has noticed this point before.
And there is a very interesting detail about knowing or not knowing where you children will end up in the distribution of income: the mother is always certain, the father never is never certain, unless exceptional measures are taken.
In particular potential fathers are never sure that they will have any children at all, or that the children that they are asked to invest in are actually their genetic progeny, while potential mothers are the only holders of reproductive rights, and thus can choose in their completely autonomous discretion when and whether to have children, being pretty sure of their being their own genetic progeny.
This means that the extending the rawlsian criterion to consideration of the future position of children in the income distribution, not only matters a lot, but has very different impacts for men and women.
Reply Thursday, October 01, 2015 at 01:52 PM
jt said...
They base their conclusion on the idea that wealth inequality in wealthy nations and decreasing poverty in poor nations are linked by increased international trade. Is that really the cause?
My sense is that the increases in first world wealth inequality is due in much larger part to the increased ability of the wealthy to externalize the costs of their income by (1) failing to pay via taxation for the stuff they take from government and (2) failing to be held accountable via regulation for the harm that they cause to their fellow citizens, the environment, the financial system, etc.
Reply Thursday, October 01, 2015 at 03:08 PM
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success that monetary policy has had in quelling inflation and anchoring inflation expectations since the 1980s"? Neither of those two should affect the estimated coefficient. Much more likely is simply that—at the national level and at the city/state level— the Phillips Curve becomes flat when inflation becomes low:
Fed Attempts To Conclude Their Mid-Cycle Adjustment - Tim Duy After spending much of the year battling the forces of uncertainty weighing on the economy, the Fed declared victory today. Absent a fresh deterioration in the economic outlook, Fed Chair Jerome Powell and his colleagues believe they are done cutting rates with this month’s policy move. Expect an extended policy pause; the Fed is neither interested in easing policy further given their outlook nor in soon raising rates back up given continued below-target inflation.
Fall 2019 Journal of Economic Perspectives Available Online - Tim Taylor I'll start with the Table of Contents for the just-released Fall 2019 issue, which in the Taylor household is known as issue #130. Below that are abstracts and direct links for all of the papers. I will probably blog more specifically about some of the papers in the next week or two, as well.
Does a wealth tax discourage risky investments? – Digitopoly The other day I wrote about the potential impact of a wealth tax. In so doing, I wrote: “we can all agree that the wealth tax likely deters risk-free saving.” This was a paraphrase of a claim made by Larry Summers who then went on to say that it was unknown whether a wealth tax would encourage or discourage risky investment. But I did wonder what the
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impact of a wealth tax would be on various types of investments and in examining this I realized that the claim was incorrect. In fact, a wealth tax is unlikely to have any change on the risk profile of investments in contrast to an income (or even consumption tax) that will. I discovered later that this was a known result being contained in a paper from Joe Stiglitz (QJE, 1969).
Stop Inflating the Inflation Threat - J. Bradford DeLong Given the scale and severity of inflation in America in the 1970s, it is understandable that US monetary policymakers developed a deep- seated fear of it. But, nearly a half-century later, the conditions that justified such worries no longer apply, and it is past time that we stopped denying what the data are telling us.
How to Tax Our Way Back to Justice - Saez and Zucman It is absurd that the working class is now paying higher tax rates than the richest people in America.
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2
The FOreign COrruPT PrACTiCes ACT: An Overview
R. Christopher Cook, Stephanie ConnorR. Christopher Cook, Stephanie Connor
Corruption poses a significant legal and economic risk for
corporations doing business around the world, particu-
larly in developing and transitioning countries. The united
States Department of Justice (“DOJ”) and the Securities and
Exchange Commission (“SEC”) are leading the international
fight against corruption by increasing the number of inves-
tigations, settlements, and prosecutions for violations of the
Foreign Corrupt Practices act (“FCPa” or the “act”).
Because of this increased enforcement activity, managers
and directors who run multinational corporations are rightfully
concerned about their compliance efforts. In order to minimize
the risks posed by foreign bribery, an organization must have
a clear understanding of the practices prohibited by the FCPa
and other applicable laws, such as u.S. regulations against
money laundering, racketeering, and conspiracy. Leaders
and legal advisors must also remain up to date on trends in
enforcement. Finally, the managers who run the organization
must be able to recognize “red flags”—circumstances under
which the risk of corrupt practices is high and enforcement
authorities expect corporations to be particularly vigilant. With
this knowledge and commitment to ethical business practices,
an organization can implement an effective compliance pro-
gram to avoid the pitfalls of international corruption.
The Foreign CorrupT praCTiCes aCT The Foreign CorrupT praCTiCes aCT
The FCPa contains both antibriber y prohibitions and
accounting requirements. The latter are designed to prevent
accounting practices designed to hide corrupt payments
and ensure that shareholders and the SEC have an accurate
picture of a company’s finances.
Who is Covered by the FCpa? The FCPa applies to two
broad categories of persons: those with formal ties to the
united States and those who take action in furtherance of a
violation while in the united States.
u.S. “issuers” and “domestic concerns” must obey the FCPa,
even when acting outside the country. an “issuer” is any com-
pany that has securities registered in the united States or
is otherwise required to file periodic reports with the SEC.1
“Domestic concerns” is a broader category, encompass-
ing any individual who is a citizen, national, or resident of
the united States. The category of “domestic concerns” also
includes any corporation, partnership, association, joint-stock
company, business trust, unincorporated organization, or
sole proprietorship with its principal place of business in the
united States or organized under the laws of a state of the
united States or a territory, possession, or commonwealth of
the united States.2 accordingly, u.S. corporations and nation-
als can be held liable for bribes paid to foreign officials even
if no actions or decisions take place within the united States.
In the past several years, u.S. enforcement authorities have
charged and prosecuted a number of foreign corporations for
bribing non-u.S. officials.3 The DOJ interprets the FCPa to con-
fer jurisdiction whenever a foreign company or national causes
an act to be done within the territory of the united States by
any person acting as the agent of that company or national.4
What the FCpa prohibits. a violation of the FCPa consists of
five “elements.” That is, a person or organization is guilty of vio-
lating the law if the government can prove the existence of:
1) a payment, offer, authorization, or promise to pay money
or anything of value
2) to a foreign government official (including a party official
or manager of a state-owned concern), or to any other
person, knowing that the payment or promise will be
passed on to a foreign official
3) with a corrupt motive
4) for the purpose of (a) influencing any act or decision
of that person, (b) inducing such person to do or omit
any action in violation of his lawful duty, (c) securing an
improper advantage, or (d) inducing such person to use
his influence to affect an official act or decision
5) in order to assist in obtaining or retaining business for or
with, or directing any business to, any person.5
a covered individual or entity that violates the FCPa can be
subject to criminal charges by the DOJ, which might lead to
imprisonment or a fine, in addition to penalties by the SEC
of up to $500,000 or the amount by which the entity profited
from the offense.
The definitions of “payment” and “foreign official” are suf-
ficiently broad to cover virtually any benefit conferred on
someone in a position to affect a person’s business dealings
with a foreign government. nonmonetary benefits, includ-
ing travel and entertainment, fall within the FCPa’s definition.
Likewise, the DOJ has taken the position that employees of
state-owned business enterprises are “foreign officials” for
purposes of the FCPa.6 The statute contains no monetary
threshold; even the smallest bribes are prohibited.
under the terms of the FCPa, a bribe need not actually be
paid in order to violate the law. rather, the FCPa prohibits the
offer, authorization, or promise to make a corrupt payment in
addition to the actual payment.
3
The FCPa prohibits payments made with a “corrupt” motive.
The legislative history of the statute describes this as an
“evil motive or purpose, an intent to wrongfully influence the
recipient.”7 The Supreme Court recently reinforced the notion
that a criminal prohibition against “corrupt” conduct requires
a consciousness of wrongdoing, although the Court declined
to provide an all-encompassing definition of the statutory
term.8 Truly innocent mistakes are not illegal under the FCPa.
In order to constitute an FCPa violation, a payment must
be intended to cause an official to take an action or make
a decision that would benefit the payor’s business interest.
note that the business to be “obtain[ed] or retain[ed]” by
the corrupt payment need not be with the government or a
government-owned entity. rather, the FCPa is violated if a
corrupt payment is made in order to facilitate improperly the
obtaining or retaining of business with a third party.
FCpa Case LaW evoLves: U.S. v. Kay, 513 F.3d 432 (5Th Cir. 2007). after a lengthy appeals process, the united States Court of appeals for the Fifth Circuit held that payments made by two executives at american rice Incorporated (“arI”) to Haitian officials to reduce arI’s tax liabilities were indeed designed to “obtain or retain business” as prohibited by the FCPa. David Kay and Douglas Murphy were indicted in 2002 but argued that their actions did not fall under the scope of the FCPa prohibition against payments to “obtain or retain business” under the conventional understanding of that language. Kay and Murphy had moved to dismiss and arrest judgment based on lack of fair notice, a motion that the Fifth Circuit rejected after concluding that Kay’s and Murphy’s convictions met the various standards of fair notice. The united States Supreme Court denied Kay’s and Murphy’s petition for writ of certiorari on October 6, 2008.
other relevant Laws. Other statutes that reach allegedly cor-
rupt activities, such as conspiracy, racketeering, mail fraud,
wire fraud, and money laundering, complement the FCPa.
Federal money-laundering laws list FCPa violations as predi-
cate offenses and can be used to prosecute the funding of
unlawful transactions.9 In 2008, the DOJ demonstrated its
willingness to use forfeiture actions to target the proceeds of
bribery overseas—a significant development, given that the
recipients of bribes are excluded from prosecution under the
FCPa and the u.S. general conspiracy statute.10
You Can’T BurY Your head in The sand. although the FCPa prohibits only a “knowing” violation, knowledge can be proved by evidence of willful blindness. Indeed, when it amended the FCPa in 1988, Congress indicated that it intended to prohibit actions that “demonstrate evidence of a conscious disregard or deliberate ignorance of known cir- cumstances that should reasonably alert one to high prob- ability of violations of the act.”11
penalties for violating the FCpa antibribery provisions. Indi-
viduals face up to five years’ imprisonment for each violation
of the antibribery provisions of the FCPa, or up to 20 years
for certain willful violations.12 Corporations and other busi-
ness entities may be fined up to $2 million for each violation,
individuals as much as $100,000.13 The maximum fine may
be increased to $25 million for corporations and $5 million
for individuals in the case of certain willful violations.14 under
the alternative Fines act, all criminal fines, including those
imposed under the FCPa, may be increased to twice the gain
obtained by reason of the offense or twice the loss to any
other person.15 Both the DOJ and the SEC may seek a court
order enjoining violations of the FCPa.16
Indemnification Prohibited. The FCPa prohibits “issuers” as defined under the act (including all public corporations) from
paying the criminal and civil fines that may be imposed on
an officer, director, employee, agent, or stockholder.17
Collateral Consequences. Individuals and corporations that are found to have violated the FCPa may suffer collat-
eral consequences such as exclusion or debarment from
certain federal programs, ineligibility to receive export
licenses, and suspension or debarment from the securities
industry. Because violation of the FCPa is a predicate act
under the racketeer Influenced and Corrupt Organizations
act (“rICO”), a corporation or individual may be subject to
additional civil or criminal actions, including a private rICO
action by an aggrieved competitor or forfeiture proceedings
by the government.18
exceptions and defenses under the FCpa. The FCPa con-
tains several provisions that exempt certain conduct from its
antibribery provisions.
Facilitating Payments for routine Government actions. The FCPa does not prohibit “facilitating or expediting payment[s]”
made to foreign officials for the purpose of causing them to
perform “routine governmental actions.”19 This provision is
commonly referred to as the “grease payment” exception.
In order to qualify for this exception, payments must relate
to the performance of routine, nondiscretionary government
4
functions such as the issuance of routine licenses or the pro-
vision of phone, power, and water service; providing police
protection or mail delivery; or scheduling inspections associ-
ated with contract performance or the shipment of goods. The
FCPa provides that a routine governmental function does not
include any decision by a foreign official to award new busi-
ness or to continue business with a party. It is important to
note that this exception is not carte blanche to make small
bribes. relying on this exception is very risky, as the govern-
ment has provided little guidance to help companies or indi-
viduals determine what conduct qualifies as a facilitating
payment. Moreover, a facilitating payment that is permitted
under the FCPa may still be unlawful under other laws, includ-
ing those of the country in which the payment was made.
Payments Permitted by Written Laws. The FCPa does not prohibit payments that are lawful under the written laws and
regulations of the foreign official’s country.20 This exception
arguably would apply, for example, if a corporation followed
a foreign country’s written guidelines regarding permissible
financial arrangements with managers of a state-owned busi-
ness, provided the payments were not made in exchange
for corrupt actions by the recipient. We are not aware of any
country with written laws that permit bribery.
“reasonable and Bona Fide Expenditures.” The FCPa pro- vides that it shall not constitute a violation of the statute if
the person charged can prove that the payment in question
constituted “a reasonable and bona fide expenditure, such
as travel and lodging expenses,” and that it was “directly
related to (a) the promotion, demonstration, or explanation
of products or services; or (B) the execution or performance
of a contract with a foreign government or agency thereof.”21
notwithstanding this affirmative defense, travel and lodging
expenses intended to influence a foreign official’s actions
can violate the FCPa. For example, the DOJ has taken the
position that luxury or recreational travel provided for govern-
ment officials can form the basis for FCPa prosecution.22
application of the FCpa to Foreign subsidiaries. Corpo-
rations cannot insulate themselves from liability under the
FCPa for actions taken overseas merely by moving foreign
operations to a subsidiary. While it is true that the antibrib-
ery provisions of the FCPa do not explicitly make a par-
ent corporation liable for violations committed by a foreign
subsidiary, enforcement authorities are clearly prepared to
employ other legal theories as a means of holding parent
corporations responsible for the actions of their subsidi-
aries. as discussed below, the books-and-records pro-
visions of the FCPa impose an obligation on corporate
parents to ensure their subsidiaries’ compliance. Corrupt
payments, of course, are almost never recorded accurately
on a corporation’s books, making every antibribery case a
potential books-and-records case. as a result, corporations
that fall within the SEC’s jurisdiction should implement at
the subsidiary level comprehensive policies directed spe-
cifically to the accuracy of recordkeeping. recent cases
exhibit the u.S. government’s increasing willingness to pur-
sue foreign subsidiaries.23
Broadly speaking, parent corporations have potential expo-
sure for the actions of their subsidiaries to the extent that the
parent controls in any way the operations of the subsidiary.
Prosecutors have at their disposal several legal theories that
can permit them to bring an action against a parent for its
subsidiary’s actions. The prosecutor might seek to establish
that the subsidiary was the “alter ego” of the parent. Simi-
larly, it might try to establish that the parent and subsidiary
formed a single “integrated enterprise” or that the corporate
veil should be pierced, destroying the corporate separateness
between the organizations. To the extent that employees of
the parent are directly involved in the affairs of the subsidiary,
the government may seek to attribute to the parent respon-
sibility for the actions of those employees under the legal
theory of respondeat superior. That doctrine can attribute
responsibility to a corporation for an employee’s illegal actions
when the employee acted within the scope of his duties and
for the benefit of the corporation. Criminal responsibility can
be triggered by the act of any employee within a company,
not just high-level officials. For all of these reasons, corpora-
tions are well advised to ensure that their foreign subsidiaries
have in place adequate corporate compliance policies and
procedures to prevent illegal activity.
obtaining advisory opinions for Future Conduct. under
procedures promulgated by the DOJ, issuers and domestic
concerns may seek and obtain “an opinion of the attorney
General as to whether certain specified, prospective—not
hypothetical—conduct conforms with the Department’s pres-
ent enforcement policy regarding the antibribery provisions
of the Foreign Corrupt Practices act.”24 Opinions issued by
the attorney General are published, albeit without specifically
naming the companies and persons involved. While the opin-
ions are binding only as to the requestor, the government’s
approach to specific fact situations can be a valuable source
when evaluating proposed courses of action.
Outside of these opinions, limited guidance exists regard-
ing FCPa compliance. For example, how much government
ownership or control is necessary to qualify an entity as
state-controlled is still an open question, and the govern-
ment has offered little explicit guidance as to the contours
of the “reasonable and bona fide” affirmative defense for
promotional expenses.
5
The imporTanCe oF Keeping good reCords. In comply- ing with the FCPa, an organization cannot neglect its books and records. For those corporations that issue u.S. securities, the FCPa explicitly imposes recordkeeping and internal con- trol requirements that extend to the company’s foreign and domestic subsidiaries. It is, for example, a separate and inde- pendent violation for such a company to book as “consultant fees” money paid to a third party for other reasons, regard- less of whether the funds actually can be traced to a foreign official. Indeed, most FCPa enforcement actions brought by the SEC arise from accounting violations, not bribery per se. although the FCPa’s accounting provisions apply only to issu- ers of securities in the united States, all organizations should focus on maintaining accurate financial records as a means of avoiding risky or suspicious payments. a Jones Day White Paper entitled “The Legal Obligation to Maintain accurate Books and records in u.S. and non-u.S. Operations,” which details the FCPa’s recordkeeping and internal control require- ments, is available at www.jonesday.com.
reCognizing red FLagsreCognizing red FLags
Corporations and individuals may be subject to prosecu-
tion for corrupt payments even if they have no actual knowl-
edge that bribes are being paid. as noted above, the FCPa
purports to impose criminal sanctions on persons who pay
money to third parties with a reckless disregard for circum-
stances that suggests the money is being used for corrupt
purposes. Thus, if an executive agrees to pay a consultant
who in turn gives some of that money to a government offi-
cial in exchange for official actions that benefit the corpora-
tion, the executive and the corporation may be targeted by
the DOJ for violating the FCPa even absent actual knowledge
of the corrupt payment. Whether the government believes
that the company and its employees should be held liable for
such indirect bribes largely depends on the existence of cir-
cumstances that should have put the company on notice that
corrupt payments were likely to occur.
The government has provided some guidance regarding cir-
cumstances it considers to be “red flags” for FCPa violations: 25
unusual payment patterns or Financial arrangements.
Generally speaking, bribes have come a long way from the
proverbial bag of cash exchanged under the table. never-
theless, improper payments made to foreign officials almost
always are accompanied by unusual payment arrange-
ments. Companies should use increased vigilance when
asked to make payments for services in a bank account
not located in either the country where the services were
rendered or the country where the recipient of the funds is
located. Similarly, the use of shell entities or aliases should
trigger heightened scrutiny of the transaction to ensure that
it is not a vehicle for corrupt payments.
a history of Corruption in the Country. although bribes may
be paid or demanded in all countries, no one seriously dis-
putes that certain nations—many in the developing world—
see more than their fair share of corruption. When doing
business in a country with a reputation for public corruption,
corporations must be particularly suspicious of any activ-
ity that might suggest that bribes are being paid by their
employees or agents. Enhanced compliance and training
efforts often are in order. Thus, at a minimum, corporations
doing business abroad should be familiar with the annual
Corruption Perceptions Index published by Transparency
International (www.transparency.org). additional resources
regarding the prevalence of corruption in a particular coun-
try are available from the State Department. International
legal counsel can provide further details regarding the like-
lihood that bribes will be solicited or demanded in particu-
lar circumstances.
rejection of anticorruption provisions. a corporation subject
to the FCPa often asks a foreign business partner to warrant
that it will not (a) take any action in furtherance of an unlaw-
ful offer, promise, or payment to a foreign public official or (b)
take any action that would cause the firm to be in violation of
the FCPa. To the extent that a prospective business partner
refuses to agree to such a contract provision or other written
certification, the corporation should be on alert that the part-
ner may not intend to live up to those standards.
unusually high Commissions. Commissions have histori-
cally been a vehicle through which bribes can be funneled to
government officials. accordingly, a request to pay unusually
high commissions is a warning sign of possible corruption. a
request to deposit commissions in multiple bank accounts,
perhaps in offshore banks, also justifies additional scrutiny.
Lack of Transparency in expenses and accounting records.
as demonstrated by the books-and-records provisions of the
FCPa, Congress and enforcement authorities view accurate
books and records as a critical bulwark against corrupt pay-
ments. Lack of transparency in the books and records of a for-
eign business partner is a possible indicator of corrupt activity.
If such a business partner seeks to shield expenses, account-
ing records, and other financial information from view, a possi-
ble motivation could be the desire to hide improper payments
to government officials.
apparent Lack of Qualifications or resources. Corporations
doing business abroad should be suspicious if a joint-venture
partner or representative does not appear capable of perform-
ing the services offered. numerous enforcement actions have
arisen from sham service contracts, under which corrupt pay-
ments are disguised using a consulting agreement or other
arrangement. Similarly, organizations and individuals doing
6
business in a foreign country should be particularly wary of any-
one who claims to have the ability to obtain licenses or other
government approval without providing a description of the
legitimate manner in which those goals will be accomplished.
recommendation by a government official. Government
officials need not demand a bribe directly in order to create
potential FCPa liability for an organization or individual. Instead
of demanding a bribe outright, a government official who is
not a potential customer but exercises authority over a trans-
action may suggest that a particular third party be hired as
a consultant or in some other capacity. numerous enforce-
ment actions have arisen from payments to third parties at the
request of foreign government officials. accordingly, any orga-
nization or individual doing business in a foreign country must
be cautious when a government official suggests in any way
that a particular third party be paid or hired.
CorporaTe CompLianCe programsCorporaTe CompLianCe programs
any organization seeking to do business lawfully and ethi-
cally in a foreign country should have in place a compliance
program designed to detect and prevent corrupt payments
to government officials. The benefits of such a program are
twofold. First, an effective corporate compliance program
will reduce the risk that employees in a foreign subsidiary
will break the law out of ignorance or in the mistaken belief
that paying bribes, although unlawful, is in the best interest
of the organization. Second, in the event that an individual
pays a bribe notwithstanding the organization’s best efforts,
a compliance program stands as tangible evidence of the
organization’s good faith. In the united States, for example,
the existence of a corporate compliance program has been
identified by the DOJ as one factor in deciding whether to
bring charges against a corporation for the illegal actions of
an employee. Likewise, corporations convicted of criminal
charges in the united States are eligible to pay lower fines if
they have corporate compliance programs in place.
an effective FCPa compliance program will contain the fol-
lowing elements:
1) a policy or code of business ethics that prohibits corrupt
payments to government officials.
2) Detailed procedures, standards, and guidance to address
specific issues that might arise in the course of a compa-
ny’s operations.
3) Training programs designed to provide the appropriate
education to each employee on the basis of seniority, job
responsibilities, geographic location, and line of business.
4) Systems to detect and investigate suspected violations,
to monitor the effectiveness of the program, and to rem-
edy violations.
The precise details of such a compliance program will vary,
of course, from one company to another, depending on the
size of the organization, the nature and location of its oper-
ations, and the degree to which its employees interact with
government officials. Typically, an organization with signifi-
cant overseas operations will include in its FCPa compliance
program specific procedures for conducting due diligence of
foreign consultants, agents, and business partners. The pro-
gram also should set company policy regarding the use of
contract terms relating to FCPa compliance, providing model
language where appropriate.
deciding Whether to self-disclose. In the event that a com-
pany learns of a possible FCPa violation—perhaps through
its compliance program—the organization faces the difficult
question of whether to alert the authorities. With increasing
frequency, corporations are self-reporting to enforcement
authorities activities of employees and business partners
that might violate the FCPa. This is due to numerous fac-
tors, including the requirements of the Sarbanes-Oxley act
of 2002, the encouragement of the SEC and the DOJ, and
the likelihood that enforcement authorities will discover vio-
lations that are not disclosed. revised policies for the DOJ
have identified “timely and voluntary disclosure of wrongdo-
ing” as a key factor to be considered in deciding whether or
not to prosecute a company.26 at the same time, enforce-
ment agencies have committed considerable resources to
investigating and prosecuting corporate misconduct over
the last several years.
In deciding whether to self-disclose, corporations must be
cautious. While disclosure may reduce penalties and avoid
negative publicity, it is only one of many factors used to
determine the penalty for foreign corruption offenses. Some
companies escape serious consequences when they self-
disclose, but there is no guarantee of leniency from the SEC
or the DOJ when companies report voluntarily. In short, com-
panies often are subject to enforcement actions even after
self-disclosure. Companies must be aware that the practical
consequences of disclosure remain unpredictable.
addiTionaL inFormaTionaddiTionaL inFormaTion
For further information, please contact your principal Jones
Day representative, r. Christopher Cook (+1.202.879.3734;
[email protected]), or one of the lawyers
listed in this publication. General email messages may be
sent using our “Contact us” form, which may be found at
www.jonesday.com.
7
endnoTesendnoTes 1 15 u.S.C. §78dd-1(a). 2 15 u.S.C. §78dd-2(h)(1). 3 See Press release, “Former alcatel CIT Executive
Sentenced for Paying $2.5 Million in Bribes to Senior Costa rican Officials,” u.S. Department of Justice (Sept. 23, 2008), available at http://www.usdoj.gov/opa/pr/2008/ September/08-crm-848.html (all web sites herein last visited Dec. 18, 2009); Press release, “Three Vetco International Ltd. Subsidiaries Plead Guilty to Foreign Bribery and agree to Pay $26 Million in Criminal Fines,” u.S. Department of Justice (Feb. 6, 2007), available at http://www.usdoj.gov/opa/pr/2007/February/07_crm_075. html.
4 See united States attorneys’ Manual, Title 9, Criminal resource Manual, 1018 Prohibited Foreign Corrupt Practices, available at http://www.usdoj.gov/usao/eousa/ foia_reading_room/usam/title9/crm01018.htm.
5 15 u.S.C. §§78dd-1(a), 78dd-2(a), 78dd-3(a). 6 See, e.g., FCPa review Procedure release no. 83-02,
u.S. Department of Justice (July 26, 2002) (treating as a “foreign official” the general manager of a company owned by a foreign government and with which a u.S. company was entering a joint venture).
7 S. rep. no. 114 95th Cong. 1st Sess. 10 (1977). 8 Arthur Andersen LLP v. United States, 125 S. Ct. 2129
(2005). 9 18 u.S.C. §1956(c)(7)(B)(iv). 10 Press release, “Department of Justice Seeks to recover
approximately $3 Million in Illegal Proceeds from Foreign Bribe Payments,” u.S. Department of Justice (Jan. 9, 2009), available at http://www.usdoj.gov/opa/pr/2009/ January/09-crm-020.html.
11 H.r. Conf. rep. no. 100-579, at 919–20 (1988). The original 1977 version of the FCPa contained a broader knowledge requirement—prohibiting a defendant from engaging in prohibited conduct while “knowing or having reason to know” that the benefit in question could be passed on to a government official for corrupt purposes. Id. (“In clari- fying the existing foreign anti-bribery standard of liability under the act as passed in 1977, the Conferees agreed that ‘simple negligence’ or ‘mere foolishness’ should not be the basis for liability.”). The DOJ may take an expan- sive view of the statute under which liability could be based solely on a failure to investigate, regardless of the reason. See united States v. Green, no. 08-59(B)-GW (aug. 18, 2009), proposed instruction 31 (noting that the knowledge requirement may be satisfied if a person is aware of a high probability of the existence of a partic- ular fact and “fails to take action to determine whether it is true or not”). See also Peter Clark, Deputy Chief of the Fraud Section, u.S. Department of Justice Criminal Division, address at the Foreign Trade Council (apr. 21, 1994) (summarized in Don Zarin, Doing Business under the Foreign Corrupt Practices act 4-32, n. 153 (1997)) (stat- ing that “the department applies a standard of ‘reckless disregard’ or ‘willful blindness’ to the knowledge require- ment” and that “the deletion of ‘reason to know’ has changed neither the prosecution standard nor counsel’s advice”). Such an interpretation would appear to be at odds with the plain meaning of the statutory language, under which a defendant must take “conscious” or
“deliberate” actions to avoid learning the circumstances which would suggest that a violation of the act is taking place. Mere negligence should not suffice.
12 15 u.S.C. §78dd-1, §78ff. 13 15 u.S.C. §78dd-1 et seq.; 18 u.S.C. §3571. 14 15 u.S.C. §78ff(a). 15 18 u.S.C. §3571(d). 16 15 u.S.C. §78dd-1 et seq. 17 15 u.S.C. §78ff(c)(3). 18 See, e.g., Glenn Simpson, “alcoa Faces allegation By
Bahrain of Bribery,” The Wall Street Journal (Feb. 28, 2008). 19 15 u.S.C. §§78dd-1(b), 78dd-2(b), 78dd-3(b). 20 15 u.S.C. §§78dd-1(c)(1), 78dd-2(c)(1), 78dd-3(c)(1). 21 15 u.S.C. §§78dd-1(c)(2), 78dd-2(c)(2), 78dd-3(c)(2). 22 See also FCPa review Opinion Procedure release
no. 08-03, u.S. Department of Justice (July 1 1, 2008), available at http://www.usdoj.gov/criminal/fraud/fcpa/ opinion/2008/0803.html; FCPa review Opinion Procedure release no. 07-02, u.S. Department of Justice (Sept. 11, 2007), available at http://www.usdoj.gov/criminal/fraud/ fcpa/opinion/2007/0702.html.
23 See In the Matter of Schnitzer Steel Industries, Inc., u.S. Securities and Exchange Commission administrative Proceeding File no. 3-12456 (Oct. 16, 2006); Deferred Prosecution agreement (Oct. 2006) (Schnitzer Steel consented to the entry of a cease-and-desist order and agreed to pay a $7.7 million civil penalty relating to corrupt payments made by its Korean subsidiary); Press release, “Former Senior Officer of Schnitzer Steel Industries Inc. Subsidiary Pleads Guilty to Foreign Bribes,” u.S. Department of Justice (June 29, 2007), available at http:// www.usdoj.gov/opa/pr/2007/June/07_crm_474.html; Press release, “SEC Settles Charges against Former Portland Steel Executive for anti-Bribery Statute Violations,” u.S. Securities and Exchange Commission (June 29, 2007), available at http://www.sec.gov/litigation/litreleases/2007/ lr20174.htm; In the Matter of Diagnostics Products Corp., u.S. Securities and Exchange Commission Litigation release no. 51724 (May 20, 2005) (finding DPC in viola- tion of FCPa for improper payments made by Chinese subsidiary); United States v. DPC (Tianjin), Ltd. (C.D. Cal. 2005) (plea agreement); see 1588 PLI/Corp 63, 103 (2007); In the Matter of Syncor International, u.S. Securities and Exchange Commission release no. 46979 (Dec. 10, 2002) (assigning liability to Syncor International for pay- ments that Syncor Taiwan made to physicians employed by hospitals owned by the legal authorities in Taiwan in exchange for their referrals of patients to medical imag- ing centers owned and operated by the defendant).
24 28 C.F.r. §80.1 (1992). 25 See u.S. Department of Justice, “Lay-Person’s Guide to
FCPa,” available at http://www.usdoj.gov/criminal/fraud/ docs/dojdocb.html.
26 See Principles of Federal Prosecution of Business Organizations—Title 9, Chapter 9-28.000 (revised on aug. 28, 2008, and describing factors that the DOJ will con- sider in deciding whether to bring charges against a corporation); u.S. Securities and Exchange Commission’s October 2001 “Seaboard report” (articulating factors the SEC considered in deciding whether or not to pursue an enforcement action).
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for gen- eral information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact us” form, which can be found on our web site at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.
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4/23/2021 What are the top risks to doing business in Latin America? | World Economic Forum
https://www.weforum.org/agenda/2017/03/risks-business-latin-america/ 1/6
What are the top risks to doing business in Latin America?
31 Mar 2017
Claudia Dill Chief Executive Officer Latin America and Member of the Executive Committee, Zurich Insurance Group
'Growing unemployment increases the prominence and structural importance of shadow economies'
Image: REUTERS/Ivan Alvarado
This article is part of the World Economic Forum on Latin America
“Failure of national governance”, “unemployment” and “fiscal crises” – all prominently cited as
risks by Latin American and Caribbean (LAC) business executives. As in previous years, the
Global Risks Report 2017 uses data from the Executive Opinion Survey, which asks LAC
executives about the risks of highest concern for doing business. The findings shed some light on
the anxieties of business people throughout the region and how these differ from those of their
counterparts in other parts of the world.
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4/23/2021 What are the top risks to doing business in Latin America? | World Economic Forum
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While key concerns across the globe include cybersecurity and data fraud, terrorist attacks and
large-scale involuntary migration, executives in LAC were more concerned with fundamental
political and economic structural risks. A major theme that emerged among business leaders in
the region was a lack of confidence in the state, both in terms of the legal frameworks within
which business might operate and the economic and social management of a country.
Many of these findings will come as little surprise in a year of negative GDP growth with large falls
in Brazil and Venezuela, where GDP dropped 3.6% and 14% respectively. The region was also
affected by the reduction in commodity prices and FX volatility in 2016. In 2017, GDP growth is
set to rebound with forecasts around the 1.6% mark. Growth is expected to be driven by external
factors such as depreciated exchange rates, improved terms of trade and government
investments. While this is good news for the region, there are still challenges that could bring a
certain degree of volatility to the region.
Failure of national governance
According to data from the Executive Opinion Survey used in the 2017 report, the failure of
national governance is at the forefront of LAC executives’ minds when it comes to identifying
risks to doing business.
Recent events in the region go some way to explaining the reasons for this concern: Brazil’s
numerous political and business corruption scandals; corporate governance issues in Mexico;
and the seemingly complete breakdown of national governance in Venezuela. There are plenty of
examples of national and regional environments that present as high-risk scenarios for doing
business across the region.
Although the existence of the rule of law is no longer an issue, every time most countries in the
region (Chile being a relatively stable, notable exception) have a new president, we can expect
4/23/2021 What are the top risks to doing business in Latin America? | World Economic Forum
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new – and sometimes radically different – policies, regulation and economic decisions, which
affect both local and foreign investment. In the next two years, the region can expect presidential
elections in many of the major markets including Brazil, Colombia, Chile, Mexico and Venezuela.
This high level of concern about national governance is unique to LAC: 44% of all executives in
the region named the failure of national governance in their top five risks, while in all other parts
of the world less than one in three executives felt this way.
The extent and vigour of governance across LAC may fall short of optimal standards, but there is
almost certainly a role for business in promoting open and democratic systems. Through lobbying
government, sponsoring civil society spaces and shining a light on corruption, business can hold
government to account and deliver positive change for societies and business ecosystems.
Unemployment or underemployment
Only sub-Saharan African executives were more concerned than those in LAC about the impact
that unemployment or underemployment might have on doing business in their region.
While LAC executives understandably desire the ability to operate in vibrant and thriving
economies, unemployment (particularly among young people) saw a sharp increase in 2016,
despite the narrative of a growing and upwardly-mobile middle class. The International Labour
Organisation (ILO) placed the official unemployment rate across the region above 8% in 2016 -
the highest level in a decade - and among 16-24-year-olds the figure sits at 14%.
The consequences for business are far reaching. Growing unemployment increases the
prominence and structural importance of shadow economies (jobs without contractual or social
security), which both undermines social security and demotivates the next working generation.
Fiscal crises
Many business leaders in LAC will have first-hand experience of the devastating impact that the
1980s Latin American debt crisis had on business and development in the region. The so-called
Unemployed Brazilians wait to fill out applications while looking for jobs in Sao Paulo
Image: REUTERS/Paulo Whitaker
4/23/2021 What are the top risks to doing business in Latin America? | World Economic Forum
https://www.weforum.org/agenda/2017/03/risks-business-latin-america/ 4/6
Lost Decade had damning implications for the growth of the region and it is unsurprising that
businesses today are wary of history repeating. At a time when the fiscal regulatory environment
in LAC is complex and volatile it is unsurprising that just over a third of all respondents cited fiscal
crises as a top five risk – only Eurasia (45%) had a higher figure.
The direction and quality of fiscal policy within LAC is also strongly linked to the question of
national governance, where legal, economic, and political aspects of the state can work together
to deliver a strong, robust environment in which business can operate.
Indeed, if the region is to reduce structural rigidity and improve business confidence, fiscal results
must be stabilized. We are likely to see such adjustments in LAC during 2017 and the next few
years. For example, in Argentina, Treasury Minister Nicolas Dujovne announced new targets for
the primary fiscal balance and presented a new fiscal framework to increase transparency and
credibility. At the same time, Brazil is implementing austerity measures, a tight monetary policy
and the government continues to introduce changes to the tax framework and pension system.
Profound social instability
In the 2015 Global Risks Report, profound social instability was ranked as the biggest risk facing
LAC, in terms of how well-prepared the region was. Among this year’s business respondents, the
number who consider this a major risk has remained broadly static (up marginally from 33.3% to
34.1%), while other risks have grown in prominence.
As one of the pillars in traditional PESTLE (political, economic, social, technological, legal and
environmental) analysis, negative social factors represent fundamental risks to a successful and
fully-functioning operating environment for business. With an ageing population, reduced but still
significant levels of social inequality, and a growing, vulnerable lower-middle class, there is much
for LAC businesses to be concerned about.
It’s also important to understand that although LAC countries share historical, social and
demographic similarities, such as language and religion, the region is very diverse and unique.
There are often several differences within individual countries, for example, the big cities
frequently have a completely different landscape from the interior and more rural parts of the
same country. This is why it is critical to increase joint efforts between governments, the private
sector and civil society to reduce social inequality in the region by increasing access to housing,
health and education. This determination is essential for reducing poverty and inequality.
These same challenges should also be viewed as opportunities for business to work with
government and other organizations to introduce solutions and improvements across the region.
4/23/2021 What are the top risks to doing business in Latin America? | World Economic Forum
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Interconnections
We must of course caveat these somewhat artificial “risk buckets”: to understand risks within a
business ecosystem one must recognize how they interact and influence one another. While the
failure of national governance and fiscal crises are almost impossible to separate, there are also
strong connections between profound social instability and rising unemployment figures.
When assessing risk, businesses may be tempted to review individual factors as discrete
hazards, but only when these issues are taken together will they be properly understood and the
most fitting mitigating tactics identified.
Mitigation and collaboration
The risks outlined above cannot be entirely eradicated. Business – in LAC as in almost all global
regions – will always deal with some levels of risk across these sectors.
Business is strongest when it works together in collaboration with governments and third sector
organizations. Initiatives like the World Economic Forum’s Partnering Against Corruption Initiative
(PACI) can shine a light on the shortcomings that undermine business. Similarly, asset managers
are organizing in Mexico, looking to change governance structures to give business and investors
more transparency and accountability.
Steps to mitigate risk must be high on the agenda of every board. When this approach is
bolstered by increased collaboration, there is every opportunity for a robust environment
conducive to business to flourish and deliver social and economic benefits. With this approach
we hope to see the topics identified in 2017 diminish in coming reports.
License and Republishing
Written by
Claudia Dill, Chief Executive Officer Latin America and Member of the Executive Committee, Zurich Insurance Group
The views expressed in this article are those of the author alone and not the World Economic Forum.
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4/23/2021 Is a Moral Obligation a Legal Contract?
https://smallbusiness.chron.com/moral-obligation-legal-contract-66668.html 1/12
Role of Government in Business Ethics Small Business | Human Resources | Business Ethics By K.A. Francis Updated January 25, 2019
Most businesses are started for two reasons: to meet a need that's not being met, and to make money. When a business can do both, it's a wonderful thing. However, if a business wants a more robust bottom line, sometimes it looks for ways to cut corners. If those cuts don't affect the quality of the goods and services, that's great.
But when the product starts to suffer and people are put at risk, this is where problems can arise. This approach can also cause problems internally. If a company expects its employees to perform their jobs in a way that might cause a conflict legally or morally, a business' ethical reputation could be in jeopardy.
Business Ethics Defined
4/23/2021 Is a Moral Obligation a Legal Contract?
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Business ethics are the rules and principles that determine what is morally right and wrong in a business atmosphere. It's the unspoken agreement that a business will conduct itself fairly and within the established rules. Many businesses operate within the proper ethical guidelines, without the need for an outside agency to step in.
However, there are also many instances in which the government has entered into the situation and has forced a company to adhere to more ethical standards. Most of the government regulatory agencies that exist do so, because a company or an entire industry has ranked profits over their workers or the environment.
Legal But Not Ethical There are business practices that are legal but aren't necessarily ethical. Charging $500 for a pill that cost 50 cents is legal, but ethically, it could be questioned, especially if the price point creates a challenge for those who need the medication. Providing miners with required equipment is legally compliant, but if say, the oxygen masks are shoddily made or ventilation equipment is not as up-to-date or maintained as it could be, ethically that could be a problem. Governmental agencies such as the Food and Drug Administration and The Occupational Safety and Health Administration keep businesses within legal and ethical standards.
Why Business Ethics Are Important People do business with other people and businesses they trust. A business that is known for dealings that are fair and ethical fare better over the long haul than those who operate using less ethical practices. Although a business might be able to get away with fooling its customers for a time, eventually the underhanded operations are revealed and the company is as best vilified, at worst driven out of business.
Unethical practices can involve how a business treats its customers, but can also carry over into how the company treats its employees. For example, a business that underpays its customers
4/23/2021 Is a Moral Obligation a Legal Contract?
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while showing record profits can find themselves on the wrong side of public opinion. This can have a negative impact on a business; bottom line. Ironically, increasing profits is often the reason that unethical practices were started in the first place.
REFERENCES WRITER BIO
4/23/2021 Is a Moral Obligation a Legal Contract?
https://smallbusiness.chron.com/moral-obligation-legal-contract-66668.html 4/12
R E L A T E D A R T I C L E S
Social Contract Theories in Business
Ethical Theories in Business
Three Levels of Ethical Standards in a Business Organization
The Most Important Criteria for Solving Ethical Dilemmas in Business
How to Apply Moral Philosophy to Business Ethics
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4/23/2021 Is a Moral Obligation a Legal Contract?
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Is a Moral Obligation a Legal Contract? By Van Thompson
Moral obligations might seem strong enough to equate to a good legal contract, but moral obligations and legal contracts are completely separate entities. A moral obligation can be encoded into a contract, and some moral obligations are protected by law even without a contract. Some contracts, however, may contain provisions that some people find immoral.
Moral Obligation Basics A moral obligation is something that, under a given ethical system, you're required to do. Philosophers, attorneys and politicians have argued for centuries about what constitutes a moral obligation, and two people can disagree strongly about these obligations. For example, your employees might feel that you have a moral obligation to give an annual cost of living raise. Some
4/23/2021 Is a Moral Obligation a Legal Contract?
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moral obligations are generally accepted and are codified into law. Few people would disagree that we have a moral obligation to avoid committing murder.
Contractual Obligations When you sign a contract, you have a legal duty to follow the provisions in the contract. Contracts can require you to do things you find immoral, but they can't generally require that you violate the law. You can't, for example, sign a contract to enslave an employee or kill someone. You can, however, give up some legal rights by, for example, agreeing to arbitrate all disputes or signing over your copyrights to a creative work.
Legal Obligations In addition to contractual obligations, you also have an obligation to follow the law. Legal scholars have long debated whether following the law is a moral obligation. Proponents of civil disobedience, for example, argue that they have a moral obligation to disobey unjust laws. However, if you don't follow the provisions of a legal contract you've entered into or violate state or federal laws, you could be imprisoned or sued. For example, your contract doesn't have to state that you will pay employees the minimum wage; the law requires that you do so.
Immoral Contract Provisions If you sign a contract with a clause that you feel violates your business's moral obligations, this is not a valid legal reason to breach the contract. Consequently, it's important to read contracts carefully before you sign them. If, however, the contract violates local laws, it might not be enforceable. Some contracts are so problematic that courts can rule them unconscionable -- sometimes on the basis of moral principles. For example, if you write in your contract that employees have to pay you money should your company go bankrupt, a court might rule that this is unconscionable and violates basic moral standards.
4/23/2021 Is a Moral Obligation a Legal Contract?
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REFERENCES WRITER BIO
R E L A T E D A R T I C L E S
The Difference Between Unfair Dismissal & Unlawful Termination
Can You Legally Fire an Employee Who Commits a Hate Crime Against Another Employee?
Legal Time Frame to Void a Contract
Types of Ethical Practices Employees Adhere to in the Workplace
Legal Precedent Vs. Contract Law
4/23/2021 Is a Moral Obligation a Legal Contract?
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Ethical Business Culture By Robert Vaux
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4/23/2021 Is a Moral Obligation a Legal Contract?
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In the journey to business success, the temptation to engage in unethical practices can become very strong. Too often, companies place profit ahead of all other considerations, engaging in dubious practices and creating a culture devoid of business ethics. The results can devastate entire economies, as well as causing irreparable harm to both the business itself and its customers . An ethical business culture can be defined by several key components, which places reliable companies above those that will do anything for a buck.
Adhering to Commitments The most important aspect of an ethical business culture is the same as it is for individuals: Keep your promises and honor your commitments. As stated by Charles D. Kerns in the "Graziadio Business Review," a business culture that means what it says will refrain from lying or deceiving others. Products will not be marketed in a duplicitous way, partners will not be misled or deceived about the deals they are making, and employees will not be induced to work for bonuses that never materialize. In cases where a commitment cannot be met, the wronged party needs to be told exactly why and receive assurances of reparation in some manner in the future.
4/23/2021 Is a Moral Obligation a Legal Contract?
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Code of Conduct An ethical business structure will create a viable code of conduct: stating how employees will behave at work, the standards the product will adhere to, and the overall ethical underpinnings of the company as a whole. According to Kerns, it should include enforceable punishments for those who break the code of conduct. It should also be adopted proactively -- anticipating ethical dilemmas rather than reacting after an ethical lapse has been revealed. The code of conduct needs to apply to everyone associated with the company. Leaders and senior officers need to lead by example and adhere to the code of conduct in every way; that makes it easier to expect all employees to engage in the same behavior.
Transparency and Communication Ethical businesses have nothing to hide, and while it may be prudent to keep marketing strategies or similar plans hidden, a culture of secrecy often leads to abuse. Good businesses communicate important information to their employees, maintain an open-door policy towards questions about the company's direction, and permit reports of abuses and complaints in a manner which does not punish those who speak out. An ethical business knows the difference between "playing its cards close to its vest" and distorting or disguising information in an effort to divert suspicion.
Treatment of People Every business is essentially a collection of people: employees, customers and partners who exist as more than simply assets to be exploited. An ethical business structure understands these facts and strives to provide a positive experience to people in its organization. That means rewarding loyalty with improved wages or other benefits; demonstrating flexibility when customers require a little give; understanding how business strategies affect those in the company; and generally understanding how the company's conduct affects the lives of those around it.
4/23/2021 Is a Moral Obligation a Legal Contract?
https://smallbusiness.chron.com/moral-obligation-legal-contract-66668.html 11/12
REFERENCES
R E L A T E D A R T I C L E S
Role of Government in Business Ethics
What Effects Do Managerial Decision Making & Leadership Have on Organizational Ground Rule Changes?
Difference Between Code of Ethics & Conduct
What Ethical Factors Must Be Taken Into Account in Organizations?
Influence of Morality in Business Operations
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DOING BUSINESS IN LATIN AMERICA By Globalaw Limited www.globalaw.net
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TA B L E O F C O N T E N T S Doing Business in Latin America
Map ........................................................................................................ 3
Introduction & Contact ........................................................................ 4
Country Guides
1. Anguilla ............................................................................................ 5
2. Argentina ....................................................................................... 11
3. Bolivia ............................................................................................ 14
4. Brazil .............................................................................................. 18
5. Colombia ....................................................................................... 26
6. Costa Rica ....................................................................................... 32
7. Curaçao ........................................................................................... 35
8. Dominican Republic ....................................................................... 39
9. Ecuador .......................................................................................... 45
10. El Salvador ..................................................................................... 49
11. Guatemala ...................................................................................... 54
12. Honduras ........................................................................................ 58
13. Mexico ........................................................................................... 62
14. Nicaragua ....................................................................................... 69
15. Panama .......................................................................................... 73
16. Paraguay ........................................................................................ 81
17. Peru ................................................................................................ 92
18. Puerto Rico ..................................................................................... 97
19. Uruguay ........................................................................................ 101
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M A P Doing Business in Latin America
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1. Anguilla
2. Argentina
3. Bolivia
4. Brazil
5. Colombia
6. Costa Rica
7. Curaçao
8. Dominican Republic
9. Ecuador
10. El Salvador
11. Guatemala
12. Honduras
13. Mexico
14. Nicaragua
15. Panama
16. Paraguay
17. Peru
18. Puerto Rico
19. Uruguay
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Globalaw Limited
Boulevard du Souverain, 280
B-1160 Brussels, Belgium
Tel: +32 2 645 2676
Fax: +32 2 645 2671
www.globalaw.net
Information for each country may change over time. Please contact the primary contact at the respective Globalaw firm to confirm that country's information. Contact details for each firm and primary contact are located at www.globalaw.net.
Dear Friends and Colleagues,
As the President of Globalaw Limited, a network of more than 110 law firms serving key jurisdictions around the world, it is my pleasure to introduce you to the Doing Business in Latin America Guide, written and produced by member firms representing this key global region. We hope you will find it a valuable resource when considering operations in these jurisdictions. Thus far, Globalaw has produced Doing Business Guides in Asia Pacific, Europe and Latin America, respectively, each of which represents the individual and collaborative expertise of the contributing law firms.
Globalaw’s over 4,500 practitioners bring a universe of diverse practice areas in their individual markets. The Guides serve not only to demonstrate this expertise but also to provide a roadmap of business fundamentals in a concise, informative and “desktop” format for your ready reference.
In addition to the contributing firms, I would also like to acknowledge the professionals at our Secretariat, MCI, for their time and effort in making this Guide a reality. If you would like to learn more about the global resources of Globalaw, please visit our website at globalaw.net.
Best regards,
Bryan C. Birkeland
Globalaw President
I N T R O D U C T I O N Doing Business in Latin America
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A N G U I L L A
• Anguilla is a 39.5 square miles British Overseas Territory affectionately known as “Tranquility Wrapped in Blue” because of its outstanding natural beauty with crystal clear turquoise waters and brilliant white sand beaches. Anguilla has a sunny and temperate climate with an average annual temperature of 27 °C; December to March is the coolest period. The people are friendly and accommodating and there is a low incidence of criminal activity across the island.
• Anguilla is the most northerly of the Leeward Islands, it lies east of Puerto Rico and north of St. Maarten, and has a single airport. It is easily accessible from mainland USA and Europe via San Juan or St. Maarten. There is a ferry service between Anguilla and St. Maarten/St. Martin which runs several times a day, every day of the week.
• Resident population of approximately 14,000. • Christianity is Anguilla’s predominant religion. • Currency: Eastern Caribbean Dollar (XCD). The United States Dollar is readily accepted
on the island and interchanged freely with the Eastern Caribbean Dollar. The Eastern Caribbean currency is pegged to the United States Dollar at the rate of EC$2.6882 to US$1.00 and there are no exchange controls in Anguilla.
• English is the national language. • Anguilla is politically stable. The United Kingdom is largely responsible for matters of
international concern such as defence and foreign affairs. However, Anguilla has an elected House of Assembly and there is a careful balance of power and responsibilities between the Governor, the Government and House of Assembly.
• The island’s economy is primarily based on luxury tourism followed by the financial services sector. Anguilla is a developing financial centre and is regulated in line with international standards. Its sophisticated statutory and regulatory framework encourages and supports this industry. Anguilla’s Commercial Online Registration Network (ACORN) is a system which provides for immediate company registration. With ACORN, company registration can be completed around the clock at the touch of a button. This has allowed Anguilla to develop as an independent financial centre and to reduce the costs associated with company incorporation.
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BUSINESS PRESENCE • In Anguilla the statutory regime allows for the incorporation of
diverse corporate entities. Prospective business owners may choose from a wide range of corporate vehicles and are thus well placed to find the corporate structure which suits their business needs.
• Some examples of the types of corporate vehicle available include the following:-
• Anguilla business company (ABC) A local company may conduct business onshore and offshore, has the capacity and all the rights, powers and privileges of an individual and thus can buy and sell property, sue and be sued, enter into contracts, hold assets including land in its own name and maintain bank accounts. A license must be obtained to carry on banking, trust, insurance or company management business.
• International business company (IBC) An international business company has the capacity to carry on its business, conduct its affairs and exercise its powers in any jurisdiction outside Anguilla, to the extent that the laws of Anguilla and of that jurisdiction permit. IBC’s and ABC’s do not pay taxes and both can be continued into or out of Anguilla. ABC’s can hold land in Anguilla but IBC’s cannot, save and except where the property is to be used as an office.
• Limited liability company (LLC) A limited liability company (LLC) is a type of company having specific features for the purposes of United States tax treatment. When an LLC is correctly structured under United States tax law, only its members and not the entity itself are subject to tax and as such they are commonly known as “pass through vehicles”. An LLC is permitted to conduct its business or operations within and outside Anguilla; it can be of finite duration and cannot own or hold an interest in land located in Anguilla unless it is for use as an office.
• Public company The shares of a public company are offered to the public instead of being held privately.
• Protected Cell Company This corporate vehicle allows separate cells to each act independently (including liabilities) of any other particular cell but yet the individual cells form a sole corporate entity and do not have separate corporate identity.
• Anguilla foundation This is an alternative to the common law trust which stems from a civil law concept, a foundation fundamentally operates as an estate-planning vehicle.
• Guarantee company A guarantee company can be used for non-charitable activities such as clubs, societies and trade associations as well as social and charitable activities.
• Hybrid company A hybrid company has certain elements of both a company and a partnership and it can be organised so as to function as a quasi-foundation.
• In order to conduct business in Anguilla foreign companies must continue as ABCs or LLCs. Alternatively, it may apply to be registered as a foreign company in Anguilla.
• The shareholders/members and directors/managers of an Anguilla corporate vehicle are generally not personally liable as shareholders or directors for the debts and obligations of the corporate vehicle. All Anguilla companies, with the exception of a public company, may have only one director. A public company must have at least three directors. It is not strictly necessary to conduct shareholders and directors meetings in Anguilla, nor is there a requirement for physical meetings to take place. Meetings may be held by telephonic or other electronic means.
ENTERPRISE ACQUISITIONS • Private company acquisitions can be conducted via share or
asset purchase. Both methods require adherence to contract law principles.
• Share Purchase – The shares of each shareholder are sold and transferred to the incoming shareholder. The business is easily transferred as a going concern, the buyer receives the assets and liabilities and the seller is relieved of any further responsibility or continuing liability. The key concerns for any buyer may be shareholders’ approval, government approval and dissenting shareholders. No shareholder approval is required unless the shares are subject to first purchase or pre-emptive rights. Under the Alien Landholding License Regulation Act (ALHL Act) Government approval via an Alien Landholding Licence (ALHL) is required if the company holds land and is an alien or if the company will become an alien company upon finalization of acquisition. A transfer of shares by an alien company or to a company which becomes an alien upon acquisition, by virtue of the identity of the directors and beneficial owners is void. Share transfers by banks, insurance or trust companies require approval. In certain circumstances legislation provides for the shares of a dissenter, which represent 10% or less of the total shares available for sale to be forcibly acquired.
• Taxes. The sale of shares will attract stamp duties payable by the transferee. The rate depends on (i) whether the target entity owns land and (ii) whether it is or will become an alien company by virtue of the acquisition:-
o Where no land is owned, the stamp duty is calculated at a rate of 1% of the consideration paid for the shares;
o Where land is owned the stamp duty on the transfer would be 5% of the value of the land;
o If the target entity is or will become an alien company, there will also be stamp duty on the ALHL tax of up to 12.5% of the value of the land. Tax paid by aliens is therefore potentially 17.5% in total.
• Asset Purchase – The assets of the company are sold to the incoming company. It is possible to achieve tax savings as the purchase price may be apportioned to the assets. The key concerns for any buyer may be shareholders’ approval, government approval and licences/approvals. Where a company is proposing to sell “all or substantially all” of its assets otherwise than in the ordinary course of business
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A N G U I L L A
shareholder approval is required. The sale, lease or transfer of land will require Government approval in the form of an ALHL if the buyer (person or company) is an alien. Approvals and licences are not generally transferrable and thus the licences and approvals required for operation must be obtained by the incoming party on their own merit.
• Taxes. The stamp duties for the transfer of land are the same as detailed above for the share purchase transaction. Transfers of other assets do not attract tax.
PROPERTY ACQUISITIONS • The Registered Land Act is based on a Torrens registration
system and it governs all land matters in Anguilla including transfer and ownership of real property. The acquisition of property in Anguilla is quick, efficient and simple especially in circumstances where the property is developed and the buyer is a belonger of Anguilla. The sale of real property to an alien is also a relatively straight forward matter but there are some additional matters to consider. Different factors may influence the manner in which the transaction proceeds, particularly the nature of the property to be acquired, whether it is undeveloped land, developed land for private or commercial (tourism) purposes or a condominium.
• Purchase and Sale and Escrow The Sale and Purchase Agreement (SPA) is the critical document that records the arrangements for the sale and transfer of the property. As the SPA is so crucial and binding upon proper execution it is highly recommended that legal advice is sought prior to execution. The SPA will typically make provision for any licences/approvals that the buyer needs to obtain and also protect the buyer in circumstances where for some reason these may not or cannot be obtained. The SPA will detail the deposit arrangements and also provide for execution and placing into escrow of the transfer documents which will transfer ownership of the property, for safekeeping in the period between execution of the SPA and closing. Aliens can buy land subject to obtaining an ALHL and the SPA makes provision for this.
• Alien Landholding License An ALHL must be obtained if an alien or alien company is to hold land in Anguilla. An ALHL is property and site specific, use specific and cannot be assigned to anyone else. In other words each acquisition by an alien is a separate matter and will require its own ALHL.
• Any individual applicant and all directors and beneficial owners with an interest of 10% or more in a company will be required to provide detailed information, in compliance with the Governments due diligence conditions. This typically includes a completed ALHL application, bank and personal references, police record, passport, colour photograph and financial and banking details.
• The Government does not tend to favour speculative applications and thus if an application is made with respect to undeveloped land the applicant should apply for and obtain outline planning permission. Full planning permission must be obtained subsequently and is premised upon the full details of the nature of the property which is to be built. ALHL often
stipulate conditions relating to the timeframe for completion of construction, the use of the property and may request a security deposit to encourage compliance. Penalties for non-compliance may result in incremental loss of security deposit through to forfeiture of the land to the Crown
• There is no restriction on the resale of property, save and except that if an ALHL is acquired by a company, statute requires that the consent of the Governor be sought prior to any transfer of shares.
• Stamp Duties/Property Taxes Upon receipt of the written confirmation that the ALHL will be granted and following this the closing of the transaction, the purchaser must pay the stamp duties due to the Department of Lands & Surveys as a pre-requisite to being registered as owner of the property and before the transfer will be accepted and registered. For belongers of Anguilla (individual or company) the rate of stamp duties due on the transfer is 5% of the assessed value of the property. For aliens (individual or company) the transfer tax of 5% of the property value must be paid and also stamp duties of up to 12.5% of the property value in relation to the ALHL.
CUSTOMS REGULATION • The collection of revenue and the regulations of ports of
entry, trade and contraband are governed by the Customs Act. The collection of revenue via excise tax in the form of customs duties accounts for a large proportion of Anguilla’s income, as there are currently no direct taxes. The amount of duty to be paid depends on the item imported. All goods are classified and the rates of duty payable are set by the House of Assembly. The determination of duty occurs by way of a paperwork system, wherein the value of the goods is disclosed using the receipt as documentary confirmation and customs calculates the amount due. Customs supports the control of vessels, warehousing and counterfeiting all of which promotes competitive and legal trade. Customs also has a critical role in protecting Anguilla’s borders and protecting society from harmful importations.
TAX REGIME • Anguilla is considered to be a “tax free jurisdiction”. In Anguilla
there is no tax on individuals or companies, thus there is no tax levied on personal income, capital gains, profits, corporations, estates. There is no withholding tax and no value added tax (VAT). Companies and individuals in Anguilla are permitted to repatriate profits, dividends, dividend interests, royalties, management charges and capital without any tax burden. Anguilla is thus an attractive option when it comes to selection of a centre for financial services and asset management.
• Anguilla has not entered into any double taxation treaty save and except the United Kingdom Income Tax Convention, which in theory applies. However, as Anguilla has no income tax it is effectively defunct.
• The following indirect taxes apply in Anguilla: import duties, ALHL tax, transfer tax, hotel accommodation levy, and work permit and residency fees.
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A N G U I L L A
• Property tax is payable on developed land, annually, currently at the rate of 0.0375 multiplied by the Government’s assessed value of the property.
• An alien acquiring freehold property must pay the stamp duties as mentioned under the Property Acquisition section above. For leasehold property the rate of transfer is 0.05% of the leased property’s value for each year of the term. The ALHL tax is tapered according to the term for which the alien will hold the land.
• Investment Incentives are often granted on a case by case basis. Given that tourism forms a large part of Anguilla’s economy the Government is often required to consider proposals and investments particularly in the area of luxury tourism development. Because of Anguilla’s predilection when it comes to tourism, in negotiating with such developers the Government typically shows a degree of flexibility in order to facilitate the further development of the tourism industry. Concessions can include reductions in transfer taxes, flexibility of payment of transfer taxes on the resale/purchase of units in residential resort units; custom duty exemptions and speedy work permit processing, although developers are usually required to utilize Anguillian workers, contractors and consultants where possible. An investor may obtain “Investment Approval”. Thereafter, although not a statutory right, the Government may negotiate and enter into a Memorandum of Agreement with the investor to outline the global understanding between the parties and future objectives.
• The Hotels Aid Act via licensure provides the basis for custom duties exemptions to exempt hoteliers from the payment of certain customs duties and pier dues on building materials for new buildings or extensions to existing structures. Exemptions for hotel equipment which is imported for use in a new or developing hotel (defined as containing more than 10 bedrooms) are also available. As customs duties are usually between 15-26%, these are excellent concessions for the developer.
EXCHANGE CONTROLS • Anguilla’s Official Currency is the Eastern Caribbean Dollar
(EC$), which has remained stable for over thirty years. The exchange rate is EC$2.6882 to US$1. The United States currency is readily accepted on the island and interchanged freely with the EC$.
• Under the Eastern Caribbean Central Bank Agreement Act and the Banking Act, the Eastern Caribbean Central Bank is the regulatory authority for Anguilla, and provides regulatory oversight for banking and currency regulation on the island. There are two indigenous banks and two international bank branches on the island.
• There are no currency exchange restrictions. Foreign exchange services are offered by the banks on the island that stock the required currency. Typically one may exchange the United States dollar, the pounds sterling, the Euro and the Canadian dollar with ease.
CAPTIVE INSURANCE • Anguilla’s captive insurance sector continues to see significant
growth and this consistent growth has propelled Anguilla into prime position as a leading captive insurance domicile, ranking #5 behind Cayman, Bermuda, Guernsey, and Vermont in terms of the number of captives formed.
• Domicile selection is key because it affects the operating cost of the captive and could potentially impact how the captive’s income will be taxed. Different domiciles will therefore offer different capabilities to a captive and in order to find the best fit a captive owner must assess which domicile meets the needs of its risk management strategy. To do this a captive owner must assess the Taxes, Regulation, Infrastructure and Perception (TRIP).
• Tax & Regulation - Captive owners need to know whether the income of the captive will be taxed and if so, how. Anguilla offers zero tax and is therefore very attractive to a captive owner. In terms of regulation, the one requirement is that the domicile be well regulated. Anguilla as a well-regulated domicile affords captive owners the flexibility they require to properly administer the captive while at the same time maintaining sufficient safeguards to protect policy holders.
• Infrastructure and Perception – Anguilla is equipped with requisite trained professionals, captive managers, claims administration services, auditors, accountants, lawyers, etc. who can provide support services to the captive, for peace of mind of the captive owner. Perception is important as captive owners are concerned about the reputation of the jurisdiction in which the captive is formed, the positive reputation of Anguilla as a transparent and compliant jurisdiction are beneficial to a captive.
• With its reasonable capital requirements and its flexible investment policy, its legislative frameworks provide captive owners with the flexibility they require to properly operate their captive while at the same time maintaining sufficient and effective safeguards to weed out rogue captives and to maintain policyholders’ confidence.
INTELLECTUAL PROPERTY • Having been revamped in 2002 Anguilla’s intellectual property
laws conform to international standards and provide adequate protection to both local and foreign investors. Intellectual Property protection comprises the following:-
• Trademarks capable of being represented graphically may be registered in Anguilla. Such marks typically include packaging, holograms, signatures, diverse colour hues, seals, labels, words, slogans, logos and devices. A mark once registered grants the registrant protection for 10 years. Additionally, in Anguilla it is possible to re-register with the local Trademark Registry an international mark that is protected in the United Kingdom, thus gaining protection in Anguilla also. A European patent designating the UK has the same rights as the proprietor of a UK patent and Community Trade Marks registered in the UK may now be re-registered in Anguilla.
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A N G U I L L A
• Patents protection is available to an applicant who is either a person with a right to claim the patent or the inventor. The application must contain details of the invention and drawings sufficient to understand it. Where a patent is registered in the UK and an application is made in Anguilla within 3 years of the date of the grant in the UK, re-registration in Anguilla may be permitted. Priority under the Paris Convention may also be obtained.
• Domain Names may be registered in Anguilla. The following are available:- gov.ai, edu.ai, off.ai, com.ai, org.ai. and net.ai. The first two may only be used by government and educational institutions which are based in and operating from Anguilla. In order to be registered the name must be compliant with any applicable statutory requirements and cannot be the same as or similar to a previously registered domain name. A domain name is registered initially for a period of 2 years and after that may be renewed for 2 more years.
• Copyright protection for original intellectual creations such as literary and artistic works is also available in Anguilla. Being protected from creation, there is no need for registration under applicable law. The owner of the copyright obtains certain rights in relation to the creation specifically related to its alienation and its public distribution. There are diverse remedies available to the owner of the copyright in the event of breach, such as, imprisonment, damages, fines, injunctions and impounding and forfeiture of goods and equipment.
• Industrial Designs, Geographical Indications and Layout Designs (Topographies) of Integrated Circuits are also afforded protection under statute.
• IP Holding Companies in Anguilla may benefit sophisticated intellectual property owners. Unlike other jurisdictions, there is no taxation of income from IP assets. This positions an Anguilla IP Holding Company (IPHC) as an excellent vehicle through which to fully exploit the potential of corporate intellectual property.
EMPLOYMENT LAW • In order to work in Anguilla a work permit is needed unless a
person is a belonger of Anguilla or falls within an exemption under the Control of Employment Act. Applications for work permits are processed by the Labour Commissioner who is the head of the Labour Department.
• Employees of the Crown, the police and casual employees fall outside of the statutory framework in Anguilla. In relation to all other employees the general principles established under the law of contract apply to the employer/employee relationships but applicable law provides the statutory framework and governs the salient aspects of the employment relationship. The law contains express provisions amongst other things, in relation to the employment contract, vacation, sick and maternity leave, hours of work and termination.
• Terms of Employment. A contract may be made orally but in circumstances where the employee must serve a probationary period of more than four weeks the contact must be made in
writing. As a general guide the law requires that the employee be informed by the employer of the nature of their job and of the terms and conditions.
• Termination. An employee may not be terminated without reason. The concept of “employment at will” is not known to Anguilla law. An employee may be terminated with or without notice or with pay in lieu of notice.
• Prohibition on termination. It is a breach of applicable law to terminate an employee on the grounds of race, pregnancy, religion, colour, sex, marital status, transient absence due to illness or maternity leave correctly obtained, trade union participation, making a complaint or becoming involved in proceedings against the employer.
• Normal working week. A standard working week is 44 hours. In any period of 7 successive days an employee must be given 24 successive hours of rest. Prior approval of the Labour Commissioner must be sought before an employee is required to work without the benefit of the statutory minimum rest period and approval may be granted where the nature of the business necessitates this. Where an employee works in excess of the standard working week or on public holidays overtime must be paid in accordance with the FLSA. Employees who are paid by piece/ by task, hourly or daily or those in positions which are deemed to be managerial or senior roles are not entitled to overtime.
• Wages must be paid in legal tender in any form of currency accepted in Anguilla. This includes United States Currency.
• Vacation Leave. Employees are entitled to a minimum of 12 days (excluding weekends and public holidays) vacation leave at the end of each year of employment.
• Maternity Leave There is no statutory provision for paternity leave in Anguilla. Maternity leave with pay is granted for up to13 weeks and is subject to deduction in relation to any amount which is due to the employee under the Social Security Act
IMMIGRATION PROCEDURES • Passport Requirements. Persons entering Anguilla, (other than
a person belonging to Anguilla), are generally required to have a passport or travel permit issued by or on behalf of the Government of the country of which he is a citizen. Persons entering Anguilla from certain countries will also require a visa and the appropriate body in the home country should be contacted for further information. Visas are also issued to persons working in Anguilla pursuant to work permits, so that they may re-enter Anguilla when travelling. Persons entering Anguilla are given a duration in which they may remain. However applications for extension may be submitted to the Department of Immigration.
• Permanent residence Applications are submitted to the Department of Immigration and may be granted to those persons who have met the criteria under the British Nationality Act. The Governor may grant to a person not belonging to Anguilla a permit of permanent residence subject to such conditions as he/she may think fit.
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RESIDENCY BY INVESTMENT • In recent years the industry in Anguilla has prompted discussion
and consideration of an economic residency program and one has now been proposed for Anguilla. The Government has recently appointed a Task Force charged with spearheading the proposal.
• The global challenges facing independent financial centres such as Anguilla have forced Government and stakeholders to find inventive ways to improve economic stability, whilst also attracting investors and financial resources. Inherent in such schemes is the ability to attract high net worth investors who are seeking tax efficient ways and methods to organise their affairs and structure their international assets.
• Although the proposal is in its formative stages the ideology at the present time is that a potential investor will be positioned to acquire permanent residency in Anguilla by making a financial investment in Anguilla. Currently there is a discretionary scheme whereby the Governor-in-Council can favourably consider applications for permanent residency from individuals who either invest US$2.5 million in a business in Anguilla or are retired persons who own property in Anguilla.
• The private sector has recommended that the following methods of obtaining permanent residency by economic investment be considered: (i) contribution of a fixed amount which is to be determined, to a National Development Fund for capital projects which is to be established, (2) the acquisition of real estate of a certain value which is to be determined and (3) the investment of a minimum amount, to be determined, in cash towards an eligible business. The private sector has also suggested that that any economic residency programme should be launched with the proviso that only a certain number of grants of permanent residency may be issued within a set period. Industry has also recommended a pre-approval system whereby the interested applicant who has complied with all Government due diligence requirements, can request a letter of comfort or assurance from the Governor, indicating that they will be eligible for a grant of permanent residence, once satisfactory evidence that the required investment has been made is provided and of course that all other Government terms and conditions are met.
INFRASTRUCTURE • Anguilla enjoys a well-developed infrastructure.
• The telecommunications infrastructure in Anguilla is highly developed with broadband Internet access on a par with world financial services centres.
• The ports of Anguilla offer safe, fast, efficient and reliable handling of both ships and cargo.
DISPUTE RESOLUTION • Anguilla is a British Overseas Territory with a common law legal
system based on English law. The High Court of Anguilla is a constituent court within the Eastern Caribbean Supreme Court
(ECSC). It is the court of first instance and appeals therefrom are to the Court of Appeal. Litigants have a final right of appeal to the Judicial Committee of the Privy Council in England.
• Civil procedure in the High Court and Court of Appeal is governed and regulated by the Eastern Caribbean Supreme Court Civil Procedure Rules 2002 (as amended) (“the Rules”). The Court in Anguilla sits in its original jurisdiction to hear all matters. This includes commercial disputes notwithstanding the absence of a dedicated Commercial Division. The Rules apply to both civil and commercial matters.
• Our primary legislation consists of Acts passed by the local legislature. However, certain Acts of the United Kingdom are applicable where they have been extended to Anguilla by Order in Council. Further, as a British Overseas Territory, the UK Parliament may and has by Orders in Council provided for Anguilla to be a signatory to and bound by certain international conventions.
• Unless expressly disclaimed, it should also be noted that where civil or commercial matters take place in an international context, issues regarding conflict of laws principles will be determined through the relevant provisions of the Rules regarding forum conveniens.
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A R G E N T I N A
BUSINESS PRESENCE • Foreign companies may conduct business on a permanent
basis. The main methods for doing so are: a) appointment of a local commercial representative, b) setting up of a branch, c) incorporation of a local corporate entity (subsidiary), d) acquisition of shares of an existing Argentine company.
• The main types of investment vehicles used by non-resident individuals and foreign companies are the corporation (Sociedad Anónima - SA) and the limited liability company (Sociedad de Responsabilidad Limitada - SRL). All vehicles are regulated by the Inspección General de Justicia (IGJ).
• Any company duly organized in accordance with the laws of its country of origin can set up a branch in Argentina. The branch must keep separate accounting records in Argentina and file annual financial statements with the IGJ.
• An SA requires at least two shareholders, which can be corporate entities or individuals, and a minimum capital of approximately US$4,000. The capital is divided into shares, which must be registered. Transfer of shares is generally unrestricted unless otherwise provided for in the by-laws. The SA is managed by a board of directors elected at the shareholders meeting. The directors may be foreigners but the majority of the members of the board must be Argentine residents. Shareholders meetings must be held at least once a year to consider financial statements, allocation of profits, and the appointing of directors and members of the supervisory committee. Shareholders that have fully paid their subscribed shares are in general not liable for the company´s obligations beyond their capital contribution. All directors and managers are subject to standard loyalty and diligence duties. Non-compliance with these standards results in unlimited and several liabilities damages.
• An SRL requires a minimum of two and a maximum of fifty partners, who may be individuals or corporate entities. In general, and with few exceptions, similar rules apply to SRLs and SAs.
• Argentina is located at the extreme southeast end of South America and is the eighth largest country in the world, covering 3.8 million km2 (1.5 million square miles).
• Population: approximately 41 million, of which 90% is urban population. • Organized as a federal republic with a democratic political system. • Spanish is the official language, but English is widely written and spoken in urban areas
and to conduct international business matters. • Currency: Argentine peso.
FOREIGN INVESTMENT RESTRICTIONS AND CONDITIONS • As a general principle, foreigners investing in Argentina
enjoy the same status and have the same rights that the constitution awards to local investors. The main aspects of the existing legal framework in relation to foreign investors are the following: a) domestic treatment for foreign investors, b) lack of prior approval requirements or registration of investment, c) access to all sectors of the economy, d) access to domestic incentive schemes, and e) possibility of transferring profits and repatriating capital.
• Local legislation provides foreign investment with protection and an arbitration process for disputes between Argentina and countries that have signed Bilateral Investment Treaties and are members of the Multilateral Investment Guarantee Agency (MIGA), the Overseas Private Investment Corporation, and the International Center for the Settlement of Investment Disputes (ICSID).
• Barriers preventing access to foreign investors have been removed, attracting foreign investment projects in several sectors of the economy, such as: manufacturing industry, oil and gas, electricity, gas and water, banking, communications, and mining.
• Foreign investments in Argentina are regulated by a framework on international treaties and as a general rule do not require prior governmental approval.
CENTRAL BANK EXCHANGE CONTROL • Argentine and non-Argentine residents can transfer, purchase,
and sell foreign currency in the Foreign Exchange Market (FEM) only in transactions authorized by foreign exchange regulations.
• There are no restrictions on cross-border transfers for foreign direct investment repatriations and payment of dividends, provided certain requirements are met.
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• Unless qualifying for an exemption, foreign financings are subject to a 365-day mandatory deposit in US dollars with a local financial entity, equal to 30% of the financing proceeds sold in the FEM. Principal can only be repaid 365 days after the proceeds have been sold in the FEM.
• Subject to certain formal requirements, principal and interest payments of foreign financings can be paid without Central Bank approval.
TAXATION • The tax rate applicable to the net income of corporate entities
such as SAs or SRLs is 35%. The same rate is applicable to branches and other permanent establishments of foreign companies in Argentina. As a general rule, the distribution of dividends and remittances of profits abroad by branches or establishments are in general not subject to taxation.
• Individuals are taxed on an increasing scale ranging from 9% to 35% of the profits.
• All transactions must be valued in Argentine currency so fluctuations in foreign exchange rates generate gains and losses.
• All incomes and gains from an Argentine source obtained by a non-resident individual or foreign entity without a permanent address in Argentina are subject to withholding tax. Argentina, along with a number of other countries, has signed tax treaties which impose caps on withholdings of certain taxable income, which may reduce the rates of the withholding tax.
• Value Added Tax (VAT) rate is 21% but sales and imports of capital goods have a 10.5% rate.
• There is a tax on sales and also a stamp tax on public and private documents. The rates depend on the province where activities are conducted.
• Personal assets tax for non-resident individuals has a 1.25% rate.
• A tax on credits and debits over bank accounts is applied at a 0.6% rate over each transaction.
• Argentina has treaties presently in force with many countries to avoid double taxation.
EMPLOYMENT LAW • Salaries must be paid on a monthly, daily, or hourly basis and
there is a mandatory minimum wage per month. A work day is a maximum of eight hours, and 48 hours per week. Employees receive an extra month’s salary by law, paid in two installments (June/December). The minimum vacation period is 14 days per year and the maximum is 35 days.
• The health and pension fund system is financed from tax on the employees of about 17% of salaries, and tax on the employers of about 25% of salaries.
• In case of dismissal with no cause, severance pay is related to the amount of time the employee has worked for the employer.
• Trade unions negotiate wages and labor conditions in each sector of the economy, receiving approximately 2% of salaries of represented employees.
DISPUTE RESOLUTION • Choice of law is allowed as long as it does not contravene
Argentine international public policy (orden público).
• Argentine courts have jurisdiction whenever a) the defendant is domiciled in Argentina, b) the performance of the obligations is located in Argentina, and c) Argentine courts have been chosen as the applicable forum.
• Argentine courts acknowledge that parties may choose a jurisdiction other than Argentina for settlement of any disputes arising under a contract, provided that there is a connection with such jurisdiction and the dispute relates to economic rights.
• The Argentine constitution guarantees non-Argentine citizens the same rights as Argentine citizens, including unlimited access to Argentine courts for the resolution of legal disputes, but non- residents will have to post a bond if required by the other party.
• If an international treaty for the enforcement of foreign judgments exists between a foreign country and Argentina, the rules of such treaty will prevail. In absence of treaty the national Code of Civil and Commercial Procedure (CPCC) will be applicable.
• Subject to certain requirements established by the CPCC, Argentine courts will enforce foreign judgments resolving disputes. A notarized copy of the decision must be filed with an Argentine court and the petitioner must evidence that each of the conditions required by law has been fulfilled.
• Foreign arbitral awards are recognized in Argentina but are subject to the same requirements applicable to foreign judgments.
IMMIGRATION PROCEDURES • Citizens of most countries are not required to obtain a visa to
enter the country for up to three months. Foreigners wishing to reside and work in Argentina must obtain a residence permit from the Argentine Immigration Board (AIB).
• There are two categories of residents: a) permanent and b) non-permanent. Permits to establish either type of residence are obtained by filing an application at the nearest Argentine consulate in the country of origin, but must be preceded by the issuance of an entry permit by the AIB directly to the foreigner or through a third party on his behalf.
• A permanent residency permit grants a foreigner the right to reside and work in Argentina indefinitely. A non-Argentine citizen may apply for a permanent residence if she/he is related to an Argentine citizen (wife or husband, son or daughter or parent). A non-Argentine citizen may also obtain permanent residency in the country after having extended the temporary residency for more than one year. Certain documentation such as a certificate that the applicant has no criminal record will be required.
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A R G E N T I N A
• To apply for a temporary residence permit in order to work in the country the applicant and her/his family must provide certain personal data and documents. The company for which the applicant will work must provide additional corporate information and the applicant and the employer must enter into a labor contract. The authorization may be granted for a period of one year and may be renewed for an equal period.
• Citizens born in Brazil, Bolivia, Colombia, Chile, Ecuador, Paraguay, Uruguay, and Venezuela may apply for an initial two- year temporary residence.
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B O L I V I A
THE BUSINESS ENVIRONMENT • The new constitutional rules implemented in 2009 and its
“non liberal” though “plural” orientation made and makes the enactment of numerous implementing laws a necessity. Some have been passed many others are pending. On the economic sectors’ front there are for example new laws of Transport and Telecommunications, providing them greater legal stability. Though the hydrocarbons sector has also stabilized and new projects and venture are under way, a new Law of Hydrocarbons is pending, as is the case with energy and electricity, forestry and water usage. A new Mining Law was enacted on May 2014, implementing certain constitutional changes in the sector with “formal” recognition of acquired rights for existing companies and operators.
• A new Law of Financial Services enacted in August of 2013, a long and complex set of new rules, has substituted the prior Banking Law and its regulations. New regulations are under way for its implementation, characterized by a greater control and participation of the state in the financial market. Some changes have occurred for the insurance sector.
• On the social side, a new Labor Code in substitution of a large number of laws and regulations governing labor is expected
• The official name of the country is Plurinational State of Bolivia (Estado Plurinacional de Bolivia) and it is often referred to as the “heart of South America” because of its location in the middle of the continent and with no direct access to the ocean.
• In accordance to the 2009 Political Constitution Bolivia is a Social Unitary State of Plurinational Communitary Rights, free, independent, sovereign, democratic, inter- cultural, decentralized and with autonomies.
• Main principles established and promoted in the Constitution are: ama qhilla (don’t be lazy), ama llulla (don’t be a liar), ama suwa (don’t be a thief), suma qamaña (live well), ñandereko (harmonious life), teko kavi (good life), ivi maraei (earth with no evil) and qhapaj ñan (noble path).
• The country has a population of approximately 10,1 million habitants, covering 1.098.581 km2 and it is divided in 9 departments.
• The capital of the country and seat of the Judiciary is Sucre. La Paz is seat of the Executive, Legislative and Electoral Bodies.
• Official languages recognized by the Political Constitution are Spanish and other 36 languages of the indigenous peasant nations and communities.
• Currency: Boliviano (Bs)
for the near future. Other new Codes have been approved or new are forthcoming. The most recent one approved is a very relevant Code of Civil Procedure (which entered into full effect on February 2016).
• Given the recognition of indigenous peoples and peasant community rights, a draft law for Prior Consultation is in process. This is extremely relevant mainly for the extractive industries which have suffered difficulties for implementing projects and activities as a result of opposition by peasant communities. A revision of the land reform laws is also expected.
• State fiscalization and control on private companies has increased, particularly on taxation, regulatory and corporate compliance. The National Confederation of Private Companies has complained to the government on excesses by certain authorities, mainly because of unjustified and excessive sanctions. Large controversial tax claims are in process of resolution by administrative or judicial authorities.
• In the meantime the general tax legislation and regulations enacted in the past essentially continue in effect, with some important new secondary regulations. Changes have been introduced to the long term social security system, with some increases in contributions.
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• Bolivian economy remains strong. It’s considered to be one of the fastest growing in the Latin American region. Exports, especially of natural gas with very favorable prices, provide a substantial income for the state; so does the new hydrocarbons’ tax structure. Monetary and fiscal policies are under control: a very stable currency and fiscal and commercial accounts surpluses; high international reserves. The economy witnesses very active commercial and agricultural and agrolivestock activity and expansion of public and private construction within a stable and strong private and public financial system. State participation in the economy, by way of old and new state or mixed economy companies on a variety of fronts, is constantly increasing. A new Law of Public Companies (December 2013) has introduced important changes facilitating their operations. Private and foreign investment is yet considered insufficient.
BUSINESS PRESENCE • Most commonly used figures in order to establish a foreign
entity in Bolivia are a Subsidiary or a Branch.
Subsidiary
• A new entity may be formed in Bolivia, as a Bolivian company, in the form of either a stock company (Sociedad Anónoma - S.A.) or a limited liability company (Sociedad de Responsabilidad Limitada - S.R.L.), becoming a subsidiary of the parent company. For that purpose the company established outside Bolivia, participating as a stockholder or partner, is required to provide evidence that is legally incorporated and in good standing according to the laws of its country of origin. The liability of the shareholder or quota holder is limited to the capital contributed to the company.
• Formalities to establish a subsidiary depend on the form adopted as a Bolivian company. Other that in the case of some regulated companies, if a stock company, the first requirement is to count with a minimum of three shareholders, companies and/or individuals and two partners if a limited liability company. Special regulations on each type of company include minimum capital requirements, procedures for decision making, officers, supervision of the Company and others. A stock company must have a board of directors whilst a limited liability company normally doesn´t have one. A stock company also has a “controlling” body called sindico.
• Subsidiaries, as well as other local companies, must be registered at the Commercial Registry and also has to file for registration with the Tax Service to obtain the Tax Registration Number (NIT). After both registrations are obtained, depending when the company will start operating, other registrations need to take place: (i) Municipal license; (ii) Employer´s registration with the Labor Ministry; (iii) Registration with the Social Security Entity; (iv) Registration with the Pension Fund Administrator, and (v) Registration with the corresponding chamber.
Branch
• A company established outside Bolivia in compliance with laws of the country of origin is governed by such laws in regards to
its form and legal existence. In order to perform its activities in Bolivia its legal capacity is to be recognized by registration with the Commercial Registry, filing the documents of incorporation, amendments, bylaws and other documents that certify the legal existence of the company in its country of origin as well as the authorization or resolution of the administrative body of the Company resolving the establishment of a branch or permanent representation in Bolivia, and appointment of the person(s) who will have such representation, with wide and sufficient powers in order to develop all the company’s activities, evidenced by a proper Power of Attorney (all documents duly legalized in country of origin). Parent company assumes unlimited liability for acts performed by the branch.
• The Procedures for decision making in a branch depend on the main Company’s policy and procedures. However, the local representative must have a broad and ample general administration power of attorney. The Branch should be administered by at least one General Manager. The legal representative or general manager, if foreigner, must have proper working visas to be registered with the commercial registry and domicile to be registered with the Tax Registry. Passport is to be presented for verification.
IMMIGRATION CONTROLS • As indicated above for subsidiaries and branches, in case the
legal representative is a foreigner, he/she must obtain proper visas and permits. It is common to hire a Bolivian Citizen to act as a temporary manager/representative while the permanent officer to be appointed obtains such permits.
• In order to work in Bolivia, depending on the position or the term, foreign employees must obtain the following visas or permits: Fixed Purpose Visa (up to 90 days); Transitory Permanence for a Fixed Purpose (up to 180 days); Temporary Permanence (up to 3 years); Indefinite Permanence.
• Certain visas or permits may be obtained at the Bolivian Consulate in the country of Residency, requirements may vary. There is also a special regime for nationals of countries belonging to the Andean Community of Nations (CAN – Comunidad Andina de Naciones)
KEY EMPLOYMENT LAWS • All labour rights recognized by Bolivian laws and regulations
may not be renounced or waived by the employee under any circumstances. No contractual arrangement can modify the rules which are of a compulsory nature. In case of conflict when worker claims certain rights or alleges facts, it is the employer who carries the burden of proof in order to respond and demonstrate the contrary. Earned salaries, labour rights, social benefits and contributions to the social security system which are not paid enjoy a privilege and preference for payment over all other credits, are indefeasible and no statute of limitations apply for the employee to file a claim.
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B O L I V I A
• Salaries are negotiated between the parties, but in no case below the Minimum National Wage (Currently BOB 1.656, approx.US$ 236). All salaries are subject to contributions and retentions established by law. Salaries can be fixed in Bolivianos or in a foreign currency. However, the payroll must be in Bolivianos or reflect the Bolivianos equivalent for purposes of payment of contributions and tax withholdings applicable to workers.
• Other concepts also payable to the workers are:
• Seniority Bonus (“Bono de Antigüedad”), which consists in a monthly payment in favor of employers who have completed 2 years of continuous work.
• Christmas Bonuses: the Worker is entitled to an additional one month salary payment for Christmas (“Aguinaldo”) (or a proportionate payment if less than a year work). The average of the salary of three months is applied for calculation of the Bonus. On November, 2013 the Government approved a Second Christmas Bonus, with the same characteristics as the one mentioned above, but to be paid each year if the gross domestic product is over 4.5%, calculated as of October of each year.
• Profit Bonus (“Prima”): If a company has annual profits an additional one salary is payable to each employee up to a maximum of 25% of the profits for all employees (if such 25% is not sufficient to pay one month’s salary to each worker, then a prorate payment is to be calculated). The average of the salary of three months is also applied for calculation.
o Employees working within 50 kilometers of the international borders enjoy an additional border subsidy of 20% of basic salary.
• As to rules regarding the employment of foreign workers, only 15% of the workers of any employer may be of a foreign nationality who also have to be of a technical nature. Also, remuneration of foreign workers of any employer may not exceed 15% of the payroll. Some very exceptional cases to this rule could be considered, like for example when a company has a foreign general manager and just a Bolivian secretary, unable to comply with the rule. However, this is not expressly regulated and a justified case could be made before the Labour Authorities with uncertain results.
• Authorization of Employment Agreements of foreign workers before the Ministry of Labour is mandatory. This is also a requirement in order to obtain a working visa.
• The foreign worker who has contributed to the Integrated Pensions System may access to the transfer of the Balance on his/her Personal Account to the social security entity of his/her home country or other if certain required conditions are met upon termination of his/her Employment Agreement.
• Since 2006 there is a very strict principle of stability at the workplace and a non-justified dismissal, rejected by the worker may, after an administrative or judicial process, result on the obligation to reinstate the worker with the same salary and position. In case the worker accepts the dismissal he/she is
entitled to the following main benefits: a) Indemnity: payment of the equivalent of a one month salary per year of work and b) Desahucio: If an employee is dismissed without a justified cause and without proper notice – 90 days in advance – the employer has to pay the equivalent of three month salary.
• Justified dismissal occurs only in cases established by the law and the cause must be fully demonstrated.
• An indirect dismissal may also occur, as a result of a reduction of remuneration, which must be notified by the Employer to the worker with three months prior notice, who has the option to accept or reject the reduction and be paid social benefits.
• The voluntary resignation which entitles the worker to collect indemnity for the time served is applicable if the worker has served for 3 continuous months or more.
• Labor regulations also include rules on types of employment agreements, day’s work, extraordinary working hours or overtime, paid leave and many other matters spread in a large number of laws, decrees and resolutions.
CONTRACTING WITH THIRD PARTIES • As part of the Civil Law System, general principles of the
Bolivian Civil Code (and the Commercial Code, when applicable) must be followed.
• The minimum legal requirements for Contracts are:
o The consent of the parties, which may be implicit or express
o The purpose of the contract, which must be feasible, licit and specific
o The cause of the contract, which must be licit, and
o The formalities, when required (only certain contracts are required to be granted by means of a public deed)
• Failure to comply with the minimum requirements as indicated above may result on the nullity on annulment of the contracts.
• According to the Civil Code, applicable to commercial contracts, what is not incorporated into a contract but in respect of which there is an express rule of law, the rule of law is deemed to be incorporated into the contract. So, contracts do not need to expressly incorporate or make reference to rules of law, many of which, particularly for contracts, already pre exist in a jurisdiction like Bolivia as a civil and not common law jurisdiction. When the law so authorizes, a rule may be modified by contract.
• Penalty clauses in substitution of compensation for damages can be used. If the penalty is disproportionate with the breach a court of law may reduce the penalty.
TAXATION OVERVIEW • Companies incorporated in Bolivia, by way of a subsidiary or a
branch, are subject to the following general tax regime:
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B O L I V I A
o The Value Added Tax (13%) on the total amount of the invoice within a system of VAT fiscal credits and debits to be declared and, depending on result, paid to the tax;
o Transaction tax (3%) on the gross amount of income generated monthly by the company. IT taxes paid can be credited against the 25% annual corporate income tax under certain conditions.
o Remittances of profits outside Bolivia are subject to a withholding tax of 12.5%, either if paid as a dividend to a foreign shareholder or as profit of parent company. The company in Bolivia is subject to a 25% Tax on Profits. It should be noted that in the case of a branch any profit resulting at year end would be deemed distributed to parent company unless a different resolution from parent company is presented and prepared before the closing of the fiscal year.
o Employees are subject to Supplementary Regime to the Value Added Tax (RC-IVA) of 13%, applicable to salaries on a monthly basis. However, certain deductions apply and individuals are also entitled to credit against the tax all of the tax credits which they may have generated from purchases of goods and services supported with official invoices (AVT tax).
• Certain economical activities have additional taxes, e.g. hydrocarbons, mining, etc
INTELLECTUAL PROPERTY • Intellectual Property protection in Bolivia is based on the
Andean Community legislation, namely on Decisions 486 and 351, covering both Industrial Property and Copyright. There are also a few local laws that stem from the early 1900s. Bolivia recognizes protection for trademarks, collective marks, certification marks, appellations of origin, commercial names, patents, utility models and industrial designs. These right need to be registered in order to be protected. Also, copyright and related rights are recognized, these do not require a registration to be protected, they are protected as of the date of their creation. Bolivia is member to all major international IP conventions and agreements, including WTO and WIPO. All in all IP rights are well protected under Bolivian legislation, although their enforcement is not easy.
• The Bolivian National Service of Intellectual Property – SENAPI – is in charge of registering and controlling IP rights. Trademarks are registered in renewable periods of ten years, whereas patents are protected for a non-renewable twenty year period, counted as of the day of application. Each Industrial Property application is published before their formal registrability examination by SENAPI for third party opposition purposes. Once an application is published and has received a third party opposition the applicant may present defense arguments, which will then be considered by SENAPI. SENAPI’s decisions are appealable in two further administrative instances and one final judicial instance.
DISPUTE RESOLUTION • By means of Law No 708 of June 25, 2015 a new Law
on Conciliation and Arbitration has been enacted, which substitutes the previous Law No. 1770 (of 1997), which at the time was inspired by the modern tendencies on arbitration and was based on the UNCITRAL Model Law.
• The new law has resulted in rather rigid rules, almost like an arbitral code of procedure, despite of which private entities of administration are confident that such focus will not limit the administration services which they will continue to provide. The law also has an important accent in promoting conciliation, with detailed rules which are expected to contribute to the development of this ADR method.
• Matters which cannot be subject to arbitration (including a number related to state contracts) are detailed in the law and a special regime for investment conflict resolution has been incorporated. which opens up possibilities for arbitration arising in non contractual and contractual relationships with the state, within a yet incomplete legal framework to be further implemented. A proposed regional center for the settlement of investment disputes should be created to complete the legal framework. This has been in process of negotiation for a number of years now..
• In February of 2016 a new Code of Civil Procedure has also come into effect, introducing new features for dispute resolution. Prior compulsory conciliation is one of the features. Also the introduction of oral proceedings in substitution of the more lengthy traditional system. The Code updates rules on international judicial cooperation which is aimed at simplifying procedures for processing and recognition and enforcing foreign courts’ orders and awards.
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B R A Z I L
BUSINESS PRESENCE • Main types of business models in Brazil: locally incorporated
companies, mostly incorporated under the rules of “sociedade limitada” type, as foreseen by the Brazilian civil code, as well as sole proprietorships, partnerships, and registered branches of foreign companies.
• Partnerships in Brazil are largely used by both Brazilian and foreign companies, involving governmental entities and private companies that may or may not have the participation of a foreign investor. The partnership is usually effectively made by the foreign investor becoming a quotaholder (in a limited liability company) or a shareholder (in a corporation) in the Brazilian company.
• Branches of foreign companies may be opened in Brazil without actually organizing a new company in the native territory. These require authorization by the country’s government before the Federal Revenue and the competent commercial register of each state prior to conducting any kind of business.
FOREIGN INVESTMENT RESTRICTIONS AND CONDITIONS Registry of Foreign Investments
• All investments made by foreign investors shall be registered before the Brazilian Central Bank, in the so-called system SISBACEN, through the Registry of Direct Foreign Investment (RDE).
• Strategically located in South America sharing borders with ten countries: Argentina, Bolivia, Columbia, French Guiana, Guyana, Paraguay, Peru, Suriname, Uruguay, and Venezuela.
• Democracy with stable public institutions, such as the Chamber of Deputies, the Federal Senate, and the Courts of law.
• Population: 205,482,085. • Roman Catholicism is the predominant religion. • Portuguese is the national language, and English is widely written and spoken
especially in urban areas and for business. • Currency: Real (R$). • Investment growth areas include infrastructure, energy, transportation, utilities,
telecommunications, and tourism.
• Investments in cash are recorded in the amount of the foreign currency invested in Brazil and, subsequently, converted into Brazilian Reais upon the execution of a currency exchange contract. An investment may also be made with assets in-kind, but in most cases an evaluation report is required.
Restrictions in Equity Participation
• Some economic activities such as mail and telegraph, activities related to media, nuclear energy, airlines with domestic flight concessions, sanitation, and the aerospace industry continue to be restricted to foreign investors. Recently, foreign investment in the health sector has been generally allowed by law (not without the expected opposition of interested parties acting in the field).
• Foreign investors can only hold a minority participation in media, financial institutions, and insurance companies, but may acquire the control of a bank with prior authorization from the government.
• Additionally, although there has been some flexibility in the matter, there are still restrictions on foreign participation in activities subject to national security concerns and on foreign ownership of rural areas and businesses in border zones.
• A potential investor should consult the government agencies that would most likely hold an interest in a proposed project.
• This process can sometimes yield significant benefits to the foreign investor, since the government generally prefers to grant incentives (tax and funding costs, for example), rather than restrictions, to encourage investors.
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• Every shareholder or quotaholder residing and/or domiciled overseas must have an attorney-in-fact in Brazil, with powers to receive service of process.
Restrictions in Real Property Acquisition
• Brazilian legislation does not apply any type of restriction on the foreign ownership of real property in urban areas, except for coastal land owned by the federal government. As a rule, the acquisition of real property in Brazil by foreigners is not permitted or has some restrictions in the following cases:
o Rural land: Foreign individuals living in the country and foreign corporations duly authorized to operate in Brazil may acquire rural land provided that they respect some limitations regarding the area, established by law. The acquisition of rural property by a foreign individual may not exceed 50 modules of operating undefined area, whether continuous or discontinuous. In case of properties with an area not exceeding three modules, the acquisition will be free of any kind of specific governmental permission, but still subject to the general requirements specified in law.
o The acquisition by foreigners of rural property located at the International Border Area is subject to the obtaining of a prior consent granted by the national defense council.
o Foreign individuals living in the country and foreign corporations duly authorized to operate in Brazil may acquire rural land for the implementation of agricultural, livestock or industrial projects, if linked to their articles of association.
o Foreign corporations and individuals are not allowed to acquire real estate owned by the federal government located in areas essential to national security without prior approval of the President.
o Foreign companies that desire to own properties in Brazil must be enrolled with the Brazilian Federal Revenue.
o A recent court decision affecting real estate located in Säo Paulo softens the restrictions applicable to the land purchase by foreign companies and companies controlled by foreign entities. There is a trend that courts of other jurisdictions may follow such decision, but up to now there is no controlling court decision.
Restrictions in Company Management
• Non-residents in Brazil and officers without permanent Brazilian VISA cannot be a member of the Executive Board of any Corporation or administrator of any limited liability company.
• Non-residents in Brazil can only be a member of the Board of Directors of a Corporation as long as they appoint an attorney- in-fact in Brazil, with powers to receive service of process.
Approvals and Licensing
• Appropriate approvals and licenses are required for the operation of certain business activities. These may be obtained from the relevant ministry, government agencies, or local councils.
• Application process and prescribed fee vary depending on the application, the nature of the activity and geographical location where the activity is proposed.
EXCHANGE CONTROL • Brazilian law confers on the Central Bank broad discretion to
regulate the flow into and out of Brazil of domestic and foreign currency.
• There are two exchange markets in Brazil subject to central bank regulations, both of which operate at floating rates. They are the following:
o Commercial/financial free exchange rate market. This market is reserved basically for (i) trade-related transactions, such as import and export transactions; (ii) foreign currency investments in Brazil; (iii) foreign currency loans to residents in Brazil; and (iv) certain other transactions, involving remittances abroad, which are subject to prior approval by the Brazilian monetary authorities.
o Tourism floating exchange rate market. This market was developed initially for the tourism industry, and was later expanded to allow certain other transactions, such as the purchase abroad of software. The applicable regulations indicate the types of transactions whose payment in foreign currency, to and from Brazil, qualify for foreign exchange in this market.
ANTI-CORRUPTION LAW • Federal Law No 12.846/2013, also called the “Anticorruption
Law” or “Clean Company Law,” sets forth the possibility of making legal entities objectively accountable (and individuals subjectively accountable) for the practice of injurious acts against the principles and property of the national or foreign Public Administration.
• Besides other penalties established by said law, such as the mandatory dissolution of the legal entity, the legal entity engaged in acts corruption may also be subject to a fine that shall vary from 0.1% to 20% of its gross revenue before taxes. Moreover, the law determines that the value of such fine shall never be less than the economic advantage obtained by said.
• The law authorizes the authorities to enter into a leniency agreement with the violator, meaning that all administrative sanctions may be dismissed, depending on the information put forth and willingness of the legal entity to bring its conduct in conformity with the law.
• The leniency agreement set forth in the Anticorruption Law does not fend off the possibility of criminal sanctions being brought against the company and the individual involved with acts of corruption must contact the responsible authority for the criminal prosecution and enter into a specific agreement.
• The existence of an effective compliance program in the corporate structure is extremely relevant to the calculation of the dimension of the penalty, indicating that the law aims at preventing injurious acts and not simply sanctioning the
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violator. The legal entity’s willingness to implement or improve compliance mechanisms is one of the requirements to enter into a leniency agreement.
• Presidential Decree No 8.420/2015 also regulates the applicability of the Anticorruption Law, defining the structure and objectives of the compliance policy that shall be created and enforced by companies to identify and punish illegal activities carried out against either the Brazilian or foreign Administration, such as fraud, embezzlement, and other irregularities.
• Unlike the FCPA (Foreign Corrupt Practices Act), Brazilian laws and regulations against corruption do not set forth any instructions in terms of a gift and entertainment rule. Therefore, there is no objective provision (based in the cost of an asset or property, for example) regarding what may be perceived as an act of corruption or a simple display of affection towards a civil servant.
RIO 2016 OLYMPIC GAMES – TAX BENEFITS
• The Government has enacted a law that grants the exemption of federal taxes due on import of goods or services provided to and used exclusively for Olympic Games-related activities. Such law comprises IPI (Excise Tax), II (Import Tax), PIS/COFINS (Social Contributions levied upon imports) and other charges and duties.
• In order for companies and individuals to be eligible for such tax benefits, they must be an accredited media company, a sponsor or an official service provider for the International Olympic Committee (IOC) or for the Rio 2016 Organizing Committee. Such entities shall provide the Brazilian Revenue Service with a list indicating the individuals and companies that shall benefit from the tax exemption.
INFRASTRUCTURE • Companies may contract with federal, state, and municipal
governments for the execution of public services through concession agreement, public-private partnership (PPP), or government contracts. Activities which are considered to be public services in Brazil include construction and operation of roads, ports, airports, railways, urban mass transportation, and environmental services.
• The contracting of private companies by the federal, state, and municipal governments should be preceded by public bidding, in the form of competition, electronic bid, and auction, to evaluate the best proposals based on the following criteria: best price, best technique, or technique and price.
• Foreign companies interested in bidding and contracting with the government should be authorized by the federal government to establish activities in Brazil, or may bid in association with local companies as a consortium.
• The contracting of services and public works for government interests may be carried out on the initiative of the public administration. However, the private sector can propose new infrastructure projects to the government, involving public works and services, through the Private Finance Initiative (PFI), consisting in a procedure by which the private entity may be allowed by the government to evaluate the feasibility studies of those projects. Once the project is approved, it is submitted for bidding and contracting by the public administration to be executed by the private sector.
• Public-private partnerships contracts (PPP) must have as a minimum value the amount of R$20,000,000 and duration between the minimum of 5 years and maximum of 35 years.
• The regulation and supervision of public services can be done centrally by the contracting institutions or can also be delegated to regulatory agencies, with the aim of professionalizing regulating services and preventing political interference in the management of contracts.
• Litigation involving public administration and private sector for the execution of administrative contracts can be resolved by the relevant judicial courts or through an arbitration procedure.
INTELLECTUAL PROPERTY • Intellectual property in Brazil comprises patents, trademarks,
industrial design, copyright, software, geographical indications, indication of origin, unfair competition, layout designs of integrated circuits, and domain names.
• Registered patents, trademarks, service marks, and industrial design enjoy monopoly rights/protection for specific periods of time.
• In specific cases, the analysis of the trademark protection is not carried out only by the Brazilian Patent and Trademark Office (INPI), but also by regulatory agencies. We can, for example, mention in the application procedure the Brazilian Health Surveillance Agency (ANVISA), which is responsible for medicines.
• Unregistered trademarks are also protected by the Brazilian courts regarding as unfair competition.
• In relation to practices in the market, the Brazilian Competition Authority (CADE) is closely monitoring licence agreements affecting competition in the market.
• Copyright protection is granted to holds for literary, musical or artistic works, sound recordings, broadcasts, and films, regardless of registration.
• The administration of the ccTLD “.br” is carried out by the Registro.br (registering entity). Several significant particularities must be observed regarding the registration and maintenance of domains by foreign companies, which are obliged to have
1 Law No 10.168, Article 2
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a local legal representative and compromise to commence business activities in the country within one year of the domain registration.
• Disputes of domain names are settled through arbitration under the Registro.br, for domains registered in violation of intellectual property rights.
• IP Agreements, including the assignment of rights and/or technology, or other licenses must be duly recorded with the INPI to bear effects to third parties, and to, inter alia, for example, carry out offshore remittances as royalties.
• Brazil is a member of the World Intellectual Property Organization (WIPO) and a signatory to major treaties such as the Paris Convention, the Berne Convention, the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), the Patent Cooperation Treaty (PCT), and the Brussels Convention Relating to the Distribution of Program-Carrying Signals Transmitted by Satellite.
• Brazil’s intellectual property laws conform to international standards and provide adequate protection to both local and foreign investors.
DATA PROTECTION • Brazil does not currently have a specific law on Data Protection.
However, there exist provisions applicable to collection, storage, use, treatment, disclosure and request of personal data that are set forth in sparse laws, such as the Brazilian Federal Constitution, the Brazilian Consumer Protection Code and in the Brazilian Internet Civil Rights Act.
• Some economic sectors have specific regulation that may impact their operation directly on data protection matters, such as, for example, financial institutions (impacted by bank secrecy rules set forth on Supplementary Law No 105), healthcare institutions (impacted by healthcare secrecy rules set forth by the Federal Medicine Council and by the definition of sensitive data present in Law No 12414/11).
• The Brazilian Federal Constitution foresees two principles that are basic guidelines for Data Protection in the country: the Principle of Privacy and the Principle of Information. According to these standards, all citizens have the right to secrecy and their data should not be disclosed without duly authorization or prior notice. Also, a personal data owner must be informed clearly and objectively of the purpose of use and the proceedings to which his or her data will be subject to.
• A specific law to regulate the Data Protection matter in Brazil is currently being discussed and should be approved soon. There are a few draft bills in both Houses of the National Congress and some of them seek to establish a data protection regulatory framework very similar to the current European model.
• In order to comply with the Brazilian regulatory framework, some companies seek legal assistance in Brazil for the analysis and possible amendment of their internal policies, binding corporate rules and other documents, whenever they are about to start doing business in Brazil.
• In addition, local companies seek legal assistance for the analysis and review of corporate policies and corporate documents considering the standards established by the Federal Constitution and other laws.
• Law firms with specialized data protection teams will assist their clients throughout the process of implementing and adapting policies and also in the negotiation and consultation with public bodies concerning data protection issues arising from their clients’ business.
TAXATION Corporate Tax
• In general, companies in Brazil can be taxed under two different taxation methods: Actual Profits method or Presumed Profits method.
Actual Profits method
• Under this method, the taxable income is the company’s net book profit, adjusted by some inclusions and deductions as per Brazilian tax legislation. Tax losses, if any, may be carried forward indefinitely but may be used to offset only up to 30% of the company’s annual taxable income.
Presumed Profits method (PPM)
• Under this method, the taxable income is the presumed profit (an estimated percentage of gross sales, which varies according to the type of activity the company performs), increased by 100% of non-operational revenues, such as income on financial investments and capital gains. As a general rule, the presumed profit percentages for Income Tax purporses are 8% for sales companies, 16% for transportation and 32% for service companies. The gross revenue cap for a company to be eligible for this method is BRL 78 million.
2 South Africa, Argentina, Austria, Belgium, Canada, Chile, China, Korea, Denmark, Ecuador, Spain, Philippines, Finland, France, Hungary, India, Israel, Italy, Japan, Luxembourg, Mexico, Norway, the Netherlands, Peru, Portugal, Slovak Republic, Czech Republic, Sweden, Trinidad and Tobago, Turkey, Ukraine and Venezuela. 3 The Multilateral Agreement of Mercosur (Argentina, Paraguay, Uruguay), the Multilateral Iberoamerican Agreement (Bolivia, Brazil, Chile, El Salvador, Ecuador, Spain, Paraguay, Portugal and Uruguay), Germany, Cape Verde, Belgium, Canada, Chile, South Korea, Spain, France, Greece, Italy, Luxembourg, Japan and Portugal 4 By the tribulation of IRRF: Consultation Solution No 554, of 16/11/2004, Disit 07 (RJ); Consultation Solution No 262, of 24/09/2003, Disit 07 (RJ); Consultation Solution No 12, of 14/04/2003, Disit 04 (AL, PB, PE and RN). 5 Declaratory Act SRF No 28, of 26/04/2000. 6 Declaratory Act SRF No° 48, of 27/06/2000. 7 Interpretative Declaratory Act No° 16, of 22/12/2005.
B R A Z I L
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Based on these premises, corporate taxes can be summarizes as follows:
• Income Tax (IR): Income tax is due by corporations on their incomes. Corporations pay IR at a base rate of 15% under an actual profit regime, plus an additional 10% on all taxable income exceeding R$20,000/month, R$60,000/quarter, or R$240,000/year. The taxable income can be reached under two different methods: Actual Profits or Presumed Profits.
• Social Contribution on Profits (CSLL): Profits earned by com- panies are taxed at 9%, with the same basis used for as the Income Tax (taxable profit can also be reached under the two different methods above mentioned).
• Contribution to Social Security Financing (COFINS): Intended to finance social security, this contribution is levied monthly on total revenues obtained by a Brazilian company (this contribution is also due when services or products are imported). Companies that are taxed under the Actual Profits method are subject to COFINS at a rate of 7.6% upon total revenues, under a non-cumulative system (under this system, the company may use credits usually calculated upon inputs). On the other hand, companies that are taxed under the Presumed Profits method are subject to COFINS at a rate of 3%, under a cumulative system (no credits allowed).
• Contribution to the Social Integration Program (PIS): Similar in implementation and purpose to COFINS, and taxed at a rate of 1.65% for companies taxed under the Actual Profits method (non-cumulative) and 0.65% for companies taxed under the Presumed Profits method (cumulative).
• Social Contribution to the National Social Security Institute (INSS): In general, this contribution is paid by the employer at a rate of 20% on payroll or at a rate that may vary from 1.5% to 4.5% (depending on company’s activities) levied upon gross revenue. In this case, the employer may choose the most beneficial taxation method (payroll or gross revenue).
Personal Income Tax
• Income Tax (IR): Individuals are taxed at a progressive rate based on their tax bracket, to a maximum of 27.5%.
• A person is considered a “resident” in Brazil if he or she stays in Brazil for at least 184 days in a calendar year.
Withholding Tax
• Generally, payments made to non-residents are subject to withholding income tax (IRRF) at the rate of 25%.
• Also, payments made to workers are subject to withholding income tax (IRRF) at the maximum rate of 27.5%.
• Companies are also submitted to a withholding social contribution (INSS) of 11% on the salary contribution of the employee.
Other Taxes
• Federal
o Import Tax (II): Foreign products entering Brazil are taxed by II and the payment is due at the moment goods are declared.
The tax is based on the custom value of the product and the rate varies according to the nature of the product (goods considered essential are taxed at a reduced rate).
o Export Tax (IE): This tax is related to products which will be exported, and payment is due at the moment the goods are declared for export. To encourage the exportation of Brazilian goods, IE covers only selected few products.
o Excise Tax (IPI): This is applicable to all imports and domestically manufactured goods sold within Brazil, with limited exceptions. The rate for the IPI is determined by the IPI table (“TIPI”), which takes into account the tax classification number of the relevant product. IPI is calculated on the aggregate value of the good. It is assessed on the import operation at the time of customs clearance, while for manufactured goods at the time of shipment of the completed good.
o Tax on Financial Transactions (IOF): This tax has different rates according to the financial transactions in question - those relating to credit, currency exchange, or bonds and securities.
o Tax on Rural Property (ITR): Charged to the owner of property in rural areas. The rates vary according to the location and use of the land.
o Tax on Large Fortunes (IGF): The Brazilian Constitution provided this tax but, until now, there is no law that has imposed it.
o Merchant Marine Renewal Tax (AFRMM): Calculated on goods imported to Brazil by sea, with varying rates (generally 25%).
o Economic Domain Intervention Contribution (CIDE): This tax covers royalty payments on technology transfer agreements, trademark and patent licensing agreements, and supply of technical assistance.¹ The tax is paid on the monthly royalty payments of the party who imports or commercializes the item, at a rate of 10%.
• State
o Tax on transfers resulting from death or donation of any property or rights (ITCMD): A tax levied on the sale of any property or property rights at a rate of 4%.
o State Value-Added Tax (ICMS): This is levied on the circulation of goods, on provision of interstate and intermunicipal transport services, and communication services, including operations originating abroad. The ICMS should be paid upon the importation of goods, at customs, even if the product is going to be used for personal consumption or as part of a fixed asset. The tax is based on the value affixed by the importation document in addition to the II, IPI, IOF, and other customary expenses. ICMS rates vary from state to state (from 7% to 25%) and according to the type of product.
o Tax on automobile ownership (IPVA): The rate may vary from state to state but, in general, is 4% on the value of the vehicle.
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• Municipal
o Tax on urban real property (IPTU): This tax is due on the ownership of real property located within city limits, and may have progressive tax rates to ensure compliance with the social function of property.
o Property transfer tax (ITBI): Due on all transfers of real property inter vivos, irrespective of the amount of consideration. The acquisition can be by natural or physical accession and the tax is due on any in rem rights to real property, with the exception of collateral, and the assignment of rights to the property. Rates vary by municipality.
o Tax on services (ISS): Tax on all services not covered by the ICMS. Rates are established by each municipality and vary depending on the service provided with a maximum rate of 5%.
International Tax Treaties
• Currently, Brazil currently has 32 international treaties relating to income tax² and fifteen treaties regarding social security.³ Generally, the social security agreements anticipate the applicability of domestic legislation with regard to pension obligations, while the tax agreements (relating to income tax) override domestic law under the CTN.
• In order to stay consistent with the STF, the Brazilian Internal Revenue Service (RFB) has required the retention of income tax (IR) even on remittances to countries with which Brazil has an agreement to avoid double taxation.4
• The RFB might withhold income tax to use as a deductable in accord with the Principle of Reciprocity of Tax Treatment, which provides income tax credits for income earned abroad to ensure equal treatment to Brazilian citizens and corporations living abroad.
• To obtain this benefit, one must produce (i) a certified copy (accompanied by an official translation) of the tax treaty or (ii) a statement made by the Brazilian diplomatic representation located in the home-country of the expatriate, attesting tributary treatment. The RFB has already officially recognized the right of Brazilians living in the United States,5 United Kingdom,6 or Germany7 to receive reciprocal treatment.
Tax and Investment Incentives
• General
o Various tax exemptions and investment incentives exist to stimulate investment in activities and products such as manufacturing, agriculture, tourism, environmental management, shipping transportation, information and communication technology, and multimedia activities.
o Categories of investment incentives include industrial adjustment allowance, industrial building allowance, approved agricultural projects incentives, research and development incentives, inbound tour operators’ incentives, incentives for approved overseas investments, and incentives for overseas construction projects.
Doing Business in Latin America
• Manaus Free Trade Zone (“ZFM”)
o There is express dismissal of II and IPI over the goods acquired for local consumption or industrialization of any kind, with II being due (at a reduced rate) only if the foreign products stored at ZFM are commercialized in any other place in Brazil.
o The IPI tax benefits are extendable to products imported under international agreement of tax exception, such as the one held among South American countries—Common Market of South (“Mercosul”). Also, there is legal discharge of IPI on goods manufactured at ZFM if the industry had its project approved by the Administrative Council of Supervision of ZFM (“SUFRAMA”).
o There is exception of PIS and COFINS on the internal operation at ZFM and reduction of such contributions to other operations, once granted by SUFRAMA. Lastly, there is exception from AFRMM and IOF on the importation of goods, also requiring approval by SUFRAMA.
o The state of Amazonas renders several ICMS tax benefits to projects considered priority for the region, including “credit- stimulation”, deferral, exemption, reduction of tax basis, and presumed credit of ICMS, where the state assumes that a certain amount of the ICMS was already collected.
• Other Free Trade Zones (“ALCs”)
o There are other free trade zones in Brazil, such as the Guajará- Mirim in the state of Rondônia; Tabatinga in Amazonas; Boa Vista and Bonfim in the state of Roraima; Brasiléia and Cruzeiro do Sul in the state of Acre; and, finally, Macapá and Santana in the state of Amapá.
o Despite the variety of ALCs, all of them follow the same pattern of tax benefits, which expressly dismiss II and IPI over the final goods acquired for local consumption and improvements (not any kind of industrialization, as in ZFM), with II being due (at a reduced rate) only if the foreign products stored at ALCs are commercialized inside the ACLs or elsewhere in Brazil.
EMPLOYMENT LAW • For employees in general, maximum working hours are 44
hours per week or 8 hours per day. This limit may be exceeded under certain specific circumstances. Minimum overtime allowance is equal to 50% over the amount of the regular hour.
• There is no rule regulating collective layoffs. The statutory severance rights payable to the former employees are the same, irrespective of the number of employees that will have their employment terminated.
• Employees within the protection of the Consolidated Labor Law (CLT) are entitled to statutory benefits such as weekly paid rest (DSR), overtime allowance, night work allowance, health hazard allowance, risk premium, public holidays, 30-day vacation pay (plus the payment of a 1/3 vacation bonus), sick leave, annual 13th salary, maternity leave, and termination benefits, such as
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a 40% fine over the Unemployment Guarantee Fund (FGTS) deposits and notice period, in the event of termination of employment without cause by the employer, proportional to the seniority of the individual with the company (in this sense, after one year of employment the individual is entitled to three additional days, besides the mandatory thirty days notice period, for each full year of employment with the company. The maximum notice period is equal to ninety days).
• Wages are determined through market forces, however there is a minimum wage requirement defined by federal law. Notwithstanding. Collective bargaining agreements may define a higher minimum wage for a specific category of workers.
• Trade unions in Brazil are mainly regulated by the Brazilian Federal Constitution and by the CLT.
• The formation of employees’ unions is free provided that the new union meets the criteria set forth by the Brazilian Constitution that forbids the same category of workers being represented by more than one union within the same city. Upon formation, the union will be entitled to a mandatory annual fee, to be deducted by the company from the employees’ wages during the month of March. The collective bargaining agreement, which can be for a maximum period of two years, is legally binding and enforceable if it has been upheld by the Brazilian labor courts.
• The Brazilian Constitution recognizes the right to strike for employees of the private sector in general. The right to strike is regulated by federal law, and breach of said law may subject the aggravating party to the consequences defined by the Brazilian labor courts, why may include the payment of an indemnity and the termination of employment for cause.
• The employer must make a monthly and mandatory contribution to the FGTS equal to 8% of monthly wages. Upon termination of employment without cause by the employer, the employee is entitled to the release of said deposits, plus the payment of a 40% fine over said deposits.
• The National Institute of Social Security (INSS) provides social security protection to employees who are Brazilians or permanent residents, and to their families. An employee contributes up to 11% of monthly wages, limited to a certain amount and according to a progressive rate. The employer, on the other hand, must make a contribution equal to at least 20% over the payroll. Additional social security contribution regarding occupational accident insurance and the “S System” may be due.
IMMIGRATION PROCEDURES Passport and Visa Requirements
• All persons entering Brazil must possess valid national passports or other internationally recognized travel documents valid for travelling to Brazil. These passports or travel documents must be valid for at least six months beyond the date of entry into Brazil.
• Applications for visas (when necessary) may be made at the nearest Brazilian consulate abroad. For countries with whom Brazil does not keep diplomatic relations, the nearest Brazilian consulate will issue a laissez-passer on behalf of the foreigner, valid for only one round trip to Brazil.
Business Passes and Work Permits
• Visit passes (business) may be issued to foreigners entering Brazil for the purpose of looking at business opportunities, investment potential or introducing their goods that are to be manufactured in Brazil. This pass cannot be used for employment.
• Technical passes (for technicians only) may be issued to a foreigner who holds acceptable professional qualification or specialist skills entering Brazil under three different circumstances: emergency situation, express assignment or normal assignment (short-term or long-term) in Brazil.
• The three kinds of passes are valid for i) up to one extendable year for normal technical passes; ii) up to 90 non-extendable days for express technical passes; or iii) up to 30 non- extendable days for emergency technical passes.
• For passes valid up to one year, it is the sole responsibility of a Brazilian legal entity to submit to the Brazilian Ministry of Labor an application for a technical pass. The foreigner may apply for an emergency technical pass directly at the nearest Brazilian consulate. For a pass valid for up to 90 days, it is the sole responsibility of a Brazilian legal entity to submit an application for a technical pass directly at the nearest Brazilian consulate.
• Employment passes are required for foreigners taking up employment agreements in Brazil being paid directly by a Brazilian legal entity. The wife and children of a foreigner who has been issued with an employment pass may be issued dependents passes (permanent or short-term visas due to family reunion). However, these dependents will legally work in Brazil if they receive an employment offer from Brazil and if they obtain a work permit of their own.
• It is the sole responsibility of a Brazilian legal entity to submit an application for a work permit. Work permits are generally valid for two years and after that term the foreigner can apply for a permanent visa. Notwithstanding, please note that during the first two years of his/her stay in Brazil the foreigner will still be linked to the Brazilian legal entity that applied for the work permit, and thus the foreigner cannot render services to any other Brazilian legal entity.
• Officer passes are required for a foreign administrator, manager, director, or executive with the power to manage a civil or commercial association, group, or economic conglomerate. This permanent work permit must be applied by a Brazilian legal entity, who must prove to have received a direct foreign investment equal to R$600,000, or R$150,000, plus the obligation to create ten new jobs within the next two years.
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CIVIL LAW AND DISPUTE RESOLUTION • The Constitution of 1998 is the main law in Brazil.
• Historically, Brazil has used Napoleonic law. The principal source of Brazilian civil law is the Civil Code, which was reformed in 2002.
• A new Code of Civil Procedure will enter into force on March, 18th, 2016, abrogating the former one, which was enacted in 1973. Its purpose is to simplify the civil process and make it faster and more transparent. It is important to stress that this New Code of Civil Procedure is still surrounded by several debates regarding the validity of part of its rules and even the confirmation of the date of its entering into force.
• Civil disputes at first instance may be heard at the local court, session court, or high court, depending on complexity and value. Cases may go on to the court of appeal and then to the Superior Court of Justice. When they involve constitutional law, cases may go to the Supreme Federal Court.
• The administration of justice is not so fast.
• Alternative dispute resolution (ADR) is available and includes mediation and arbitration.
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BUSINESS PRESENCE • Foreign investment is understood as all the investments made
with foreign capital as part of a portfolio held in Colombian territory, including Colombian free trade zones, by people who do not reside in Colombia.
Corporate vehicles in Colombia
• Pursuant to Colombian Corporate law, and except from certain cases, any foreign company willing to perform commercial activities within the Colombian territory requires a corporate vehicle dully incorporated in Colombia. These vehicles, as a general, rule are subject to inspection and eventual supervision or control by national authorities such as the the Superintendency of Corporations and/or the Superintendency of Financial Matters.
o Simplified Stock Company: This company can be created with one or more natural or legal persons. The shareholders are liable only for their contributions.
• Colombia is located in the northwestern part of South America, bordered to the northwest by Panama; to the north by the Caribbean Sea; to the east by Venezuela and Brazil; to the south by Ecuador and Peru; and to the west by the Pacific Ocean.
• Colombia has a total area of 2,070,408 km², spread over a continental area of 1,141,748 km² and a sea area of 928,660 km².
• The official language of Colombia is Spanish, even though there are more than eight ethical languages around the country.
• Colombia’s government is presidential and representative. It is a democratic republic according to what has been established in the Constitution of 1991.
• Currency: Colombian peso, with free-floating exchange rate, which has been established by the Central Bank.
• Colombia’s GDP for the past six years was recorded as follows, 2009: 3.8%; 2010: 4.0%, 2011: 6.6%%, 2012: 4.0%, 2013: 4.7%; 2014: 4.6%.
• Colombia has many advantages for investment in several areas. Its geographical location allows fields like agriculture, mining, textile, oil, livestock and fishing among others to easily develop. Among major export products, Colombia has oil, minerals and coffee, as well as gold, oil derivatives, and flowers.
• Colombia has a modern airport and road infrastructure. Also, its sea and river ports, bordered by two oceans, make imports and exports much easier.
• Other common types of companies that allow foreign investments are the Limited Liability Company (Ltda), Stock Corporation (S.A.) and Foreign Company Branch.
o Limited Liability Company: The associates are liable only for their contributions which are divided in equal quotas that are not represented in negotiable certificates. The corporate structure is between two to five partners.
o Stock Corporation: Equity stock is divided in shares represented in negotiable instruments. A minimum of five shareholders are required to create this kind of corporation.
o Foreign Company Branch: Business establishment opened by a company within or outside the corporate address, to develop corporate business or part of them, managed by agents with authority to represent the company. The foreign company branch is recommended for mining and hydrocarbon sectors.
• There are other corporate types with specific characteristics which are not commonly used by foreign investors:
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o General Partnership: All the associates are liable in an unlimited, joint and several manners.
o Mixed Liability Company: Generally used for family businesses. There can be two types of companies: Simple Mixed Liability Company, and Stock Mixed Liability Corporation.
• Creation. The business companies are created by a corporate agreement that contains basic aspects such as company name, place of business and purpose, meetings of corporate bodies and the scope and limitations of powers.
• Inspection, oversight and control. All companies in Colombia are subject to inspection, and eventually to the supervision and control of the Superintendent of Companies; exceptionally and according to his purpose, some companies may be subject to the control of other superintendents.
RESTRICTIONS AND CONDITIONS OF FOREIGN INVESTMENT • Foreign investment in Colombia is defined as all the external
investment capital by non-residents of the country, which includes Colombian free-trade zones.
• The principles are the equality of treatment with the local investment; the universality for any sector of the economy; no authorization except under special regimes e.g., mining, oil and gas, television, which requires prior acknowledgment by authorities, and; stability for the reimbursement of the investment and the transfer of profits for the investor.
Types of Foreign Investment in Colombia
• Direct foreign investment: Acquisition of equity participations, shares, corporate interests, or any representative interest in a company’s capital; acquisition of real property or investments through real estate funds; taking part in activities or contracts as the case of technology transfer, cooperation, concession, service administration, and licensing contracts; and investments in assigned capital in branches established in Colombia by foreign legal persons.
• Portfolio investment: This type of investment is made through foreign capital investment fund shares, bonds, and other securities registered with the National Registry of Securities and Issuers (RNVE) in the public stock market.
Approvals and Authorities
• Foreign investments must be registered with the Colombian Central Bank (Banco de la Republica) as a requirement for the foreign investor to be able to reach foreign exchange rights.
• The Superintendent of Companies has authority to control and sanction operations related to foreign investment that are conducted by companies in general. And also the tax authority (DIAN) is authorized to control and sanction foreign exchange infractions related to foreign trade operations and foreign indebtedness derived therefrom.
Foreign Exchange Rights
• To remit profits generated periodically for the investments.
• To reinvest the profits or retain them in the surplus of undistributed profits with right of transfer.
• To capitalize sums with right of transfer.
• To remit abroad, in freely convertible currency, sums received either from the transfer of the investment inside the country, from the liquidation of the company or the portfolio, or from a decrease in the capital of the company or the portfolio.
Exchange Control
• Governed by the Exchange Control Department of the Colombian Central Bank (Banco de la Republica).
• The following operations need to be channeled through the foreign exchange market and exchange market intermediaries: importation and exportation of goods; foreign debt operations; foreign capital investments; guarantees and surety agreements in foreign currencies; and derivative operations.
Free Trade Markets and Treaties
• Colombia participates in the negotiation and signing of Bilateral Investment Treaties (BIT) and Free Trade Agreements (FTA) regarding foreign investments clear rules which include international arbitration.
• FTA examples with foreign investment provisions in force with Mexico, Chile, Guatemala, Honduras, El Salvador and BIT with Peru, Spain and Switzerland.
• FTA which includes investment chapters have been signed with the United States, Canada, Iceland, Liechtenstein, Norway, and Switzerland and BIT with Peru (a deeper agreement that the one in force), with India, China, and the UK.
• Colombia is member of the Andean Community of Nations – CAN with Peru, Ecuador and Bolivia.
TAXATION • The Colombian tax system has different levels depending on
the political map division: national taxes (departmental) and sub-national taxes (municipal).
National taxes:
• Income Tax
o Companies, branches and other bodies established in the country the income tax rate is 25 % for annual period. Income tax is determined as a rule of the excess of revenue earned over deductible costs and expenses. Also the presumptive income system is an alternate method that operates by a legal presumption that this tax is not lower than 3% of the net assets as of December 31 of the year prior to the current taxable year. In the case of Industrial Users of good and services located in a Free Trade Zone, the income tax rate is 15%.
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• Income Tax for Equality
o For companies there is also an Income Tax for equality (CREE) with a 9% rate for the years 2013, 2014, 2015, and then it will be reduced to an 8% rate for the following years. According with the latest tax reform for the years 2016, 2017 and 2018 will be a surcharge rate depending of exceeding the amount of COP $ 800 million (USD $400.000) on the tax base CREE.
• Value Added Tax (VAT)
o It taxes the sales of movable property that are not fixed assets, the delivery of services within the national territory and the import of movable property. The general rate is 16%.
• National Consumption Tax
o It taxes the sales of food prepared in restaurants, bars or nightclubs at an 8% rate.
Municipal Taxes:
• Industry and Commerce Tax
o It is a local tax imposed on revenue generated from industrial, commercial or service activities carried out in the corresponding municipality with a rate ranging between 0.2% and 1%.
• Unified Property Tax
o It taxes the ownership of real state property located in urban areas, with a rate ranging between 0.4% and 1.2% of the good’s value.
• Agreements for avoiding double taxation
o In order to avoid double taxation and prevent evasion, Colombia has signed double taxation treaties with the following countries and communities: (i) Andean Community of Nations; (ii) Chile; (iii) Mexico; (iv) Canada; (v) Spain; (vi) Switzerland and it is expected with Korea, India and others.
o There are other agreements for avoiding double taxation in specific matters entered into with Argentina, Brazil, Germany, Italy, Panama and the United States.
o Lastly, other treaties are also under negotiation with, the Netherlands, Belgium, Czech Republic, Japan, France, Israel and the United Arab Emirates.
LABOR REGIME • The ordinary workday covers a maximum of eight (8) hours
per day and forty-eight (48) hours per week, which can be distributed from Monday to Friday or Monday to Saturday. The law also allows reaching agreements with workers on flexible working hours.
• Employment contracts can be classified in different ways. Depending on their duration, they can be classified as follows:
o Fixed-term contract: Its duration may not exceed three (3) years. However, the parties may extend it indefinitely.
o For the duration of a work or a contracted job: Its duration is equal to the duration of the assigned task.
o Occasional or Temporary Contract: Its length is not greater than one (1) month and it refers to tasks that are different from the normal activities of the employer.
o Indefinite Term Contract: A term is not stipulated and its length is not determined by the work or nature of the contracted job. It does not refer to an occasional or temporary job either.
• Contracts can also be classified in written or oral exams. The following types of contract must always be written:
o Fixed term contracts, their extensions and the advanced termination notice.
o The contracts signed with foreigners that are non-resident in the country.
o Contracts through which ten (10) or more workers are moved to provide their services out of the country (collective hiring).
• Trial Period is the term corresponding to the initial phase of the employment contract which aims to allow the employer to evaluate the worker skills. It also allows the employee to evaluate the convenience of work conditions. This period may not exceed two (2) months for most of the contracts. In particular, fixed-term contracts with a less than one (1) year length, cannot have a trial period longer that 1/5 of the initial term agreed in the contract.
OBLIGATIONS RELATED TO WAGES AND BENEFITS Every employer in Colombia, under any type of labor contract, has the obligation to pay a salary for rendered services as well as the social benefits generated during the validity of the labor relationship, as follows:
Wages
• Every employer must pay its workers the monthly wages agreed in the employment contract. There are several modalities of salary in Colombia, including ordinary wages, which cannot be less than the minimum legal monthly wage in force (for year 2015 it is the sum of COP $644.350). In addition, there is another modality of salary besides the ordinary one, called Integral Salary, whereby an employee is paid more than ten minimum legal monthly wages plus a 30% as a benefit factor (it means the employer is paying in advance fringe benefits and the overtime surcharge if it is agreed), this modality of salary has to be agreed in writing by the parties.
• The minimum value for the integral salary set by the National Government for 2015 is the amount of COP $8.376.550. Any sum above this amount can be agreed in writing as an integral salary and the employer shall only be liable for paying vacations.
Social Benefits
• Every worker earning an ordinary salary is entitled to the periodic recognition, by its employer, of the following social benefits:
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C O L O M B I A Doing Business in Latin America
Benefit Description Calculation
Severance One month of wages, including transport subsidy
per year of services or
proportional.
(Average wages of the last
12 months plus transport
subsidy, times the number
of days worked in the year)
/ 360
Interest on Severance
12% of the full value of the
severance benefit per year
or proportional.
(Severance x number of
days worked in the year x
12%) / 360
Service Bonus One month of wages, including transport
subsidy. It is paid as
follows: 15 days in June
and 15 days in December
proportional to time
worked each semester.
(Average wages of the last
6 months plus transport
subsidy, times the number
of days worked in the half-
year period) / 360
Vacations Fifteen (15) business days’ paid leave per year of
services or proportional.
(Average wages of the last
12 months x number of
days worked in the year)
/ 720
* Social benefits are originated when the worker is under the ordinary type
of salary; in Integral Salary, only vacations are due.
Social Security and Para–Fiscal Contributions
A company with one (1) or more employee must enroll to the following entities:
• Family Compensation Bureau: Every company with employees must enrol in a Family Compensation Bureau within the city or municipality were the payroll is paid and also Para–Fiscal contributions assigned to the payment of the Family Subsidy on a monthly basis must be paid.
• Labour Risk Insurer (ARL): In addition, every company must enroll in a ARL, entity that will arrange and determine the applicable risk to the company according to its economic activity and that subsequently will cover the derived risks from the labour activities of all the employees of such company.
• Workers Enrollment: Any company with employees under any kind of contract must enroll its workers in (i) a Health Promotion Entity (EPS) to cover all of the employee’s risk due to general disease; (ii) a Pension fund to cover the employee’s risk of disability, old age and death; (iii) a Labour Risk Insurer (ARL) to cover all of the employee’s risks of professional disease or working accident, and (iv) A Family Compensation Bureau to provide welfare to the worker and its family and pay the Family Subsidy, if applicable.
Monthly contributions to the aforementioned institutions are paid as follows:
Item Monthly Percentage
Health Since the new tax statute is enforced, employers are not entitled to contribute the
8.5% of the salaries to the social security
system in health, this contribution is taken
from the CREE (a special tax for the utilities
of the company). The employee has to pay
the 4% of his salary.
Pensions 16% of the monthly wages (12% a paid by the employer and 4% paid by the employee).
On top of this, and additional contribution
to the Pension Solidarity Fund must be
added when the employees earn more than
4 minimum monthly wages and up to 20
minimum monthly wages, in a percentage
ranging between 1% and 2%.
Labor Risks From 0.522% up to 8.7% of the monthly wages depending of the type of risk set by
the ARL (fully payable by the employer).
When an employee earns more than 10
minimum legal monthly wages, the employer
is entitled to pay an additional 5% of the
payroll of the employee as a payroll tax, 2%
goes to the SENA (Educational National
System) and 3% goes to the ICBF (National
Children Institute).
Family Conpensation Bureau Contributions
4% of the full monthly payroll (fully payable
by the employer).
IMMIGRATION PROCEDURES Visa and Foreigner’s Identity Card
• If the foreigner comes to Colombia to provide personal services, contracted by a private company with domicile or a branch in Colombia, he/she must apply for a Temporary Work TP-4 Visa. This type of visa is processed by Colombian Consulates on request and is the responsibility of the company validating the application. It may be granted for a term of up to three (3) years for multiple entries.
• On the other hand, for foreign crew members or members of an international mean of transport, a Crew Member Visa must be processed before the consular offices of the Republic of Colombia for entering and staying in the national territory. The validity of a Crew Member Visa can be up to one (1) year.
• When a foreign comes to Colombia in activities different from providing personal services as an employee, it is necessary to obtain the required visa or special permanent permit, according with the activities to be developed and the length of his stay in the country.
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• Currently, the Superintendence of Industry and Commerce is the designated authority in Colombia for most IP matters and is thusly responsible for almost all of the proceedings concerning trademarks, patents, industry designs and others.
Industrial Property
• Distinctive Signs
o Trademarks: Trademarks identify products and services within each relevant class of the Nice Classification, and once granted, their owner will enjoy a protection lasting ten (10) years, after which it must be renewed.
o Slogans: It is the word or phrase used as a complement for a trademark. The registration of a slogan must be requested before SIC and will represent the products and services that identify the trademark.
o Tradenames and business signs: Designations of origin. The authorization for using a protected appellation of origin shall have a duration of ten (10) years, which can be renewed for equal periods.
• New Creations: Patents
o They are property titles conferred by the government of a country which give their holders the right to temporarily prevent others from manufacturing, selling, or commercially using protected inventions.
– Invention Patents: The use right is granted for 20 years.
– Utility Model Patents: The use right is granted for 10 years.
– Industrial Design: 10 years from the last day of the year when the first commercial exploitation of the layout scheme was completed anywhere in the world or the date on which the application for registration was submitted in a member country of the Andean Community, whichever comes first.
Copyrights
• In Colombia, the protection on a new artistic or literary work, including software, is granted through copyright. Copyright protection is equal to the life of the author plus 80 years. Since protection of moral rights is non-transferable and imprescriptible, it is indefinite.
• Unlike with industrial property rights, copyrights over these works are granted with their creation and not their registration. However, works may be registered before the National Copyrights Directorate, to establish a legal presumption of first- use, which is beneficial in the event of copyright litigation.
DISPUTE RESOLUTION • In Colombia, the Arbitration National Statute was adopted (Act
1563 of 2012), which main purpose is promoting the use of an alternative mechanism for dispute resolution (ADR). The parties shall agree to use an arbitration agreement to solve any further controversy, which implies that the parties renounce to assert their claims before the courts.
C O L O M B I A Doing Business in Latin America
• In addition, all foreign persons who enter Colombia with a visa valid for more than three (3) months must appear before the Oficina de Migración Colombia within the fifteen (15) calendar days following their entry into national territory to register as a foreigner and apply for the respective foreigner’s identity card.
Types of Visa
• Business Visa: It is for retailers, industry people, goods and services suppliers, or people wishing to get into the country for business purposes or in order to carry out market studies, dealing future sales or settling commercial presence in the country. It is also for legal representatives, directors, managers or executives of foreign commercial, service or industrial companies which have an economic link with a national or foreign company in Colombia and that are able to develop activities related to business management.
• Temporary Visa: This visa is granted to foreigners hired by local companies to develop activities in which they are experts, such as technicians, journalists, people belonging to artistic groups and legal representatives, among others. It is also granted to those who intend to enter into the country under academic agreements between higher education institutions or inter- administrative agreements in specialized areas. There are 13 different types of temporary visas depending on the type of activities of the foreigner.
o People designated by a state body or institution. Directors, technicians or administrative staff of public or private foreign bodies, commercial or industrial, who have been transferred from abroad to work in specific positions in their companies.
• Resident Visa: May be granted to the foreigner who wishes to enter to Colombian territory and reside in it when: (i) One of the parents is a Colombian national; (ii) The foreigner has held selected TP visas for an uninterrupted minimum time of 5 continuous years; (iii) The foreigner has had a TP-10 visa for a minimum of 3 continuous and uninterrupted years; (iv) The foreigner in his condition of investor has registered Foreign Direct Investment with the Central Bank in an amount of more than 650 current legal monthly minimum salaries.
• The foreign with an RE visa is authorized to exercise any legal activity in the country, including those that are developed in accordance to a work contract. This visa will be granted and in no way contradicting the legal requirements established for the exercise of these activities in the national territory.
INTELLECTUAL PROPERTY • In Colombia, intellectual property is regulated by Decision 486
of 2000 of the Andean Community. By means of this Decision, intellectual property matters in Colombia, Peru and Ecuador were given a unified regulation concerning trademarks, commercial labels, commercial names, patents and industry designs, thus simplifying registration proceedings, amongst other benefits.
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• Even though this statute is close to the law model from Uncitral, a division between national and international arbitration was kept. This way the two regimes are kept, which is different from what happens in other countries such as Peru.
• The parties may choose the formation of the Panel, which will be composed of three (3) arbitrators; president, arbitrator for part A and arbitrator for part B. They must be registered in the Chambers of Commerce.
• Since 1997, Colombia has been part of the International Convention for Settlement of International Disputes (ICSID), an institution responsible for supporting the processes of resolution of disputes that may arise between investors and the government.
Doing Business in Latin AmericaC O L O M B I A
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C O S TA R I C A
LEGAL SYSTEM • The Costa Rican government is ruled by a series of
constitutional controls. The executive responsibilities rest on the president, and a congressman cabinet composed of 57 members in charge of approving the laws, all of them are elected every four years.
• The country has a strong legal system that manages the ‘Judicial Power’, which ensures law compliance and covers nationals, as well as foreigners within the country’s territory.
• The 2012 World Bank Study for Global Governance Indicators ranks Costa Rica in the second place within Latin America for political stability.
THE ECONOMY • Costa Rica’s economy was historically based on agriculture, and
this has had a large cultural impact through the years. Costa Rica’s main cash crops, both historically and up to modern times, were coffee and bananas.
• However, since the mid-nineties the strength in the non- traditional export and tourism sector has relegated the
• Republic of Costa Rica, is a country located in Central America, bordered by Nicaragua to the north, Panama to the southeast, the Pacific Ocean to the west, the Caribbean Sea to the east, and Ecuador to the south of Cocos Island.
• Costa Rica was sparsely inhabited by indigenous people before it came under Spanish rule in the 16th century. Once a poor and isolated colony, since becoming independent in the 19th century.
• The system of government is a constitutional republic. It is the only Latin American country to have been a democracy since 1950 or earlier. It constitutionally abolished its army permanently in 1949, becoming the first and one of the few sovereign nations without a standing army.
• Total Area: 51.100 square kilometres. • Climate: The climate is tropical year round. However, the country has
many microclimates depending on elevation, rainfall, topography, and by the geography of each particular region.
• Population: 4.301.712 inhabitants. • The official language is Spanish. • The monetary unit is the Colon.
traditional sectors, including agriculture. The strength of these areas is based on the trade liberalization, which has allowed exports to surpass its 30% ratio of GDP in 1980 to a 38% rate in 2012 (includes exports of goods and services)
• Hybrid electronic circuits was the leading durable export category in 2013, followed by pineapple, banana, medical equipment, medical bio products, and coffee, juices, prosthetics, and surgery tools; these categories added up to over 50% of exports.
SEVERAL FUNCTIONS OF THE CENTRAL BANK OF COSTA RICA • The Costa Rica Central Bank main objective is to control
inflation, and is also responsible for the issuance and management of bills and coins.
• The Costa Rica Central Bank also seeks to maintain the external value and the currency conversion.
• It custody and administrate the international monetary reserves of the nation.
• Defines and manage the monetary and exchange rate policy.
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C O S TA R I C A Doing Business in Latin America
• Serves as counsel and State bank-teller.
• Promotes the strengthening of favourable conditions, liquidity, solvency and proper functioning of the National Financial System.
SEVERAL FUNCTIONS OF THE CENTRAL BANK OF COSTA RICA • The Costa Rica Central Bank main objective is to control
inflation, and is also responsible for the issuance and management of bills and coins.
• The Costa Rica Central Bank also seeks to maintain the external value and the currency conversion.
• It custody and administrate the international monetary reserves of the nation.
• Defines and manage the monetary and exchange rate policy.
• Serves as counsel and State bank-teller.
• Promotes the strengthening of favourable conditions, liquidity, solvency and proper functioning of the National Financial System.
TAX REGIME • Costa Rica tax regime is still ruled by a territorial principle,
which establishes that contributors will be subject of taxes only for income generated within the country.
• The ordinary tax fiscal period begins on October 1 of one year and ends on September 30 of the following year (12 months). There are also other tax periods that may be authorized depending on the activity of the taxpayer, which is referred to as “special tax period.” The dates for submission of statements vary for different fiscal periods.
• Taxpayers have being divided in four categories: individuals, legal entities, consumers and producers. They are obligated to pay direct or indirect taxes according to their activities.
• There are some exonerations the tax payers may apply if they are subject to it.
FREE TRADE ZONE • The Free Trade Zone Regime is a collection of incentives
and benefits that the State grants to companies making new investments in the country, as long as the companies comply with the requisites and obligations established in the pertinent Free Trade Zone Regime Law, N° 7210 of November 23, 1990 and its amendments and regulations.
• The application to be a beneficiary of the Free Trade Zone Regime is processed by the International Trade Promoter (PROCOMER). Nevertheless, it requires the approval from the Ministry of Foreign Trade, and the President of the Republic.
• The companies that may apply shall be classified under one of the following categories: processing for export, traders, services export, free trade zone park administrators, investigation and
research companies, companies that operate shipyards and docks and processing companies whether they export or not or supplier companies to other FTZ.
COMPANIES STRUCTURES IN COSTA RICA • In order to register a business enterprise, a public deed has
to be drafted by a Notary Public and such deed has to be presented before the Mercantile Registry, with the objective of registering it and to obtain the corporate identification number.
• The commonly used structures for corporations in Costa Rica are: Public Limited Company (Sociedad Anonima), Limited Liability Company (Sociedad de Responsabilidad Limitada), Branch of A Foreign Corporation
• According to the Law 9024, an annual tax should be paid every January by all companies, branches of foreign companies and their representatives, and limited liability companies, in addition to those taxes currently paid for these entities (educación y cultura stamp, income tax, among others). Yet, this tax has been declared unconstitutional from January 2016.
OPERATION OF A BUSINESS • In order to operate a business in Costa Rica, some
authorizations and permits must be acquired.
• Taxpayer Registry, after the registration of the company at the Mercantile Registry, it has to be registered as a taxpayer before the General Income Tax Office.
• National Insurance Institute (INS in Spanish), to conform to the Costa Rican Labor Code, the employer must secure an occupational risk insurance policy for its employees. For this purpose the employer has to underwrite a policy from the National Institute of Insurance (INS). The policy has to be underwritten at the beginning of the operation and has to be in force during the operation.
• Costa Rican Social Security Office (CCSS in Spanish), pursuant to Costa Rican legislation, the employer must contribute to the social security system of its employees. To this effect, prior to paying the social security contributions, it must register as an employer at the central or regional offices of the CCSS.
• Ministry Of Public Health: Operation Certificate. In accordance with the General Health Law, prior to the initiation of operations, companies must request authorization, or an Operation Certificate, from the Ministry of Public Health.
• Municipal License. All lucrative activities require a municipal license (or permit) from the canton in which the activity is developed. The license involves the payment of a tax during the time of operations (Municipal Code, Law N° 7794, Article 79).
EMPLOYMENT • In Costa Rica, the employment matters are primarily regulated
by a Labor Code, which establishes the general rules governing all labor relationships. There are other important laws such
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C O S TA R I C A Doing Business in Latin America
as the Law of Labor-Related Risks and the Law for Worker’s Protection, also there are several administrative regulations emitted by the Labor Ministry that must be taken into consideration, such as the decrees establishing minimum wages that is updated every six months.
• Moreover, the companies can create their own internal rulings, to include for example their worldwide policies or manuals. These internal rulings must be approved and registered by the Labor Ministry.
• Salary can be stipulated freely, but cannot be less than the minimum wage set by the National Wages Council for the specific activity or work. The agreement or consent of the employee to be paid a sum less than the salary that corresponds to its services is not allowed.
• The Labor Code establishes a list of justified causes for an employee’s dismissal; in these cases the employer will only be liable for the payment of wages, proportional vacation time and Christmas Bonus.
• Severance Pay (Cesantia), it is an economic indemnification for the employee or his/her family, when the labor relationship ends because of an unjustified dismissal, age retirement or dead of the employee.
IMMIGRATION • There are several migratory category options, however just
the categories such as executives of a company or workers of a specific field (agriculture, construction or domestic services) or residents with free migratory condition are allowed to work. Therefore is important before come to Costa Rica get an advice, to know which labor categories are immigrants allowed to work.
• A request for residency in Costa Rica should be submitted to the Costa Rican Consulate in the country of origin or residency or at the General Migration and Foreign Affairs Office, in Costa Rica. It’s important to check the requisites for each residency categories, because the requirements may vary.
• Companies which qualify under one of the categories established by law may request a special recognition from the migration authorities once the Migration Office grants the recognition to the company, its executives, representatives, managers and technical personnel, etc. can apply for their residency in a more expedite procedure.
INTELLECTUAL PROPERTY RIGHTS • Intellectual Property in Costa Rica is protected by the different
IP Laws and Bylaws, as well as several international treaties.
• The IP Office at the Public Registry is the entity in charge of the administration and regulation of the process for the registration of copyrights, trademarks, patents, industrial designs, geographical denominations, etc.
• The Costa Rican IP Office, the Administrative Court and specialized Courts are in charge of the IP Rights enforcement in Costa Rica.
• IP rights and inscription processes is regulated by special laws and bylaws on every matter and also for international treaties such as CAFTA, PCT, WCT, Paris Convention, and Brussels Conventions among others.
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C U R A Ç A O
LEGAL SYSTEM • Curaçao has an independent and high-quality legal system
which is based on the Dutch civil law system. As a Netherlands protectorate Curaçao enjoys European Union market privileges.
• Curaçao has a Court of First Instance, and as appellate court a Common Court of Justice of Aruba, Curaçao, St. Maarten, and of Bonaire, St. Eustatius, and Saba. The Supreme Court in The Hague is also the Supreme Court for Curaçao, Aruba, St. Maarten, the BES islands, and the Netherlands itself.
• Curaçao is an island in the southern Caribbean Sea off the Venezuelan coast. It includes the main island plus the small, uninhabited island of Klein Curaçao (“Little Curaçao”).
• Curaçao is one of the five island territories of the former Netherlands Antilles, in existence until the constitutional reform of October 10, 2010.
• Curaçao is an autonomous country within the Kingdom of the Netherlands, which consists of the following four countries: the Netherlands and its three public bodies Bonaire, Sint Eustatius, and Saba (also known as “BES islands”); Curaçao; Aruba; and Sint Maarten.
• Curaçao enjoys self-determination on all internal matters and defers to the Kingdom in matters of defense, foreign policy, and some judicial matters.
• The system of government of Curaçao is a parliamentary democracy based on the Dutch model.
• Total Area: 444 km2. • Climate: Tropical maritime climate with an average temperature that ranges from
25.3°C to 31.2°C. • Population: 154,843 as of January 1, 2014. • The official languages are Dutch, English, and Papiamentu, a multifaceted Creole
language based on Portuguese, Spanish, Dutch, English, and several African dialects. • Race/religion: Multicultural and multidenominational. • The monetary unit is the Netherlands Antillean guilder (ANG). The exchange rate has
been pegged to the US dollar since 1971 as more than 60% of the Central Bank of Curaçao and Sint Maarten’s international trade relations have been conducted with the United States or using US dollars.
THE ECONOMY • Tourism, financial services, and oil refining have been the
mainstays of the Curaçao economy since the 1970s.
• Shipping, international trade, and other activities related to the port of Willemstad also make a contribution to the economy.
• Curaçao has free access to foreign currencies, such as the US dollar and the Euro.
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C U R A Ç A O Doing Business in Latin America
SEVERAL FUNCTIONS OF THE CENTRAL BANK OF CURAÇAO AND SINT MAARTEN • The bank’s most important objectives are to maintain the
external stability of the Netherlands Antillean guilder and to promote the efficient functioning of the financial system in the countries Curaçao and St. Maarten.
• The bank supervises banking and credit institutions to guarantee depositors and other creditors funds at banking and credit institutions in particular and the soundness of the financial sector in general.
• The bank is also entrusted with the supervision of trust service providers, fund administrators and the insurance industry.
• The bank manages the foreign exchange reserves, which includes regulating the transfer of payments between residents and non-residents of the countries Curaçao and Sint Maarten.
TAX REGIME • Curaçao offers a wide variety of tax-exempt, low-, and high-tax
solutions for international businesses.
• Curaçao has concluded a large number of treaties such as investment protection agreements, tax information exchange agreements, and agreements for the avoidance of double taxation, crucial to the development of Curaçao’s financial services sector.
• For the development of hotels and similar recreational businesses a tax holiday may be obtained if the minimum investment amounts to at least ANG 1,000,000. Similar tax holidays apply to export industries, project development, and large enterprises.
E-ZONE • The Curaçao E-zone consists of a series of physical locations
that are appointed by the Curaçao Minister of Economic Affairs to stimulate the local economy by offering import, export, and general trading incentives, as well as online services.
• Companies established in one of these zones enjoy a complete exemption from import duties and turnover tax.
• Their net profits are taxed at a flat rate of 2%.
• As of January 1, 2014 an export facility was introduced, which is a tax incentive for companies that are practically exclusively aimed at exporting goods and services. The income of these companies is taxed against an effective tax rate of approximately 4%.
• The domiciliation of the companies is in curacao and they are required to have real substance which is appropriate for the nature and size of the activities of the companies.
• Activities that are permitted are: the export of goods, international trade and services, performing maintenance and repairs on machines located abroad, e-commerce and other services on behalf of foreign clients.
• Other benefits are that the tax incentive is not restricted to designated zones and that advance permits are not required to apply for the export facility.
FINANCIAL SERVICES • Being a financial center, numerous international companies are
based in Curaçao. International companies, also known as off- shore companies, are organized under the laws of Curaçao, or managed and controlled in Curaçao, and do not conduct trade or business within Curaçao or with residents of Curaçao.
• Such companies are considered resident companies for Curaçao tax purposes, but can be granted preferential tax rates.
• As of January 1, 2001, aforementioned companies are grandfathered into the off-shore tax regime until the end of the financial year starting on or before July 1, 2019.
• International companies to which the off-shore regime applies may elect to apply for the participation exemption of the new fiscal regime.
• Curaçao is home to all major corporate management providers that offer domiciliation and management to all sorts of international companies.
FUNDS • Curaçao was named the number one location for hedge fund
administration services in 2008, outperforming jurisdictions like Singapore, Hong Kong, Luxembourg, the Netherlands, and the Cayman Islands.
• Besides domiciliation of these funds, the administration of such funds also takes place in Curaçao.
GAMING • Online gaming is a legitimate business activity provided the
e-gaming company has obtained the proper license.
• Basic requirements for applying for a license are compliance with due diligence and KYC policies, full identification of ultimate beneficial owners, as well as a detailed and transparent description of the games.
DUTCH CARIBBEAN SECURITIES EXCHANGE • In 2010, Curaçao launched the Dutch Caribbean Securities
Exchange. The DCSX is an ideal place for the listing and trading in domestic and international securities. Because of its efficient listing procedure, the supervision by the central bank of Curaçao and Sint Maarten and its civil legal framework, the DCSX is quickly becoming a listing destination of choice for especially Latin America. The DCSX has also been identified by European, US, and Asian markets as an attractive alternative for listing of international funds.
• Licensed listing advisors can guide the listing process.
• The DCSX is a correspondent exchange of the World Federation of Exchanges (WFE).
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C U R A Ç A O Doing Business in Latin America
PRIVATE FOUNDATION • In November 1998 Curaçao introduced a new form of
Foundation called the “Private Foundation” (in Dutch the “Stichting Particulier Fonds” or “SPF”) which differs fundamentally from the traditional foundation.
• This special form of foundation has been introduced with the principal aim to serve as an alternative to the Anglo-American Trust, with a view to separating private assets from private estates by way of transferring these assets to separate legal entities for purposes such as asset protection.
• Assets or capital may for example be protected against political interference or expropriation, criminal risks such as kidnapping, economic risks such as product liability, or other types of risks such as spendthrift.
• An SPF is typically used for purposes of asset protection, estate planning, tax planning, preservation of family assets, holding of shares and investments, and managing assets.
• The SPF is in principle tax exempt, but may elect to be taxed. An SPF may not conduct a business or enterprise, and thus should be passive.
THE CURAÇAO TRUST • On January 1, 2012, new legislation entered into force which
made it possible to set up an Anglo-American Trust pursuant to Curacao Law.
• The Curaçao trust can be used for many different purposes like estate and inheritance planning, pension or investment fund, finance and security structures, and promoting charitable objectives.
OTHER LEGAL ENTITIES • The private limited liability company (“BV”) is a flexible
and highly modern form of corporation. The option of a company “managed by shareholders” is introduced for the BV, comparable to the American member-managed limited liability company. The BV is in principle subject to profit tax. However, a full exemption can be applied for if the activities are investing in debt instruments, securities, and deposits, and the exemption is applied for within three months of incorporation.
• The Commanditaire Vennootschap (“CV”) is a limited partnership in which there is a distinction drawn between the limited partners and the general or managing partners. The general or managing partners manage the affairs of the CV and represent it in dealings with third parties. They are jointly and severally liable for the debts of the CV. A limited partner contributes to the partnership a certain amount of capital. His liability is limited to the amount of capital contributed.
• The Vennootschap Onder Firma (“VOF”) is a general partnership in which the individual partners are jointly and severally liable for the debts of the partnership.
• Taxation of the VOF and CV: The VOF is not considered a separate entity for profit tax purposes. Therefore, the partners
in the VOF are each individually subject to tax on their share in the profit of the VOF. The same applies to the CV. The exception is the so-called CV by shares. The CV by shares is considered a separate entity for profit tax purposes. The CV is then subject to tax, but only on the profit share of the limited partners. The general partner remains himself subject to tax on his profit.
• A proprietorship (eenmanszaak) is a form of business where there is no distinction between the business assets and personal assets. As the owner of a one-man business, you will be personally liable for all obligations of the business.
• A foundation (stichting) is a legal entity in its own right with its own assets and liabilities. The stichting is still frequently used by/for religious and nonprofit organizations.
SHIPPING • Curaçao has been a recognized jurisdiction for the registration
of commercial ships for over half a century amongst others due to its naturally protected deep sea harbor which makes it easily accessible by large freight ships. Curaçao has the largest dry dock facility in the entire Caribbean and is located outside the hurricane belt.
• To make Curacao even more attractive for the establishment of shipping business, a tonnage tax was introduced limiting taxation to a profit calculated on the basis of a taxable amount per net tonnage.
• A great advantage of the tonnage tax is the very broad definition of “vessel.” In principle every legitimate use of a vessel (outside the territorial waters of Curaçao) is eligible for the tonnage tax.
• Thus, specialized ships like survey, fishing, cable-lying and dredging vessels, tugboats, oil rigs, and also ship management all qualify for tonnage-based taxation instead of being taxed on their actual operating results.
INFRASTRUCTURE • Curaçao enjoys a well-developed infrastructure.
• The telecommunications infrastructure in Curaçao is highly developed with broadband Internet access on a par with world financial services centres.
• The ports of Curaçao are the most modern and efficient container ports in the Caribbean and offer safe, fast, efficient and reliable handling of both ships and cargo.
• In 2010 CTEX was established and together with regional banks, pension funds and private investors the company is operating the region’s most advanced datacenter. CTEX is working with companies in the oil & gas, financial services, government, transportation & logistics, utilities and telecom industries located throughout the region. Their goal is to leverage a state-of-the-art facility to deliver highly advanced and specialized industry solutions.
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C U R A Ç A O Doing Business in Latin America
• In June 2013 CTEX achieve Tier-IV ‘Design” certification, the highest and most stringent certification to meet.
EMPLOYMENT • Curaçao general labor law is largely regulated in the civil
code which contains stipulations about what agreements are considered to be employment agreements, the term of the employment contract, and the ways in which the employment contract can be terminated.
• More specific areas of labor law are regulated in separate national ordinances, for example the obligation to pay overtime, minimum wages, and labor circumstances.
• The labor law has tried to combine flexibility for the employer with security and protection for the employee.
• For certain business sectors that are important to the Curaçao economy the regulations with regard to, for example, overtime are more liberal, to encourage these sectors.
• The collective labor agreement is growing in popularity. This is an agreement between one or more employers and one or more trade unions in which rules are given for employment conditions which have to be observed in employment agreements.
• This collective labor agreement is used to regulate employment conditions and fringe benefits uniformly for a large group or all employees of a company.
• A collective labor agreement is negotiated between the company and the union. The employees are entitled to representation by a union. Representation by a union can be forced by the employees by holding an election within the company to decide which union represents the majority of the employees.
IMMIGRATION • Foreign nationals require a residence permit as well as a work
permit in order to legally reside in Curaçao.
• The National Ordinance on Admission and Expulsion addresses the terms and conditions of admission to Curaçao.
• A prerequisite of obtaining a permit is having a job.
• The application process of a residence or work permit takes approximately three months.
• Tourists are allowed to enter Curaçao without a temporary residence permit for a maximum period of 14 to 30 days. For certain nationals such period is three months.
INTELLECTUAL PROPERTY RIGHTS • Intellectual Property rights (IP rights) protect intellectual efforts,
perceivable through tangible objects, that are deemed to be unique. The intellectual effort is the subject of legal acts, such as transfers of ownership and licensing.
• Although copyright, trademarks, and patents are explicitly provided for in local legislation, this does not restrict nor limit the protection of other IP rights in Curaçao.
• Curaçao is a part of the Madrid Protocol, which allows for international registration of trademarks in the other member states trough a single registration in Curaçao.
• The Bureau of Intellectual Property (“BIP”) of Curacao is the regulatory authority and keeps the trademark register. Apart from trademarks the BIP also receives and processes applications and keeps a record of the so-called i-envelopes, a closed envelope through which ideas are deposited for evidence purposes.
• Patents are regulated by the Kingdom Patent Act 1995 which also applies to Curaçao.
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BUSINESS PRESENCE • Foreign investors may conduct business in Dominican Republic
either through a Dominican company or by establishing a branch of a foreign company.
• To establish a branch in the country, it is required to register the company in the Mercantile Registry at the Chamber of Commerce and Production and also obtain a Taxpayer ID.
• Foreign companies and local corporations that are registered have the same tax liability (treatment).
• There are no restrictions as to the nationality of the partners. All shareholders can be foreigners.
• To register a foreign company, all incorporation documents must be authenticated with an apostille or legalized by the correspondent Dominican consulate in the country of origin.
Main types of business models in Dominican Republic: Dominican corporate law recognizes different types of commercial entities. Depending on the activities and operations, the most frequently used corporate vehicles are the following:
• Limited Liability Company (S.R.L.): Recommended for small business, managed by one or several officers (managers). The company´s name must be followed by the suffix “Sociedad de Responsabilidad Limitada” or its abbreviation “SRL”. The minimum capital required is RD$100,000.00 with an individual nominal value of RD$100.00 per social part. A minimum of two partners is required, whose liability is limited to their contribution. All managers must be individuals.
• Dominican Republic is located in the Caribbean, bordered to the north by the Atlantic Ocean; to the east by the Mona Passage, to the west by Haiti; and to the south by the Caribbean Sea, with a total area of 48,442 km2.
• Government: Democrat, with three branches of government: executive, legislative and judicial.
• Population: 9,445,281 • Spanish is the national language; English is widely used for business and commercial
purposes. • Currency: Dominican Peso (DOP) • Climate: Tropical and warm with average temperature that ranges from 23ºC and 27ºC. • Investment growth areas include tourism, real estate, mining, energy, construction,
aviation, free zone, telecommunications, industrial and agricultural.
• Shareholder Corporation (S.A.): Recommended for large business. The company´s name must be followed by the suffix “Sociedad de Anónima” or its abbreviation “S.A.”. A minimum authorized capital of RD$30,000,000.00 is required, of which a 10% must be paid and subscribed. Corporate capital is represented in shares with a minimum nominal value of RD$1.00, which are essentially negotiable. Shareholder Corporations are managed by a Board of Administration with a minimum of three members. Legal entities may not serve as president or vice-president in this type of company. A vigilance officer must be appointed.
• Simplified Shareholder Corporation (S.A.S.): Recommended for medium business. Is a limited liability company formed by two or more partners. The corporate name must contain the suffix “Sociedad Anónima Simplificada” or “SAS”. A minimum of two partners is required. A minimum authorized capital of RD$3,000,000.00 is required, of which a 10% must be paid and subscribed. These companies are managed by a Board of Directors composed by a minimum of three members or by a sole manager.
FOREIGN INVESTMENT • Dominican Republic provides a positive legal framework that
promotes and protects foreign investment. The Dominican constitution grants to foreign investors the same rights as local investors.
• There are no restrictions on foreign investment; it is permitted in all sectors of the economy.
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• The Export and Investments Center of the Dominican Republic (CEI-RD) is the official agency responsible for the promotion of foreign trade and investment in the country.
• Investments must be registered before CEI-RD to benefit from the provisions of Foreign Investment Law and Law 98-03.
• Investors interested in establishing Free Zones in the country should register the investment before the National Counsel of Free Zones.
• Foreign investment is restricted in certain activities such as toxic, hazardous or radioactive waste, activities that affect public health and environment and production of materials or equipment directly related to national security, unless authorized by the government.
Types of foreign investment in Dominican Republic • Foreign Direct Investment (FDI): Consists of monetary
contributions made by individuals or companies from abroad (foreigners or foreign residents) to the capital of an enterprise operating in national territory.
• Foreign Reinvestment: Investment made in capital of the enterprise operating in national territory by a foreign investment registered in Dominican Republic with the profits received from such enterprise.
• New Foreign Investment: Investment made to a different enterprise with profits coming from the enterprise operating in national territory by a foreign investment registered in Dominican Republic.
EXCHANGE CONTROL • The financial and monetary system is regulated by the
Monetary and Financial Administration, which includes the Monetary Board, the Central Bank and the Superintendence of Banks.
• The foreign exchange regime in the Dominican Republic is based on the free exchange of national currency against foreign ones; foreign investors are free to deal in any currency.
TAXATION • Any legal entity or individual residing in the Dominican Republic
are subject to the payment of taxes over their income from Dominican sources and from sources outside the Dominican Republic from investments and financial gains. For tax purposes, any person residing in the Dominican Republic for more than 182 days in a year is considered a resident by the Internal Revenue Services (DGII).
Corporate Income Tax and Tax upon Assets • Income Tax (ISR): Income tax is due by corporations upon their
incomes. Corporations pay ISR at a base rate of 27% upon net income.
• Tax upon Assets (ISA): The Tax upon Assets is applied to all assets that are registered in the general balance of the
contributor, not adjusted by inflation, after applying the deductions for depreciation, amortization, provision for unrecoverable accounts receivable, investments in stock in other companies, lots located in rural areas, agricultural real estate, and taxes that have been paid in advance.
• Out of this net assets total, the applicable rate for legal entities with domicile in the country is currently 1%. This percentage will be reduced to 0.5% in 2015, and will disappear in 2016 (Nonetheless, in 2016 (Nonetheless, when the ISA will disappear, Real Estate Property Tax (IPI) will apply again for Real Estate Properties owned by companies).
• The amount paid off as Tax upon assets will be considered a credit against the Income Tax corresponding to the declared fiscal year. In case the liquidated amount is equal or superior to the Tax upon Assets to be paid, the obligation of payment shall be considered extinguished. In conclusion, only the higher amount between the ISR or the ISA has to be paid.
• Income Tax Advance Payments: The law also establishes the payment of monthly advanced payments for the Income Tax, which will be used as payment of the yearly Income Tax. The monthly amount to be paid shall represent 1/12 of:
o The amount paid off as Income Tax in the current Fiscal Year, or,
o 1.5% of the Gross Income of the current Fiscal Year; whichever the highest.
Nonetheless, if the Tax upon Assets exceeds the Income Tax, no Income Tax Advance shall be paid.
Capital Gain Tax • Capital gains represent the difference between the sale price
and the price of initial acquisition of a capital asset (goods, shares, lands, and other non-depreciative items), adjusted for inflation. Capital gains are taxed at 27%, as part of the Income Tax (ISR).
Excise Tax • Excise tax (ISC) is applied upon the consumption of luxury
goods, transferred or imported, such as jewelry alcoholic beverages, motor vehicles, guns, and tobacco; or services such as Telecommunications or Insurance; among others. Tax rates vary depending on the type of good or service taxed
Value Added Tax • Value Added Tax (ITBIS) rate is 18% over the transfer and
import of industrialized goods, as well as the rendering of services. Physical and legal persons (foreign and domestic) that make transfers and imports of industrialized goods or render services have the obligation to pay this tax. According to Article 23 of the Law #253-12, this percentage should have been reduced to 16% in 2015; nonetheless, this provision remained without effect.
• Nonetheless, some goods and services are exempt of ITBIS: Basic food, financial services, person or goods land transport, electricity, health services, cultural and educational services, etc.
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Withholding Taxes ISR Withholding Tax • Payments made abroad: Payments made to non-residents
related to Dominican sourced income (such as services provided to Dominican entities, even from abroad) are subject to withholding income tax at the rate of 27% (same rate as ISR). Nonetheless, the Dominican Republic, has signed tax treaties with a number of other countries, avoiding double taxation. Therefore, the income tax withheld in Dominican Republic may be used as a Tax Credit in the other country.
Interests paid regarding foreign loans: A 10% withholding income tax must be paid upon any interests paid regarding foreign loans. • Payments made to physical persons in Dominican Republic:
An up to 10% Withholding Income Tax must be retained upon payments made to resident physical persons.
• Dividends: A 10% tax must be paid as definitive payment of the ISR upon any retained earnings distributed to shareholders. Therefore, the shareholder will receive the amount as a net income, and won’t be taxed again under Personal or Corporate ISR. Payments made to headquarters are assimilated as dividends by default.
ITBIS Withholding Tax • A 30% up to 100% ITBIS Withholding tax may apply,
depending of the nature of the goods or services provided to a company.
Other Taxes • Motor Vehicles Transfers: A 2% tax calculated upon the sale
price shall be paid in order to transfer the property of the vehicle.
• Real Estate Transfers: A 3% tax calculated upon the sale price shall be paid in order to transfer the property.
• Tax upon Mortgages: A 2% tax calculated upon the mortgaged amount shall be paid in order to register the mortgage.
• Real Estate Property Tax (IPI): A 1% tax upon properties exceeding USD 150,000.00 each must be yearly paid to the DGII, upon the fraction exceeding USD 157,000.00. Properties subject to the Tax upon Assets (ISA) are exempted (as they already pay ISA).
• Tax upon transfers resulting from death or donation (ISD): A tax calculated upon the value of the transferred asset is due, at a rate of 3% in case of inheritance, 27% in case of donation.
• Excise Tax upon Financial Transactions: A 0.15% Excise Tax is due upon any financial transactions involving checks, electronic transfers or payments made to third parties.
• Tax upon Authorized Capital: A 1% tax is due upon any authorized capital increase.
Transfer Pricing Rules • Transactions between related parties (national or international)
must be documented through a Transfer Pricing Study, and the result should be submitted to the DGII. Transactions between related parties must be concluded at arm’s length.
• On the other hand, advanced pricing agreements (APA) may be subscribed to prevent future opposition from the DGII.
Tax and Investment Incentives • Tax exemptions and investment incentives exist to stimulate
investment in activities and products, such as:
• Free Trade Zones: Total Exemption of ISR.
• Cinematography Production Business: Investment amounts made in the Cinematography Production Business can be used as a 25% up to 100% credit against ISR of another Dominican company; and Incomes coming from investments are exempt of ISR if reinvested in Cinematography Production Business.
• Tourism: Developers to first purchasers of accommodation or tourist facilities (villas, apartments, lots, and so on) in certain areas will enjoy Exemption of Real Estate Transfer Tax; Exemption of Import Custom Duties upon all equipment needed for the activity; and Exemption of ISR for 15 years.
• Renewable energy: Exemption of Import Custom Duties upon all equipment needed for the activity; reduced withholding tax for interests paid abroad financing the aforesaid equipment (5%); and investment amounts made can be used as an up to 40% credit against ISR. More specifically, Bioetanol and Biodiesel production companies are exempt of ISR.
• Textile industry: Exemption of Import Custom Duties upon all equipment needed for the activity.
• International Treaties (such as CAFTA-DR) / ProIndustria: Reduction or Exemption of Import Custom Duties upon certain goods.
INTELLECTUAL PROPERTY • Intellectual property matters are regulated by Industrial
Property Law No. 20-00 and Copyright Law No. 65-00.
• Intellectual property protection comprises:
• Inventions: patents, industrial designs and utility models;
• Distinctive signs: trademarks, collective mark, certification mark, trade name, label, emblem, hallmark, geographic indication, designation of origin, well-known distinctive sign;
• Copyrights: Any literary or artistic productions literary, namely, musical or artistic work, sound recording, photography, computer software.
• Dominican Republic is a member of the World Intellectual Property Organization (WIPO) and a signatory of the Paris Convention for the Protection of Industrial Property, Trademark Law Treaty (TLT) and Patent Cooperation Treaty (PCT).
LABOR LAW • Labor relations, employee and employer rights and obligations
are regulated by the Labor Code (Law No. 16-92).
• The Labor Code provides comprehensive protection for workers, with provisions that cannot be modified by a written
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employment contract unless it grants workers further favorable conditions than the ones that are set as minimum by law.
• A written contract is not required to establish a work relationship between workers and employers.
• The Labor Code provides the conditions in which work must be performed, suspended and terminated.
• Employment contracts are classified in three types: (1) contracts for a non-specified term, which are the most common employment contracts; (2) contracts for a specific term; (3) contracts for a specific activity.
• The maximum hours of work are 44 per week, limited to 8 hours daily.
• Employees are entitled to 14 working days of paid vacation after a year of uninterrupted labor. After 5 years of service, vacation period is increased to 18 working days.
• The Labor Code requires at least 80% of an enterprise´s workforce to be Dominican. Technical or executive positions can be excluded.
• No less than 80% of the payroll must correspond to salary earned by Dominicans (except salaries for technical or executive positions).
• The Dominican Social Security System (Law No. 87-01) recognizes the following insurances: health, labor risks, incapacity and retirement fund. The compliance of this law is mandatory for all employers.
Percentage of insurance contributions: • Health insurance:
o Employer contribution: 70% of the quote, equal to 7.09% of the employee salary.
o Employee contribution: 30% of the quote, equal to 3.04% of their salary.
• Labor risks: Employer contribution is 100%. A fixed base fee of one percent (1%) for all employers. An additional fee varying from zero point one (0.1%) to zero point three percent (0.3%), established on the basis of the branch of activity and risk of each company, these percentages are applied to the amount of salaries subject to contributions of each employee.
• Incapacity and retirement fund:
o Employer contribution: 70% of the quote, equal to 7.10% of the employee salary.
o Employee contribution: 30% of the quote, equal to 2.87% of their salary.
• Types of Contract Termination
o Termination by mutual agreement: By Mutual Consent or Execution of the Contract.
o Termination by will of one of the parties: Any of the parties (employer or employee), by notice to the other and without cause, exercise the right to terminate the contract of indefinite term.
The party exercising the eviction must give an advance notice to the other. If the party that exercises the eviction doesn’t give an advance notice to the other, would have to pay a compen- sation of a day of salary for each day of advance notice omitted as follows:
Time of continuous work Advance Notice
From 3 to 6 months of continuous work
7 days of advance notice
From 6 months to 1 year of continuous work
14 days of advance notice
From 1 year and beyond of continuous work
28 days of advance notice
Severance Assistance: If the employer exercises the eviction, is obligated to pay to the employee an unemployment benefit or Severance Assistance, defined as compensation paid to the worker for damages of leaving him unemployed.
The employer must pay the employee this compensation within the next 10 calendar days from the eviction, if the employee doesn’t pay the severance assistance in that term, would have to pay in addition, a day of salary for each day of delay until the complete payment.
The severance assistance is calculated according to the follow- ing table:
Time of continuous work Days
From 3 to 6 months of continuous work
6 days of ordinary salary
From 6 to 12 months of continuous work
13 days of ordinary salary
From 1 to 5 years of continuous work
21 days of ordinary salary for each year
From 5 years and beyond of continuous work.
23 days of ordinary salary for each year
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Dismissal: Termination of the employment contract unilaterally exercised by the employer as a consequence of foul committed by the employee. It can be practice in any contract; Must be based in one of the causes exhaustively listed under Article 88 of the Labor Code. Justified Resignation: Termination of the employment contract unilaterally exercised by the employee as a consequence of foul committed by the employer. The foul has to be listed un- der article 97 of the Labor Code.
IMMMIGRATION • Foreigners who visit Dominican Republic for tourist purposes
are required a tourist card, which can be obtained at the port of entry in the country and is only valid for one entry in national territory for one month.
• The tourist card is only applicable to nationals of countries who have signed visa waiver agreements with the Dominican Republic unless authorized by the Executive Branch.
• People interested in entering Dominican Republic with non- tourist purposes must apply for a visa at the nearest Dominican consular mission abroad.
TYPES OF VISA • Tourist visa: are issued to nationals of countries with no visa
waiver agreements with the Dominican Republic, and for the purposes of tourist and cultural trips and for attending meetings and conventions. They are valid for 60 days, either for a single entry or for multiple entries during that period. Tourist visa holders cannot engage in any profit-earning activity while in Dominican territory.
• Business visas: are issued for business, professional or commercial trips. They are valid for 60 days and can be automatically renewed at the request of the interested party within that time and without the express authorization of the Ministry of Foreign Affairs. If a person needs to travel to the country multiple times, he or she may apply for a multiple- entry business visa covering the period of one year. The person cannot, however, remain in the country for more than two consecutive months.
• Business visa for employment purposes: are granted to foreigners who are under contract, for a specified amount of time, with private or public entities established within the Dominican territory, without necessarily having to go outside to maintain his legal status. Valid for one year with multiple entries and is renewable for an equal period of time during the contract period.
• Resident visa: It is issued for people interested to establish permanently in Dominican Republic. This visa is valid for one entry within sixty days of issue and applicable for family reunification, investors, retired persons and landlords.
• Temporary worker visa: are issued to workers with a job offer in a company duly registered in the Dominican Republic. This visa has a maximum validity period of one year, with one or multiple entries, depending on the type of employment contract.
• Student visa: are issued for the purpose of studying in the Dominican Republic to applicants who demonstrate their student status by being accepted in a Dominican educational institution to pursue a particular field of study. This visa is renewable each year.
• Dependent visa: are issued to a person who is dependent on an individual holding a
PERMITS • Temporary residence permit: applicants must enter Dominican
Republic with the Resident Visa and submit residency application to Department of Immigration in compliance with requirements of Dominican legislation. This permit is issued between 3 or 4 months. If approved, Temporary Residence Permit and National ID are granted to the applicant.
• Permanent residence permit: applicants are required to comply with all renewals of Temporary Residence prior applying to this type of residence. It is valid for 1 year, after this period the residency can be renewed every 4 years.
• Residence for investment purposes permit: applicable to investors, retired persons and landlords. This residence is issued within 45 days and valid through 1 year, after this period the residency can be renewed every 4 years. Permanent residency is granted. Previous temporary residence is not required.
• Temporary worker permit: granted to foreigners in the No Residents category who have a Temporary Worker Visa. This permit is issued with the same validity as the employment contract.
• Temporary labor residence permit: Granted to foreigners with a Business visa for employment purposes who have duly completed the residency application in compliance with Dominican law. This permit is issued between 3 or 4 months. If approved, the Temporary Labor Residence Permit is granted to the applicant, renewable annually during the term of the employment contract.
DISPUTE RESOLUTION • The Constitution of 2010 is the major law in the Dominican
Republic.
• The primary source of Dominican civil law is the civil code. This code is practically the same Napoleonic Code with some reforms.
• Civil disputes at first instance may be heard at the local court or high court, depending on complexity and value.
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• Cases may go on to the court of appeal and then to the Supreme Court of Justice. When it involves constitutional law or rights, the Supreme Court judgments can be reviewed by the Constitutional Court.
• The judicial system is not fast, especially in civil and commercial matters.
• Alternative dispute resolution (ADR) is available and includes mediation and arbitration.
• The Dominican Constitution of 2010 created a Constitutional Court as an independent and autonomic public entity that is charge of the interpretation, application and control of the Constitutionality and fundamental Rights.
• The Court´s judgment is final and must be applied by all private and public entities established in Dominican territory. ¢
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E C U A D O R
BUSINESS PRACTICE • Main types of business entities in Ecuador: locally incorporated
companies, domiciled foreign companies, partnerships.
• Locally incorporated companies are the most prevalent form for doing business, and the two most common types are limited liability company and stock corporation.
• Representative offices of foreign companies may be opened in Ecuador. These require the establishment of legal domicile before the Superintendency of Companies and appointing a local legal representative.
FOREIGN INVESTMENT RESTRICTIONS AND CONDITIONS Restrictions in Equity Participation
• Generally, no restrictions are imposed on foreigners owning equity in Ecuadorean companies. However, foreign companies must file certifications regarding their legal existence in the foreign country concerned and a detailed list of shareholders, disclosing their names and nationalities.
Approvals and Licensing
• Locally incorporated companies and foreign companies must obtain approvals of their line of business by the corresponding regulatory agencies, ministries, and other agencies only if their activities are regulated (i.e. oil and gas, telecoms).
EXCHANGE CONTROL • As the local currency is the US dollar, there are no currency
exchange controls in Ecuador.
• Certain taxes may apply to remittances of funds, such as the tax on overseas transfer of currency.
• Located in South America, covering a 283,561 km² area. • Presidential representative democracy. • The country’s religious composition is primarily Roman Catholics and a minority of
Protestants, Jews, and Muslims. • Spanish is the national language. English is written and spoken in urban areas
especially, and for business purposes. • Currency: United States dollar (US$). • Investment growth areas include mining, hydrocarbon exploration and exploitation,
tourism, infrastructure works, and agriculture.
TAXATION Corporate Tax
• Companies incorporated in Ecuador as well as branches of foreign companies domiciled in Ecuador and permanent establishments of foreign companies which earn taxable income are subject to a 22% tax rate.
• If profits are reinvested—for purchases of new machinery or equipment, assets to be used for irrigation, plant material, plantlets, and all kinds of inputs for agriculture, forestry, livestock breeding, and flower growing, and for purposes of productive activities, or to purchase goods relating to research and technology aimed at improving productivity, seeking productive diversification, and increasing employment opportunities—by increasing the capital stock of the company that generated such profits, the income tax rate is reduced by ten percentage points from the income tax rate on the sums reinvested. This benefit applies only to companies duly incorporated in Ecuador and to branches of foreign companies domiciled in Ecuador. It does not apply to consortia or permanent establishments.
• The tax base comprises all income earned during the fiscal year (from January 1 to December 31) less costs and expenses incurred for the purpose of obtaining, maintaining, and improving income subject to taxation.
Personal Income Tax
• All people employed or those who earn income deriving from an Ecuadorian source must pay income tax. Individuals resident in Ecuador are subject to progressive tax rates up to 35%.
• A person who reside in Ecuador more than 183 days within a fiscal year, continuous or not, including absences of 30 days, is considered a resident for tax purposes.
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• A person who resides in Ecuador more than 183 days within two fiscal years, continuous or not, including absences of 30 days, is considered a resident for tax purposes.
• A person who obtain more than the fifty per cent of its revenue from Ecuador within a fiscal year; or who has more than the fifty per cent of its assets in Ecuador, is considered a resident for tax purposes.
• A person who is not tax resident of another country and have dependent children or dependent parents in Ecuador.
Withholding Tax
• Dividends paid by Ecuadorian entities to individuals not domiciled in Ecuador or foreign entities not domiciled in tax havens or reduced taxation jurisdictions constitute exempted income once income tax has been paid at source. If the shareholder of an Ecuadorian entity is a foreign individual not domiciled in Ecuador or a foreign entity (domiciled or not in Ecuador), income tax paid by the Ecuadorian entity is imputed to the shareholder who may therefore use it as a tax credit in his home country (to the extent permitted by the corresponding local laws).
• Nonetheless, dividends paid by Ecuadorian entities are subject to withholding of income tax when the ultimate beneficial owner is a person considered as tax resident in Ecuador.
• Dividends paid to shareholders that are companies with residence in tax havens are subject to withholding at source in Ecuador by 13%.
• Generally, other remittances sent abroad which constitute income for the beneficiaries, whether forwarded, paid, or credited on account, are subject to a single income tax rate that must be withheld at source (tax rate of 22%). Some exceptions apply (i.e. import of goods). Exceptionally, in cases where an agreement to avoid double taxation exists between Ecuador and the country of which the recipient is a resident, the withholding rate may be lower, or no withholding would apply.
• Ecuador has entered into tax treaties and agreements to avoid double taxation with the Andean Community countries (Colombia, Peru, and Bolivia), and other countries such as Brazil, Canada, Chile, Germany, Spain, France, Romania, Italy, Switzerland, Belgium, Mexico, Uruguay, China and South Korea.
Value Added Tax (VAT)
• VAT is applied on transfers of ownership and on imports of movable property of a tangible nature at all phases of commercialization, as well as copyrights, industrial property and related rights. It is also applied on rendering of services, even on importation of services (services rendered by foreigners with no tax residence in Ecuador to Ecuadorian residents). VAT rate ranges from 0 to 12%.
• VAT paid on local purchases and imports constitutes a tax credit to be offset with VAT originating from local purchases of goods
and services subject to this tax. If the goods produced or the services rendered by a company are subject to a 0% VAT rate, the tax originating from purchases constitutes a cost.
• If a company exports goods, it is entitled to a refund of VAT paid in relation to the production of goods that are exported.
Other Taxes
• Import duty: ad valorem duty at various rates.
• Tax on overseas transfer of currency: All payments abroad higher than US$1,000 are subject to 5% tax on overseas transfer of currency.
• The remitter of the currency, rather than the foreign recipient, is legally responsible for paying this tax; therefore, this tax is not subject to withholding at source. Payments on imports are subject to this tax, even if paid by a third party outside Ecuador or if paid with money held by the importer abroad. Labor profit sharing: Employees receive 15% of their employers’ gross profits, deductible for the employer for income tax purposes. Income tax returns or settlements are used to calculate annual profits.
• Municipal taxes:
o Municipal tax on total assets. Companies incorporated or domiciled in Ecuador (as well as permanent establishments of foreign companies) must pay this tax to the municipality of the city where they operate. The taxable base for this tax consists of total assets less one-year liabilities and contingent liabilities. The rate is 1.5 per one thousand.
o Municipal license tax. All persons engaged in commercial and industrial activities must pay this tax to the municipality of the county in which they operate. The municipal permit tax rate depends on each county and ranges from US$10 to US$25,000 per annum.
Tax and Investment Incentives
• Companies organized after the enactment of the Organic Code on Production, Trade and Investment (published on December 29, 2010) for the purpose of making new productive investments will be entitled to income tax exemption for five years commencing on the first year in which income directly and solely attributable to the new investment is generated. The law requires that such investment be made outside the urban jurisdictions of the counties of Quito and Guayaquil and in the economic sectors of production of fresh, frozen and industrialized food products; forestry and agro-forestry products and related manufactured products; strategic replacement of imports and promotion of exports, among others, as established by the President of the Republic.
• The Organic Code on Production, Trade and Investment provides other types of investment incentives to companies duly installed in special economic development zones, exoneration of advance income tax for the next five years, and additional deductions for income tax calculation.
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LABOR LAW • The maximum hours of work are 40 per week, over five working
days. Saturdays and Sundays are mandatory rest days, in addition to the following holidays: January 1, Good Friday, May 1, May 24, August 10, October 9, November 2, November 3, and December 25. Special working schedules may apply subject to ministry of labor approval.
• Daytime work: Daytime work is limited to eight hours per day from 6:00 a.m. to 7:00 p.m., divided into two shifts of four hours each, with up to two hours of rest in between.
• Nighttime work takes place between 7:00 p.m. and 6:00 a.m. the next day. It may last the same as daytime work and entitles the worker to the same remuneration, increased by 25%.
• Every year, the National Council for Salaries (“CONADES”) or otherwise the Ministry of Labor Relations establishes a unified minimum salary as well as a unified sector remuneration. In 2015 the minimum wage was fixed at US$354.
• Two additional remunerations exist. The thirteenth salary, payable no later than December 24 of each year, when all workers are entitled to be paid a bonus by their employers equivalent to one twelfth of the remunerations earned by them during the year (not including profits, per diems, voluntary bonuses, fourteenth salary, and social benefits). This bonus is commonly known as the “Christmas Bonus.” The fourteenth salary is equivalent to one unified base salary and is paid by August 15 in the Highland Region and the Amazon Region, and by March 15 in the Coastal Region and the Galapagos Islands.
• Companies or employers must distribute 15% of their annual net profits among their workers, computed before any reserves, social distributions, taxes, and other participations.
• All employees and workers who have rendered their services for one year are entitled to receive 8.33% of their remuneration monthly, after the year following the first year of work.
INTELLECTUAL PROPERTY • Intellectual property (IP) protection in Ecuador comprises
patents, trademarks, industrial design, copyright, geographical indications, and layout designs of integrated circuits.
• Although rights are territorial in nature, Ecuador shares Andean Decision No. 486 for harmonious protection of IP rights.
• Ecuador maintains a system requiring registration to grant rights over IP, with the exception of copyrights.
• Copyright protection is granted over artistic, literary, musical, or visual arts.
• Ecuador is a member of the World Intellectual Property Organization (WIPO) and is a signatory to the Paris Convention, Berne Convention, the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), and the Patent Cooperation Treaty (PCT).
• Ecuador’s intellectual property laws conform to international standards and provide adequate protection to both local and foreign investors.
DISPUTE RESOLUTION • Ordinary civil proceedings include two ordinary stages and one
extraordinary stage known as cassation. The first stage is heard by a judge with jurisdiction over the county concerned. The second stage is heard by the provincial court of justice, which comprises three justices with jurisdiction over the province concerned. The extraordinary stage—cassation—is heard by the civil chamber of the national court of justice, comprising three justices.
• Labor disputes are heard by specialized labor courts.
• Alternative dispute resolution (ADR) is available and includes mediation and arbitration.
• Ecuador has withdrawn from the ICSID convention. The announcement was made in July 2009, and withdrawal became effective in January 2010.
• Ecuador is a party to the World Trade Organization, and more than once it has applied state-to-state arbitration as set forth in WTO treaties.
IMMIGRATION PROCEDURES Passport and Visa Requirements
• Foreign citizens may enter Ecuador as transient visitors using their passports (with at least six months’ validity after the date of entry) during up to 90 days per year. This migration category (transient visitor) allows them to perform the following activities in Ecuador: tourism, sports, health, study, science, art, or to carry out commercial arts not involving simultaneous import of goods.
• Foreign citizens whose nationalities correspond to Afghanistan, Bangladesh, Eritrea, Ethiopia, Kenya, Nepal, Nigeria, Pakistan, People’s Republic of China (except those who have a public passport), and Somalia are banned from entering Ecuador as transient visitors according to the aforementioned procedure. In those cases, before coming to Ecuador foreigners must obtain at the Ecuadorian consulate with jurisdiction over the place of domicile or nationality a visa allowing them to enter Ecuador in accordance with the activities to be carried out.
• In those cases, before coming to Ecuador foreigners must obtain at the Ecuadorian consulate with jurisdiction over the place of domicile or nationality a visa allowing them to enter Ecuador in accordance with the activities to be carried out.
Business Passes and Work Permits
• Immigrant and Non-immigrant Status:
o Immigrant visas are of indefinite validity and are granted to foreigners who legally and conditionally enter the country for purposes of establishing residence and mainly to perform the activities for which they were authorized. The visa is no longer valid upon completion of the activities for which they were granted, save for a few exceptions.
o Holders of immigrant visas may “leave and return to the country, but cannot remain outside Ecuador during more than 90 days each year during the first two years after the date
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of admission as immigrant …” After those first two years, he may remain up to 18 consecutive months outside Ecuador without forfeiting his immigrant visa. However, with a non- immigrant visa a foreigner has no limitation as regards the time of staying outside Ecuador during the period of validity of his visa.
o Non-immigrant visas have limited-term validity (with the possibility of renewal) and are granted to such foreigners who legally and conditionally enter the country without intending to establish residence. Those visas only allow the holder to perform the activities for which they were expressly authorized.
• The main types of immigrant and non-immigrant visas are the following:
o Immigrants:
– 9-I visa: Granted to foreigners who on a permanent basis receive revenues from abroad of at least US$800 per month.
– 9-II visa: Granted to foreigners who have invested US$25,000 in Ecuador for the purchase of bonds, securities, shares, debentures, real property, etc.
– 9-III visa: Granted to foreigners who have invested in Ecuador at least US$30,000 in industry, agriculture, livestock or export trade either in businesses or companies owned solely by the immigrant or in any companies other than stock corporations.
– 9-IV visa: Granted to foreigners holding general powers of attorney for legal, judicial or extrajudicial representation granted by an individual or corporation established in Ecuador, or having approval for non-specific labor activities, or having a mandate from a religious order.
– 9-V visa: Granted to foreigners having academic degrees enabling them to practice a profession in Ecuador.
– 9-VI visa: Granted to a foreigner having an Ecuadorian spouse or Ecuadorian children, or a foreign spouse or children holding immigrant visas other than 9-VI visas.
o Non-immigrants:
– 12-I visa: Granted to diplomatic or consular officials, international officials of international organizations of which Ecuador is a member, and their closest relatives.
– 12-II visa: Granted to high officials of other States and personalities covered by a diplomatic passport and their closest relatives.
– 12-III visa: Granted to private and domestic employees of foreigners covered by 12-I and 12-II visas. Also granted to the closest relatives of the holder of that visa.
– 12-IV visa: Granted to displaced foreigners as a con- sequence of war or political persecution in the country of origin for purposes of protecting their lives or their freedom.
– 12-V visa: Granted to students wishing to initiate, complete or improve their education in official or private schools with
governmental recognition, and to their family companions within the second degree of consanguinity and first degree of affinity.
– 12-VI visa: Granted to foreigners that come to this country to perform temporary work of their specialty. Access to this visa is afforded to professionals with high technical degree, specialized workers, legal representatives of companies incorporated in Ecuador, agents, and persons hired for industrial training purposes, as well as to relatives accompanying the direct beneficiaries of the visa within the second degree of consanguinity and first degree of affinity.
– 12-VII visa: Granted to missionaries, volunteers, or members of religious organizations or religious orders recognized in their countries of origin and in Ecuador in order to undertake work involving assistance, teaching, or apostolate activities; this visa is also granted to direct relatives of the beneficiaries within the second degree of consanguinity and first degree of affinity.
– 12-VIII visa: Granted to foreigners assisted by legally established national organizations to perform such programs and to their relatives within the second degree of consanguinity and first degree of affinity.
– 12-IX and 12-X visas: Granted to temporary visitors and their relatives within the second degree of consanguinity and first degree of affinity coming to perform activities such as tourism, sports, health-related, educational, scientific, artistic, or commercial acts not involving simultaneous import of goods for a period for up to six months each year, in the case of a 12-IX visa, and 90 days each year, in the case of the 12-X visa.
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E L S A LV A D O R
BUSINESS OVERLOOK • El Salvador has evolved over the last two decades. Today it
offers its business partners:
o A free economy, among the freest in Latin America.
o Proven macroeconomic stability, with the U.S. dollar as legal tender.
o Openness to global trade and investment
o Democracy and political stability
• One of the most important policies implemented to open country´s economy to world trade and investment is the adoption of the U.S. dollar as legal tender in 2001. As a result, El Salvador has achieved a single-digit inflation rates for over a decade, remaining below the average of the rest of Latin American countries.
LEGAL FRAMEWORK AND INCENTIVES Investment Law
• This law seeks to encourage private investment and foreign direct investment enouncing the next benefits:
o Procedure streamlining.
o Equal treatment to all investor (foreign and local investors will have the same rights and obligations. Discriminatory measures that hinder the establishment, administration, use, extension, sale and liquidation of investments may not be used against them).
o Freedom to invest.
o Transfer of funds abroad (foreign investors are guaranteed the right to transfer funds abroad, without delay and with the freedom to convert currency through the banking system).
o Protection of property and security (in accordance with the Constitution, foreign and national investors are guaranteed protection of their property.
• El Salvador is located in Central America, bordering Guatemala to the north, Honduras to the east, The Pacific Ocean to the west and Nicaragua to the south, by the Gulf of Fonseca.
• Population: 6, 340 454, making it the most populated country in Central America. • Total area: 21, 040 square miles, making it the littlest country in the region. • El Salvador labor force is composed of 2.8 million people, 60% of whom is 39 years or
younger. • Currency: United States dollar.
Free Zones Law
• Offers generous tax incentives to export-oriented manufacturing companies located in Free Zones or Warehouses for Inward Processing. Free zones are industrial parks considered outside the national territory for fiscal purposes, and thus raw material or merchandise required by companies are imported free of taxes and tariffs. If a company, due technical reasons, is unable to operate inside a free zone, it can be authorized to operate outside as a Warehouse for Inward Processing and enjoy the benefits that follow:
o Full exemption from customs duties and other taxes on the import of machinery and equipment used for production.
o Full exemption from customs duties and other taxes on the import of raw materials and other goods used for production.
o Full exemption from taxes on the transfer of real estate property, for the acquisition of real estate that will be used in the incentivized activity
International Services Law
• Provides tax incentives to companies dedicated to providing services to foreign customers. To enjoy these benefits companies may establish in:
o Service Parks: Limited areas considered to be outside of the national customs territory, where exporters of services are installed and operate under the benefits of this law.
o Service Centers: When a company – in an eligible activity specified in this law – for physical or technical reasons, is unable to operate inside a service park, it can be authorized to operate outside as a Service Center and enjoy all the benefits of this law.
o Full exemption from customs duties and other taxes on the import of machinery, equipment, tools, replacement parts, accessories, furniture and office equipment, and other goods required for the execution of the incentivized activity.
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o Total exemption from income tax, exclusively for income deriving from the incentivized activity during the period of operation in the country.
o Total exemption from municipal taxes on company assets during the period of operation in the country.
Renewable Energy Incentives Law
• This law aims to promote investment in renewable energy sources (hydraulic, geothermal, wind, solar and biomass) to generate electricity; fostering research, exploration and project development activities, offering the next benefits:
o Full exemption (during the first 10 years) from customs duties on imports of machinery, equipment, materials and supplies intended exclusively for pre-investment and investment activities in the construction of the electrical power generation centrals.
o Full exemption from income tax for a period of five years, for projects between 10 and 20 megawatts (MW), and for ten years, for projects under 10 megawatts (MW).
o Total exemption from taxes on revenues originated from the sale of Certified Emissions Reductions (CER) in the framework of the Clean Development Mechanism (CDM) or similar carbon markets.
o In addition, projects in excess of 20 megawatts (MW) of capacity may deduct from income tax (for a maximum period of 10 years), all expenses or costs on research, exploration and preparation of projects to generate electricity based on renewable energy sources, as well as geothermal reinjection projects.
Tourism Law
• Tourism projects with a minimum investment of USD 25,000 are eligible to be declared of “national touristic interest” and enjoy the following benefits:
o Full exemption from taxes on the transfer of real-estate property, for the acquisition of real estate intended for the project.
o Full exemption from customs duties and other taxes on the import of goods, equipment and accessories, machinery, vehicles, aircrafts or maritime vessels and construction materials used for buildings until the completion of the project.
o Full exemption from income tax for a period of 10 years.
o Partial exemption from municipal taxes (up to 50%) for a period of 5 years, beginning in the fiscal year in which the business begins operations.
Construction Projects Procedure Streamlining Law
• This law aims to speed up the approval of permits and authorizations for construction and land fragmentation projects throughout the national territory, regardless of its nature. This law describe the next benefits:
o Creation of a One-Stop-Office for the reception and processing of construction and land fragmentation project applications.
o Development of a centralized information technology system to track applications.
o Publication of updated information about requirements, administrative procedures, criteria and environmental and cultural zoning.
o Procedure streamlining (if a public authority doesn’t resolves within the established deadlines, it shall be understood that the resolution has been issued in favor of the applicant, enabling him to continue with the process).
Public Private Partnerships Law
• This law establishes a legal framework for the development of Public Private Partnership (PPP) projects regarding public infrastructure, public services or activities of national interest:
o The PPP Law is applicable to projects in which a private sector investor is entrusted by a public entity to design and build an infrastructure project and its related services, or to build, rehabilitate, upgrade or equip, as well as the responsibility to operate and maintain such infrastructure. It will also be applicable to infrastructure projects for the provision of public services or the exploitation or execution of an activity of national interest.
o The minimum investment to qualify for a PPP project is 45 thousand times the trade and services minimum wage (approximately USD 11.3 million).
o 40 years - maximum period for a PPP contract.
o Private initiative regime: Private investors may propose new projects to be publicly tendered if such are declared of national interest by a government institution. This provides attractive advantages for those who submit project proposals.
o PROESA is the advisory and governing authority of Public Private Partnerships (all PPP projects are approved by PROESA’s Board of Directors).
Law of Legal Stability for Investments
• This law guarantees legal certainty to investors on taxes, customs and immigration issues through Legal Stability Contracts.
• Individuals and legal entities, national or foreign, with new investment projects or the expansion of existing investments within the following eligible activities may benefit from this law:
o Aeronautics
o Agroindustry
o Aquaculture
o Electronics
o Energy
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o Strategic Infrastructure
o Logistics
o Health Services
o Offshore Business Services
o Tourism
o Telecommunications
o Light Manufacturing
o Science and Technology
• Once a Legal Stability Contract is signed, private investors shall benefit with the following guarantees:
o Tax stability at national level.
o Tax stability at the municipal level.
o Stability in tax exemptions provided by special legislation for the period of time in which these were granted by the relevant institution.
o Stability on customs procedures.
o Stability on the right to transfer funds abroad as stated on the Investment Law.
o Stability on the immigration regime concerning the investor´s residence status.
• To be eligible for these benefits investor’s shall comply with the requisites stated in this law, among which is the commitment to invest an amount on fixed assets greater than or equal to four thousand two hundred and twenty times the industry minimum wage (USD 246.60). This is equal to USD 1,040,652 in new investment projects or the expansion of existing investments.
• Benefits are granted for a period of up to 20 years depending on the amount of the investment.
TAXES Income tax
• A 30 % tax rate is applied over taxable income. For legal entities with a taxable income less than or equal to USD 150,000.00, a reduced tax rate of 25 % is applied. Income tax exemptions are described as it follows:
o 100% of exemption for 15 years to companies in a Free Zone operating in San Salvador Metropolitan Area. If it is a Warehouse for Inward Processing, the period of exemption would be for 10 years. If the Free Zone operates outside San Salvador Metropolitan Area, the exemption is 100% for 20 years. In case of a Warehouse, the exemption will be for 15 years.
o 60% of exemption for the following 10 years to companies in a Free Zone operating in San Salvador Metropolitan Area. For a Warehouse for Inward Processing, the exemption will
be 60% for the following 5 years. If the Free Zone operates outside San Salvador Metropolitan Area, the exemption is 60% for the following 15 years. If it is a Warehouse, the period of exemption would be for the exemption will be 60% for the following 5 years.
o 40% of exemption for the following 10 years to companies in a Free Zone operating in San Salvador Metropolitan Area. If it is a Warehouse for Inward Processing, the exemption will be 40% for the following 10 years. The same exemption applies both if they are located outside San Salvador Metropolitan Area.
Branch profits tax
• Branches of foreign companies are subject to the same tax rates as Salvadoran companies.
Dividend Tax
• Dividends paid or credited to shareholders (individuals or legal entities) are subject to a 5% income tax rate.
Tax on Transfers of Real Estate Property
• The transfer of real estate is subject to a tax rate of 3 % applicable on amounts exceeding USD 28,571.43.
Value Added Tax
• Services and goods are subject to a 13 % value added tax. The following items are exempt from IVA: public health, home rentals, education, state titles, public water, public transportation, pension funds and public lottery.
Municipal taxes
• Taxes are paid according to a table established by each municipality based on the company’s total assets. For example, in San Salvador rates are determined by the company’s activity (industrial, commercial or other).
Company and Establishment License
• All industrial and commercial businesses are required to have an annual license to operate. This tax is paid based on the company’s total assets according to the following rates:
o From USD 2,000.00 to USD 57,150.00 pays USD 91.43
o From USD 57,151.00 to USD 114,286.00 pays USD 137.14
o From USD 114,287.00 to USD 228,572.00 pays USD 228.57
• If assets exceed USD 228,572.00, USD 11.43 will be paid for every USD 100,000.00, up to a limit of USD 11,428.57.
INVESTMENT OPPORTUNITIES IN EL SALVADOR Aeronautics
• All industrial and commercial businesses are required to have an annual license to oper
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Advantages of investing in El Salvador
• Aeronautics Clusters with renowned companies such as AEROMAN and Avianca.
• Labor costs up to 40% more competitive than United States/ Mexico border operations.
• Geostrategic Positioning proximity to the world´s largest aviation market.
• High productivity.
• Low employee turnover with less than 2% per year, key factor for training and performance.
• Engineering and technical degrees in Aeronautics.
• Availability for Industrial Land.
• Attractive Fiscal Incentives.
Energy
• The government of El Salvador has an energy policy for the 2010-2024 period. Among its strategic lines we can find:
o Diversification of the energy matrix.
o The promotion of renewable energy sources.
o Innovation and technological development.
o Regional energy integration
Advantages of investing in El Salvador
• Processes of international bidding and long term contracts of up to 20 years based on implemented market costs.
• Diversification of the energy matrix: wind, geothermal, hydroelectric, biomass, biogas, solar, coal and natural gas.
• Distributed generation projects at industrial level
• Large hydraulic, geothermal and solar projects in national public generation.
• Categorization of activities or projects for the better use of renewable energy sources in conjunction with the Ministry of Environment and Natural Resources.
• SIEPCA interconnection line
Agroindustry
• El Salvador offers and ideal location for the production and processing of foods, as well as to address specific market niches that goes beyond the tradition agricultural industries.
Advantages of investing in El Salvador
• Suitable climatic (temperature and altitude) and soil conditions to grow ornamental plants and fruits.
• Excellent road and port infrastructure.
• Free trade agreements that provide favorable market conditions to access major markets in America and Europe.
• Availability of water resources for sustainable aquaculture development.
Tourism
• In recent years, the tourism sector in El Salvador has undergone a significant expansion, creating lots of investment opportunities. The natural wealth of the country, attractive fiscal incentives provided by the Tourism Law as well as the determined support from the government have tourism one of the most booming sectors of the country.
Advantages of investing in El Salvador
• Solid and growing tourism demand.
• Political stability.
• Healthy and completely dollarized economy.
• Air traffic hub with over 470 weekly arrivals and departures.
• Hard-working and service-oriented work force.
• Pleasant climate throughout the year.
• Attractive fiscal incentives provided by the Tourism and International Services Laws.
• Availability of human resources.
• Health services provided at costs significantly lower than the U.S. and Canada.
LABOR LAW • El Salvador´s Labor Code regulates employer-worker
relations. Salvadoran legislation states that wages area determined freely, but cannot be lower than the minimum wage established by the National Wage Council, revised every three years.
Working shifts
• Day Shift between 6:00 am and 7:00 pm.
• Night Shift between 7:00 pm and 6:00 am.
Fringe benefits
• Annual paid vacations.
• Social Security (ISSS).
• Training fund.
• Christmas bonus.
• Retirement fund.
• Compensation for voluntary resignation.
• Compensation for unjustified dismissal.
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E L S A LV A D O R Doing Business in Latin America
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G U AT E M A L A
REASONS TO INVEST IN GUATEMALA • It is the largest economy in Central America (37.5% of the
total GDP).
• It offers access to 67.5 million people in the Mesoamerican market.
• Has a local market of 15 million citizens, 70% of them under the age of 30.
• Has the largest student population in Central America.
• Rated to be the 5th most open Latin American economy to direct foreign investment.
• Nontraditional products are those recently incorporated into the exportable supply of Guatemala. Includes six main groups: Agricultural, apparel and textiles, manufacturing goods, seafood products, furniture and forestry, and handicrafts. Throughout the years, non-traditional exports outside the Central American area have shown a remarkable dynamism.
• A small country with key investment and development potential. Recent cluster analysis suggested opportunities in the following fields:
o Agribusiness, fishery and forestry.
o Textiles and apparel.
o Tourism.
o Medical research and development.
o Electronic components and software.
o Infrastructure and services.
• Is a country in Central America bordered by Mexico to the north and west, the Pacific Ocean to the southwest, Belize to the northeast, the Caribbean to the east, Honduras to the east and El Salvador to the southeast.
• Population: 16,647,083 • Religion: Christianity, indigenous and Mayan beliefs • National Language: Spanish • Currency: Quetzal (Q) • Investment areas include agriculture, energy and mining, infrastructure, drawback and
services.
BUSINESS PRESENCE • The main types of for-profit business structure in Guatemala
are:
o Corporation (Sociedad Anónima).
o Limited liability companies.
o Partnerships.
o Registered branches of foreign companies and corporations.
• All companies, corporations and partnerships require a minimum of two shareholders or partners. In case of corporation (Sociedad Anónima), shares must be nominative.
ECONOMY • Guatemala is the most populous country in Central America with a GDP per capita roughly one-half that of the average for Latin America and the Caribbean. The distribution of income remains highly unequal with the richest 20% of the population accounting for more than 51% of Guatemala’s overall consumption. More than half of the population is below the national poverty line, and 13% of the population lives in extreme poverty.
• Guatemala is the biggest economy in Central America but is among Latin American countries with the highest levels of inequality, with poverty indicators--especially in rural and indigenous areas—among the highest in the region.
FOREIGN INVESTMENTS RESTRICTIONS AND CONDITIONS • The Central Bank maintains the faculty to intervene in the
exchange market, but only indirectly: purchasing and selling foreign exchange.
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• All foreign currency transactions must be made through approved financial institutions. A form must be filled out for all transactions involving foreign investments, remittance of dividends and repatriation of capital.
• To increase the efficiency of the mechanisms through which Banco de Guatemala participates in the exchange market, some gradual modifications will be introduced to comply with the following principles to achieve a flexible exchange system:
o That it be consistent with a monetary schedule of explicit inflation goals.
o That it be based on rules that are clear, transparent and understandable in the markets.
o That it eliminates the discretion of the participants of the Banco de Guatemala.
o That it reduces the volatility of the exchange rate without affecting its trend.
TAXATION SYSTEM • Guatemala’s Constitution grants the power of taxation to the
Congress of the Republic1. This provides certainty that no other government body can impose tax burdens on the private sector.
Income Tax
• Guatemala imposes Income Tax on resident taxpayers under one of the following regimes:
• General Regime, which consists of a 5% flat tax on gross revenues.
• Optional Regime, which consists on a 31% corporate tax with the taxable income determined on the basis of net income.
Value Added Tax
• The VAT standard rate is 12%2, generally chargeable on 3:
o Supplies of goods made in Guatemala.
o Supplies of services made in Guatemala.
o The import of goods and certain services into Guatemala.
o Leases.
o Transfer of Real Estate.
o Insurance and bonding.
• There are various transactions that are exempt for VAT purposes including:
o Exports of goods and service.
o Services provided by banks and financial institutions.
o Contributions in kind. Will not be exempted when this one to be bought. Will not be exempted when this one
to be brought is all or part of a real estate which has been previously given to a society that works for the real estate performance.
o Mergers.
o The issue and transfer of shares, credit titles and any kind of security.
o The transfer of goods under trust and the return of trusted goods to the settler.
Stamp Tax
• The 3% Stamp Tax applies to dividend payments and documents issued abroad and used locally as documentary evidence for transactions not subject to VAT.
• The tax is determined applying the rate to the value of the acts and contracts subjects to tax. The value is reflected on the document, which cannot be lower than the one registered in the public records, registrations, property registries or in the official listing.
Solidarity Tax
• There are exemptions to this tax applied to:
o The institutions of the State, their decentralized or autonomous entities, and the municipalities and their enterprises, with the exception of the legal entities formed with mixed capital.
o The universities and the private and public educational centers legally authorized to operate in the country.
o The persons subject to this tax who are commencing business activities, during the first four quarters of operation.
o The commercial and agricultural activities conducted by individual persons or legal entities that per a specific law or due to operating within the special regimes established by the Law of Promotion and Development of Export and Drawback Activities, Decree 29-89 and the Law of free Trade Zones, Decree 65-89, both of the Congress of the Republic, and their reforms are exempt from the payment of Income Tax, during the term of the exemption that they enjoy.
o The individual persons or legal entities and the other entities that are subject to the Solidarity Tax who pay Income Tax according to the Simplified Optional Regime over income from lucrative activities of this tax (Decree 10-2012).
o The taxpayers who as of the date on which the Solidarity Tax established in this Law went into effect incur in operational losses during two consecutive years. This exemption is solely applicable for the four tax periods following the second year in which the cited losses occurred.
• The tax basis for this tax is comprised of whichever is greater between:
o o One-fourth of the total net assets.
o o One-fourth of the gross income (taking as a basis the last Income Tax return).
1 Article 239 of the Political Constitution of the Republic of Guatemala 2 Article 10 of the VAT Law, Decree 27-92 3 Article 3 of the VAT Law, Decree 27-92 4 Article 4 of the Stamp Law, Decree 37-92
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o o The tax period is quarterly and shall be calculated by calendar quarters.
o The tax rate for this tax is 1%.
o In cases of periods less than one quarter, the tax is determined in proportion to the number of days of the quarter that have transpired.
o The tax must be paid within the month immediately following the end of each calendar quarter, using the means that the Tax Administration has made available to the taxpayers for this purpose.
Real Estate Tax
• The taxable event is applied owning real estate within the Republic’s territory. 66 Rates are applied on the registered value of real estate in Quetzales (US$ 1.00 = GTQ7.80 approx), as follows:
o From 0 to GTQ. 2,000 exempted.
o From GTQ 2,001 to GTQ. 20,000 2 per thousand annually.
o From GTQ 20,001 to GTQ. 70,000 6 per thousand annually.
o From GTQ 70,000 and up 9 per thousand annually.
o This tax is paid on a quarterly basis.
Witholding Taxes for payments abroad
• There are specific withholding tax rates for payments made abroad in favor of nonresident corporations and individuals. These withholding taxes also fall on intercompany charges. The withholding rates are the following:
o 10% on payments or credits on account of interest, dividends, participation in profits, gains and other benefits paid or accredited by companies or establishments domiciled in the country; payments or credits on account of allowances, commissions, bonuses and other renderings subject to the tax.
o 5% on freights related to FOB imports and CIF and FOB exports, and on passenger fares from a Guatemalan source earned by transportation companies domiciled abroad.
o 3.1% on payment of rights related to the media and entertainment industry.
o 3.1% on insurance, reinsurance and rebounding premiums obtained by companies domiciled abroad.
o 31% on payments or credits on account of fees, royalties and other retributions for the use of patents and trademarks, as well as for scientific, economic, technical and financial advice
o 31% on payments or credits on account of any other income from a Guatemalan source.
o The withholding tax must be paid to the Tax Office within the first 15 business days of the month following that to which such withholdings correspond. When the Guatemalan payer takes charge of the withholding tax, gross-up calculation is mandatory.
Tax on Financial Proceeds
• The tax is generated when a payment or credit is made for interest to resident individuals or entities other than those belonging to the local regulated banking and finance sector.
• Rate is 10% on gross interest to individual and legal entities domiciled in the country, except banks and other entities supervised by the Superintendence of Banks.
• Once this tax is paid, the tax payer is to report his interest income as exempt from income tax.
TAX INCENTIVE LAWS Law for the Promotion and Development of Export and Drawback activities
• Grants a 1 to 2-year waiver of VAT and import taxes on raw materials, a 10 year income tax exemption, and other tax benefits.
• Special considerations should be made on a case-by-case basis before applying for any classification.
• It is not necessary to be in a specific location to obtain the benefits and thus companies can operate and enjoy the benefits from wherever they are located.
Incentive Law for the Development of Renewable Energy Projects
• Exemption on customs duties and VAT on the import of machinery and equipment to be used in the project. In this case the exemption should be authorized by the Tax Office.
• 10 year income tax exemption as of the starting date of the commercial operations.
AGENCY, DISTRIBUTION OR REPRESENTATION CONTRACTS • If an individual decides to appoint an agent, distributor or
representative for your products and/or services in Guatemala, it is recommended to contract a legal advisor for the preparation, negotiation and execution of a written contract. This contract should include:
o Type of contract, i.e. agency, distribution or representation.
o Term of contract with a possibility of extension.
o Territory covered by the contract.
o Is it exclusive or not.
o Principal duties of the parties.
o Remuneration of the agent, if any or sale price of the products or services to the distributor or representative.
o A clause of the resolution of controversies, number of arbiters, entity in charge of arbitration, as well as procedures, language and location.
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BENEFITS OF THE FREE TRADE ZONES • The Industrial or service Permit-Holders authorized to operate
in the Free Trade Zones will enjoy the following tax incentives:
o Equipment, machinery, tools, raw materials, inputs, semi elaborated products, containers, packaging and in general in goods used for production or the offering of services, are not subjects to taxes, custom duties and import charges.
o Total income tax exemption on income obtained exclusively from the activity as an industrial Permit-Holder, for a period of ten years.
o Exemption from the Value Added Tax, in the transfer of merchandise within and between Free Trade Zones.
LABOR RELATIONS • Guatemala is a country with considerable human capital that
offers attractive, high-quality and low-cost labor to local and foreign investors. In Guatemala labor relations are governed by the Political Constitution of the Republic, by the Labor Code, International Treaties and by several laws and regulations which rule different labor related areas.
• Other regulations have been implemented to formalize and improve labor relations to meet the needs of national and foreign investors, such as hourly work. Unfortunately no advance has been made to achieve a thorough labor reform, incorporating regulations that meet the needs of the growing population. In addition to the protection to the workers, regulations are still needed to promote recruitment and to improve economic activities which will result in an important growth of the economy.
• In the meantime, legislation is complemented by labor contracts and internal labor regulations which rule labor relations. Thus, it is important that all employers enforce clear policies and comply with present regulations.
FOREIGN INVESTMENT LAW • Promotes foreign investment and includes provisions that
recognize and guarantee private property rights equally for Guatemalan nationals and foreign investors and establishes an equal treatment between domestic and foreign investors.
• Any foreign investor has equal legal conditions as domestic investors and this is a great incentive for foreign investors in Guatemala, given that not every country grants this.
• Foreign Investment Law recognizes the following rights for all foreign investor:
o Private Property.
o Expropriation, only for reasons of collective, social benefit or social interest can be proven.
o Free trade.
o Free access to foreign exchange.
o Prohibition of confiscatory taxation and double taxation.
GOVERNMENT PROCUREMENT • Government Procurement Law regulates all the agreements of
sales, purchase, supplies of goods, construction and services between private suppliers and the governmental institutions, which includes all decentralized entities, municipalities and public corporations.
• The Government Procurement Law states three types of procurements:
o Direct Sales or Contracts: these are executed with the State when the purchase is under thirty thousand quetzals (Q. 30,000.) approximately three thousand eight hundred fifty dollars (US$ 3,850.00).
o Request of Quotes: these are executed when the acquisitions are below nine hundred thousand quetzals (Q. 900,000.00) or approximately one hundred fifteen thousand three hundred eighty five dollars (US$ 115,385.00).
o Public biddings are executed for acquisitions above nine hundred thousand quetzals (Q. 900,000.00) or approximately one hundred fifteen thousand three hundred eighty five dollars (US$ 115,385.00)
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ECONOMY • The economy in Honduras has continued to grow slowly but
the distribution of wealth remains very polarized with average waves remaining low. Economic growth in the last year has averaged 3.2%
• Initially Honduras economy was primarily agricultural-based, depending on traditional exports such as bananas and coffee. However, in the past years, Honduras economy has diversified in other areas such as tourism, apparel manufacture and shrimp farming.
• Trade relations with U.S. have been of extreme importance to Honduran economy. Even today, half of Honduras’s exports sent to U.S. and over a third part of the country imports comes from U.S. However, trade with European countries and the rest of Latin grows every day.
BUSINESS PRESENCE • All laws in Honduras are constitutionally based and the
Code of Commerce is the main regulation for Honduran corporate and commercial law. The law stipulates that in order to participate in the business sector, you have either to be constituted as an merchant that owns and carries out a business, or form a corporation. There are five corporations types recognized in Honduras:
• Sociedad Colectiva (General Partnership).
• Sociedad en Comandita Simple: Is similar to collective society except for the fact that there are two types of shareholders. Comanditado partners are jointly and severable liable. The comanditario partners are only considered as investors.
• Sociedad en Comandita por Acciones (Limited Share Partnership).
• Honduras is the second largest country in the Central American region. The country is bordered to the west by Guatemala, to the southwest by El Salvador, to the southeast by Nicaragua, to the south by the Pacific Ocean at the Gulf of Fonseca, and to the north by the Gulf of Honduras, a large inlet of the Caribbean Sea.
• With a population of 8, 448 040 and a total area of 112, 492 km2, it has a total GDP estimated in US$ 40, 983 billion.
• 47% of respondents identify themselves as Roman Catholic, 36% as evangelical Protestant, and 17 percent either provide no answer or consider themselves “other”.
• Currency: Honduran Lempira • Spanish is the official language and English is also used for business.
• Sociedad de Responsabilidad Limitada (Limited Liability Company): Is the smallest capital entity under Honduran law, it requires a minimum of two persons or entities and a maximum of 25 shareholders.
• Sociedad Anónima (Corporation): It requires a minimum of two shareholders or entities with a founding capital approximately of US$1,400. Due to the minimum of shareholders and the founding capital it is the most used form of corporation in Honduras.
• Additionally, a new law was enforced in June 2014 which allows for the incorporation of any of the described corporations with only one partner (Corporation Sole).
• Steps that must be followed in the incorporation of a Honduran corporation:
o Choose the Commercial Name of the Company and perform search at the Registry of Commerce to confirm availability.
o Prepare the articles of incorporation which include the name, purpose, name of shareholders, etc.
o File the incorporation at the Commerce Registry for recordation as well as in the Chamber of Commerce of its domicile.
o Obtain its fiscal identification.
o The Corporation may start operating after such identification is granted.
TAXATION Tax on corporate income
• Corporate tax rate for a resident company is 25% of the company´s period net income plus at the rate of 5% on the next taxable income which exceeds HNL 1 million. Honduras
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resident companies are taxed on their worldwide income. Non-resident companies are subject to income tax only on income derived from Honduran sources.
• Additionally, there are some companies that operate under a special tax regime which exempts form sales tax, income tax, custom duties and several municipal taxes. The special regimens are:
o Free Trade Zones.
o Industrial Parks.
o Export Processing Zones.
o Companies that are under the Tourism Incentive Law.
o Tourism Free Zones.
o Law promoting the generation of electric energy with renewable sources.
o Law for Promotion and Protection of Investments.
Corporate residence
• Any resident or non-resident legal entity engaged in an activity or business that generates profits sourced in Honduras is treated as a corporate taxpayer. Taxable entities also include merchant vessels operating under Honduran registry or flag, as well as foreign merchant vessels navigating in Honduran territorial waters or deriving Honduran-source income.
• Any company incorporated in Honduras is generally deemed to be resident for tax purposes. In addition, any person or company resident in Honduras is subject to tax on both local and foreign income.
• Non-resident companies are those incorporated/registered outside of Honduras. However, income taxes on corporations are levied on local income regardless of the place of incorporation.
Net Assets Tax
• The tax is levied at a rate of 1% on the total value of net worth (determined as the average worth on 31 December of the year) and must be remitted to the tax authorities together with the income tax return.
• This tax is payable annually, together with income tax.
• The following are exempt from the net worth tax: legal entities the total net worth of which does not exceed HNL 3 million; legal entities exempt under the income tax law; and business entrepreneurs operating in free zones; industrial parks, tourism free zones and export processing zones.
Capital gain tax
• Capital gains or losses are defined as the positive or negative result of transactions in respect of goods or assets not representing a taxpayer´s ordinary and habitual business, such as immovable property, shares, fixed assets and other similar assets.
• Capital gains and losses derived in the same tax year are computed together and the result, if positive, is subject to tax at the rate of 10%. However, if the result is a capital loss, it may not be deducted from the gross income obtained from the taxpayer´s ordinary income.
• Capital losses derived from the sale of securities by qualified individuals or legal entities, habitually, engaged in such activities, may be deducted from the taxpayer´s gross income.
• Capital gains derived from the transfer or movable or immovable property is equal to the transfer value, less the adjusted cost of the property. The adjusted cost includes the acquisition value plus the value of improvements, less depreciation allowances. The immovable property will not be registered by the Property Institute if the 10% tax on capital gains has not been remitted to the tax authorities.
Tax on branch income
• Branch income is subject to income tax at the rates applicable for corporate income. Before May 12, 2010 there was no withholding tax on dividends distributed in the country or abroad. Currently, there is a 10% withholding tax rate on dividends.
Sales Tax
• The general tax rate is 15%
• An 18% tax rate is assessed on first and business class airline tickets.
• The import of and sale of alcoholic beverages, cigarettes and other tobacco products are subject to 15% sales tax.
Municipal Tax
• Industry, commerce and service tax, which is based on sales volume per year.
• Personal municipality tax (individual tax).
• Public service tax, paid for services such a waste management.
• Real Estate Tax, which is taxed on asset and assets gain.
• Sign tax, referred to taxation on public advertising.
NATIONAL SECURITY REGULATION • A National Security Regulation was issued by the Secretary of
Finance to determine the application of norms that establishes taxes that would be used for security manners. Taxes were established as it follows:
o Special tax levied on the financial system for bank accounts transactions and renewal of credit cards membership.
o Special contribution on cell phone companies taxed with a 1% rate on monthly gross income (air time).
o Special contribution to the mining sector taxed with a 2% rate on the FOB value for exports.
o Special contribution on food and beverage companies taxed with 0.5% on their monthly gross income.
3 This section has been prepared in collaboration with Mr. Alejandro Calderón partner of Calderón, González y Carvajal, S.C.
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o Special contribution on casinos and slot machine companies taxed with a 1% on their monthly gross income.
o Special contribution on the cooperative sector taxed with a 3.6% rate on their net annual surplus.
FOREIGN INVESTMENTS RESTRICTIONS AND CONDITIONS • Some of the restrictions that are included on foreign
investments are:
o Disposal of toxics, dangerous garbage not produced in the country.
o Those activities disturbing public health and the country’s environment.
• The Promotion and Defense Competition Law regulates the competition oriented to monopolies and other forms of concentrations that can affect the consumer. Its objective is the exercise of free competition, for the benefit of the market and the consumer.
• Two important issues are solved by this law:
o A full and definite clarification of title or ownership of real estate in Honduras.
o The implementation of modern technology in the registration process of the rights upon assets, such as movable assets, real estate, trademarks, vehicles, vessels etc., as well as their transfer, hypothecation, pledging, attachments and other forms in which this title could be affected.
INDUSTRIAL PROPERTY • In Honduras Industrial Property is regulated by the Ley de
Propiedad Industrial which regulates everything related to Inventions, patents, industrial designs, trademarks, industrial secrets, and its object is to:
o Set up the basis so that there shall exist a permanent system of perfecting of these processes and products within the industrial and commercial activities of the country;
o Promote the inventiveness of industrial application, best techniques, and broadcasting technological knowledge within the productive sectors.
o Propitiate and impel the improvement of the quality of goods and services in industry in relation to the interest of the consumers.
o Favor creativity for the design and presentation of new and useful products.
o Protection of the Industrial Property through the regulation of patents, utility models, industrial designs, trademarks, and commercial signs, name of origin and industrial secrets.
o Prevent acts that attempts industrial property or shall create unfair competition related to it; and, establish the penalties related to them.
LABOR LAW • The Honduran Labor Code is applied to all corporations
regardless if they are sited in a Free Zone or an Industrial Park. Contract may be verbal or written. The Labor Code authorizes the verbal contract in cases of:
o Domestic service.
o Incidental or temporary work not exceeding 60 days.
o A given work which value does not exceed 200.00 Lempiras (almost US $10), and, if it has been stated time for delivery, provided it is not more than 60 days.
o A farming or ranching, unless in the case of industrial or commercial enterprises from agriculture or livestock.
• It is important to mention that the written agreement is a guarantee for the employee and its omission is imputable to the employer. The labor contract and all subsequent legal obligations are assumed at the beginning of the work relationship, even though the contract was verbal. Labor contracts may include a trial term for the first 60 days, term within which any of the parties may terminate the relationship without cause. Once these 60 days have passed, the labor contract is considered undetermined, unless the parties have agreed a specific term in the cases permitted by law.
• The Labor Code provides the following types of work:
o Working indefinitely.
o For a limited time.
o For work or services.
Work Shifts
• The following shifts are established in the Honduran Labor Code:
o Day Shift: from 5:00 a.m. to 7:00 p.m.
o Night Shift: from 7:00 p.m. to 5:00 a.m.
o Mixed Shift: This would be part day shift and part night shift. If more than 3 hours would be part of a night shift, the whole shift is considered a night shift.
Vacations
• Vacations according to Honduran Labor Code are:
o 10 consecutive work days for the 1st year of work.
o 12 consecutive work days for the 2nd year at work.
o 15 consecutive work days for the 3rd year at work.
o 20 consecutive work days for the 4th and following years at work.
3 This section has been prepared in collaboration with Mr. Alejandro Calderón partner of Calderón, González y Carvajal, S.C.
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M E X I C O
• Mexico, officially the United Mexican States (Estados Unidos Mexicanos) is a federal republic in North America. Mexico´s government is based on a framework of a federal representative democratic republic that is based on a congressional system. The federal government follows the Political Constitution of the United Mexican States, which was enacted in 1917. The Mexican federal government has three branches: executive, legislative, and judicial. The seat of the federal government is in the Federal District (Distrito Federal). Mexico’s official language is Spanish and its currency is the Mexican peso (MXN).
• Mexico’s population is 120,286, 655. Mexico´s total area is 1,964,375 sq. km. Mexico and the United States share a 3,141 km border and the United States is Mexico´s most important trading partner. In fact, 80% in 2015 of Mexico’s exports go the United States. Mexico’s total exports amount to $349.8 billion USD in 2015. Since the implementation of the North American Free Trade Agreement (NAFTA), Mexico´s economy has become increasingly oriented towards manufacturing. In fact, it has made Mexico pursue further free trade agreements (FTA). Mexico today has FTA with over 50 countries, more thanany other nation in the world, and is under negotiations for the Trans-Pacific Partnership (TPP). It is also a founding member of the Pacific Alliance.
• Mexico´s nominal GDP is $1.291 trillion (2015), making Mexico´s economy the 14th largest in the world. Its public debt is 45.6 % of GDP (2014)2 and its forecasted GDP Growth expectation in 2016 is 2.8%. Its inflation rate in 2015 was of 2.3% (2014) and foreign direct investment (FDI) is currently at a record high with $38.4 billion (31 March 2015)1.
• Since NAFTA entered into effect more than 20 years ago, Mexico has not seen any other major amendments to its legal system impacting all areas of its economy. Such amendments have the purpose of making the country more competitive and aligning it with current global economic trends.
• Some of the laws that have been enacted or amended include the Fiscal Law, Labor Law, Antitrust Law, Telecommunications and Transportation Laws, Foreign Investment Law, Corporate Law, Energy Law, Financial Law, Personal Data Protection Law, Immigration Law, Anti-Money Laundering Law, Securitization Law, Commercial Code Law and others.
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BUSINESS ENTITIES Representative Office
• Allows a foreign entity to have a presence in Mexico by means of an office that serves as a link between the foreign entity and its clients in Mexico. Its activities are limited to preparatory processes for business carried out by the parent company, such as receiving or delivering information and rendering advice related to the activities, products or services of the parent company. The foreign entity is not considered a separate entity from its Mexican representative office and is liable for the activities and duties of the Mexican office.
Branch
• A branch may engage in business activities and is subject to the tax obligations of all Mexican companies. As is the case with the representative office, the parent company is subject to liabilities of the Mexican branch. A permit from the Ministry of Economy needs to be obtained in order to commence operations, except for service related industries. Furthermore, it must register its bylaws in the Public Registry of Commerce, the Ministry of Finance and with the Foreign Investment Registry.
Subsidiary
• The most common forms of Mexican entities regulated by the general law of commercial companies are the Corporation (Sociedad Anónima, S.A.) and the Limited Liability Company (Sociedad de Responsabilidad Limitada, S. de R.L.). Such entities provide limited liability for the shareholders/partners for as much as the amount of the investment on the capital stock. It is required to have at least two shareholders/partners and in the case of the S. de R.L., a maximum of 50.
• The capital stock of the S.A. is represented by shares which can be freely transferred, and in its case, subject to shareholders agreement. The capital stock of the S. de R.L. is represented by quota holdings evidenced by certificates that are non- negotiable instruments. The transfer of capital stock requires the consent of the partners representing the majority of the capital stock and a right of first refusal is granted by law to the partners.
Securities Law (Ley del Mercado de Valores)
• Securities Law implemented on December 2005 to create corporations that promote investment (Sociedades Anónimas Promotoras de Inversión). It aims to provide the possibility to include in its bylaws more flexibility than the standard S.A. Among the specific provisions, the shareholders could agree on the possibility to restrict the voting rights to some of the shareholders, to freely determine the way profits or other benefits will be granted or restricted to the shareholders; veto rights, among others. Some of these provisions were recently allowed also for Corporations.
• This law also includes the creation of the corporations that promote investment and securities (Sociedades Anónimas Promotoras de Inversión Bursátil), whose main objective is to participate in the stock market.
Distribution and Agency Agreements
• There is no specific law that regulates distribution or agency agreements. The parties shall be subject to the terms and conditions of their agreements. There are no provisions for payment of remuneration at termination, unless established in the agreement. Antitrust Law considers monopolistic practices the obligation of the distributor to sell at a price established by the company granting the distribution, among other cases.
Foreign Investment Law
• Together with NAFTA and as a part of the liberalization of the Mexican economy, the Foreign Investment Law was adopted on December 1993, changing the general rule from 49% foreign investments participation to allow 100% foreign investment on the capital stock of most entities operating in Mexico. At that time, certain foreign investment participation remained restricted in areas such as oil and gas, petrochemicals, electricity, telecommunication. During recent months, Mexican Congress has approved major reforms to oil, gas and telecommunication laws, in order to allow up to 100% foreign investment in these areas. Amendments to the Mexican Constitution have been enacted as well as the specific secondary laws.
Central Bank Exchange Control
• There are no exchange controls in Mexico. The Mexican peso is subject to free market conditions. There is no restriction, nor is there any governmental process for repatriation of investments and the free flow of money. Special attention will be taken with the new Anti-Money Laundering Law, which requires the notification of certain transactions related to gaming, financial operations, jewelry and real estate transactions, among others when those transactions are for amounts over a certain threshold.
TAXATION1
• On 2016 different tax hikes/changes took in effect in Mexico. The tax hikes/changes include incentives for the repatriation of capitals to Mexico, temporal investment deduction for small and medium enterprises and individual with commercial activities, filing and informative transfer pricing tax return. Furthermore, it will maintain the current corporate tax rate.
• On 2015 entered into force several dispositions through which the tax authorities grant incentives to the energy and infrastructure trusts focused on the hydrocarbons exploration and extraction.
a) Federal Taxes
• In Mexico, companies are subject to the following: federal taxes: income tax, value added tax, special tax on products and services, international commerce tax, motor vehicle usage tax and sales tax on new automobiles
1 This section has been prepared in collaboration with Mr. Alejandro Calderón partner of Calderón, González y Carvajal, S.C.
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Income Tax
• The income tax rate on business legal entity resident income earners is 30% for companies (corporate tax) and up to 35% for individuals. The tax base is similar to the accounting profit subject to certain and specific adjustments.
Capital Gains
• The tax rate on capital gains is the same as the rate imposed upon business profits. The difference between them is the treatment of the set-off. Capital losses can only be offset against capital gains and not against any other type of income.
Branch Profits
• A locally formed subsidiary that is considered a Mexican tax resident has to pay corporate income tax on its worldwide income. A branch of a non-resident company that is a permanent establishment according to Mexican law must only pay income tax on income attributable to that permanent establishment.
• Subsidiaries and permanent establishments of non-resident companies are subject to the same taxes, with respect to the constitutional principle of tax equality.
VAT
• Mexico has a value added tax (VAT) which is levied on the alienation of goods, rendering of independent services, granting the temporary use or enjoyment of goods, and on importation of goods and services. The general rate is 16%.
• Exports and some other specified items are subject to the 0% rate, such as non-industrialized animals and vegetables, some products intended for food, medicines and agricultural services and books.
b) Special Taxes
Taxes on production and services are payable on the sale of alcoholic and some non-alcoholic beverages, tobacco, gasoline, diesel, non-fossil fuels and some other specified items. Tax is also payable on certain gourmet foods and a 0% rate is applicable to exports of such gourmet products processed by Mexican enterprises.
c) Local Taxes
• States are empowered to impose tax on any wealth/income that is not expressly reserved for the federal government.
• The main local taxes are on real property (on new acquisition and on continued ownership), payroll tax, and taxes on public shows, lotteries and gambling.
Property Taxes
• In Mexico, there exists a state tax on acquisition of real state in most of the 32 states of the Federation; the tax rate differs in each state ranging between 3% and 5% on the value of the real state
Payroll tax
• Most states in Mexico have a payroll tax. The rate varies but the average is 2.5%
Tax and investment incentives
• There are tax incentives for the following: processing, assembly or transformation operations (maquila and manufacturing programs); agricultural and land transportation activities; investment in national film and theatrical production; deductions for employers who hire handicapped employees, among others.
Tax Treaties
• Mexico has more than 70 tax treaties (to avoid double taxation and/or exchanging information) currently in force and it is negotiating several more. Most of the tax treaties for the Avoidance of Double Taxation and Fiscal Evasion follow the OECD model with some amendments. In México, tax treaties cannot be overridden by any existing or subsequent domestic law.
LABOR LAW • On December 1st, 2012, new labor laws took effect in Mexico.
These reforms make it easier for companies to hire and dismiss workers, contemplate trial periods and training contracts for employees, and provide the possibility to contract for hourly wages (as opposed to daily wages), among others.
Basic Labor Provisions
Concept of Employment
• Any person rendering services to another individual or entity is considered an employee if that person works under the supervision of, or is subordinate to, the contracting individual or entity in exchange for a salary. Individual Employment Agreement (Mandatory for Employers).
• Employment agreements:
o For a definite period of time
o For an indefinite period of time
o For a specific job or task
o With an initial training period
o With a trial period
o Per hour
• The mininim wage is determined by the National Minimun Wage Commission which sets the minimun wage to be applied annually in the differet geographical areas in Mexico. For 2016, the general minimum daily wage is $73.04 pesos (USD $3.83).
Geographical Area Minimum Daily Wage
“A” $70.10 pesos (USD $ 4.58)
“B” $68.28 pesos (USD $ 4.46)
• The National Minimum Wage Commission also determines the specific ranges of minimum wage according to specific occupations. The National Minimum Wage Commission
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is composed of employees, employers and governmental representatives.
• Working shifts shall be agreed to by employee and employer with the following rules:
o A daytime work shift is between the hours of 6:00 to 20:00 with a maximum of 8 hours.
o A nighttime work shift is between the hours of 20:00 to 6:00 with a maximum of 7 hours.
o A mixed work shift is one which includes hours from the daytime and nighttime work shifts as long as the part of the shift that is during the nighttime hours is less than 3 and a half hours, otherwise it should be considered a nighttime work shift. The maximum duration for the mixed work shift is 7 and a half hours.
o Employees are entitled to have at least a 30 minute break.
• Workers may work overtime for up to 9 hours per week and be paid 100% of wages for the overtime they work.
Salary
• Salary is composed of daily cash payments, bonuses, housing, premiums, commissions, payments in kind and any other amount or benefit given to the employee. The cash payment shall never be less than the minimum wage.
• Workers shall be entitled to a Christmas Bonus after the first year, which must be paid before December 20th of the corresponding year, equivalent to at least 15 days of salary.
• Basic Labor Obligations:
o Written Contract
o Registration before Social Security
o Registration before Workers’ Housing Fund (Infonavit 5%) and Pension Fund (Afore – 2%)
o Payment of at least minimum wage.
o Christmas Bonus (of at least 15 days of salary)
o Vacation Time and Vacation Bonus
o Severance Payment
o Profit Sharing- Employees are entitled to receive an amount equal to 10% of the taxable income of the Company. (National Commission of Profit Sharing) Exemptions: New Companies during the 1st year of operation (Two years for new products) Mining Companies: Exploration period. Payment shall be made no later than May 30 of the following year.
• All employees in Mexico have the right to their share of the profits of the businesses they work for, as provided by Article 123, section A, paragraph IX, of the Federal Constitution. The percentage of share participation is determined every 10 years by the National Commission on Profit Sharing, which is a government body consisting of representatives of employees, employers and the government itself.
Unjustified Dismissal
• Indemnification. In case of unjustified dismissal, employees are entitled to claim either:
• 1) Reinstatement Or 2) Payment of compensation equivalent to three months’ salary, seniority premium equivalent to 12 days’ salary per year of service, with a cap of twice the minimum salary, payment of back wages from the time of dismissal to the date of the judgment (with a 1 year limit), and the outstanding balance of any earned and unpaid benefits.
• Back wages will be calculated for up to 12 months of employee´s integrated salary. After the 12th months, interests must be calculated based on 15 months of the employee´s salary applying a 2% rate each month.
• In case of employee´s death, back pay salaries will stop at the date of death.
• Before the modification of the Federal Labor Law, back pay salaries were calculated for all the time that the labor process took place. Usually it would be around 2 to 4 years depending on the labor case.
• Back pay salaries are calculated based on integrated salary (no base salary). This is the base salary plus the proportional part of Christmas bonus, premium vacation and other benefits paid to the employee.
• Employer has the right to refuse reinstatement of the employee as every employer pays 20 days salary per year of services in addition to the 3 month salary compensation.
• Employee has the right to terminate with cause his employment contract if employer commits any unlawful act such as insults, salary reductions, sexual harassment, unilateral modification to the labor relation conditions and, in such case, the termination will be treated the same as with an unjustified dismissal.
• The General Law to prevent and eliminate discrimination, prohibits discrimination based on ethnic origin, culture, sex, religion, immigration status, pregnancy, family, political orientation, race, sexual preference etc. It also prohibits acts that restrict equal employment opportunities, limit training programs, etc.
• The National Board to prevent discrimination, shall take all required actions to prevent and eliminate discrimination and promote equal treatment.
Trial Period
• Trial period is when it is an agreement for specific time or when the job to be performed does not exceed 180 days.
• With an initial training period, it could be agreed to for 90 days for general employees and up to 180 days for management employees.
• In case the employer does not decide to hire this kind of employee once the period ends, then the only obligation of the employer is to notify the Mix Commission of Productivity, Training and Teaching.
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• This last Commission is mandatory for companies or employers with at least 50 employees.
• These agreements can only be executed once and cannot be agreed to simultaneously or one after another.
• In these new modalities, there is no severance payment at the time that the trial or training period ends, since it is an employer´s right to determine whether or not to hire the employee for an indefinite period of time.
Asset Purchase Agreement/Employer Substitution.
• The acquisition of a business is considered to be an employer substitution with respect to the employees and the original employer shall be jointly liable along with the new employer for any labor contingency prior to the transfer of employees and six months after. This term shall be effective as of the date on which the employees or the union is notified of the employer substitution. In order to be effective, it will require a transfer of assets.
Stock Purchase Agreement.
• The relationship between the target company and its employees will continue under the same terms and conditions. There is no obligation to inform or require authorization from the employees nor the union for a transfer of shares; although it is advisable to inform the union at the time of the transfer. The new shareholders shall not unilaterally decide to reduce the labor benefits and if they do, the target company shall make severance payments
IMMIGRATION LAW • The new immigration law entered into effect on July 2011 and
established a new classification for the granting of visas under the following main categories:
o Visas forvisitors without authorization to work authorize foreigners to stay in Mexico up to 180 days. Mostly used for tourism and business but without the right to receive any payment for activities done in Mexico.
o Visas forvisitors with authorization to work authorize foreigners to stay in Mexico for up to 180 days and work in Mexico. This immigration status can only be obtained from the Mexican Consulates abroad.
o Temporary resident authorize foreigners to stay in Mexico up to 4 years with the possibility to work if having a job offer. This visa will enable the authorized individual to bring his family.
o Permanent resident authorize foreigners to stay in Mexico indefinitely and to engage in any lucrative activity in the country. Also this visa entitles foreigners to bring their family.
• In order to change any of the above mentioned visa categories, it will be necessary for the foreigner to leave the country and request a visa under a different category.
• Any Mexican company having foreign employees shall be registered before the national immigration institute and obtain an employer’s certificate.
ANTITRUST LAW4
• On May 23, 2014 a new Antitrust Law was enacted in Mexico. Its purpose is the implementation of a constitutional reform regarding economic competition that was approved in June 2013.
The Commission
• The aforementioned constitutional reform restructured what is now referred to as the Federal Economic Competition Commission (“Commission”) into an independent government agency (previously, it had been a semi-autonomous agency under the purview of the Ministry of Economy) with its own legal personality and assets. Moreover, all five commissioners were removed from the Commission, and seven new commissioners were appointed using a selection process carried out by an Evaluation Committee consisting of the Mexican central bank, the National Institute for Educational Assessment, and the National Institute of Statistics and Geography. The reform also led to the creation of a telecommunications regulatory agency called the Federal Telecommunications Institute, among whose responsibilities is enforcing the Law in matters of telecommunications and broadcasting. For the purpose of this document, the Commission’s powers apply to said Institute in matters of economic competition regarding telecommunications and broadcasting.
Investigation Authority
• One of the Law’s new features is the creation of an Investigation Authority in the form of an independent agency under the Commission’s purview that is responsible for investigating violations of the Law. Once this authority has concluded its investigation and has issued a determination of presumptive liability concluding that the economic agent is presumably liable for a monopolistic practice or forbidden concentrations, it becomes another party to be tried in the procedure overseen by the Commission. The head of the authority must be appointed by a qualified majority of five commissioners, serves a four-year term, and may be reelected once.
Monopolistic Practices
• As was the case for the previous law, this Law regulates absolute and relative monopolistic practices; however, it includes a new absolute monopolistic practice consisting of exchanging information for one of the purposes or effects covered by the practices already under regulation. Previously, exchanging information was only addressed regarding practices involving the fixing, raising, combining, or manipulation of prices. Now, this behavior has been included and applied to the remaining absolute monopolistic practices.
• Regarding relative monopolistic practices, two new behaviors have been included that were not present in the previous law. These are the refusal of, restriction of access to, or access subject to discriminatory terms and conditions to an essential
Doing Business in Latin America
4 This section has been prepared in collaboration with Mr. Alejandro Mendiola, Partner of RGRH.
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raw material, as well as margin squeezes, which consist of reducing the existing margin between the price of access to an essential raw material supplied by one or more economic agents and the price of a good or service provided to the end user by the same economic agents using the same raw material for its production.
Concentrations
• The concentrations proceeding has not undergone significant change with respect to how it had been handled in the past. It is important to mention that the notification thresholds are the same as before.
The Proceeding
• An investigation into monopolistic practices and forbidden concentrations may commence ex officio by the Commission, at the request of the federal executive branch or the Federal Consumer Protection Agency, or at the request of an individual party. Any person may file a complaint alleging absolute or relative monopolistic practices and forbidden concentrations. Previously, only the affected party could file the corresponding complaint regarding relative monopolistic practices and forbidden concentrations. As mentioned above, the Investigation Authority is responsible for conducting the corresponding investigations. If an economic agent is presumed liable, the proceeding will be carried out in trial form overseen by the body responsible for the trial stage and in which there will be two parties: the Investigation Authority and the implicated economic agent.
• In accordance with the constitutional reform dated June 2013, general rules, acts, or omissions of the Commission may only be challenged via indirect amparo and are not subject to a stay. However, fines and disposals of assets or stock are not enforceable until the amparo proceeding has concluded. For trial proceedings, only decisions bringing the proceeding to a close may be challenged. Additionally, said constitutional reform also specifies that the amparo proceedings must be resolved by specialized economic competition judges and courts.
• Finally, as with the previous law, the new Law contains procedures for waiving and reducing fines for economic agents taking part in monopolistic practices and forbidden concentrations. In the event of relative monopolistic practices and forbidden concentrations, it establishes the possibility of accepting a reduction in fines by making commitments that must meet certain requirements. In the case of absolute monopolistic practices, the party in question may acknowledge that it committed such behavior and accept a reduction in penalties, provided it is the first of the implicated parties to provide evidence, cooperate, and take actions aimed at discontinuing its participation in such behavior.
TELECOMMUNICATIONS/MEDIA General Legal Framework
• Mexico’s telecommunications reform creates a new autonomous telecommunications regulator, the Federal Telecommunications
Institute which will have triple the budget of the old regulator. The new regulator can revoke operating licenses for companies employing monopolistic practices. A second new regulator, the Federal Economic Competition Commission will promote competition and seek to prevent companies from controlling more than 50 percent of market share.
• The legislation creates two open television channels, and makes access to information and communication technologies a constitutional right. It also allows foreign investment in telecoms to grow from 49 percent to 100 percent, though it limits foreign investment in radio to 49 percent. The reform defines rules around “must carry, must offer,” requiring paid TV operators to offer free channels, and for open TV operators to provide free transmissions to paid operators. Finally, the reform aims to improve access to broadband and other telecom services.
ENERGY5
• The 2014 energy reform in Mexico, among many other effects, caused both Petróleos Mexicanos (“Pemex”) and the Comisión Federal de Electricidad (“CFE”) -and their new subsidiaries- to be transformed into productive public companies owned by the Mexican State instead of public entities depending from the federal administration. This major change means that they shall compete within their respective economic areas and markets with all other players, both foreign and domestic, and not as monopolistic entities.
• To be able to compete, the legislative changes, among many other administrative reforms to public procurement rulings, include new organic laws for each of such entities within which new contracting schemes are now allowed. To such end, their new laws allows them to enter into agreements under civil and commercial laws, which opens a complete and new set of possibilities regarding the ways in which such companies, once under rigid frameworks, can do and close contracts and participation schemes with domestic and foreign companies.
• The new flexibility given by the recent legal framework allows new opportunities to be created in the very near future. Already alliances are on their way between parties that, before the reform, had little or no projects together. Now as public productive companies, CFE and PEMEX are not only entitled —but obliged— to create value to their operations and within this process, the experience, capabilities and financial strength of private companies will surely be welcomed. Also, they have full technical, operative and administrative independence, providing more flexible business capabilities.
Petróleos Mexicanos (PEMEX)
• This Energy Reform gave PEMEX an initial period to choose the fields for Exploration and Production (E & P) activities- called - Round 0. The scope was determined by the National Hydrocarbons Commission once PEMEX demonstrates that it has sufficient technical and operational capabilities.
• Oil & Gas bid Round 1, is still in progress with a diversified portfolio of blocks that range from deepwater to mature fields to unconventional resources.
5 This section has been prepared in collaboration with Mr. Luis Jáuregui from Consulting Services Petroleum Business and Mr. Claudio Rodríguez head of Energy Department of RGRH.
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Wholesale Power Market Rules
• On September 2015 after important comments, discussions and suggestions made by relevant industries, the Ministry of Energy enacted the Rules which definitively changed the way the power businesses where understood in Mexico since 1992, when a partial liberalization of the power market occurred.
• The Rules allows private entities to offer and buy not only power but associated products such as capacity, financial transmission rights and clean energy certificates at: (i) “spot” market, (ii) through bilateral agreements with market participants; or, (iii) medium or long term auctions (power, financial transmission rights and capacity) with basic power suppliers (CFE).
Industries with major possibilities
• On the second quarter of June 2015, CFE announced USD 9.8 Billion bids in power and gas.
• All energy laws promote new participation schemes and indeed, very important gas transport agreements have been recently awarded by CFE. In the power sector, the division between generators, traders and certified users means that new entities and collaborative measures will be formed and taken which were not needed under the previous schemes. The wholesale power market will require a continuous supply of several products, including, energy, capacity, financial transmission rights, and clean energy certificates.
• Whether or not the price and conditions of availability and dispatch capacity can be met will depend on the rulings and the infrastructure and technology available, and therefore, supplied by generators (i.e., gas-fired, geothermal, wind, solar). Further, alliances with companies with proven storage technologies will be necessary in order to increase a project’s dispatch capacity and availability, given the intermittency and inability of some technologies to generate electricity during peak hours. To such ends, several technologies, companies will have to merge into a single proposal in order to comply with the requirements set forth in power bid proceedings. Thus, we foresee a huge potential of synergies within this industry.
•
• In august 2015, CFE intended to launch a “round one” bidding process to offer to private investors the geothermal fields over which CFE did not declare its intention to explore and exploit. Since CFE is, as we stated, a productive state company, international experienced players will be allowed to enter into association agreements with CFE. However, as in the case of oil-related “round one” processes, international geothermal companies might be interested in entering in joint ventures, or even M&A, with foreign companies in order to share the risk, receive local experience, and with national entities in order to comply with national contents requirements instead.
• The alliances are even clearer in cogeneration projects to be built by PEMEX, in which several GW of power under this technology will be built and operated. In this case, important consortiums have been already structured to meet the financial, technical, experience, and national contents requirements.
• Lastly, but no less important, is the fact that the energy reform opened a complete new set of opportunities in transmission. Even though transmission and distribution will continue to be areas operated by the Mexican State, the Power Industry Law already foresees private participation in the design, finance, construction, and maintenance (but not operation) of new transmission infrastructure. This collaboration will contribute to create the necessary evacuation needed as new pipelines for gas-fired projects, in one hand, and for renewable projects, in the other, are built in the following years.
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EXCELLENT ECONOMIC PERFORMANCE • Pro-business legislations and administrative procedures
have contributed to a strong inflow of foreign investment in recent years. Furthermore, Nicaragua´s excellent economic performance has been recognized by the International Monetary Fund (IMF) through a series of revisions over the past years. In 2014, the GDP of Nicaragua checked a growth of 4.7 percent. In turn, GDP per capita was US$ 1,904.7 experiencing a growth of 4.4%.
SOLID LEGAL FRAMEWORK • The legal framework for investment in Nicaragua possesses
a unique harmony. This is complemented by groundbreaking special regulations, enacted over the last ten years. These regulate specific aspects of the country´s business climate such as: contracts, loans, investment incentives and exports, stock market, banking, real estate, etc.
• The Foreign Investment Promotion Law offers investors fundamental guarantees such as full currency convertibility; freedom to expatriate all capital and profits, dividends or earnings generated in the national territory, after paying pertinent taxes; there is no need of a minimum or maximum amount of investment; prompt depreciation of capital goods; national loans are available through local banks, according to their terms and condition of approval; 100% international ownership if allowed.
GENEROUS FISCAL INCENTIVES • The Tax Law describes a series of benefits to different sectors:
• The Republic of Nicaragua is the largest country in the Central American region, bordering Honduras to the north and Costa Rica to the south. The Pacific Ocean lies to the west and the Caribbean Sea to the east.
• With a total area of 130,373.4 km2, Nicaragua has experienced sustained economic growth as a result of the disciplined management of its fiscal, financial monetary and exchange policies.
• Although the official language of Nicaragua is Spanish, English is increasingly popular, mainly being used for business.
• Córdoba is the official currency. • Population: 6.1 million • Labor Force: 3.2 million
Exporters
• 0% Value of Added Tax (IVA) rate to exports on domestically produced goods or services provided to clients abroad.
• Exports of goods are taxed at 0% of the Selective Consumption Tax.
• A tax credit can be applied to the advance payments or annual Income Tax with previous authorization of the tax administration in an amount equal to 1.5% of the FOB value of exports.
Agricultural Producers
• Article 127 presents a list of transfer that are exempt of transferring the Value Added Tax, some of them are related to the agricultural sector.
• Additionally, article 274 provide exemptions on Value of Added Tax and Selective Consumption Tax, to the transfers of raw materials, intermediate goods, capital machinery and equipment to agricultural producers and micro, small and medium industrial and fishing enterprises, through a tax list.
Forestry Sector
• Plantations registered on the regulatory entity will be exempted of paying fifty percent (50%) of the Municipal Income Tax.
• Areas where forestry plantations are established and where forest management are performed through a Forest Management Plan are exempted from Property Tax (IBI).
• Companies of any line of business that invest in forestry plantations may deduct, as an expense, 50% of the amount invested for Income Tax purposes.
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Temporary Admissions Law
• Companies that export directly or indirectly are eligible for this regime at least 25% of total sales with an export value not less than US$ 50,000 annually.
Industrial Free Zones for Export
• 100% exemption from Income Tax during the first 10 years of operation, and 60 percent from the 11th year onwards.
• Exemption from taxes on transfers of real-estate.
• Tax exemption from the set-up, transformation, merger and reforming of entity as well as on stamp duties.
• Exemption from all taxes, customs and consumption duties related to empower the company for its operations, as well as taxes applicable to benefits that tend to satisfy the needs of personnel of the company.
• Exemption from customs taxes on transport equipment, including vehicles used for cargo, passengers or service intended for normal use of the company.
• Full exemption from indirect, selective-sales or consumption taxes.
• Full exemption from municipal taxes.
• Full exemption from export taxes to products processed within the zone.
• Exemption of taxes on local purchases.
Electricity Generation from Renewable Sources
• Exemption from payment of import duties of machinery, equipment, materials and supplies used exclusively for pre- investment work and of building works.
• Exemption from payment of VAT on machinery, equipment, materials and supplies used exclusively for the work of pre- investment and construction works.
• Exemption from all existing municipal taxes on property, sales, fees for the construction of the project for a period of 10 years (5 years in case of geothermal energy).
• Exemption from all taxes for the exploitation of natural resources for a maximum period of 5 years after the start of operating.
• Exemption from Stamp Tax that may cause the construction, operation or expansion of a project for a period of 10 years with the same tax exemptions.
Exploration and Exploitation of Mines
• The holders of mining concessions are required to pay for surface right and pay for the right of extraction. The exemptions to this sector are:
o Temporary admission regime which allows the entry of goods into national customs territory and the local purchase of goods into national customs territory and the local purchase of goods or raw materials without paying any tax or fee.
o If it is not possible to apply the previous suspension of duties and taxes, the benefit will apply under subsequent refund procedure of the taxes paid
o Zero percent tax rate for exports applicable to all exports.
Tourism Industry
• Exemption of 80 to 100 percent of the income tax (IR) for a period of ten years.
• Exemption of property tax (IBI) for a period of ten years.
• Exemption of Value Added Tax (VAT) applicable to design services, engineering and construction services.
• Exemption of Import Tax and Value Added Tax on the local purchase of goods, furniture, equipment and vehicles, and on the purchase of equipment that contribute to save water and energy for those necessary for the safety of the project. Also, exemption on the purchase of non-luxury materials and fixtures of the building.
Ports
• The approved investment projects, during the period of construction, improvement, expansion or development of port infrastructure, will be considered exempt from duties and taxes on imports, local purchases and municipal taxes.
Fishing and Aquiculture
• In addition to the benefits granted by the Tax Law, the Law of Fishing and Aquiculture grants the right of previous suspension of taxes levied on diesel used for fishing activities.
Hydrocarbons
• An exemption of Import Duties and Temporary Protection Tariff which are regulated in accordance with the Agreement on the Customs and Tariff Regime of Central America.
• There is a Unique Specific Tax on Fuels (IECC, for its acronym in Spanish) which purpose of creating a single tax on crude oil or partially refined or reconstituted, and other derivatives. The IECC is applied just once on the transfer of import of petroleum derivatives; the Tax Law (822) forbids the existence of another tax on them, municipal, local and regional taxes.
SECURITY INDEX • The 2014 Security Index, published by the Economist
Intelligence Unit, ranked Nicaragua on its evaluation as sixth safest country in Latin America, before Dominican Republic and after Argentina, being the safest country in Central America.
Fiscal System
• Tax Law (Law 822) provides numerous tax benefits to certain productive sectors of the economy in order to promote their growth and development. Waivers and exemptions granted by this law are without detriment to those granted by the legal provisions listed in the article 287.
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Income Tax
• A direct and personal tax is applied to income of Nicaraguan source obtained by tax payers, whether residents or not. That income tax is also applied to any increase in capital that is not justified and to income that is not explicitly or exonerated by law. Income is classified as follows:
o Work income: Encompasses all kind of compensation, remuneration or revenue, whatever its designation or nature, in cash or kind, arising from personal work provided by others. The taxable base for income tax of the work income is net income, which is the result of subtracting the allowable deductions from gross income.
o Income from economic activities: are those earned or received in cash or kind by a taxpayer who provides goods and services, including capital income and earnings and loss of capital, as long as they are constituted or integrated as income from economic activities. Additionally, taxpayers are required to pay a definitive minimum payment, which is calculated by applying a one percent of aliquot on taxable gross income. During the first three years, taxpayers are exempt of this payment.
o Capital income on earnings and losses of capital: Capital incomes are revenues earned or received in cash or kind, from the operation or disposition of assets under any legal concept. Earnings and losses of capital are changes in the equity value of taxpayer; as a result of the sale of goods, or assignment or transfer of rights. Also, capital incomes are those derived from gambling, betting, donations, legacies and any other similar income. When the amount of capital income is greater than or equal to 40% of total income from economic activities, these incomes pay the same taxes of economic activities.
Value Added Tax
• Is applied to the following activities performed in Nicaraguan territory, with a tariff of 15 percent of the value of a product or of an activity carried out; except the export of goods of the national production and the services provided abroad:
o Goods transferred.
o Import of goods.
o Exports of goods and services.
o Provision of services or use of goods.
Selective Consumption Tax
• An indirect tax that is applied to the transfer and import value of goods and merchandises in annexes I, II and III of the Tax Law. Exports are subject to 0 percent of ISC.
Stamp Tax
• Applies to certain documents listed in article 240 of the Tax Law when they are issued in Nicaragua or when issued in foreign countries, but take effect in Nicaragua.
Real Estate Tax
• It must be paid by December 31st every year, is applied to properties located within the boundaries of each municipality. The real estate tax payment is one percent over the base, which can be established in:
o Municipal Land Registry Appraisal: Based on the application of the guidelines of Land Registry of DGI-MHCP. The land appraisal can also be outsourced by the Mayor´s Office to companies specialized in land and property appraisal.
o Self-Appraisal: Is declared by the tax payer based on the property´s description according to formats, value tablets and municipal costs provided by the municipal Mayor´s Office. The property value is estimated by the tax payer, the value is based on the book value or acquisition value of the property minus the accumulated depreciation, whichever is highest.
Municipal Income Tax
• Establishes the payment of a monthly tax equal to one percent of total gross income. This tax applies to any person or entity engaged in the sale of goods, industrial activity or the provision of services.
Municipal Registration Tax
• The amount of registration tax is 2 percent of the average monthly gross income from the sale of goods and services in the last three months of last year. In cases of starting a business, the municipal registration tax is 1 percent of the social capital.
Customs Duties on Imports
• Taxes are contained in the Central American Import Tariff and apply to the CIF value of goods imported outside of Central America. DAI taxes are applied proportional to the value of the imported goods.
LABOR LAW • Spanish will be the default language to use in all labor relations,
except for the Caribbean Coast which uses the languages of its communities.
• It is mandatory for employees to hire at least 90% of Nicaraguan employees, except if the Ministry of Labor authorizes the employers to hire more foreign employees for technical reasons.
Minimum guaranties
• Equal salary for equal work in the same conditions without discrimination of any kind.
• 8-hour workday, weekly rest, vacations, remuneration for national holidays and Christmas bonus in accordance with the law.
• Social security for full protection and livelihoods in cases of disability, old age, occupational hazards, sickness and maternity; and their families in cases of death, in the form and manner prescribed by the Law.
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Fringe Benefits
• Paid Vacations: All workers have the right to take 15 continuous days of vacation, fully paid, for every six months of uninterrupted labor by the same employer.
• Christmas Bonus (13th Month): For each year of continued labor, all workers are entitled to a 13 month of salary. The amount of this bonus is equivalent to a monthly salary. If the worker does not have a year of continued labor, the 13th month is calculated proportional to the months worked. This must be paid within the first 10 days of December. If the employer fails to comply, he or she must pay a compensation equal to one day´s worth for each day of delay.
• Severance payment: An employer can fire an employee without cause, as long as the employer pays a severance payment according to the Article 45 of the Labor Code. This payment also applies if the labor relation ends by natural agreement or quit and consist in a payment of a month of salary per each worked year, during the first three years; and 20 days of salary per each additional worked year after the fourth year, no more than 5 months of salary. The applications of Article 45 have some limitations in cases of workers with union privileges.
SOCIAL SECURITY • Every employee must be registered in the Nicaraguan Social
Security Institute (INSS) within three days of beginning employment. The employer must withhold the social security contribution (6.25%) from the employee´s salary and monthly pay the employer´s contribution (17%) along with the employee´s contribution to the INSS. In both cases, the salary subject to contribution will be up to CS$ 72, 410.00 monthly. From 2016, every 1st of January, the INSS will set the salary object to contribution by applying the annual change of the average salary of the monthly insured people.
MINIMUM WAGE • Nicaragua ranks as the country with the most competitive
wages in the region, with wages of US$ 0.73 per work hour in the agricultural sector and US$ 1.09 in companies under the free zone regime.
• The Minimum Wage Law states that minimum wage will be fixed every six months according to the details of each job and industry. This fixation may be per unit of time, work, or task, and can be calculated per hour, day, and week, per fourteen days, fortnight or monthly.
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BUSINESS PRESENCE • Panamanian legislation offers several types of business models
in Panama. Amongst the most relevant are the following:
Panamanian Corporation (Sociedad Anónima)
• In Panama, a corporation is usually known as an “S.A.,” or Sociedad Anónima (translated literally to “anonymous company”). However, only the shareholders are actually anonymous.
• A Panamanian corporation can have the following suffixes: INC., CORP., Corporation, or S.A.; there is no difference from a legal perspective.
• The Republic of Panama is located in the center of the Western Hemisphere. It is bordered by Costa Rica to the northwest, Colombia to the southeast, the Caribbean Sea to the north and the Pacific Ocean to the south. Panama occupies a strategic location at the southeastern end of the isthmus forming the land bridge between North and South America.
• Area: 75,517 km². • Population: 3,405,813 (per May 2010 census). • Political division: ten provinces and five indigenous communities. • Government: Constitutional democracy. • Religion: Freedom of religion is protected by the Panamanian constitution. Most
Panamanians are Roman Catholics but due to the diversity of the country all kinds of temples of worship may be found throughout the country.
• Language: The official language is Spanish but English is widely spoken as a second and commercial language.
• Weather: Panamanian weather is tropical and uniform throughout the year. The average temperature is 27ºC.
• Currency: The official Panamanian currency is the Balboa, fixed at parity with the United States dollar since the country’s independence in 1903. In practice, however, the country is dollarized; Panama uses US dollars for all its paper currency and has its own coinage, which is equivalent in size and value to those of the US dollar.
• Panama’s dollar-based economy rests primarily on a well-developed services sector that accounts for three quarters of gross domestic product (GDP). Services include the operation of the Panama Canal, logistics, banking, the Colon Free Zone, insurance, flagship registry, corporate legal services, and tourism.
• Two or more natural persons may organize a corporation by executing the corresponding Articles of Incorporation. The incorporators do not need to be citizens or residents of Panama.
• The Articles of Incorporation must contain at least the following information: name of the corporation, general purpose or purposes of the corporation, amount of authorized capital, and the number and par value of the shares into which said capital is to be divided. Non par value shares are also allowed.
• The enumeration of corporate purposes in the Articles of Incorporation does not preclude the corporation from pursuing any other activities not so specified, since Panamanian law
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expressly allows a corporation to engage in any business, even though same is not mentioned in the Articles of Incorporation.
• The Articles may provide that the corporation can issue both par value and no par value shares.
• Panamanian corporations can have shares issued in either Bearer form or Nominative form. If the company issues Bearer Form shares, they must be given in custody to a duly authorized agent (Lawyer or Bank). A Panamanian corporation can do business and own property and other assets (boats, cars, jewelry, etc.) in any country. Some offshore jurisdictions do not allow IBC’s to do business locally. Panamanian corporations can do business inside or outside of Panama.
• Panamanian law requires all corporations to have a Resident Agent domiciled in the Republic of Panama, whose name and address must appear in the Articles of Incorporation. The Resident Agent must be a lawyer or law firm authorized to practice law in the Republic of Panama. Usually the lawyer or law firm that incorporates the corporation acts as such.
Panamanian Branches of Foreign Companies
• A foreign company can register a branch in Panama by depositing the following documents at the Public Registry Office:
o Articles of Association;
o Board minutes authorizing the Panamanian registration;
o Copies of the most recent financial statements;
o A certificate from a Panamanian consul confirming that the company is organized according to the laws of its place of incorporation;
o Notification of the allocation of capital to the Panamanian operation.
• All the above mentioned documents, if not originally issued in Spanish, must be previously translated to Spanish by a Panamanian Authorized Public Translator. All signatures must be legalized before a Panamanian consulate or by Apostille.
Panamanian Limited Liability Company (LLC)
• Limited Liability Companies (sociedad de responsabilidad limitada) must have a minimum of two partners.
• There is no restriction on the nationality of the partners or their domicile.
• The names of the partners must be registered in the Public Registry Office along with details of the amount of capital committed and paid in (in cash or kind) by each of them.
• The partners can appoint administrators for the company, who may or may not be partners, and whose names must also be registered at the Public Registry.
Panamanian Civil Company
• The Civil Company (sociedad civil) has legal personality, although the liability of the partners is unlimited. This type of company is often selected by professionals such as lawyers and accountants.
Panamanian Private Interest Foundation
• This legal entity was created based on the Liechtenstein Family Foundations. Private Interest Foundations are used mostly for the protection of assets and protection of minors and disabled persons, protecting the objectives of the Founder with regard to the destiny of its patrimony even after his or her death. The Private Interest Foundation cannot be profit-oriented. Nevertheless, it can engage in a non-habitual manner in commercial activities if the economic result is used towards the foundation’s objectives.
• It can be defined as a donation or assignment of assets by a Founder for specific objectives, determined in a document known as the Foundation Charter, and carried out by the Foundation Council, which is similar to a board of directors in a corporation. The members of the Foundation Council must be designated in the Foundation Charter.
• The Foundation Charter must be registered at the Public Registry. Since the moment of its registry, the Foundation starts its existence without the need for previous approval from any governmental authority. The regulations or rules do not require registry and therefore can be maintained as a private document.
• The Foundation Charter must specify the names of the Foundation Council (who administer the foundation on behalf of the beneficiaries), the property of the Foundation, its domicile, the name of its Panamanian-registered agent and other details; but the names of beneficiaries and principles of operation can be contained in separate regulations or rules, and can remain as a private document.
• The minimum capital requirement is US$10,000.
Panamanian Trusts
• A trust is a juridical act by which a person called settlor transfers assets to a person called trustee for its administration or disposition in favor of a beneficiary, who may be the settlor.
• Panamanian trusts (Fideicomiso) must be expressed in writing, so cannot be constructive. The trust shall be executed via private document, with the only formality being that the signature of settlor and trustee must be authenticated by a Panamanian notary, guaranteeing confidentiality. The trust instrument must be executed via public deed and registered before the Public Registry in such cases where real property located in Panama is given in trust.
• Trusts can be stated to be revocable but otherwise are irrevocable.
• The settlor, trustees, and beneficiaries need not be Panamanian nationals or residents in Panama.
• A Panamanian lawyer must act as registered agent for the trust.
• Trusts may be established for existing or future property; additional property may be included after the settlement either by the settlor or a third party.
• Assets in trust constitute an estate separate from the assets of the trustee. Therefore, they cannot be seized, sequestered, or
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subject to any lien as a result of the trustee’s obligations. The assets of the trust can only be affected by the liabilities of the trust itself.
FOREIGN INVESTMENT RESTRICTIONS AND CONDITIONS • Panama’s investment regime offers foreigners national
treatment with some exceptions.
• The Constitution reserves for Panamanian citizens the acquisition of land located less than 10km from the country’s borders, as well as retail trade, fishing in Panamanian territorial waters, and broadcasting.
• The operation of games of chance and gambling, along with postal and telegraph services, are reserved as state monopolies. In the case of games of chance and gambling, the tax code gives the Gaming Control Board of the Ministry of the Economy and Finance (MEF) the power to regulate the operation of casinos, bingos, hippodromes, and other related activities by signing contracts with private Panamanian or foreign-owned firms.
• Foreign investment in the air transport sector is also subject to restrictions.
• In Panama there is no specific legal statute on foreign investment, and the general legal regime is applied equally to national and foreign investors alike.
• The constitution provides that foreigners in the national territory shall receive the same treatment as nationals, but it allows the authorities to impose special conditions or deny access to certain activities to foreigners in general for reasons of employment, health, morality, public safety, and national economy.
• According to the constitution, salt pans, mines, underground and thermal waters, hydrocarbon deposits, quarries, and mineral deposits of all kinds may not be privately owned, but they can be exploited by private enterprise through concessions or other types of contract.
• Law No. 54 of July 22, 1998, (Law on Legal Stability for Investments) promotes and protects investments made in Panama, including foreign investment. It states that foreign investors and the enterprises in which they participate have the same rights and obligations as national investors and enterprises, without any restrictions other than those established in the Constitution. The same law allows foreign investors to freely dispose of the proceeds of their investment, guaranteeing free repatriation of capital, dividends, interest and profits arising from the investment, and freedom to market their production.
• There are also certain restrictions relating to the nationality of a corporation’s executive staff and workers. Up to 10% of a firm’s total work force may be foreign nationals, and up to 15% in the case of technical or specialized personnel. The proportion of foreign technical or specialist staff may be increased, for a predefined period, with due authorization from the Ministry of Labor.
• Although foreign investment does not need prior authorization, registration and licensing requirements exist in certain activities that generate investments, for example, banks, insurance, and reinsurance.
• Disputes are settled through the national courts and the foreign investor has access to the same procedural remedies as the local investor.
• Panama has signed agreements for the reciprocal promotion and protection of investments with several countries. It also has double taxation agreements with other countries.
EXCHANGE CONTROL • There are no exchange controls in Panama and there is no
central bank. Foreign investment is welcomed, and profits may be freely repatriated.
TAX COMPLIANCE—TAXATION Corporate Income Tax
• The taxation system of the Republic of Panama is based on the territoriality system, by which only Panamanian source income is levied with income tax. The general corporate income tax rate is 25%.
Individual Income Tax
• Individuals who earn less than US$11,000 per year pay no income tax. Those earning between US$11,000 and US$50,000 pay a 15% tax rate while those earning more than US$50,000 pay a 25% rate.
Social Security Tax
• Employers and employees pay social security taxes on the employee’s salary. Currently, employers pay 12.25% and employees pay 9.75%. Employers are required to withhold a percentage from each employee’s pay for income tax and for social security tax.
Educational Tax
• An additional 1.25% of an employee’s wages are withheld as an “educational tax” while the employer pays 1.5%.
Capital Gains Tax
• The capital gains tax rate differs by the type of property being transferred. Only properties located in Panama are subject to the capital gains tax. The standard rate is 10% of the realized gain from the sale.
• Transfer of shares of a Panamanian entity that obtains Panamanian source income requires the buyer to withhold 5% of the purchase price and remit it to the Ministry of Economy and Finance within ten days. This is considered as an advance of the seller’s capital gains tax. The seller can declare the 5% to be the total capital gains tax or if the amount withheld exceeds the normal 10% rate of the actual gain, the seller can claim a tax credit for the excess amount when filing his/her annual tax return.
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Dividends Tax
• There is a 10% dividends tax levied to entities that have a commercial operations permit and have Panamanian source income. Dividends distributed to holders of bearer shares must pay a 20% dividend tax. The dividend tax is only 5% if the earnings come from foreign sources, are export-related, or other specific laws exempt the income. Companies located in the free trade zones pay a 5% dividend tax for all income. The entity declaring the dividend withholds the tax and remits it to the tax authorities. There is no additional income tax levied to those receiving the dividends.
Commercial Permit Tax
• All persons and entities engaging in business activities within the Republic of Panama must obtain a commercial operation permit (“Aviso de Operacion”) which is issued by the Ministry of Commerce and Industries. The annual tax for the permit equals 2% of the company’s net worth with a maximum payment of $60,000. Companies located in special economic or development zones within free trade zones pay a rate of 1% with a maximum payment of $50,000.
VAT
• Value Added Tax or sales tax is known in Panama as the “ITBMS”. This tax applies to imported goods, products sold or services rendered in Panama. The ITBMS is 7%. Higher rates exist for other activities such as the sale of alcoholic drinks (10%), tobacco products (15%), and specific services such as housing services (10%). Exceptions to paying this tax include free trade zone transactions, power generation and distribution services, and cargo and passenger transportation by sea, air, or land.
Real Estate Taxes
• Property tax applies to the value of the land and all registered improvements. The standard property tax rate begins at a value of $30,000 up to $50,000 at a rate of 1.75%, while the rate is 1.95% between $50,000 and $75,000, with everything over $75,000 at a 2.1% rate.
Other Taxes
• Stamp taxes can be applied based on the value of certain documents, such as contracts. Panama banks and some financial institutions pay a yearly tax based on the type of institution or total assets. The usual stamp tax levy is $0.10 for each $100.00 or fraction of $100.00 of the value of the document.
Avoiding Double Taxation
• Panama has entered into an Agreement for Taxation Cooperation and the Exchange of Taxation Information with the United States of America and more than sixteen Treaties to Avoid Double Taxation with several countries, in order to meet the current international standards set by the Organization for Economic Co-operation and Development (OECD). Having completed this process, and having been withdrawn off the OECD’s “grey list” of tax havens, Panama continues to negotiate and sign tax treaties with other countries to avoid double taxation of foreign investors on their Panamanian source income.
TAX AND INVESTMENT INCENTIVES • Certain industries receive tax incentives to encourage
foreign investment in areas including agriculture, tourism, mining, exporting non-traditional goods, power generation, construction and operation of government concessions, processing and storing oil-related products, maritime, manufacturing, and reforestation.
ESTABLISHMENT AND OPERATION OF REGIONAL CENTERS FOR MULTINATIONAL ENTITIES • Law 41 of August 24, 2007, creates a special regime for
the establishment and operation of Regional Centers for Multinational Entities in the Republic of Panama, with the purpose of attracting and promoting investments, the generation of employment, and the transfer of technology, as well as to make the Republic of Panama more competitive in the global economy by means of using its optimal geographical position, its infrastructure, and its international services.
• A Multinational Entity is such juridical firm that, having its head office in a given country, develops important productive, Commercial, financial, and service activities in various other countries. In addition, they will be considered as such companies that, despite operating only in one country, have important operations in different regions of such country, and decide to establish a branch, subsidiary, or related company in Panama in order to develop commercial transactions in the region. For immediate reference, the law establishes that in order to be able to apply, the assets of the commercial group must be equal to or greater than US$200,000,000 and in the event of establishing a headquarters or branch in Panama, minimum initial capital of US$2,000,000 is required.
• Services to be rendered by the Regional Centers for Multinational Entities are the following:
o Direction and/or administration of business operations, globally or in a specific geographical area, of any company of the business group.
o Logistics and storage of components or parts, required for the manufacturing or assembly of manufactured products.
o Technical assistance for companies of the business group or clients that have acquired some product or service from the company.
o Accounting for the business group.
o Elaboration of plans that are part of the designs and/or developments, or part thereof, related to typical business activities of the head office or any of its subsidiaries.
o Counseling, coordination and follow-up on marketing and advertisement guidelines for goods and/or services produced by the business group.
o Electronic processing of any activity, including the consolidation of operations of the business group.
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o Financial management (treasury) for the business group.
o Operational and investigatory support and development of products and services for the business group.
o Any other service approved previously by the Licensing Commission of the Ministry of Commerce and Industries of the Republic of Panama.
• The main function of a Regional Center for Multinational Entities is to render services only to the business group to which it belongs, in attention to the aforelisted activities.
• Regional Centers for Multinational Entities have the following tax benefits:
o Exemption on the payment of income tax in the Republic of Panama, for services rendered to entities of any kind domiciled abroad, that do not generate taxable income in the Republic of Panama. This exemption will only apply to the company and not to its employees.
o Exemption on VAT Tax on services, as long as such services are rendered to persons domiciled abroad, who do not generate taxable income in the Republic of Panama.
• Income of Regional Centers for Multinational Entities will be deemed produced in the Republic of Panama as long as the services rendered are incident to the production of Panamanian source income or its conservation, and its value has been considered as a deductible expense by the person that received them. In such cases, Regional Centers for Multinational Entities will pay their income tax at 50% of the rate established by the Fiscal Code of the Republic of Panama.
EMPLOYMENT LAW Panamanian Regulatory Environment
• The main piece of employment legislation in Panama is the Labor Code of 1971, which deals with labor relations and the rights and duties of employer and employee.
• There is a contract between employer and employee, whether written down or not, and it can include elements from a collective agreement. Unions are allowed, and can negotiate on behalf of employees collectively. Strikes are lawful under defined circumstances and after a majority vote. Conciliation is mandatory before a strike. However, only around 11% of private sector workers are unionized.
Panamanian Work Permits
• The employment market is quite closely regulated in Panama: the law sets maximum percentages for the employment of foreigners. Usually the figure is 10%, and 15% for technical workers. For workers in senior positions of companies that are dedicated exclusively to perform transactions that are perfected or whose effects take place abroad, it may be possible to agree a higher percentage with the Ministry of Labor, which is responsible for issuing work permits.
• A Panamanian worker is privileged with a wide variety of legal benefits:
o For every 11 months of continuous employment employees are entitled to an annual paid vacation of 30 days.
o The “thirteenth month” rule: In Panama workers get paid 13 months for every twelve months worked, or one day’s salary for every 11 days worked. This bonus is payable in three equal installments in April, August, and December.
o There are 11 public holidays per year. An employer will be expected to pay a 150% surcharge calculated over the salary, plus an additional day of rest, if he or she requests that employees work on a national holiday.
o Termination of employment compensation includes, among other sums, a week’s salary for every year worked.
o Paid maternity leave of 14 weeks (paid by social security, not by the employer).
INTELECTUAL PROPERTY Copyright Law
• The National Assembly in 1994 passed a comprehensive copyright bill (Law 15), based on a World Intellectual Property Organization (WIPO) model. It was issued to protect the intellectual property rights of literary, educational, scientific, or artistic works. The law modernizes copyright protection in Panama, provides for payment of royalties, facilitates the prosecution of copyright violators, protects computer software, and makes copyright infringement a felony.
Patent Law
• An Industrial Property Law (Law 35) went into force in 1996 and provides 20 years of patent protection from the date of filing. Pharmaceutical patents are granted for only 15 years, but can be renewed for an additional ten years, if the patent owner licenses a national company (minimum of 30% Panamanian ownership) to exploit the patent. The Industrial Property Law provides specific protection for trade secrets.
Trademarks
• Law 35 also provides trademark protection, simplifying the process of registering trademarks and making them renewable for ten-year periods.
Treaties
• In addition to its membership in the WIPO Panama is a member of the Geneva Phonograms Convention, the Brussels Satellite Convention, the Universal Copyright Convention, the Berne Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, and the International Convention for the Protection of Plant Varieties. In addition, Panama was one of the first countries to ratify the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty.
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DISPUTE RESOLUTION Legal System
• Based on a civil law system. Acceptance of foreign tribunals´ jurisdiction with some reservations.
General Legal Framework
• The constitution establishes the Supreme Court as the highest judicial body in the land. Judges must be Panamanian by birth, be at least 35 years of age, hold a university degree in law, and have practiced or taught law for at least ten years. The number of members of the court is not fixed by the constitution. There are nine justices, divided into three chambers, for civil, penal, and administrative cases, with three justices in each chamber. Magistrates (and their alternates) are nominated by the cabinet council and subject to confirmation by the legislative assembly. They serve for a term of ten years. Article 200 of the constitution provides for the replacement of two judges every two years. The court also selects its own president every two years.
• The constitution defines the Supreme Court as the guardian of “the integrity of the constitution.” In consultation with the attorney general, it has the power to determine the constitutionality of all laws, decrees, agreements, and other governmental acts. The court also has jurisdiction over cases involving actions or failure to act by public officials at all levels. There are no appeals of decisions by the court.
• Other legislation defines the system of lower courts. The nation is divided into three judicial districts: the first encompasses the provinces of Panamá, Colón, and Darién; the second, Veraguas, Los Santos, Herrera, and Coclé; the third, Bocas del Toro and Chiriquí. Directly under the Supreme Court are four superior tribunals, two for the first judicial district and one each for the second and third districts. Within each province there are circuit courts (civil and criminal). The lowest regular courts are the municipal courts located in each of the nation’s 65 municipal subdivisions. In the tribunals, the judges are nominated by the Supreme Court, while lower judges are appointed by the courts immediately above them. Additionally, there are courts of special jurisdiction such as family law court and admiralty court.
• The constitution also creates a public ministry, headed by the attorney general, who is assisted by the solicitor general, district and municipal attorneys, and other officials designated by law. The attorney general and the solicitor general are appointed the same way supreme court justices are. Lower-ranking officials are appointed by those immediately above them. The functions of the public ministry include supervising the conduct of public officials, serving as legal advisers to other government officials, prosecuting violations of the constitution and other laws, and arraigning officials before the Supreme Court over whom the Court “has jurisdiction.”
• Several constitutional provisions are designed to protect the independence of the judiciary. These include articles that declare that magistrates and judges are independent in the exercise of their functions and are subject only to the constitution and the law; that positions in the judicial organ
are incompatible with any participation in politics other than voting; that judges cannot be detained or arrested except with a written order by the judicial authority competent to judge them; that the supreme court and the attorney general control the preparation of the budget for the judicial organ; and that judges cannot be removed, suspended, or transferred from the exercise of their functions, except in cases and according to the procedures prescribed by law.
Alternative Dispute Resolution
• Although, as of 1984, Panama has been a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Panama’s alternative dispute resolution law, which implemented and regulated arbitration, conciliation, and mediation as alternative dispute resolution mechanisms, was only passed in 1999. At first, the law was not well perceived by the judiciary, who considered rendering justice was its exclusive function (arbitration proceedings were previously governed by the Code of Civil Procedure). But in 2004, the National Assembly approved a series of amendments to the Constitution including certain provisions relevant to the acknowledgment of the use of arbitration in the resolution of disputes. The Constitutional amendments were approved and as a result, an important step forward was made in the promotion of the use of arbitration in the resolution of commercial disputes as well as in contracts with the government.
• In addition to acknowledging that arbitration was also a means of administering justice, the amendments acknowledged the arbitration tribunal’s capacity to decide, on its own, if it was competent or not to decide on a matter submitted to arbitration and not the ordinary civil courts. It was also acknowledged that approval from the cabinet of ministers was not necessary as a formality to initiate arbitration proceedings, provided the public contract object of dispute already had an arbitration clause.
• Ever since the constitutional amendments were adopted, the Panamanian government has been proactive in promoting the use of arbitration as an alternate dispute resolution mechanism for private matters as well as in public contracts, and has incorporated its use in various areas of the law. For example, in recent amendments to the Code of Maritime Procedure, the use of arbitration was acknowledged as a mechanism to resolve maritime litigation disputes, establishing the duty of the maritime judge to refer disputes to the arbitration tribunal when evidence of the existence of an arbitration clause was provided by one of the parties; the Consumer Protection law of 2007 introduced a chapter on Consumer Matters Arbitration (a matter yet to be regulated).
• Panama’s dominant arbitration centers are the Center for Conciliation and Arbitration hosted by the Panamanian chamber of commerce, Industries and Agriculture (CeCAP), and the Center for Resolution of Controversies of the Panama Construction Chamber (CESCON). Both have extensive experience in national and international commercial arbitration, as well as in disputes related to the public and private sector.
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In addition the International Chamber of Commerce (ICC) has established a Panama Chapter with the Panamanian Chamber of Commerce, Industries and Agriculture, and actively promotes ICC arbitration for the resolution of commercial disputes.
IMMIGRATION PROCEDURES • The law establishes four categories of foreigners entering the
Panamanian territory:
o Non-residents: tourists, transit passengers and crew, fishermen, workers shows, casual workers, domestic workers, short stay visas.
o Temporary residents: those who come into Panamanian territory for work, for reasons of investment, special policies, for reasons of education, for religious reasons, for humanitarian reasons, and for family reunification.
o Permanent residents: those who enter Panama, for economic or investment purposes, or by special policies or for family reunification.
o Foreigners under protection of the Republic of Panama: refugees, asylum seekers, stateless persons accepted on humanitarian grounds.
Tourist Visa Requirements
• Most foreigners enter Panama, with a tourist visa or a tourist card, which allows them to stay in the country for a 90-day period. There are exceptions for citizens of several countries who do not need a tourist visa or tourist card to enter the territory.
Visas/Permits
• Tourist Visa: Runs for 90 days with a possibility for a 90-day renewal for good cause, not an automatic renewal.
• Reforestation: The temporary visa is US$60,000 minimum with a 3-hectare requirement. The permanent reforestation visa is US$80,000 with a requirement of 5 hectares.
• Self-Solvency Visa (bank time deposit): US$300,000 in a three year time deposit at any Panamanian bank.
• Self-Solvency Investor Visa (real estate): requires US$300,000 in titled Panamanian real property. You can mix real estate and time deposit of US$300,000. It is possible to hold real estate under a Panama Foundation if the primary applicant is the beneficiary of the foundation or if the founder.
• Rentist Visa: Requires a time deposit in the National Bank of Panama or Caja de Ahorros for five years that yields US$850.00 per month.
• Pensioned Person Visa (Retirement Visa): The applicant must show a government or private pension income guaranteed for life of US$1,000 per month. You can be any age and is permanent, no renewals needed. Applicants can apply for citizenship after five years. There is a provision to mix property up to US$100,000 in personally held Panama real estate.
• Permanent Residency for Specific Nationalities: This permit grants permanent residency to citizens of the following 50 countries: Andorra, Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong, Hungry, Israel, Japan, Latvia, Liechtenstein, Lithuania, Luxemburg, Malta, Mexico, Monaco, Montenegro, Netherlands, New Zealand, Norway, Paraguay, Poland, Portugal, Republic of Ireland, Republic of Taiwan, San Marino, Serbia, Singapore, Slovakia, South Africa, South Korea, Spain, Sweden, Switzerland, United Kingdom and Northern Ireland, United States of America, Uruguay, who wish to pursue any economic, labor, or professional activities in Panama. Once the permanent residency is approved, an Indefinite Work Permit may be requested, thus allowing the foreigner to work in Panama.
• Permanent Residency for Italian Citizens: This permit grants permanent residency to Italian citizens who wish to pursue any economic, labor, or professional activities in Panama. Once the permanent residency is approved, an Indefinite Work Permit may be requested, thus allowing the foreigner to work in Panama.
• Work Permits: Work visas must be approved before the foreign employee can start. Any foreigners caught working without permits will be fined and deported. Some work permits are not permanent and must be renewed. Foreign workers must contribute to social security.
• Multiple Entry Visas: Are required for the provisional processing card, for non-residents who are applying for a Panama residency. Approved temporary and permanent residents are not required to have this visa.
• Visas for Permanent Personnel of Multinational Company Headquarters: These visas are granted to foreign personnel at the management staff or executive levels, and their dependents. Visas are issued for five years, renewable for the same period of time. It is not necessary to obtain a work permit with these types of visas.
• Visas for Dependents of Personnel of Multinational Company Headquarters: These apply for spouse, underage children, or students under 25 years of age, and for parents who will remain in Panama under the responsibility of the executives of Multinational Company Headquarters. The term of the dependent visa is equal to the term of the visa granted to Permanent Personnel of Multinational Company Headquarters whose application covers.
• Special Visas for Temporary Personnel of Multinational Company Headquarters: These visas are issued to any personnel of a Multinational Company Headquarters that has to come to Panama for activities related to the Multinational Company Headquarters, like technical services or training, and has a maximum term of three months, renewable only once for the same period of time. This type of visa also eliminates the requirement of obtaining a working permit or any other permit from any governmental authority.
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• Visa for Foreign Professionals: This visa grants permanent residency to any foreigner who has a college or university diploma in a profession that is not restricted by the Constitution of Panama to Panamanians nationals (among those professions restricted are engineering, architecture, agricultural sciences, economy, accounting, law, sociology, journalism, medicine, chemistry, pharmacy, nursery and nutrition).
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• Paraguay is strategically located right at the center of South America, between Brazil, Argentina, and Bolivia. Albeit landlocked, Paraguay`s position at the confluence of an important river system and at the crossroads of the Atlantic and Pacific Oceans situate it within easy reach of both thriving regional markets and major international sea ports. In addition, the country has had exponential growth rates in recent years (14.5% GDP growth in 2010) turning it into an attractive investment alternative.
• With an area of 406,752 km2, Paraguay is slightly smaller than California and somewhat bigger than Germany. The Paraguay River runs north to south and divides the country into two distinct natural and climatic regions. The Eastern Region (Región Oriental) is humid, has a temperate to subtropical climate and houses almost 97% of Paraguay’s 6.5 million inhabitants. The Western Region (Región Occidental or Chaco) has a wet- and-dry to semiarid tropical climate and occupies close to 60% of the country’s land area.
• Paraguay is rich in natural resources. Both of the country’s regions have very fertile soils, apt for agriculture and cattle farming. The Eastern Region has dense woodlands and sits on top of the Guaraní Aquifer, one of the biggest fresh water reserves in the world. A vast uranium reserve has recently been discovered close to the country’s border with Brazil heralding the development of a mining industry.
• The country has access to abundant, clean, and cheap energy supplied by three hydroelectric power plants. Itaipú and Yacyreta are extensive facilities operated in conjunction with, respectively, Brazil and Argentina; Acaray is a small national dam in the proximity of Ciudad del Este, the country’s second most populous city.
• Paraguay is a presidential, representative, and democratic republic. Since the beginning of the democratization process back in 1989, Paraguay’s civil society has matured greatly developing a free press and a multi-party political system. A modern and democratic constitution was introduced in 1992, which empowers Congress and significantly curtails the president’s powers. Paraguay is a unitary but decentralized state with 17 administrative subdivisions (departmentos) in addition to the capital district of Asunción. The official languages are Spanish and the indigenous Guarani. The national currency is the guaraní (ISO code PYG).
• The Republic of Paraguay is a founding member of the Mercosur trading bloc and maintains friendly diplomatic relations with the United States and the European Union as well as Asia.
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INVESTMENT CLIMATE • The Paraguayan Government encourages foreign investment.
Law No. 117/91 secures equal treatment to foreign investors and Law No. 60/90 allows the full repatriation of capital and profits, while the recently enacted Law No. 5102/13 for the Promotion of Investment in Public Infrastructure (public private partnership or PPP law) encourages private investments in infrastructure and public services.
• The country has a low tax and social security contributions. Foreign investment is further encouraged with tax breaks.
• Paraguay has entered into investment agreements with Germany, Switzerland, Luxembourg, Austria, Belgium, The Netherlands, Spain, Hungary, Korea, Romania, Peru, Costa Rica, Venezuela, El Salvador, and Ecuador. BITs have been signed with France, the UK, South Africa, Taiwan, Brazil, Chile, Argentina, and Uruguay.
• Comparatively, Paraguay’s enjoys both monetary and fiscal stability. The country’s banking system is sound. Even though the banks are very liquid, credits are costly, creating a good investment opportunity. Paraguay’s financial market is underdeveloped, but has made great strides in the past few years.
• Paraguay’s workforce is vast and young. Close to 3 million Paraguayans are of working age. The country’s population growth rate is 3% per annum.
• The Government is looking to give concessions to bolster the road, rail and waterway networks. A deepening of the Paraguay River’s bed was planned to enhance navigation and 1,000 km of roads are being built and improved to increase the volume of trade that crosses the country between the Atlantic and Pacific Oceans. An expansion of the electricity grid with the building of 500 kV transmission lines and two sub-stations is being completed.
BUSINESS ENTITIES IN PARAGUAY Main types of entities
• A foreign entity can carry out business in Paraguay by incorporating a new entity (subsidiary) or setting up a branch. The main types of business entities in Paraguay used by non- resident foreigners or foreign companies are Limited Liability Companies (sociedad de responsabilidad limitada or “LLC”), Corporations (sociedad anónima or “Corp”) and Branches (sucursal).
Shareholders or Partners
• Both the Limited Liability Company as well as the Corporation, require by law, a minimum of 2 partners (LLC) or shareholders (Corp)
• In Paraguay, an LLC can have a maximum of 25 partners, whereas, a Corp does not have an established maximum of shareholders.
• Paraguayan law does not set forth a minimum stockholding percentage or participation a shareholder or partner may
subscribe. It is possible for a shareholder to hold a substantial amount of shares and the other one a minimum amount.
• There are no restrictions for natural persons or companies, local or foreign, resident or nonresident, to be shareholders or partners. Non-resident foreigners and foreign companies can hold 100% of stock.
Administration
• The administration and representation is in charge of one or more managers in an LLC, one or more directors in a Corp and one or more proxies or managers in a Branch.
• Administrators (manager or director) can be foreign, but are required to hold a residency permit.
• Directors can be reelected indefinitely and their appointment can be revoked at any moment by decision of the Shareholders Meeting.
Capital
• There are no minimum capital requirements to establish a subsidiary (LLC or Corp) or branch, except for some specific activities (such as banking and insurance activities). In practice it is advisable to subscribe a minimum capital of approximately US$ 5,000 and then increase it according to the company’s needs.
• Capital must be subscribed entirely at the incorporation act. Contributions not made in cash must also be completely subscribed at the incorporation act.
• In LLCs, or Paraguayan branch of a foreign LLC, 50% of cash contributions must be paid in at the incorporation act and the remaining percentage completed within a 2-year period. The payment of the 50% cash contribution is credited through a deposit made in an official bank. These funds are unavailable during the paperwork period for the incorporation of the company, but released afterwards.
• There is no minimum cash contribution percentage for a Corp or branch of a foreign Corp.
• Capital increases in both LLCs and Corps require the agreement of the shareholders/partners, amendment of the bylaws, and registration of such amendment in the Public Registries.
Additional formal procedures required for Corps
The annual maintenance cost for a Corp is relatively higher to that of a LLC or branch, ranging from US$ 1,000 to US$ 3,000 per year.
The functioning of a Corp is also subject to more formalities than a LLC or branch. A Corp requires:
o Keeping records of directors’ and shareholders’ meetings;
o iConvening of an annual Shareholders Meeting by publishing summons in newspapers;
o Appointing a corporate comptroller (syndic).
o Periodically electing a new Board of Directors, whose members must periodically meet;
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o Preparing an Annual Report, Balance Sheets and a Comptroller Report once a year.
Operations prohibited for LLCs
• LLCs can neither perform banking, insurance, capitalization and saving operations, nor other specific activities for which the Law requires a different type of business entity.
Assignment of quotas and stock assignment
• Paraguayan law rejects the free transfer of quotas in an LLC. Transfer and assignment of quotas to third parties requires the agreement of the partners representing three quarters of capital when the LLC has more than 5 partners, whereas if the LLC has less than 5 partners, unanimous agreement is required. Transfer or assignment of quotas requires an amendment of the bylaws.
• In a Corp assignment of shares is free. The bylaws may regulate the transfer of nominal shares, but may not prohibit it. Shareholders agreements are permitted.
Liability of partners and shareholders
• A very important difference between a Corp or LLC on one side, and the branch on the other, is that in a branch the parent company is also liable, whereas in the LLC or Corp liability is limited to the partners’ participation or shareholders’ stockholding amount.
Taxes
• Corps, LLCs and branches are all governed by the same tax provisions and tax treatment is the same for all 3 company types. All 3 company types must pay taxes in the form of withholdings when remitting funds abroad to their parent company or foreign shareholders.
Duration of incorporation process
• Setting up a subsidiary (Corp. or LLC) through business proxies or shareholders that move to the country: 4 weeks1
• Setting up a subsidiary or branch through a power of attorney: 8 weeks2
• Acquiring a previously incorporated company (Corp): 3 days3.
Required documentation
• Power of attorney granted by two or more shareholders, duly legalized by the Paraguayan Consulate, authorizing a representative to sign the public deed in which the Articles of Incorporation and the By-laws of the subsidiary are passed, as well as perform all necessary proceedings before public offices regarding the registration of said subsidiary.
• Foreign company branch4
a) Copy of the parent company’s bylaws and amendments thereto, duly certified by the appropriate government authority;
b) Certificate of good standing of the company issued by the appropriate government authority;
c) Duly notarized extract from the minutes of the meeting of the Board of Directors of the company resolving the following:
(a) to register the branch in Paraguay, (b) to appoint the Manager and establish legal domicile in Paraguay, and (c) to assign capital to the branch.
d) Power of attorney granted by the company authorizing a local proxy to register the branch;
e) Power of attorney granted by the company authorizing an individual to act as Manager of the branch;
Incorporation proceedings
• Receipt of the above mentioned documents and legalization of the documents at the Ministry of Foreign Affairs.
• Submission and registration of the Powers of Attorney for the incorporation of the company or registration of the branch at the Public Registries.
• Notarization of the bylaws or resolution by which it was resolved to set up a branch, assign capital and appoint managers or representatives.
• Submission of the respective documentation to the Treasury’s Advocacy and obtaining an approval for the registration of the company at the relevant registries.
• Registration of the bylaws or the company’s articles of incorporation at the Legal Entities and Associations Registry Office and at the Public Registry of Commerce.
• Publication of the summary of the articles of incorporation in a newspaper and in the Official Gazette for 3 times.
• Registration of the company with the Ministry of the Treasury to obtain the Taxpayer Unique Registration Number (RUC)
• Obtaining a commercial license from the relevant municipality, which requires entering an office lease agreement or owning property (Vouga Abogados may lease space initially).
• Obtaining and registering the mandatory commerce books.
• Registering the company at the Ministry of Justice and Labor to get the Employer
• Registration Number and, if there are employees, with the Social Welfare Institute (IPS).
• According to the specific activities the company carries out, it may be required to to be registered and obtain permits, registrations or licenses at the: Ministry of Industry and Commerce (MIC), National Customs Administration (Aduanas), Environmental Agency (SEAM), National Telecommunications Commission (CONATEL), among others.
Other
• Paraguay has recently enacted the 1961 Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents.
TAX REGIME • Compared to the other countries of the region, the overall tax
burden in Paraguay is one of the lowest. Paraguay introduced amendments in 2004 to lower the tax burden while expanding
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the tax base. It did so to help formalize the economy, increase income and investments, and ultimately expand revenues from taxes. Further amendments were introduced in 2013, extending VAT to agriculture and cattle-farming activities, introducing a new income tax for agribusiness and basic transfer pricing rules, and amending the tax credit recovery process.
• The main tax laws are Law No. 125/91 on Tax Reform, Law No. 2421/04 of Administrative Reordering and Fiscal Adjustment, and Law No. 5061/13 which Amends Law No. 125/91.
Corporate Tax (Income Tax on Commercial, Industrial and Services Activities – IRACIS)
• The corporate tax rate in Paraguay is 10% and is levied on a territorial basis. Corporate income tax is due on all income obtained from activities carried out, property located in or economic rights exercised in Paraguay, irrespective of the nationality, residence or domicile of those participating in the transaction. The taxable income is the difference between the total earnings and expenses incurred. Capital gains derived from the sale of fixed assets, real estate and securities are also taxed at the standard corporate rate.
• Certain tax exonerations are contemplated in the law.
• Loss carryback and carryforward is not permitted.
Withholding tax
• Dividends are taxed at a 5% rate, if distributed to residents. The distribution of dividends to non- residents is subject to a 15% withholding tax. 50% percent of the interests paid to non-residents are also subject to a 30% withholding tax, resulting in an effective rate of 15%. If the payment is made to a financial institution, the effective rate is lowered to 6%. 50% of the royalties paid to non-residents are taxed at 30%, with an effective rate of 15%. In addition to the 10% corporate tax, branch remittances to the head office are subject to a 20% withholding tax.
Real Estate tax
• Municipalities collect taxes on real property at a 0.5 to 1% of the cadastral value depending on whether the plot is a rural or urban one, as well as its surface. Both natural and legal persons are responsible to pay the real estate tax. In case of inheritance, joint ownership, and marriage partnership, all parties are jointly and severally liable to pay the taxes.
• Conveyances are taxed at a 0.3% rate on the sales price or cadastral value, whichever yields the highest amount.
Social security contributions
• Employer contributions to social security amount to 16.5% of the employee’s total earnings. Total earnings are calculated based on all remuneration, either in cash or in kind, except year- end bonuses and family bonuses. The employer also acts as a withholding agent of the employee’s contribution of 9% of earnings.
Personal Income Tax
• The personal income tax is levied on Paraguayan-source (net)
income from services and certain investments, provided the taxpayer’s income exceeds the monthly minimum wage by a certain amount.
• Income from services and certain investments are taxable. These items include: personal services income; benefits in kind; dividends, profits and share price surplus (50% if derived from a resident company/enterprise subject to corporate or agricultural income tax and 100% if the resident company/enterprise is not subject to corporate or agriculture income tax); certain capital gains; and interest, commissions and other income that has not been subject to the corporate or agriculture income tax. A nonresident that derives business or professional income in Paraguay is subject to withholding tax at an effective rate of 15% on the gross amount.
• Capital gains from the assignment of real estate located in Paraguay and shares of Paraguayan companies are subject to individual income tax if they are occasional. If not occasional, the gains are subject to the corporate, agricultural business tax or small business tax. Capital gains derived by a nonresident are subject to tax at an effective rate of 15% on the gross amount.
Agricultural Business Tax (IRAGRO)
• This tax levies income originating from agricultural activities in Paraguayan territory. The levied net income arises from the difference between gross income and all expenses relating to the business activity, provided that they are real and properly documented, including depreciation of assets. The applicable rate shall 10% over the net income.
• Entities with lower income may be subject to a different tax liquidation regime.
Small Business Tax
• Taxpayers qualify as small businesses when (i) they are a small one-person business, domiciled in the country, having earned less than PYG 100,000,000 in the previous calendar year; or (ii) owners of forest areas, not exceeding 30 ha, used for the purpose of extraction and sale of timber. Import and export activities are excluded from this tax.
• Net income is the tax base, but can be calculated using the taxpayer’s actual or presumptive net income, whichever is lower. Real net income is the positive difference of the duly documented total income minus expenditures. Presumptive net income is calculated as 30% of the gross annual revenue. Once the net income is determined, a flat 10% tax rate is applied.
Value Added Tax (IVA)
• The Value Added Tax levies the transfer and supply of goods and services, and the import of taxable goods and services. The standard rate is 10%. Lease agreements and in general the transfer of the right to use goods or immovable property, sale of basic food products, pharmaceutical products, interest and commissions on loans are levied a lower 5% rate.
• Notwithstanding special provisions, transfers and services rendered within the country are subject to tax, regardless of where the agreement is entered into or the domicile, residency or nationality of the parties engaging in the operations,
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as well as who receives them and where the payment is made. Technical assistance and other services, as well as the assignment of the use of goods and rights, are considered performed within the country when used or exploited in therein.
• Exports of goods and services, foreign currency, interests of public and private securities, among other, are exonerated.
• All companies and unincorporated businesses whose taxable income exceeds a certain amount are required to register for the VAT. VAT must be filed and paid on a monthly, with the due date determined according to the taxpayer’s registration number.
Selective Consumption Tax
• This tax levies the import of certain products foreseen in the Tax Law and the first transfer of any title, when manufactured in the country.
• Depending on the types of goods, the tax rate ranges from 1 to 12%, except on fossil fuels, which pay a flat tax of 50%. The Executive may establish the different rates for different each type of products within the maximum limits established by the law. The tax must be filed and paid on a monthly basis, except for taxes on fuel. For imports, the tax must be paid before the goods can be removed from the customs.
Other taxes, anti-avoidance rules and relevant provisions
• There are no payroll taxes, stamp duties or transfer taxes.
• Paraguay does not have foreign exchange controls.
• With respect to anti-avoidance rules, there are currently no transfer pricing or thin capitalization rules, nor controlled foreign company or disclosure requirements provisions. Advance Pricing Agreements (APA) are not foreseen in the law. Paraguayan tax laws do not establish or define arm’s length agreements, “intra-company” transactions, or affiliated corporations, either.
• The Paraguayan fiscal year normally coincides with the calendar year, but certain industries are required to use specific fiscal years. Consolidated tax returns are not permitted; each company must file a separate return. A company must make 4 advance payments based on the previous tax year’s liability. A return and balance sheet, at a minimum, must be filed for corporate income tax purposes. In general, the return is due within 4 months of the end of the taxpayer’s tax year, but the taxpayer’s identification number determines the exact due date.
• Applicable penalties range from 4% to 14% of the total tax due, plus monthly interest at 1.5%.
• Corporate reorganizations are exempted from taxes. Transfers that have taken place as a result of the reorganization of a company (i.e., mergers & acquisitions, changes in the type of entity) or capital contributions thereto, are not subject to VAT. Likewise, neither are the raises of capital stock that have taken place during the fiscal year as a result of capital contributions levied by the Income Tax.
• A useful tool tax payers can use is the “binding enquiry system”, expressly governed in Paraguayan law in favor of
whoever holds a personal interest in the matter and directly on the use of said right in a specific situation. The filing of the enquiry does not suspend the course of the time lapses, nor does it justify fulfilling the obligations exclusively borne by the enquirer. The authorities must apply the technical criteria supported in the resolution; the enquirer must be served of the modification thereof must be notified thereto and shall only take effect after said notification, regarding events subsequent thereto. If the authorities do not issue a ruling within a 90-day term, the enquirer may exercise the right (in accordance with his/her valid opinion). Obligations that arise shall only apply to interests and surcharges.
• With respect to double taxation treaties, some treaties with Chile, Uruguay, Belgium, Germany and Argentina have been signed, but these refer exclusively to income that comes from international air and land transport activities, and in some cases, river transport activities.
• Additionally, Paraguay has entered into a treaty with Chile to avoiding double taxation. It is applicable to Income taxes and capital taxes, which affect any activity (In Paraguay, the agreement applies to Agricultural Tax, of Single Tax payer tax and Personal Service Tax, and in Chile, to the Taxes established in the Income Tax Law). Paraguay also entered into agreements with China on April 28, 1994 and Brazil on November 20, 2000 in order to avoid double taxation regarding Income Tax. However said agreements were not ratified by Paraguay.
INVESTMENT INCENTIVES Law No. 117/91 of Investments
• In order to promote economic and social development, Paraguay enacted Law No 117/91 of Investors. The law gives investment from abroad equal status to domestic investment, where foreign investors have the same rights and guarantees as domestic investors. The law guarantees a currency exchange system that allows unlimited convertibility of local currency into foreign currency. It also guarantees a competitive free market system, which includes freedom of production, marketing, export, and import of goods and services. It also includes a free market for pricing, which may not be subject to the state’s protectionist privileges.
Law No. 60/90 of Tax Incentives for Domestic and Foreign Investment
• For certain investments, filed prior to their commencement, this law permits nationals and foreigners to request tax exemptions. Investment can be money; financing; supplier credit or other financial instruments; capital goods; raw materials or instruments for local industries in order to produce capital goods established in the investment project; trademarks, designs, models, industrial processes, and other forms of technology transfer subject to licensing; leasing of capital goods; and any other form established by the executive branch. Approved investment projects can enjoy the following exemptions:
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o Total exemption from fiscal and municipal taxes levied on the incorporation, registration, and recording of companies and enterprises;
o Total exemption from customs duties and others with equivalent effects, including internal taxes for specific application on capital goods import, raw materials and supplies for the local industry under the investment project;
o Release of the requirement of any banking reserve or special deposit for the importation of capital goods;
o When the amount of funding from abroad intended to promote the investment activity is at least USD 5,000,000, it is exempted from the payment of taxes levied on remittances and payments abroad as interest, commissions and capital of the same, for an agreed period, provided that the borrower was a bank or financial institution or other lending institution with a distinguished record in the financial markets and multilateral lending agencies located abroad;
o Total exemption of taxes that impact dividends and profits from approved investment projects for a term of ten years counted from when the investment project began; where the investment must be at least USD 5,000,000; and exemptions on taxes of such dividends and profits which would not be credited to the investor in the country from which the investment originated.
Tax incentives under Law No. 3180/07 of Mining
• Holders of mining rights are exempt from paying any taxes whatsoever during the prospecting and exploration phases. Likewise, all machinery, vehicles, tools, supplies, installments and materials that aren’t manufactured in the country and are necessary for prospecting and exploration are exempt from import rights, VAT and all other taxes currently in force or yet to be created. They must, however, pay the tariffs for services effectively rendered.
• This tax exemption does not apply in the mining production phase, in which the mining claim holder must pay the corresponding taxes. The claim holders must pay one fee per year or through installments, according to a scale foreseen in the law, different for each stage, taking into account the surface that is being prospected, explored or produced.
• When an extension/deferral is requested, the fee shall increase 30% over the fee that corresponds to the surface that is still under stages of prospecting, exploration or production. The law establishes a 30% reduction of fees for licenses and claims regarding non metallic minerals and mineral gems, with the exception of diamonds. The Ministry of Public Works and Communications decides whether a certain mineral is metallic or not. One of the causes of the lapsing of mining licenses and claims is the lack of payment of fees and royalties within the time frames set forth in the Law.
Export Manufacturing Program (Maquila)
• Investors may bring goods, products, or services into the country, for the purpose of assembly, repair, or improvement, worked or processed for subsequent export, once the aggregated value is added. Foreign businesses seeking to
create a Maquila program can create any type of business entity recognized by national law. There are no restrictions or limitations on the necessary domestic or foreign capital needed to start a Maquila program.
• Maquila entities can temporarily import raw materials and supplies needed to begin production and later exportation; sample equipment and products for quality control testing, equipments and accessories. This exemption cannot exceed a period of six months. Extensions of this period of exemption will only be granted when properly justified.
• Maquila programs can sell a portion of their production in the domestic market. This amount cannot exceed 10% of the total volume of the product exported in the past year.
• A Maquila program is limited to a tax of 1% on the value added to the product in the country or 1% of the value quoted on the invoice in respect to the costs to create the product, whichever is greater. The exportations pursued by Maquila entities are VAT exempted.
Incentives for the Automotive Industry and Free Trade Zones
• Local laws and regulations contemplate several other tax incentives for other specific activities, such as those encompassed in the National Automotive Regime pursuant to Decree No. 21.944/98, or the sale of goods and services from Free Trade Zones (FTZ) under Law No. 523/95, among other.
LABOR AND SOCIAL SECURITY • The Labor Code, Law 213/93, governs the relationships
between dependent workers and their employers. It is not applicable to directors, managers, administrators and other executives of a company where, by the nature of their work or technical skills, receive high levels of compensation or enjoy independence and autonomy in their employment. The rights granted by the Labor Code for dependant workers cannot be waived, compromised or limited by contract; any such agreements are null and void. Unlike dependant workers, the special employee relationships mentioned above can be regulated by collective bargaining agreements or under the terms of individual employment contracts.
• Currently, the minimum wage for various activities is approximately PYG 1.600.000 per month.
• The salary may be paid by unit of time (monthly, weekly, daily, hourly, etc), by production level, or by commission.
• The Labor Code provides for a 30-90 trial period before employment contracts take effect. The 30-90 day period depends on the amount of time used for worker training. During the trial period either party can terminate the contract without incurring any liability, including having to pay compensation for unfair dismissal and giving proper contract termination notice.
• To dismiss an employee without cause who does not have special tenure (those working 10 years continuously with the same employer, union leaders or pregnant workers) a previous notice of 30, 45, 60, or 90 days, depending on the employee’s
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seniority, is required. If dismissed without notice, the employer is obligated to pay the employee an amount equivalent to his salary during the would-be term of notice (30, 45, 60, or 90 days). In addition the employer is obliged to pay the employee 15 days wages for each year of service or fraction of time that exceeds 6 months in compensation of dismissal without cause.
• The dismissal of a worker with tenure is only possible for just cause after verification by trial, or for those having opted for retirement. In case of dismissal for just cause, the employer assumes no obligation to indemnify or give advance notice, only having to pay the salary and bonuses accrued to that point.
• The normal work day cannot exceed 8 hours per day or 48 hours per week when during daytime hours. At night, the work day cannot exceed 7 hours per day or 42 hours per week. For employees working mixed shifts, the total work per day cannot exceed 7.5 hours or 45 hours per week. Unhealthy or dangerous work cannot exceed 6 per day or 36 hours per week. Young adults under 18 cannot work in any jobs at night or those in unhealthy or dangerous locations. They may not work overtime, and the only occasional exception to this rule is for rural jobs.
• Overtime work is permitted in special cases but may not add more than 3 hours to the workday and with increased pay.
• Every employee is entitled to a period of paid leave or vacation after each year of continuous service of 12-30 days, depending on seniority. Vacation time is not cumulative, unless through previous agreement and for a maximum period of 2 years. Any pregnant employee has the right to go on leave for 6 weeks before and after delivery.
• Workers have the right to form unions without prior authorization from the state.
Social Security
• The state, through worker and employer contributions, has established a Social Security System (IPS) to protect against risks of a general nature, especially from work. The Social Security System cover sicknesses, maternity, accidental work injuries and work-related health problems, invalidity, old age, and death of employees in the country.
• All employers that have one or more employees are required to:
o Register in the Social Security Institute at the start of its activities
o Pay monthly Social Security payments.
• Companies choosing not to withhold employee contributions to Social Security are still responsible for their payment. The total percentage of social security contribution for employer and employee is 25.5% of the monthly wage of the worker. 9% is paid by the employee and 16.5% by the employer.
IMMIGRATION • Foreigners can be admitted to the country as residents or
non-residents. Residents can be permanent (valid 10 years) or
temporary (valid 1 year, renewable for 5 years). A precarious residency may also be obtained under certain circumstances (valid 6 mos., renewable for 6 mos.).
• Diplomatic or consular civil officials, representatives and members of international organizations accredited or recognized by the Government of Paraguay, and administrative or technical civil servants on service missions are exempt from these immigration laws.
• As for permanent or temporary residence, the following documents must be filed: (i) passport, (ii) police or criminal records certificate from the country of origin, (iii) health certificate, (iv) birth and marital status certificate, (v) sworn statement by the applicant stating that he will abide by the laws of the country, (vi) professional license or certificate that states the activity or occupation that would be considered in order to grant entry permit, (vii) certificate or reliable proof of economic solvency, (viii) Interpol record, (ix) foreign citizen record, (x) life and residency certificate. The items (iii), (v), (viii), (ix) and (x) are obtained locally in Paraguay. Visas are also required for certain countries.
• For entry as a non-resident, the foreign citizen must present a valid passport or identification document (the latter for nationals of MERCOSUR member countries).
FINANCIAL SYSTEM • Paraguay’s financial system is dominated by commercial banks.
Other players in the financial system are finance companies and cooperatives. Banks and finance companies require prior authorization from the Central Bank of Paraguay (BCP) to operate.
• Laws and regulations governing the financial sector include, among other, Law No. 861/96 of Banks and Finance Companies, the Organic Law of the BCP, regulations passed by the Board of Directors of the BCP and the Bank Superintendency (authority of control).
• Foreign investment in financial entities receive the same treatment as domestic investment. Banks and financial Institutions must be incorporated as corporations (sociedad anónima) and their capital must be represented by registered shares. This requirement does not apply to branches of foreign banks within the country.
• Banks must maintain at least PYG 40 billion in capital at all times, whereas finance companies need keep a minimum of PYG 20 billion. Said amounts can be updated by the BCP according to the Consumer Price Index. Branches of foreign financial entities must maintain the same capital amount as national financial entities, and funds must remain in Paraguay on a permanent and indefinite basis.
• Paraguayan law, under various banking legislations, permits banks to conduct operations in various sectors including mortgages, incentives, savings and loans, and investments to name but a few.
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INTELLECTUAL PROPERTY • Intellectual property rights are protected by the National
Constitution, several treaties and other laws and regulations. Paraguay has ratified the TRIPS agreement. Penalties for intellectual property rights offenders have stiffened in recent years.
Trademarks
• Trademarks for products and services are protected by Law No 1.294/98 and Decree No 22.365/98, which are in line with international standards. The International Classification of Products and Services of Nice prepared by the WIPO is adopted. Trademarks owned by foreign companies must be registered with the Industrial Property Office (DPI) to receive the wide array of protection granted by Paraguayan laws.
• The owner of a trademark may enter into license agreements for use of the trademark. To be effective against third parties, the license agreement must be filed with the DPI (prior translation into Spanish). A trademark may be licensed out exclusively.
Patents and Utility Models
• Patent Law No. 1630/00 grants protection to inventions and utility models. The Law follows the principle of unity of invention, where a patent application can link together more than one new invention, provided that they constitute one inventive concept.
Copyrights and Related Rights
• Law No. 1328/98 and Decree No. 5199/99 grant authors of a work, by the mere fact of its creation, original right of ownership opposable to all, including all moral and economic rights. Moral rights, including distribution, paternity, integrity, and withdrawal of the work, are perpetual, inalienable, indefeasible, and non waivable, and continue after death of the author through his or her heirs. Economic rights, including reproduction, communication, public distribution, importation and translation can be utilized in any form or procedure benefiting the author.
DISTRIBUTION, AGENCY AND REPRESENTATION • Law No 194/93 governs the relationship between foreign and
domestic businesses where a domestic business (including distributors, agents, and representatives) aids the foreign business (manufacturers and the like) in the promotion, sales or distribution of products or services in Paraguay. In the event the relationship is terminated or improperly modified without cause, this Law sets forth guidelines for the aggrieved domestic business to receive indemnification. The contractual parties cannot waive the rights set forth in the Law, though parties can contract freely on other terms. Distribution, agency and representation agreements may or may not be exclusive.
• Any and all distribution, agency, and/or representation contracts between foreign and domestic businesses must be subject to Paraguayan law, under the jurisdiction and venue of Paraguayan judicial courts or arbitration.
• Promotion, sales or distribution agreements with foreign entities must be executed in writing. Even without a written contract, domestic persons or businesses can prove a relationship exists through any evidence the law allows.
• A distribution agreement can always be unilaterally amended or terminated by the foreign manufacturer without cause, provided the foreign manufacturer indemnifies the local distributor in accordance to Law 194/93.
Termination procedure
• A termination “with cause” is permissible and shall not trigger the foreign manufacturer’s obligation to indemnify the distributor, provided the foreign manufacturer complies with the termination requirements and procedure of Law 194/93. Please note that the occurrence of a cause will not suffice without the specific procedure, which is the following: a) In the occurrence of any of the causes stated in the Law, the foreign firm shall request that the distributor solve (mend) the stated cause within a 120-day term; b) If the distributor solves the cause within said term, the foreign firm cannot terminate the contract “with cause”; c) On the other hand, if the distributor does not solve the specific cause, the foreign firm shall file a lawsuit to prove in court –or before an arbitral tribunal if agreed– the cause alleged for termination; d) In the event the alleged cause is not duly proven before the court, the termination of the distribution relationship will be considered “without cause”, and thus subject to compensation in favour of the local distributor.
CONSUMER PROTECTION • Law No. 1334/98, among other provisions, governs consumer
protection. The rights provided by these laws cannot be waived, transferred, or be subject to any contractual or other limitations. The rights granted by the law supersede any other custom, practice, use, or stipulation. When in doubt, provisions must be interpreted in favor of consumers.
• These legal protections apply to any activity which can potentially burden the consumer market. Banking, finance, credit and insurance activities fall under the purview of consumer protection laws, while activities arising from employment relations and certain services do not.
• If the cause alleged by the manufacturer is fraud or abuse of trust, the manufacturer is allowed to terminate immediately (that is, there is no 120-day advance notice); nevertheless, the manufacturer must file an action in court or in arbitration, to prove the cause alleged for termination. Only after the court or the arbitration panel has ruled that the alleged cause has occurred, can the foreign manufacturer terminate the contract without becoming liable for an indemnification.
• Law No 194/93 calculates the indemnification by taking into account the average of the last three years’ gross profits obtained from the representation or distribution relationship by a coefficient representing the duration of the relationship or other factors. The trial judge determines the final amount of indemnification.
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MINING • Mining has become an important factor of economic
development in the country. Several investors have focused on the search and obtainment of, among other, uranium, titanium, aluminum and gold.
• In 2007, Law No 3180/2007 replaced the previous Law No. 93/14, governing mining in Paraguay.
• Then again, prompted by the recent discoveries of gold, titanium and uranium on Paraguayan soil, Congress revamped the 2007 Mining Act. The goal was to strengthen the legal framework and make Paraguay more appealing to investors by introducing longer timeframes, making the devising of investment plans easier, and enabling the possibility of making advance payments of the mining canon to avoid speculations.
• Paraguayan law establishes that all natural mineral resources in the country are property of the state. The state reserves the right to issue temporary permits and concessions to individuals or businesses, which by nature can be any combination of private, public, foreign or domestic, for prospecting, exploration, and extraction of mineral resources in the country. Foreign investors seeking mining rights must be domiciled within the country or designate a proper representative within in the country. Mining rights are transferable by proper assignment.
• The state grants prospection and exploration permits. A prospection permit grants the right to conduct the initial search for minerals within a given land area for up to one year (it may be renewed once for a 6 month term). An exploration permit within a given area is granted for up to two years (it may be renewed once for a one year term).
• Paraguay grants mining concessions through authorization from the National Congress. Before obtaining a mining concession, the investor must sign a contract with conditions established by law. The contract must also have executive approval. An extraction concession gives its holder the exclusive right to extract mineral resources for their benefit from a designated area for a period of 20 years (renewable every five years). The concession holder also has the right to transport, smelt, refine, or market the extracted minerals as necessary.
• The permit holder pays an annual fee for their mining rights. However, the holder is exempt from paying any fiscal, departmental, or municipal tax during the prospecting and exploration phases. Additionally, all machinery, tools, and supplies imported from other counties for prospecting and exploration are exempt from import duties and value added taxes. During production phase, the concession holder is subject to the general provisions of the tax laws.
ENVIRONMENTAL LAW • The National Constitution establishes the foundation for
environmental law in Paraguay. It gives all people the right to a healthy and ecologically balanced environment, and identifies this as a social interest and thus commits the state to working to preserve, conserve, rebuild, and improve the environment.
It also outlines the general power of the state to regulate environmental affairs. These goals for environmental protection and sustainable growth have become the framework for all current environmental laws and regulations within the nation. The National Constitution states that all damage done to the environment will imply an obligation to repair and compensate.
• Considered the main environmental law in the country, Law No 1561/00 created the three primary environmental agencies in Paraguay. These agencies are the Secretariat of the Environment (SEAM), the National Environmental Council (CONAM), and the National System of Environment (SISNAM). The law establishes the agencies powers and responsibilities for developing and supervising national environmental policy. Of the three, SEAM is the primary environmental agency charged with the development and enforcement of environmental laws. SEAM is the primary authority for implementing nearly all of the country’s environmental legislation and main body responsible for monitoring compliance. CONAM is responsible for researching and establishing the general environmental policy goals SEAM must help implement. CONAM is split into smaller committees that focus on various environmental areas including, inter alia, water resources, forestry, soils, and biodiversity. SISNAM is composed of various bodies including national government entities, municipal and private sector actors concerned with solving environmental problems. SISNAM provides a forum for the private and public sector to work together collectively, developing ideas and plans to promote sustainable development.
• Under Law No 294/94, SEAM must approve any work or activity that could have an impact on the environment before the work or activity can begin.
• Environmental impact assessments (EIAs) are a necessary requirement for practically any activity that due to its size or intensity may cause an impact on the environment. Just to name a few, this includes projects or activities like agriculture, livestock, forestry, farming, industrial projects, mining, oil projects, construction, sewer systems, urban waste disposal, archaeology, any action with hazardous substances, and importing alien species. Following the assessment, the SEAM may approve or reject the project based on the EIA.
• SEAM gives its approval of an EIA by issuing a declaration. A declaration granted by SEAM is valid for up to two years. SEAM will revoke declarations for violations of approval conditions or misrepresentations on the assessment. The declaration is required for obtaining loans or guarantees from banks. The banks are required show the declaration when applying for government subsidies and tax exemptions. The law outlines a limited group of activities that do not require an approval declaration from SEAM, but only a simplified study on the potential environmental harms of a project or activity.
Water law
Law No 3239/07 regulates the waters and lands that produce them within the Republic of Paraguay. The law’s purpose is to ensure the quality and sustainability of water.
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All surface and ground water is property of the state. With the exception of any foreign state or its representative, every inhabitant has the right to use the water as needed.
Any use of water resources or their surrounding areas, except for direct personal or family purposes, requires a permit or concession from the state. Prior to receiving a permit or concession, the prospective project must successfully complete an EIA and receive approval from SEAM. Further, the water authority must issue a certificate of water availability before the environmental impact assessment.
GOVERNMENT CONTRACTS • Law No. 2051/2003 regulates public sector contracts
concerning planning, programming, budgeting, procurement, implementation, disbursement, locating/acquiring goods, and for contracting of general services, public works, and consulting. Paraguay is not a signatory of the WTO Agreement on Government Procurement.
• Public entities may execute public contracts through the following proceedings:
o Public bidding;
o Call for tenders;
o Direct contracting; and
o Fixed funds contracting.
o Public bidding can take the form of:
a) National: where only natural or legal persons within the country can participate; or
b) International: where any natural or legal person from within the country or abroad can participate.
• International bidding: Bidding will only be international when:
o Resulting from obligations taken on by the Republic of Paraguay in international agreements;
o Stipulated in a loan agreement with an international multilateral organization;
o There are no offers from domestic suppliers or contractors for needed goods or services;
or
o No other local offer meets the necessary requirements.
• If a country does not grant reciprocal treatment to Paraguayan suppliers or contractors, Paraguay may deny participation to individuals or legal entities domiciled in that country.
Law No. 5102/13 on Public Private Partnership (PPP Law)
• Paraguay enacted in 2013 its first-ever public-private partnership law. The regulatory decree is currently in its drafting stages and is expected to be finalized in the coming months.
TELECOMMUNICATIONS • The transmission of electromagnetic communication signals are
controlled and regulated by the state. Investors are guaranteed equal opportunity to access to the electromagnetic spectrum, subject to principles of non-discrimination. Paraguay ratified by Law No. 444/94 the Final Act of the Uruguay Round of the GATT, and with it, the Annex on Telecommunications. Law No. 642/95 along with Decree No. 14135/96, regulating the industry under the executive branch, classify the different types of telecommunication services, establishes conditions of operation, and creates a system of protection for subscribers and users, the system of charges to be applied, and a list of restricted conduct.
• This restructuring of the telecommunication sector offers new opportunities for national and foreign investors without discrimination. There are no limitations or restrictions on the amount of shares a foreign investor may own in a telecom company providing services in Paraguay.
ALTERNATIVE DISPUTE RESOLUTION • Law No. 1879/2002 of Arbitration and Mediation follows the
Model Law of the United Nations Commission on International Trade Law (UNICITRAL). Any dispute, providing it has economic consequences and has not been subject to a final, enforceable ruling, may be submitted to arbitration.
• Paraguay is a member of ICSID. The central government, administrative subdivisions, state- owned enterprises, and municipal bodies may submit their disputes with domestic or foreign individuals to arbitration, providing they arise from legal acts or contracts governed by private law. Mediation may also be used to resolve any matter that results from a contractual relation susceptive to transaction, agreement or arbitration.
COMPETITION LAW • Enacted in June 2013, the Law No. 4956/2013, (Paraguayan
Competition Law) follows the Model provided by the United Nations Conference on Trade and Development (UNCTAD). This Law is the outcome of the consensus reached between the Government and the private sector, based on UNCTAD’s assistance.
• Law No. 4956/2013 establishes the freedom in buying, selling and accessing the market in efficient and non-discriminatory conditions. Prices shall be freely offered and determined in accordance with the law. When assessing practices and conducts, the Authority must take into account “efficiency gains”.
• Among the agreements forbidden by the Law we may find:
o i) To impose, directly or indirectly, or recommend collectively, the purchase or sale prices
• or other transaction conditions in an abusive manner
o ii) Unjustifiably limiting, restricting or controlling the market, production, distribution,
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• technical development or investments, to the detriment of competitors or consumers
o iii) Allocate markets, customers or sources of supply
o iv) Apply unreasonably to third parties, unequal conditions to equivalent transactions
• thereby placing them at a competitive disadvantage
o v) Condition the conclusion of contracts to the acceptance by the other parties of
• supplementary obligations which, by their nature or according to commercial usage, have
• no connection with the subject of such contracts
o vi) Collusive biddings
o vii) The restrictions of production or sales, in particular through market shares;
o viii) Concerted refusals to purchase
o ix) Collective unjustified denial to participate in an agreement, or admission to an
• association, which is crucial to competition
• The Law also regulates vertical restraints. The following are considered cases of abuse of dominant position:
o i) The direct or indirect imposition of prices or other trading conditions, or unfair services
o ii) The limitation of the production, distribution or technical development causing unjustified
• detriment to competitors or consumers
o iii) The unjustified refusal to meet demands for the purchase of products or services
o iv) The application of unjustified unequal conditions to equivalent transactions in trade or
• service relations, thereby placing some competitors at a disadvantage to others
o v) Condition the conclusion of contracts to the acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have
• no connection with the subject of such contracts
o vi) Obtain or attempt to obtain, under the threat of disruption of trade relations, prices, terms
• of payment, terms of sale, payment of fees and other terms of trade cooperation not included in the general conditions of sales that have been agreed
• In order to establish the existence of dominant position in a market, the following circumstances shall be considered:
o i) The extent to which the good or service in question can be substituted by another one, of
• either domestic or foreign origin, the terms of such substitution and the time required there for
o ii) The extent to which regulatory restrictions limit access to products or suppliers or demand to the market in question
o iii) The extent to which the possible responsible party might unilaterally influence in setting prices or restrict the supply or demand in the market and the degree to which its competitors can counteract that power
• Additionally, Law No. 4956/2013 sets forth mergers control with a threshold of a 45% acquisition or increase in the market of a specific product or service or when the gross domestic turnover in Paraguay of the companies within the concentration exceeds 100,000 minimum monthly wages (USD 40 millions approx.) during the previous fiscal year.
• The CONACOM is the central regulatory authority of the Paraguayan Competition Law.
o Spe
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BUSINESS PRESENCE • Main types of business models: The most commonly used
corporate forms by investors are corporations (“sociedad anónima”) of different modalities (open and closely held corporations), as well as limited liability companies. Locally incorporated companies are used in most activities. Foreign companies can establish branch offices in Peru, but they are required to appoint a permanent legal representative in the country.
• Strategically located on the west central coast of South America, with total land area of 1,285,215.60 km² (third largest country in South America).
• Population: 30 million, over 75% living in urban areas. • Constitutional democratic republic with a multiparty system. President is head of state
and government. • Dominant religion is Roman Catholic (81%). Peru allows for freedom of religion. • Spanish is the main language with Quechua, Aymara, and other indigenous languages
also having equal official status (majority of business sector also speaks English). • Currency: Nuevo Sol, with free-floating exchange rate. • Peru has obtained Investment-grade status from all three credit rating agencies
(Standard & Poor’s and Fitch in 2008, Moody’s in 2009). • Peru’s GDP has shown steady growth in the past six years, with an average of
7.1% growth per year. In 2010 alone the GDP grew 8.8% and in 2011, 6.9%, and in 2012, 6.3%, and in 2013, 5.02%.
• Several ports, airports, and a road system provide infrastructure to serve as a connecting bridge between South American, Asian, and United States markets.
• More than 50% of Peruvian exports come from mining, mainly copper, gold, molybdenum, silver, and zinc. However, the country has substantially increased agricultural exports, becoming a world-leading exporter of asparagus and dried paprika. Forestry, fishing, hydrocarbons and chemicals, textiles, clothing, manufacturing, jewelry, metallurgy have all increased as exports.
• Major suppliers of the Peruvian government are as follows: U.S. (20%), China (19%), Brazil (6%), Ecuador (5.0%), and Mexico (4%).
• Investment growth areas include mining (gold, silver, copper, zinc, lead, iron), telecommunications, finance, fisheries, agriculture, oil and gas, manufacturing-related industries, tourism, and wood resources.
• Peru’s corporate laws allow foreigners, both domiciled and non-domiciled entities and/or individuals, to own equity in local companies in almost every sector. Those where restrictions apply are referred to below.
• Corporate laws make no restrictions between local and foreigner Board Members allowing non-domiciled foreigners to serve as Board Members. Local laws allow board meetings to be held even if board members are not physically present and votes can be cast through electronic means.
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• The closely held corporation (“sociedad anónima cerrada”) is the most widely used corporate form.
• Procedures to incorporate any form of corporate entity are generally similar with the requirement that all entities be incorporated by public deed. The incorporation process will take anywhere from seven to 14 days, no minimum capital required (usually a company is incorporated with initial capital of S/.1,000 or US$255).
FOREIGN INVESTMENT RESTRICTIONS AND CONDITIONS • Peru offers a favorable legal framework that promotes and
protects foreign investment. Foreign investment laws guarantee the possibility of investing in almost every economic sector, granting the same rights to local and foreign investors, with equal property rights for foreign investors and nationals as established by the Peruvian constitution. The shareholders with the restrictions below indicated can be foreign as well as the general manager. Peruvian residence is required for the general manger, though not for the members of the board.
Restrictions on Equity Participation
• Freedom to purchase stocks from local persons/companies, free access to internal and external credit and free transfer of capital. Certain restrictions apply to radio, television, and air transport and banking and finance sectors.
Investments That Require Government Authorization
• Investment in areas located within 50 km of the country’s frontiers, as well as in weapons, ammunition, and explosive industries requires prior approval from the appropriate government agency.
Approvals and Licensing
• No authorizations are required to incorporate a company, except in the case of Superintendence of Banking and Insurance.
• Approvals and licensing are required for the operation of regular business activity. These may be obtained with the local authorities (city hall, taxpayers registry, for example). Furthermore, specific authorizations will be required in case of companies entering into regulated markets or sectors, such as banking and finance, and companies regulated by the National Superintendency of Securities Market.
EXCHANGE CONTROL • There is no foreign exchange control. The Peruvian constitution
guarantees freedom to hold and dispose of foreign currency.
• There are no restrictions on remittances of profits, dividends, royalties, and capital although investors are encouraged to register foreign investment with ProInversion to secure the investment.
• Exporters and importers can conduct transactions freely on the open market and are not required to channel foreign exchange transactions through the Central Reserve Bank of Peru.
Free Trade Markets and Agreements
• Peru maintains a proactive position of free trade with other markets including a free trade area among the Andean nations of Peru, Colombia, Ecuador, and Bolivia (Comunidad Andina).
• Economic Complementation Agreement No. 58 (ACE 58) signed by Peru, Argentina, Brazil, Paraguay, and Uruguay, States of MERCOSUR.
• Peru is a member of APEC (Economic Cooperation Forum Asia-Pacific).
• Free trade agreements with the U.S., China, Singapore, Canada, Japan and South Korea, Panama, Mexico, Thailand, Cuba, Chile, EFTA (European Free Trade Agreement) have been signed and are in full force and effect, while free trade agreements with Venezuela, the European Union, Costa Rica, and Guatemala are about to take effect. Negotiations are currently in course for free trade agreement with Honduras and El Salvador.
• Free trade agreements with U.S., China, Singapore, Canada, Japan and South Korea, Panama, Mexico, Thailand, Cuba, Chile, EFTA (European Free Trade Agreement), Venezuela, Costa Rica, and European Union have been signed and are in full force and effect, while a free trade agreement with Guatemala is about to take effect. Negotiations are currently in course for free trade agreement with Honduras, El Salvador and Turkey.
TAXATION Corporate Income Tax
• Domiciled corporations are taxed at a rate of 28% on a worldwide income basis for 2015-2016, 27% for 2017-2018 and 26% from 2019. Branches and permanent establishments of foreign corporate bodies are taxed at a rate of 28% on Peruvian source income only for 2015-2016, 27% for 2017-2018 and 26% from 2019. Domicile in the case of corporate bodies and permanent establishments is based on place of incorporation or place of establishment concept, respectively.
• Corporate income tax is assessed on the yearly taxable profit derived from financial statements after operating proper tax adjustments.
• Dividends and other profit distribution schemes, as received from domiciled corporate bodies, are subject to 6.8% withheld by payer in a final manner for 2015-2016, 8% for 2017-2018 and 9.3% from 2019, except where a domicile corporate body is the beneficiary.
Personal Income Tax
• Domiciled individuals are subject to personal income tax on a worldwide income basis.
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• Domicile in the case of individuals is based on but not limited to the civil domicile concept. Foreign individuals are deemed as domiciled in Peru for tax purposes if they have resided in Peru for over 183 calendar days within a 12-month period.
• Domiciled individuals in Peru are subject to progressive tax rates (8%, 14% and 17%) on a yearly net income basis.
• Capital gains and income derived from capital, both sourced in Peru, are subject to a 5% effective tax rate.
Non-domiciled Income Tax (Withholding Tax)
• Non-domiciled corporations and non-domiciled individuals are taxed only on Peruvian source income.
• Non-domiciled corporations are subject to a general flat rate of 30% on their gross Peruvian-source income. Some allowance could be deducted from the gross income (base cost in capital gains) provided that an invested capital certificate issued by the Tax Authority is rendered. Some other flat rates apply depending on the type on income obtained.
• Non-domiciled individuals are subject to a different set of flat rates depending on the type of Peruvian source income, such as 4.1% (dividends), 4.99% (some interests), or 30% on their gross Peruvian-source income. Some allowance could be deducted from the gross income (base cost in capital gains) provided that an invested capital certificate issued by the Tax Authority is rendered.
Value Added Tax
• Peruvian valued added tax (IGV) is applied on the sale of movable property, commercial services rendered, commercial services utilization in Peru, construction contracts, the first sale of real property by the constructor, and the import of goods.
• IGV is levied at a 16% rate, although this tax is actually imposed jointly with a Municipal Promotional Tax of 2%. Therefore the effective rate charged is 18%.
• Although the tax will be applied on each level of the commercialization chain, it is designed to transfer to the final consumer.
• In that sense, IGV paid upon acquisition of goods and services can be deducted as a fiscal credit for the domiciled company when determining its tax due.
Excise Tax
• Excise tax is applied on the consumption of luxury goods, produced or imported, alcoholic beverages, soft drinks, gambling, and games of chance. Tax rates vary depending on the type of good (0% to 50%) or the assessment system (sale value basis, final consumer price, fixed rate).
Real Property Taxes
• Alcabala Tax, as it is called in Peru, is applied on the purchase of real property at a rate of 3%.
Other Taxes
• Temporary Tax on Net Assets is a tax applied on net assets, entered into the books on December 31 of the previous year.
The tax effectively paid can be used as a credit against advance payments or against the regularization payment of the income tax. The rates are: (i) 0% over the net assets for S/.1,000,000 and (ii) 0.4% over the excess.
• Financial Transactions Tax is a tax levied at a 0.005% rate on banking operations in national or foreign currency (both debits and credits). It can be deducted as an expense for income tax purposes.
• Customs Duties levy the import of foreign goods and are calculated on the import CIF value. The rates go from 0% to 11%, depending on the type of imported goods. Some goods are subject to additional customs surtax.
Double Taxation Agreements
• In order to solve problems with international double tax burdens, Peru has signed bilateral agreements with Chile, Canada, Brazil, Korea, Mexico, Portugal, Switzerland and with states within the Andean Community (Ecuador, Bolivia, and Colombia).
TAX AND INVESTMENT INCENTIVES • Special regulations for export-processing zones provide for
tax exemptions on income tax, IGV, and excise tax, use of temporary labor as needed, greater flexibility in labor contracts, and for setting wage rates based on supply and demand.
IGV Early Recovery Regime – Legislative Decree N° 973
• Special Early Recovery Regimes applicable to development and/or exploitation of projects taxed with IGV (VAT) in Peru.
• This system consists of the refund of the tax credit generated on imports and/or local purchases of certain goods and services during the pre-production stage, to be used directly by the regime’s beneficiaries in the execution of projects contemplated under investment agreements and destined to the performance of transactions taxed with the VAT.
IGV Definitive Recovery Regime – Law N° 28754
• The definitive recovery regime consists on the refund of IGV that has been transferred or paid on import operations and/or local acquisitions of certain goods and services during the preoperational phase of infrastructure public work and public services, provided they will be destined to non taxed transactions and used directly in the implementation of investment projects in public infrastructure and utilities.
• Under this regime, the concessionaire is entitled to recover the VAT levied on the investments in the preoperative stage, provided that its purchases were intended for the conduct of operations not taxed with IGV.
Legal Stability Agreements
• Investors may enter into Legal Stability Agreements with the government whereby the investor is able to obtain certain guarantees for the companies and towards their investment with respect to (i) income tax levied on investors and companies; (ii) free exchange of foreign currency and the
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remittance of capital and profits (only for investors); (iii) hiring of workers (only for companies); and (iv) export promotion measures, including drawback (only for companies receiving investments).
• As per applicable laws, Legal Stability Agreements can be signed by those investors who undertake to make either financial contribution to the capital stock of already constituted companies or to-be-constituted ones, or risk investments under agreement with third parties, through the National Financial System, for which the least amount is as follows: (i) US$10 million for the mining and oil sectors; and (ii) US$5 million for the other sectors.
• Concession agreements entered into with the Peruvian government on infrastructure projects and/or public services in which investors hold an interest may obtain legal stability for the same term during which the concession is granted.
EMPLOYMENT LAW • Maximum working hours are 48 hours per week. A full-time
workday may vary from four hours up to eight hours maximum.
• Statutory minimum wage is currently set at S/.750.00.
• Overtime pay is a surcharge of 25% for the first two hours. Afterwards overtime work is paid at a 35% surcharge. Management personnel and workers earning non-wage compensation (not subject to control by employer) are not entitled to overtime benefits. Overtime should be agreed upon between employers and employees.
• Local labor laws require the withholding of income tax from salaries and wages of both residents and non-residents. Non- resident employees income is withheld at a flat 30%. Resident wages are subject to withholdings from 8% to 30% depending on the amount of wages.
• Employers are required to observe and grant the following mandatory benefits to employees: 30 days paid vacation, 20 days medical leave per calendar year, legal bonuses equivalent to one monthly salary each in July and December, life insurance (0.53% of monthly wages) since the fourth year of being hired by the employer, family allowance (10% of minimum wage), complementary risk insurance (in high risk activities).
• For severance or unemployment protection (Compensación por Tiempo de Servicios) employers must pay one monthly salary per year. This amount must be paid in the bank account established by the employee.
• Essalud provides social security protection to Peruvian employees. Contributions to Essalud must be paid by employers equivalent to 9% of the employee’s monthly wages.
• Labor unions are part of the collective rights of employees. Strikes are allowed in matters covered by collective bargaining.
• Employers can hire foreign employees but must not allow the number of foreign employees to exceed 20% of the total number of employees in the company. Likewise total foreign
employees’ salary cannot be above 30% of the total payroll. There are exemptions related to managing positions.
• Companies with more than 100 employees, must have internal labor regulations (Reglamento Interno de Trabajo) that must be approved by the Labor Authority.
• Companies with more than 20 employees must have a Health and Security Internal Regulations.
INDUSTRIAL PROPERTY • Industrial property protection in Peru covers trademarks,
patents, utility models, industrial design, business secrets, trade names, slogans, designations of origin, layout of integrated circuits, licensing, and assignment of trademarks.
• The Industrial Property Agency (Indecopi) provides equal treatment to national and foreign owners of trademarks. The law does not distinguish between individuals or corporations.
• Trademark registration entitles the holder exclusive use for ten years and may be renewed for successive ten-year periods. Trademark renewal does not require proof of trademark use and is granted automatically on the same terms as the original registration, per request of the owner.
• Patent protection is given for a term of 20 years and that of the utility patent is for a period of ten years from the filing date of the corresponding application with the Inventions and New Technologies Administration at the Indecopi. Once the term has expired, the patent shall assume a public nature. It is not possible to grant more than one patent for the same invention.
• Peru is a member of the World Trade Organization and is a contracting party of the Paris Convention and Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS, as well as a member of the Andean Community (CAN)).
DISPUTE RESOLUTION • Peru adopts a civil law system with a hierarchical justice system
headed by the supreme court, superior courts (with jurisdiction over several entire departments), specialized civil criminal and mixed courts, and justice of peace courts. Peruvian courts can prove to be a complicated system to navigate.
• Alternate dispute resolution is available and widely utilized through mediation and arbitration. Parties may agree to a choice of applicable laws, provided the selected laws are compatible with international public policy.
• The 2008 Peruvian arbitration law is based on 1985 UNCITRAL Model Law and applies internationally used arbitration rules and principles.
• Peru has also joined the International Convention for Settlement of International Disputes (ICSID) as an alternative to settle disputes arising between investors and the government.
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IMMIGRATION PROCEDURES Business Visa Requirements
• Usually Consulates require an Invitation Letter from the Peruvian Company. Depending on the Consulate where the visa is issued, there are different requirements. This kind of visa allows foreign citizens to sign any kind of document in Peru.
Working Visa Requirements
• Working Visas are granted to foreign employees who have a labor agreement and will develop activities as an employee. Foreign citizens should enter Peru with a temporary business visa in order to sign the labor contract. If not, we would need to ask for a special permit to sign contracts. To start the immigration procedure it would be necessary to have the approval of the labor contract by the Labor Authority.
• The immigration procedure takes at least three months.
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BUSINESS PRESENCE: • Puerto Rico law allows for the establishment of the following
business types: domestic and foreign corporations and limited liability companies, limited liability partnerships, and civil partnerships. Not-for-profit, close and professional corporation types are also widely used. The Puerto Rico General Corporation Law is modelled after the State of Delaware’s General Corporation Law, thus allowing ample reciprocity between US corporate entities and PR corporate entities. The most popular entity forms used are the corporation and LLC. Typically, investors either form domestic entities or qualify their existing entity to do business in Puerto Rico.
• The incorporation process is very similar to that available in the United States. To incorporate in Puerto Rico you must file the corresponding forms with the Department of State of the Commonwealth of Puerto Rico along with the payment of the filing fees. To maintain their “Good Standing” status, entities must annually file a report and/or renewal and pay an annual fee.
• Puerto Rico, officially known as the Commonwealth of Puerto Rico (Estado Libre Asociado de Puerto Rico), is a self governing territory of the United States, located in the northeastern Caribbean.
• Puerto Rico (Spanish for “rich port”) consists of an archipelago that includes the main island of Puerto Rico and several islands: Vieques, Culebra, Mona and numerous islets.
• Puerto Rico it is the smallest island of the Greater Antilles with an area of 100 miles long by 35 miles wide.
• Puerto Rico is bordered to the west by the Dominican Republic and Haiti (La Hispañola), separated by the Mona Passage (“Mona Canal”), to the east by the Virgin Islands, to the north by the Atlantic Ocean, and to the south by the Caribbean Sea.
• Puerto Rico is a self-governing commonwealth in association with the United States. The chief of state is the President of the United States of America. The head of government is an elected Governor.
• Government: Republican form government, with three branches of government: Executive, Legislative and Judicial.
• Population: Approx. 3,620,897 • Spanish and English are the official languages of Puerto Rico. • Currency: U.S. Dollar (USD) • Climate: Tropical, average temperatures year round between 90 °F (32.2 °C) and 70 °F
(21.1 °C).
FOREIGN INVESTMENT: • Puerto Rico provides a positive legal framework to promote US
and foreign investment. Some of the benefits of doing business in Puerto Rico includes:
o Puerto Rico is a territory of the United States and unless expressly excluded, federal US laws apply. As a result:
• Puerto Rico is part of the US free trade zones and customs system.
• Puerto Rico is protected under the US legal framework for intellectual property protection.
• Puerto Rico is under the protection of the US Homeland Security Act
• Puerto Rico’s banking system is regulated under US laws (Federal Deposit Insurance Corporation).
• Puerto Rico has access to US federal programs and funds.
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• There are no restrictions on foreign shareholders.
• US federal government’s restrictions on doing business with certain countries apply in Puerto Rico.
• Puerto Rico does not have any exchange control or currency regulations.
TAX INCENTIVES FOR BUSINESS • Puerto Rico offers a highly attractive incentives package
that includes a fixed corporate income tax rate – one of the lowest in comparison with any U.S. jurisdiction – various tax exemptions and special deductions, training expenses reimbursement and special tax treatment for pioneer activities.
• Examples of the most popular incentives legislation include:
o Act 20 -2012, known as the “Law to Promote the Export of Services” which aims to promote the environment and opportunity to develop Puerto Rico as an international service center, promote the retention and return of local professionals and attract foreign capital, promoting in this way the economic development and social improvement of Puerto Rico.
o Act 22-2012, known as the “Law to Encourage the Transfer of Investors to Puerto Rico “ with the objective to grant tax exemption in regards to revenue, resulting from investments accrued by individuals who are residents in Puerto Rico;
o Act 73-2008, known as “Economic Incentives for the Development of Puerto Rico Act,” allows qualifying industrial operations in Puerto Rico to obtain high profits while stimulating the local economic development.
o Key provisions which may be available under incentive acts include:
• 100% exemption applicable to the interests and dividends income earned by a resident individual investor (Act 22)
• 4% or 8% fixed corporate income tax rate (Act 20, Act 73)
• 1% income tax rate for “pioneer” industries and/or “strategic services” (Act 20, Act 73)
• Allows for tax credits on their corporate income tax return for job creation tax, investment in machinery and equipment, purchase of locally manufactured products (Act 73)
• Reduced electric energy cost of the industrial exempt business (Act 73)
• Provides 90% exemption from personal and real property taxes, 60% exemption from municipal license taxes and 100% exemption from state and local sales and use tax on raw material (Act 20, 73)
• Other tax incentive legislations is available for qualifying industries such as renewable or “green” energy, banking centers, and the film industry.
TAXATION: • Taxation in Puerto Rico takes the form of both Federal (US) and
Commonwealth taxes. Puerto Rico has independent tax-levying authority by provisions of 48 U.S.C. § 734 of the United States Code, and the Puerto Rico Internal Revenue Code.
Correlation with the United States Tax Laws.
• Though the Commonwealth government has its own tax laws, Puerto Ricans are also required to pay most U.S. federal taxes:
Individuals Residing in Puerto Rico.
• Residents of Puerto Rico pay into Social Security, and are thus eligible for Social Security benefits upon retirement. Other federal taxes paid by Puerto Rico residents include import/ export taxes, and federal commodity taxes. Like residents of the United States, residents of Puerto Rico are subject to federal income tax on their worldwide income. However, U.S. Code Section 933, for tax purposes, allows a bona fide individual resident of Puerto Rico to exclude Puerto Rico source income from his/her gross income. The process for determining and establishing bona fide residence for income tax purposes hinges on the result of three tests found in U.S. Code Section 937: (a) the presence test, (b) the tax home test and (c) closer connection test.
Employers in Puerto Rico.
• Are subject to both Federal Insurance Contributions Act (FICA) tax (a payroll withholding tax, which funds Social Security and Medicare) and the Federal Unemployment Tax Act (FUTA). Employers in Puerto Rico are legally obligated to withhold the employee portion of FICA taxes from their employees’ wages and contribute the employer portion of FICA.
Puerto Rico Corporations.
• Puerto Rico corporations are treated as foreign corporations for U.S. income tax purposes. Thus, Puerto Rico corporations are subject to a 30% U.S. income tax withholding on, among others: interest, rents, wages, premiums, annuities, compensation, remuneration, emoluments and other fixed or determinable annual or periodical gains, profits and income from sources within the United States. Dividends received by a Puerto Rico corporation from a U.S. corporation, however and provided certain conditions are met, are subject to a reduced U.S. income tax withholding instead of the 30% rate applicable to other foreign corporations. Puerto Rico corporations are subject to regular U.S. tax rates on their income effectively connected to a trade or business in the United States.
Puerto Rico Tax System.
• The Internal Revenue Code for a New Puerto Rico (‘Puerto Rico Internal Revenue Code’) is the main body of domestic statutory tax law. It covers income taxes, payroll taxes, gift taxes, estate taxes and more.
Personal Income Tax:
• Individuals are taxed on a graduate rate based on their tax bracket, which ranges from 7% to a maximum of 33%. A person
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is considered a “resident” of Puerto Rico if he or she lives in Puerto Rico for at least 184 days in a calendar year. Capital gains earned by resident individuals are also taxed. Long-term capital gains are gains earned from an asset, which is held for more than 6 months. The taxable gain is computed by deducting the acquisition costs from the gross selling price.
Puerto Rico corporations.
• Puerto Rico corporate entities are taxed at on a graduated tax rate structure.
• Municipal taxes. Other taxes applicable to the Puerto Rico tax systems include, excise tax, municipal license tax (gross volume) and real and personal property taxes. The percentages will vary depending on the local government and other considerations.
• Sales and Use Tax. Puerto Rico residents and entities are also subject to 11.5% sales and use tax.
INTELLECTUAL PROPERTY: • Puerto Rico is protected under the US legal framework for
intellectual property protection:
• Patents. Patents are issued under United States federal law.
Trademarks.
• Trademark rights can be used to prevent others from using the same, or very similar mark in connection with the same goods or services that are sold under the trademark. Trademarks enjoy protection under United States Trademark Act, as amended, and under Act 169-2009, known as “Puerto Rico Trademark Act”. If merchandise is used in inter-state commerce owners of trademarks can register them with the United States Patents and Trademarks Office. Applications for the registration of trademarks in Puerto Rico must be filed with the Registry of Trademarks and Commercial Names of the Puerto Rico Department of State. In Puerto Rico, registration with intent to use is allowed.
Copyright
• Copyright is available for authors of original works, including literary, dramatic, musical, artistic, and certain other intellectual works. Copyright is governed by Federal (US) and Puerto Rico law (Visual Artists Rights Act, and PR Author’s Moral Rights Act, Act 55-2012). Copyright protection subsists from the time the work is created in fixed form and immediately becomes the property of the author of the work. Copyrights can be registered with the US Copyright Office of the Library of Congress and with the Copyright Registry Office of the Puerto Rico Department of State.
LABOR LAW: • The Constitution of the Commonwealth of Puerto Rico
establishes the framework for the Labor Laws of Puerto Rico, through its Articles 15, 16, 17 and 18. The Constitution provides the minimum range of protection that can be granted to employees. These provisions cannot be modified by a written employment contract unless it grants workers further
favorable conditions than the ones that are set as a minimum by the Constitution and related laws.
• The Minimum Wage, Vacation and Sick Leave Act statutorily incorporates, as a substantive right the automatic and immediate application of the Federal Minimum Wage to all workers in industries in Puerto Rico covered by the Fair Labor Standards Act (FLSA).
• Both the Constitution and the Laws of Puerto Rico establish that eight (8) hours of work within a period of 24 consecutive hours constitute the legal and regular workday in Puerto Rico. Forty (40) hours of work constitute the regular workweek. Act 379- 1948 requires payment of work in excess of eight hours a day or forty a week at double the regular rate of pay. If the employer is covered by the Fair Labor Standards Act, the employer has to pay for each overtime hour of work in excess of the legal eight hours per day, a wage rate of not less than one and a half time the wage agreed upon for regular hours unless otherwise established by mandatory decree or collective bargaining agreement. In addition, the employer and employee have the option to agree to a flexible work schedule as regulated by the “Flextime Act”, Act 83-1995. This law allows for flexibility in determining the beginning of an employee’s regular workday or the beginning of his meal period.
• Meal Period are regulated by Act No. 379-1948, which states that the meal period shall not be less than one hour that the employee cannot work for more than five hours consecutively without taking his meal period.
• Vacation and Sick Leave. Employees of the company are entitled to accrue vacation leave with full pay to be made effective when the employee begins to enjoy the same, at the rate of one and one fourth (1¼) working day for each month in which he has worked at least one hundred and fifteen (115) hours. Employees shall accrue sick leave at the rate of one (1) working day for each month in which they have worked at least one hundred fifteen (115) hours for. The use of sick leave will be considered as time worked in the accrual of this benefit.
• Other Puerto Rico labor laws issues are governed by: “Unjust Dismissal Act”, “Maternity Benefits and Breast Feeding”, “Safety and Health in the Work Place”, “Workmen’s Accident Compensation”, “Non-Occupational Disability and Social Security for Chauffeurs”, “Unemployment Insurance”, laws that prohibit discrimination and sexual harassment, laws concerning veterans and employees on military service leave, laws governing jury duty, witness leave for criminal cases, sports leave, automobile accident disability leave and “Christmas Bonus” Act.
FOREIGN EMPLOYEES:
• As a territory of the United States, Puerto Rico is governed by US immigration law. All foreign employees require work permits and/or residency permits issued by the United States Citizen and Immigration Services, ascribed to the Department of Homeland Security.
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IMMIGRATION: • U.S. Citizenship and Immigration Services (USCIS), ascribed
to the Department of Homeland Security, is the government agency that oversees lawful immigration to the United States.
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BUSINESS PRESENCE • Main types of business entities in Uruguay include corporations
and limited liabilities companies; less frequently used are partnerships.
• Corporations may be newly incorporated or purchased “off the shelf.”
• Branches of foreign companies may also be opened in Uruguay.
FOREIGN INVESTMENT RESTRICTIONS AND CONDITIONS • Generally no restrictions are imposed on foreigners owning
equity in Uruguayan companies. Directors may be Uruguayan nationals or foreigners.
• The hiring of foreign personnel is not restricted, except in some areas such as shipping, and on entities located within free trade zones.
EXCHANGE CONTROL • Uruguay maintains a long tradition of not restricting the
purchase/sale of foreign currency.
• Likewise, the remittance of capital and profits is free and not restricted.
TAXATION Principal Taxes Applicable in Uruguay Include:
• Income Tax: Income Tax in Uruguay consist of: (i) business tax, at an annual rate of 25% on net profits derived from Uruguayan- sourced business income; (ii) personal income tax, is a direct tax applied to resident individuals with Uruguayan-sourced income. The tax is applied under a dual system that distinguishes income derived from capital source (taxed at proportional rates that range from 3% to 12%), and from the labor source (taxed at progressive rates from 0% to 30%); and, (iii) non-resident
• Centrally located in South America, with an area of 176,215 km2.
• Population comprises those of European descent 93%, African descent 5%, Mestizo 1%. • Spanish is the national language; English is widely written and spoken, especially in
urban areas and for business. • Currency: Uruguayan Peso. • Investment growth areas include agribusiness, forestry, logistics, real estate, energy,
finance, tourism.
income tax, an annual tax applied to Uruguayan-sourced income of non-residents (individuals and legal entities). This tax is applied at proportional rates that range from 3% to 12%, depending on income type.
• Regulations require withholding on various types of income.
• Value Added Tax (VAT) is imposed on the circulation of goods and services, as well as imports. The basic rate for this tax is 22% and the minimum rate is 10%, which is applied to prime necessity and medical products.
• Property tax is applied to assets located in the country at year end (after deduction of certain liabilities), at a general rate of 1.5%.
• Specific internal tax is applied to the first sale of certain goods, such as beverages, tobacco, fuel, cosmetics, and vehicles at different rates according to the product.
INVESTMENT INCENTIVES • The current investment promotion system declares that the
promotion and protection of investments made by domestic and foreign investors in the country is an issue of national interest.
• Investment promotion law created streamlined procedures under which investments may qualify for substantial tax exemptions, based on objective and transparent criteria, such as the extent to which a project incorporates national added value, fosters territorial decentralization, creates quality jobs, enhances the activity of small to medium-sized companies, and promotes and diversifies exports, inter alia.
• Basic principles of the investment promotion law include: (i) equal treatment to national and foreign investment; (ii) investments do not require prior authorization or registration, (iii) free transferability of capital and profits overseas.
• Investment promotional law also establishes other automatic benefits: (i) exemption from property tax of moveable goods
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U R U G U AY Doing Business in Latin America
• directly used in production and of equipment for electronic data processing; (ii) exemption from value added tax and specific internal tax for certain imported goods; and (iii) return of VAT included in local purchases of moveable goods for production and of equipment for electronic data processing.
• In addition, investment promotion law empowers the executive branch to exempt from property tax the following assets: (i) fixed assets for manufacturing and agribusiness; (ii) intangible goods such as patents, industrial models, copyrights, goodwill, trade names and concessions granted for prospecting, crops, extraction and exploitation of natural resources; and (iii) other goods, procedures, inventions or creations that incorporate technological innovation and facilitate technology transfers.
• Temporary Admission: Products may be imported into Uruguay under temporary admission or drawback provisions, exempt from import duties, in order to be processed, assembled, transformed or integrated, but they must be re-exported within 18 months. The system applies to raw materials; parts and accessories; motors; packaging and packaging materials; matrix, molds and models; intermediate goods; products that are part of the manufacturing products.
• Free Trade Zones: These are areas within the Uruguayan territory which are geographically delimited and in which industrial, commercial, and services activities may be carried out (e.g. warehousing, call centers, logistics and distribution, manufacturing, financial services, software and data processing), under a special legal system of customs and fiscal exemptions. These activities are considered to take place outside Uruguayan territory.
• Those operating in the free trade zones are exempted from: (i) all national taxation created or to be created (ii) outgoing and ingoing goods are exempted from all taxes; (iii) tax exemptions do not apply to social security contributions, except for foreign personnel who may opt not to join the national social security system. At least 75% of the personnel must be composed by Uruguayan citizens, though this percentage can be reduced under authorization of the executive power.
• Goods introduced into a free trade zone from Uruguayan territory are considered to be exports, and goods introduced from a free trade zone into Uruguayan territory are considered to be imports (thus paying the corresponding tariffs and taxes).
EMPLOYMENT LAW • The constitution guarantees workers’ right to work, to organize
themselves in associations, and the right to strike.
• The maximum working hours are 48 hours per week, or eight hours per day. These limitations do not apply to management positions. The hours worked beyond those limits are considered to be overtime and are paid at a rate double to that for normal hours. Overtime on holidays or day off, is paid at 2.5 times the value of normal hours.
• Complementary benefits to employees established by law are: (i) paid holidays; (ii) an extra monthly salary, divided into two halves, payable in June and December; (iii) a holiday partial
salary, which is paid before the worker takes his or her annual holiday.
• Union members are protected by law against dismissal for union activities.
• The social security system currently allows for retirement at age 60 for both men and women, 30 years of working.
• Workers who become disabled on the job receive a monthly pension from the government equal to 2/3 of their salaries.
• Uruguay has ratified most conventions that protect workers’ rights, and generally adheres to their provisions.
• The government provides six months of unemployment benefits.
INTELLECTUAL PROPERTY • Intellectual property protection in Uruguay comprises patents,
industrial design, patents for utility models, trademarks, copyright, commercial names and geographical indications.
• Patents are protected by law and have a 20-year term of protection from the filing date. Patents for utility models and industrial designs have a ten-year term of protection from the filing date and may be extended for an additional five.
• Under Uruguayan law a registered trademark lasts ten years and can be renewed as many times as desired.
• Copyright protection includes literary, musical or artistic works, sound recordings, photography and other works, and lasts 50 years.
• Other assurances offered by Uruguay to investors derive from its membership with the World Intellectual Property Organization (WIPO), together with its ratification of the Bern and Universal Copyright Conventions, as well as the Paris Convention for the Protection of Industrial Property, and from its membership with the International Center for the Settlement of Investment Disputes (ICSID).
DISPUTE RESOLUTION • Under Uruguayan procedural law, prior to initiation of any action
in an ordinary proceeding a settlement hearing has to be called.
• Civil and commercial disputes may be heard by a district court or by a peace court, depending on the amount of the claim.
• Employment disputes are heard in a district court for labor matters.
• Legislation recognizes the full effectiveness of foreign findings and sentences, which are submitted to exequatur procedure for their enforcement.
• Arbitration tribunals may be guided by Uruguayan law or by foreign law, without distinction.
• Uruguayan law regulates the right of the parties to resolve their commercial disputes through arbitration. According to these rules, the parties may validly stipulate arbitration clauses
103
U R U G U AY Doing Business in Latin America
• providing for the settlement through arbitration of future disputes that may arise between them out of their contractual relationship. Uruguayan laws on execution of foreign judgments are also applicable to execution of foreign arbitration awards.
• Uruguay is a member to the 1979 Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards, to the 1975 Inter-American Convention on International Commercial Arbitration, and to the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
IMMIGRATION PROCEDURES • Entry to Uruguay is free, and there are no prior permits,
invitations, visas (in most cases), nor vaccinations required.
• Foreigners arriving in Uruguay may remain for 90 days without paid employment. This may be extended to a further 90 days at the request of the interested party.
• There is no discrimination in law or in fact between nationals and foreigners, except as regards those political rights which are inherent to citizenship.
• Migrants admitted as temporary residents or as permanent residents have equal treatment as nationals with regard to labor rights.
• Those migrants that have not completed the residence process may request from the national direction of immigration a reentry permit to travel and reenter Uruguay.
DOING BUSINESS IN LATIN AMERICA Content updated as of February 2016
4/23/2021 The compromises that companies make to do business in China
https://money.cnn.com/2018/05/09/news/economy/foreign-companies-china-taiwan-compromise/index.html 1/5
The compromises that companies make to do business in China by Julia Horowitz @juliakhorowitz
May 9, 2018: 8:41 AM ET
Foreign companies just got an important reminder: Doing business in China comes with a long list of demands.
More than 30 global airlines — including some US carriers like American Airlines ( ) — were recently told by the Chinese government to remove any information that could suggest Taiwan, Hong Kong or Macau are not part of China.
Over the weekend, the White House denounced the warnings as "Orwellian nonsense." But toeing the line on Taiwan is just one of many concessions required of foreign companies that want to keep on China's good side.
"It's a constraining environment," said Nicholas Lardy, a fellow at the Peterson Institute for International Economics and expert on the Chinese economy.
Here are some of the compromises businesses need to make.
Watch what you say about Taiwan, Hong Kong and Macau
China considers self-governed Taiwan to be an integral part of its territory, and rejects any suggestions to the contrary. Hong Kong and Macau are special administrative regions of China.
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The country has acted forcefully when it believes that materials from foreign companies imply these areas are independent. In January, China blocked the Marriott website and app for a week after the hotel group listed Taiwan, Hong Kong, Macau and Tibet as separate countries in its emails and app. Delta Air Lines ( ) and retailer Zara were called out by China over similar problems shortly thereafter.
The Chinese government seems to be increasingly vigilant about monitoring content that isn't written in Chinese, according to Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies.
"What's new now is they are trying to enforce the way these companies talk to any audience," he said.
Store some data locally
In June 2017, China enacted a law that tightened restrictions on cross-border data transfers, and mandated that critical data be stored locally. The Chinese government has framed the legislation as an e�ort to shore up cybersecurity, but critics see it as further means for China to monitor and control online information.
A number of foreign companies have had to make big changes in order to comply.
Apple ( ) said it would store the iCloud data of mainland customers with a state-owned company in Guizhou. Last November, Amazon ( ) Web Services sold the hardware it uses for cloud storage to its local Chinese partner to satisfy the new rules.
Strike up joint ventures with local businesses
In some sectors, Beijing only lets foreign companies operate in the country through joint ventures in which Chinese partners hold the majority stake.
Automakers like GM ( ), Volkswagen ( ) and Toyota ( ) have paired up with local players so they can avoid paying sti� import tari�s on cars. Chipmakers like Qualcomm ( ) and Intel ( ) have also set up joint ventures to develop semiconductors in the country.
Requirements regarding joint ventures have been a particular point of contention in the current US-China trade fight. The US government claims that foreign companies are expected to transfer proprietary technology to their Chinese partners before many joint ventures can be finalized — and that can mean giving up intellectual property.
There has been some movement to loosen constraints on foreign investment in recent months. China has committed to easing restrictions on the finance industry, for example.
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By the end of June, the People's Bank of China intends to fully remove foreign investment limits on banks and asset management firms, according to analysts. The central bank will also let foreign companies own a majority stake (up to 51%) in securities, fund management, futures and life insurance firms.
Be careful when it comes to the Dalai Lama
The Dalai Lama is a popular global figure. But to the Chinese government, the Buddhist spiritual leader of Tibet is a "splitist" who should be denounced — or at least not celebrated by companies in their marketing materials.
Mercedes-Benz had to apologize in February after quoting the Dalai Lama in a post on its Instagram account.
In 1950, Communist China sent troops into Tibet to enforce its claim on the region. China has controlled Tibet since 1951 — though the central government in Beijing has faced repeated unrest from ethnic Tibetans.
Censor content
In order to operate in China, internet companies have to follow the government's strict rules about censored content.
This even applies to powerful multinational companies like Apple and LinkedIn.
In 2017, Apple pulled the New York Times news app from the App Store in China, saying it was told that it violated "local regulations." Apple also removed software from its App Store in China that allowed users to circumvent the country's so-called Great Firewall.
LinkedIn agreed to China's censorship requirements when it launched a Chinese version of its site in 2014. Later that year, it told some users that posts related to the 25th anniversary of the Tiananmen Square massacre wouldn't show up in mainland China. The networking site was bought by Microsoft in 2016.
-- CNNMoney's Daniel Shane contributed to this report.
CNNMoney (New York) First published May 9, 2018: 8:27 AM ET
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Doing Business in Latin America IBA Latin American Regional Forum October 2018
Doing Business in Latin America OCTOBER 2018 1
Coordination Committee
Juan Carlos Rocha Philippi, Prietocarrizosa Ferrero DU &Uría
David Gutiérrez BLP
Luis Carlos Rodrigo Rodrigo Elías & Medrano Abogados
Updating Committee July 2018
Francisco J Roggero Estudio Zang Bergel & Viñes
Paulo Coelho da Rocha Demarest
Participant Firms
Argentina A&F Allende Ferrante Abogados Estudio Beccar Varela Estudio Zang Bergel & Viñes Marval O’Farrell & Mairal
Bolivia Bufete Aguirre Soc Civ Moreno Baldivieso
Brazil PinheiroNeto Advogados TozziniFreire Advogados Veirano Advogados Velloza & Girotto Advogados Associados
Chile Alessandri Abogados Cariola Diez, Pérez-Cotapos Carey Prieto Abogados
Colombia Brigard & Urrutia Gómez-Pinzón Zuleta Abogados Lloreda Camacho & Co Philippi Prietocarrizosa Ferrero DU &Uría Posse Herrera Ruiz
Costa Rica Batalla Salto Luna BLP Consortium Legal Pacheco Coto
Ecuador Coronel & Pérez Abogados Pérez Bustamante & Ponce
El Salvador Arias & Muñoz BLP
Mexico Basham Abogados Goodrich, Riquelme y Asociados Ramírez, Gutiérrez-Azpe, Rodriguez-Rivero y Hurtado SC
Nicaragua BLP Consortium Legal
Panama Arias Fabrega & Fabrega Fabrega Molino Mulino
Paraguay Ferrere
Peru Estudio Echecopar – Member Firm of Baker & McKenzie International Philippi Prietocarrizosa Ferrero DU & Uria Estudio Rodrigo, Elías & Medrano - Abogados
Uruguay Bado, Kuster, Zerbino & Rachetti Ferrere Guyer & Regules Hughes & Hughes Sanguinetti & Asociados
Venezuela D’Empaire Reyna Abogados Hoet Peláez Castillo y Duque Tinoco, Travieso, Planchart & Núñez
2 Doing Business in Latin America OCTOBER 2018
Acknowledgments
The Latin American Regional Forum (LARF) of the International Bar Association is proud to present
this first Doing Business in Latin America handbook, which covers the main topics for 14 jurisdictions in
the region.
This is the first publication of LARF, it is intended to be updated every two years and it has coverage
of all Latin American jurisdictions.
We are thankful for the contributions from all participant firms, which made a tremendous effort not
only to cover the legal aspects but also to work together in the best interest of our legal community.
We believe that this publication is an important tool for both investors and the legal profession when
approaching certain critical aspects in our jurisdictions.
We also thank the International Bar Association for its continuing support of this initiative, and
encourage all members of the Latin American Regional Forum to contribute in the coming editions.
Disclaimer
This Doing Business in Latin America handbook is a publication from the Latin American Regional
Forum of the International Bar Association.
This work is a product of the participant firms and therefore, the International Bar Association
does not necessarily own each component of the content included in the work. The International
Bar Association and the Latin American Regional Forum do not warrant that the use of the content
contained in the work will not infringe on the rights of third parties. The risk of claims resulting from
such infringement rests solely on the user of the materials contained there.
The findings, interpretations and conclusions expressed are the product of the work of the
participant firms in their jurisdictions and do not necessarily reflect the views of the other participant
firms, their governments, the Coordination Committee or the International Bar Association.
Neither the Coordination Committee nor the International Bar Association guarantees the accuracy
of the data included in this work. The information included in the maps, boundaries, denominations
and other information shown in this handbook do not imply any judgment concerning the legal
status of any territory or the endorsement or acceptance of such boundaries.
The information included in the chapters has an informative purpose and cannot be considered as
legal advice of any kind; therefore, the participant firms are not held liable for any inaccuracy or the
use of the information contained herein for investment purposes.
Doing Business in Latin America OCTOBER 2018 3
4 Doing Business in Latin America OCTOBER 2018
Contents
I. Argentina
A. Foreign investment 10
B. Offshore vehicle providers in Latin American countries 22
C. Development of ample/integrated capital markets and joint activities between Latin American countries 27
D. Rendering of public services 30
E. Real estate: limitations for private parties 32
II. Bolivia
A. Foreign investment 38
B. Rendering of public services; treatment of foreign investment 41
C. Real estate 45
III. Brazil
A. Foreign investment 50
B. Rendering of public services 57
C. Real estate 60
D. Development of ample/integrated capital markets and joint activities between Latin American countries 66
E. Offshore vehicle providers in Latin American countries 70
IV. Chile
A. Foreign investment in Chile 74
B. Rendering of public services 79
C. Real estate 81
D. Development of ample/integrated capital markets and joint activities between Latin American countries 84
E. Offshore vehicle providers in Latin American countries 88
Doing Business in Latin America OCTOBER 2018 5
V. Colombia
A. Foreign investment in Latin American countries 90
B. Rendering domestic public services 107
C. Real estate 110
D. Development of ample/integrated capital markets and joint activities between Latin American countries 114
VI. Costa Rica
A. Foreign investment 120
B. Rendering of public services 129
C. Real estate 132
D. Development of ample/integrated capital markets and joint activities between Latin American countries 135
E. Offshore vehicle providers in Latin American countries 138
VII. Ecuador
A. Foreign investment 142
B. Public services 147
C. Real estate 148
D. Development of ample/integrated capital markets and joint activities between Latin American countries 151
VIII. El Salvador
A. Foreign investment 154
B. Rendering of public services 159
C. Real estate 163
D. Development of integrated capital markets and joint activities between Latin American countries 167
E. Offshore vehicle providers in Latin American countries 168
6 Doing Business in Latin America OCTOBER 2018
IX. Mexico
A. Foreign investment 172
B. Rendering of public services 180
C. Real estate 183
D. Compliance programmes 185
E. Offshore vehicle providers in Latin American countries 187
X. Nicaragua
A. Foreign investment 193
B. Rendering of public services 198
C. Real estate 201
D. Development of ample/integrated capital markets and joint activities between Latin American countries 204
E. Offshore vehicle providers in Latin American countries 204
XI. Panama
A. Foreign investment 206
B. Rendering of public services 215
C. Real estate 217
D. Development of ample/integrated capital markets and joint activities between Latin American countries 220
E. Offshore vehicle providers in Latin American countries 221
XII. Paraguay
A. Foreign investment 230
B. Rendering of public services 237
C. Real estate: limitations 239
Doing Business in Latin America OCTOBER 2018 7
XIII. Peru
A. Foreign investment in Latin American countries 242
B. Rendering of public services 254
C. Real estate 258
D. Development of ample/integrated capital markets and joint activities between Latin American countries 262
XIV. Uruguay
A. Foreign investments 266
B. Public services 274
C. Real estate 278
D. Development of ample/integrated capital markets and joint activities between Latin American countries 280
E. Offshore vehicle providers in Latin American countries 281
XV. Venezuela
A. Foreign investment in Latin American countries 288
B. Rendering of public services 295
C. Real estate 296
8 Doing Business in Latin America OCTOBER 2018
Doing Business in Latin America OCTOBER 2018 9
Argentina
10 Doing Business in Latin America OCTOBER 2018
I. Argentina
A. Foreign investment
i. Authorisations versus limitations or prohibitions
a. argentine foreign investment regime
In general terms, foreign investments in Argentina are regulated by a framework of international
treaties and Argentine laws that establish, among others, the rules for choice of law and jurisdiction,
legal treatment of foreign investors, monetary policy and foreign exchange (FX).
Particularly, foreign investments are governed by the Argentine Foreign Investments Law No 21,382,
which states, as a general principle, that foreign investors enjoy the same status and have the same
rights that the Argentine Constitution affords to local investors. However, there are certain regulated
areas that impose restrictions on foreign investors, such as antitrust regulations, FX matters, the
broadcasting industry and the acquisition of rural land.
b. free choice of law and jurisdiction
1. Choice of law
Argentine law generally permits parties to a contract to select the laws that will govern their
agreements provided some connection to the system of law that is chosen exists. Further, the choice
of foreign law will only be valid to the extent that it does not contravene Argentine international
public policy (orden público (public order)). Typical public policy laws include criminal, tax, labour
and bankruptcy law, as well as inheritance and family rules.
Rights associated with real estate (eg, in rem rights), the ability to acquire real estate and the formal
requirements with regard to legal acts connected with real estate are all governed exclusively by local
laws. The same principles apply with respect to movable property permanently located in Argentina.
2. Choice of jurisdiction
Argentine courts have jurisdiction whenever: (1) the defendant is domiciled in Argentina; (2) the
place for performance of any of the obligations is located in Argentina; or (3) Argentine courts
have been chosen as the applicable forum (subject to certain restrictions). With respect to debtors
domiciled abroad, local courts have jurisdiction only to the extent that the debtor has assets in
Argentina, in which case, insolvency proceedings will only cover such assets.
Argentine courts acknowledge that parties to a contract may choose a jurisdiction other than
Argentina for the settlement of any disputes arising under a contract provided that there is a
connection with such jurisdiction and the dispute relates to pecuniary rights.
Doing Business in Latin America OCTOBER 2018 11
c. fX matters
While there are still FX controls in place in Argentina, when the current Administration took over
(ie, 10 December 2015), the Central Bank of Argentina (the ‘Central Bank’) revised all FX and trade
rules, and issued many FX regulations aimed at abrogating all existing restrictions – especially those
related to the outflow of funds. As of today, the only FX regulations that remain in place refer to
operational and reporting aspects.
All transfers of foreign currency in and out of Argentina must be made through the Argentine
Foreign Exchange Market (the ‘FX Market’), with the participation of an Argentine licensed
financial entity or FX agency, and must comply with formal requirements set forth in the regulations
periodically issued by the Central Bank as the regulatory authority of the FX Market, including the
registration of such a transfer under a specific code (códigos de concepto), for statistical purposes only.
Currently, both Argentine and non-Argentine residents can freely access the FX Market. Access to
the FX Market is done at the market exchange rate. While the exchange rate is determined by the
relevant counterparties, the Central Bank has the power to intervene by buying and selling foreign
currency on its own account, a practice in which it engages on a regular basis.
An information regime regarding foreign debts and direct investments remains in place for Argentine
residents, who must submit to the Central Bank information regarding capital and investment fund
shares; non-negotiable debt instruments; negotiable debt instruments; financial derivatives; and land,
structures and real estate. The information must be delivered through an electronic form available at
the Federal Tax Authority’s website on an annual and quarterly basis or, depending on the case, on an
annual basis only. Such information is to be used exclusively for statistical purposes.
ii. Treatment of foreign investment in infrastructure initiatives and PPP projects
The Federal Government and some provincial governments have enacted regulations to foster private
initiative in public interest-related projects.
Some jurisdictions have passed regulations that allow private investors to propose public works
or projects to the relevant government entity in order to meet public needs. According to such
regulations, should the proposals be declared of public interest by the corresponding public entity,
the private investor who initially filed the proposal will get certain advantages in the subsequent
competitive bidding process.
Legal frameworks for the participation of private investors in the design, construction, operation,
maintenance and financing of infrastructure works are in place at the federal level and in some provinces.
In 2017, the Federal Public–Private Partnership Contracts Regime (the ‘PPP Regime’) was
established via Law No 27,328 and its implementing Decree No 118/2017, as amended by Decree
No 936/17. The provinces and the Autonomous City of Buenos Aires have been invited to adhere
to the PPP Regime.
The PPP Regime is an alternative contracting method for public works and public concessions, thus
its implementation does not preclude the use of traditional public procurement systems. For each
project, the public sector may consider the most suitable contracting method to meet public needs.
12 Doing Business in Latin America OCTOBER 2018
Projects governed by the PPP Regime will not be subject to Public Works Law No 13,064, Concession
of Public Works Law No 17,520 or Public Procurement Decree No 1,023/01.
The PPP Regime promotes balanced and predictable cooperation between the private and public
sectors, allowing risks to be distributed adequately between the contractor and state. It implies a shift in
the traditional paradigm of public contracts, as it excludes or limits the traditionally recognised public
law prerogatives of the administration (eg, the power to unilaterally modify or terminate a contract for
reasons of public interest, the power to force the private contractor to continue the project despite the
state’s failure to comply with its own obligations and the limitation of state liability).
Regarding the remuneration of the contractor, the PPP Regime establishes the right to maintain the
financial-economic balance of the contract. The prohibition of indexation set forth by Convertibility
Law No 23,928 is excluded. In addition, the parties may agree for the consideration to be payable
in foreign currency. Regarding the consideration structure, the PPP Regime provides the possibility
of assigning funds, assets, loans or taxes, the creation of surface and/or use rights, or any other
contributions by the state.
Technical disputes or any other type of dispute arising from contracts celebrated under the PPP
Regime may be submitted to technical panels and/or local or foreign arbitral tribunals. Review by
local courts of the merits of awards is expressly excluded.
The PPP Regime provides a broad framework of principles and parameters that must be completed
by the relevant bidding terms and conditions, and the contract that will define the rights and the
specific undertakings of both parties.
In 2018, the Federal Highway Authority launched the Highways and Safe Routes PPP Network
Project, a public bid for the construction, operation and maintenance of roads, which is yet to be
awarded. This is the first initiative to be carried out by the Argentine Federal Government through
the PPP Regime.
iii. Treatment of foreign investment in oil and gas and mining activities
a. oil and gas
1. Domestic policy on oil and gas
Argentina is a major player in the South American hydrocarbon market. According to the 2016
edition of the BP Statistical Review of World Energy, Argentina is the largest producer of natural
gas and the fourth largest of crude oil in South America. Hydrocarbons, especially natural gas, have
historically accounted for a large portion of the Argentine energy matrix. Until recently, hydrocarbon
production and reserve rates had been falling, forcing the country to import increasing volumes of
natural gas and liquefied natural gas (LNG), as well as crude oil and liquid fuels. However, recent
reports announcing that Argentina has one of the largest in volume shale gas reserves in the world
have had a significant impact on Argentina’s position as a global energy player. According to the
United States Energy Information Administration and Advanced Resources International, Argentina
has the second-largest shale gas resources (802 trillion cubic feet) and the fourth-largest shale oil
Doing Business in Latin America OCTOBER 2018 13
resources (27 billion barrels) in the world. More than 50 per cent of these unconventional resources
are located in the Neuquén Basin. In addition to its favourable geology, the Neuquén Basin has
attributes that favour unconventional development: a long history of oil and gas operations, an
established and thriving service sector, and strong access to domestic and international markets.
Over the last few years, under the presidency of Mauricio Macri, the country has radically changed
its policies and attitude towards private investment, creating a friendlier business environment. That
said, Argentina is still facing financial and economic difficulties, including high inflation rates and
lack of liquidity.
However, the current policy of the Federal Government is aimed at restoring the necessary conditions
for Argentina to recover and maintain its self-sufficiency in hydrocarbons supply.
2. The regulatory regime
Hydrocarbon resources are severable from the general ownership of property. According to the
Argentine Constitution (the ‘Constitution’), as amended in 1994, natural resources, including
hydrocarbon reserves, belong to the provinces where they are located. However, the Constitution
empowers the national Congress to legislate on hydrocarbon matters.
In 2006, the transfer of hydrocarbon resources from the federal domain to the provinces was
implemented through Law No 26,197. The resources transferred were those located in the provinces
and in territorial waters up to 12 nautical miles from a baseline, which in Argentina is the mean
low-water line along the coast. With Law No 26,197, the enforcement of exploration permits, and
production and transport concessions granted by the Federal Government over these resources
prior to the law was transferred to the provinces. The provinces have since handled the granting,
enforcement and control of such permits and concessions within their territories.
However, offshore resources located more than 12 nautical miles beyond the baseline are in the
federal domain and subject to exclusive federal jurisdiction.
Federal Hydrocarbons Law No 17,319 of 1967, as amended (the ‘Hydrocarbons Law’), and several
subsequent dispositions have established the basic legal framework for E&P activities. The Ministry of
Energy and Mining (the ‘Ministry of Energy’) is the enforcement agency of Hydrocarbons Law at the
federal level.
The main objectives of the latest amendments to the Hydrocarbons Law, approved in 2014 through
Law No 27,007, are to provide specific rules for the exploration and development of unconventional
resources, the extension of current concessions and the granting of new permits and concessions.
Hydrocarbon exploration, development and production require an exploration permit or a
production concession granted by the Federal Government or the relevant province, depending
on the location of the reserves. Exploration permits and production concessions must be granted
through a competitive bidding process and may be transferred with the grantor’s approval.
To become the holder of a permit or concession, companies must register in the registries of oil
companies kept by the National Ministry of Energy and, in some cases, the corresponding provincial
authorities. Registration is granted on the basis of meeting certain financial and technical standards.
14 Doing Business in Latin America OCTOBER 2018
Exploration permits allow their holders to perform exploration and usually require a minimum
investment in that activity. The base term of a permit for conventional exploration is divided into two
periods of up to three years each, plus an extension of up to five years. For unconventional resources,
the base term is divided into two four-year periods, plus an extension of up to five years. In the case of
offshore exploration, the base term is divided into two periods of up to four years, plus an extension
of up to five years. At the end of the first period of the base term, the permit holder may choose to:
(1) revert 100 per cent of the area included in the permit; or (2) keep the entire area and enter into
the second period of the base term. At the end of the base term, the holder may choose to extend the
term of the permit, subject to reverting 50 per cent of the area.
A permit holder that discovers a commercially exploitable reser voir is entitled to a production
concession to develop it. The term of a conventional production concession is 25 years.
Concessions for the development of unconventional resources are granted for a term of 35 years.
Unconventional production concessions allow conventional E&P as ancillar y activities subject to the
payment of a production bonus and an additional royalty of three per cent. Offshore production
concessions are granted for a term of 30 years. In all cases, the concessions may be extended for
successive ten-year periods.
For production concessions, unconventional hydrocarbon production is defined as the extraction
of oil and gas through unconventional stimulation techniques applied to deposits in geological
formations characterised by the presence of rocks with low permeability. These include shale or slate
rocks (eg, shale oil and shale gas, compact sandstone), tight sand, tight oil and tight gas, and layers of
coal (ie, coal bed methane).
Holders of permits and concessions are required to pay royalties to the grantor – the Federal
Government or provincial government – at a 15 per cent rate for exploration permits and a 12 per
cent rate for production concessions. Royalties are increased by three per cent each time a concession
is extended, up to a maximum of 18 per cent. Royalties may be lowered to five per cent under
exceptional circumstances. Permit holders and concessionaires must also pay the grantor a surface
canon based on the acreage of the permit or concession.
3. Regulatory bodies
As explained above, the transfer of hydrocarbon resources from the federal domain to the provinces
was implemented in 2006 through Law No 26,197. The provinces have since handled the granting,
enforcement and control of permits and concessions within their territories.
The Ministry of Energy is the enforcement agency of the Hydrocarbons Law at the federal level.
Although natural gas transport and distribution are under exclusive federal jurisdiction, these
activities are subject to a separate regulatory framework (Law No 24,076, as amended and
implemented) (the ‘Natural Gas Law’), and the regulator for these matters is the national gas
regulator Ente Nacional Regulador del Gas (‘ENARGAS’).
In each oil-producing province (ie, Salta, Jujuy, Formosa, Mendoza, La Pampa, Neuquén, Río Negro,
Chubut, Santa Cruz and Tierra del Fuego), there is an agency with specific regulatory powers over
hydrocarbon upstream operations.
Doing Business in Latin America OCTOBER 2018 15
4. Oil and gas rights
The Hydrocarbons Law provides for the grant by the owner (ie, the Federal Government or relevant
province) of the mineral rights, surface survey permits, exploration permits and production
concessions to private investors. Permits and concessions had been granted by the Federal
Government until 2007 when jurisdiction over the hydrocarbon reserves was transferred to the
provinces. However, most of the hydrocarbons currently produced come from concessions that had
been granted by the Federal Government.
Under the Hydrocarbons Law, the holder of an exploration permit has the exclusive right to perform
the operations necessary or appropriate for the exploration of hydrocarbons within the area covered
by the permit. Usually, exploration permits set minimum commitments consisting of a seismic survey
and wells. If the holder of an exploration permit discovers commercially exploitable quantities of
crude oil or natural gas, it may apply for, and is entitled to acquire, an exclusive concession for the
production and development of these reserves.
5. Transportation by pipeline
The transportation of hydrocarbons through pipelines requires a concession or a licence from
the Federal Government or province, depending on whether the relevant pipeline system crosses
into another country or runs across two or more provinces, or is limited to the territory of a single
province. These permits can be obtained via two regulations: the Hydrocarbons Law, which applies to
all hydrocarbons, and the Natural Gas Law, which is only applicable to natural gas.
Under both frameworks, transportation services are defined as a public service and therefore cannot
be curtailed or interrupted by the carrier, except if there is a force majeure event or other event that
affects the operating conditions of the transportation facilities. The services are also subject to open
access and regulated tariffs.
Under the Hydrocarbons Law, the holder of a production concession is entitled to obtain a
concession to transport its production of hydrocarbons. A transportation concession is granted for
the same term as that of the related production concession: 25 years if it is a conventional concession
or 35 years if it is a concession for production of unconventional resources. These concessions may be
extended for additional and successive ten-year terms.
The Natural Gas Law governs the transportation, storage, marketing and distribution of natural
gas. Each of the transportation and distribution systems is operated under a licence granted by the
Federal Government.
This law establishes several restrictions on cross ownership for companies operating in different
segments of the gas industry, including producers, distributors, large consumers, transportation
companies and marketers. ENARGAS is the enforcement agency of the Natural Gas Law.
Given the country’s shortfall of natural gas production to meet domestic demand, the transportation
and distribution of gas is subject to a special regulatory regime aimed at satisfying the demand of
protected consumers (ie, homes and small businesses). Under this regime, natural gas producers
must allocate a set volume of natural gas to meet the demand of protected customers. The delivery
16 Doing Business in Latin America OCTOBER 2018
of gas to other customers (ie, natural gas vehicles and industries) is permitted when the demand of
protected customers is met.
After years of frozen transportation and distribution pricing, including the rates homes and small
businesses pay, tariffs have been substantially increased.
6. Downstream
Hydrocarbon-refining activities are subject to Law No 13,660 of 1949, which provides the basic
regulatory framework for these activities, whether done by oil producers or third parties.
Refining activities are subject to registration requirements established by the Ministry of Energy. In
addition to federal rules, refining activities must comply with provincial and municipal regulations on
technical and safety standards.
7. Market regulation
The price of liquid fuels has been liberated and gas prices are following the same trend. Natural gas
prices for industries can be freely negotiated; however, they are regulated for power generation and
residential customers.
The Federal Government has adopted several measures to foster investment in the upstream sector,
such as:
i. incentive programmes (eg, the Gas Plan) to promote gas production by recognising a minimum
price of US$7.50/MBtu for producers were extended for unconventional fields in certain
basins;
ii. the reduction of import duties for oil services’ equipment;
iii. the adjustment of gas prices for residential customers;
iv. the release of import and export restrictions; and
v. the promotion of multilateral agreements among producers, provinces and unions to reduce
operational costs; and
vi. incentive programmes.
8. Incentive programmes
Over the last few years, the Federal Government has created programmes to promote investment in
E&P with the aim of rebuilding gas reserves over the medium and long term so that the country can
regain self-sufficiency in gas. The main programmes are Gas Plus and Gas Plan.
Gas produced from projects approved under the Gas Plus programme can be marketed at prices
higher than standard regulated prices and cannot be redirected to protected customers. Since 2016,
benefits under the Gas Plus programme are no longer available for new projects, but the projects that
were already awarded these benefits will continue to enjoy them.
Doing Business in Latin America OCTOBER 2018 17
Under its current format, Gas Plan is available for unconventional gas production in the Neuquén
Basin. Producers and the provinces in which the gas is produced are entitled to compensation payable
by the Federal Government, which is determined as the difference between the producer price and a
minimum price, which will decrease from US$7.50/MBtu in 2018 to US$6.00/MBtu in 2021. Of the
compensation, 88 per cent goes to the producers and the remaining 12 per cent to the provinces.
The Federal Government incentives for the Neuquén Basin are made available under a framework
agreement for the oil sector. The Federal Government, Neuquén Province, oil unions and oil
companies entered into the agreement in 2017. As part of the agreement, Neuquén agreed not
to increase the tax burden on the oil sector, and committed to make investments to improve the
province’s logistics infrastructure with the help of the Federal Government. It is expected that similar
agreements will be reached with other hydrocarbon producing provinces to make the Gas Plan
incentives available for the gas produced in the basins of those provinces.
Another incentive was created with Federal Decree No 929/2013. It is available for direct investment
projects in hydrocarbon E&P at a minimum of US$1bn over a five-year term. This regime is also
available for direct investments of US$250m or more over a three-year term. The benefits of this
programme include: (1) the right to export a portion of the hydrocarbons produced by the project;
(2) the right to export those hydrocarbons free of export duties, or at a zero per cent rate; (3)
the right to do as you wish with the foreign-currency proceeds from the export deal; and (4) in
the event that there is a shortfall of hydrocarbons in Argentina and exports are restricted to meet
local demand, the exporter will be entitled to international prices for the hydrocarbons that could
have been exported and were not. In such a case, a compensation mechanism for payment in local
currency will be established. In such a case, producers would have a priority right to acquire foreign
currency in the official exchange market up to the total amount of the local currency obtained in
exchange for the hydrocarbons prevented from export, including the amounts collected for their sale
in the domestic market plus any compensation received under the above mechanism.
The benefits of this regime can be enjoyed as from the third or fifth year, depending on the
aforementioned investment amounts of the projects, and apply to 20 per cent of the production in
the case of onshore projects and up to 60 per cent for offshore projects.
Another benefit for the oil and gas sector is the reduction of the duties for importing capital goods
and essential supplies for investment projects.
b. mining activities
The basic statute that governs mining in Argentina is the Mining Code. Argentine law is
based on the principle that all mineral deposits are state owned. Each province or the Federal
Government, as the case may be, is considered to be the owner of the minerals located within its
jurisdiction. However, individuals and legal entities may obtain concessions from such bodies to
explore and develop those deposits, and may freely dispose of the minerals extracted within the
area of the concession.
18 Doing Business in Latin America OCTOBER 2018
1. Exploration of mineral resources
Exploration permits grant a right to search for mineral resources within a specified area and the right
to request a mining concession if a discovery is made during the term of the exploration permit. The
provisions of the Mining Code do not apply to oil and gas deposits. The mining of ores used in the
nuclear industry (ie, uranium and thorium), although subject to the Mining Code, must comply with
additional regulations.
The mining concession is for exploitation and includes the mine and its deposits as well as the
buildings, machinery, vehicles and so on used in developing the mine. The law considers this
concession to be a real estate property distinct from the title to the surface land where it is
located. Once the Mining Authority has registered the mining discovery, the discoverer’s rights are
incorporated into public deeds and registered with the Registry of Mines, and such a discoverer gets
the title of the mining concession. Mining concessions may be sold or transferred like any other
real estate property. The transfer document must be notarised and registered with the appropriate
administrative mining registry. Mortgages may also be granted for mining concessions once they
have been surveyed and such a survey has been approved by the Mining Authority. Because mineral
products are movable assets, once extracted, they can be pledged as security for financing purposes.
The law states that concessions may be terminated upon the occurrence of certain events.
Prior to the commencement of exploration works, the mining company must obtain an exploration
permit from the provincial Mining Authority (whether the land to be explored is public or private
property). The exploration permit grants the explorer the exclusive privilege to explore and
eventually obtain a development concession to work any deposit of any mineral (this right is not
limited to those mentioned in the petition) discovered within the area of the grant.
2. Development of mineral resources
If a discovery is accidentally made, or during the term of an exploration permit, the discoverer must
register the discovery with the Mining Authority to apply for a mining concession. In such a case, no
exploration permits or mining concessions can be granted to third parties in such a territory until the
termination of the mining concession.
3. Mining concessions
1. Acquisition: Mines are acquired through a legal concession. Mines capable of being acquired
through a concession (original acquisition) are: (1) discoveries; and (2) null and vacant mines.
2. Effects: A mining concession grants the concessionaire ownership of every deposit found
within its boundaries. However, the discoverer must inform the Mining Authority of the existence of
any mineral different from that registered. This information is needed for determining the annual
fee and required minimum capital investment.
3. Withdrawal: Concessionaires can withdraw from a mining concession through a direct and
spontaneous act that informs the Mining Authority of their decision to not move ahead with the
mining works. A written declaration must also be filed with the Mining Authority.
Doing Business in Latin America OCTOBER 2018 19
4. Mining fee: Mines are awarded through the payment of an annual fee established by the
Argentine Congress and paid to the Federal Government or provincial government, depending on
the location of the mines.
5. Investment plan: The concessionaire must submit an estimate of the capital investment plan
to the Mining Authority. The required minimum capital investment is 300 times the amount of the
annual fee. Investments must be for: (1) works for mine workers; (2) the building of camps, roads
and other constructions for exploration purposes; and (3) the acquisition of machinery, facilities and
production equipment that will permanently be at the mine.
6. Termination of the mining concession: Mining concessions are terminated for the following
reasons: (1) lack of payment of the annual fee; (2) lack of filing of the investment plan estimation;
(3) investments made contrary to the requirements of the Mining Code; (4) the amount of the
investment made is lower than 300 times the annual fee; (5) lack of filing of the annual affidavit
on the development of the investment plan; (6) committing fraud in the annual affidavit for the
development of the investment plan; (7) lack of compliance with estimated investments; (8) a
modification or reduction of the estimated investment without prior notice; (9) withdrawal of assets
that cause the reduction of the investments committed in the investment plan; and (10) inactivity of
the mine for over four years.
7. Specific tax treatment: Mining activities have special tax incentives, which should be carefully
analysed in the decision-making process for a new investment in the area. Legal statutes on tax
incentives provide for: (1) the financing or reimbursement of value added tax (VAT) payments made
by mining companies; (2) a 30-year tax stability regarding taxes in force at the time of filing the
feasibility report; (3) the beneficiaries have the right to deduct from their income tax statements 100
per cent of the amounts invested in prospecting, special research, mineral and metallurgical tests,
pilot plants, applied research and other works aimed at determining the technical and economic
feasibility of a project; (4) the possibility of accelerating (over three years) the depreciation of
investments made on housing, transportation, construction of plants and equipment required for
mining activities; (5) the exemption from paying income taxes derived from profits of the mines and
mining rights, used as payment for the subscription of shares of registered beneficiary companies;
and (6) a three per cent cap on royalties, among other benefits.
iv. Treatment of foreign investment in real estate
a. restrictions
Foreign ownership of real estate is unrestricted except for limitations on: (1) ownership or possession
of rural land; and (2) acquisition of properties located within national security zones.
1. The rural land regime
The Rural Land Law No 26,737 and its implementing Decree Nos 274/2012 and 820/16 (the ‘RLL’)
impose limits on the ownership or possession of rural land by foreign persons or legal entities.
20 Doing Business in Latin America OCTOBER 2018
1. Scope: The RLL’s purpose is to regulate, with regard to individuals and legal entities, the limits
to ownership and possessions of rural land, which are defined as any piece of land outside the
urban grid, regardless of its location or destiny. Foreign ownership over property or possession
of rural land is deemed as any acquisition, transfer, or assignment of possessory rights, whatever
the type, name and extension of time imposed on the parties, in favour of the subjects reached
by the RLL’s scope.
2. Restrictions: The RLL sets forth the following limits to individuals, legal entities or contractual
forms of association:
i. Foreign ownership of rural land shall not exceed 15 per cent of the total amount of ‘rural
land’ in the whole Argentine territory or in the territory of the relevant province or
municipality where the relevant land is located.
ii. Individuals or corporations of the same nationality will not be able to own or possess rural
land that represent more than 30 per cent of the 15 per cent previously mentioned.
iii. Ownership or possession by the same foreign owner shall not exceed 1,000 hectares
in the ‘core area’ or the ‘equivalent surface’ determined according to the location of
the land that is to be defined by the Interministerial Council of Rural Lands (Consejo
Interministerial de Tierras Rurales).
iv. Foreign legal entities or individuals shall not be owners of rural land that comprise or are
located beside ‘permanent and significant bodies of water’.
v. foreign legal entities or individuals shall not be owners of land located in security zones,
other than in accordance with the exceptions and the procedures established in the
security zones’ regulations.
3. Subjects reached by the RLL are:
1. foreign individuals, except those who: (i) have a ten-year residence; (ii) have Argentine
children and have a five-year residency; and (iii) have been married to Argentine citizens
for at least five years prior to the transfer of the property and have a five-year residency in
the country; and
2. legal entities in which more than 51 per cent of the stock or a portion sufficient to prevail
in corporate decisions is held by foreign individuals or legal entities held by foreign
individuals or legal entities. Other forms of ‘control’ or legal vehicles are also subject to the
limitations of the RLL.
4. Consequences of non-compliance: The RLL sets forth that all legal acts that are executed in
breach of its provisions shall be null and void, and the authors and participants shall not have
any right to claim compensation for their illicit act. The pretended appearance of Argentine
individuals as owners to comply with the ownership required by law, in order to breach the
provisions of the RLL, is prohibited. Such a circumstance shall be considered an illicit and
fraudulent simulation.
Doing Business in Latin America OCTOBER 2018 21
2. Security zones
The national security zones (the ‘Security Zones’) are areas surrounding international borders and
certain military and civil facilities in the interior of Argentina. The width of the Security Zones varies
from case to case. The National Executive Branch can amend the width of the Security Zones taking
into account the situation, population, resources and national defence interests.
The Security Zones’ regime states that it is in the national interest that properties located within
Security Zones belong to native Argentine citizens. For this reason, any and all sales, transfers or
leases of properties located within the Security Zones are subject to the prior approval of the Security
Zones Commission (SZC). Likewise, the SZC’s prior approval is required for: (1) mergers and
transfers of the controlling stocks in companies that own a property located in a Security Zone; and
(2) the conversion, merger or spin-off of a corporation that owns properties in a Security Zone. Only
Argentine individuals are exempt from the Security Zones’ regulations.
b. Zoning and related matters concerning the use and occupation of real estate property
Real estate developments in Argentina are basically governed by provincial and municipal zoning
regulations and building codes; therefore, they differ in each jurisdiction. The Federal Government
sets the minimum environmental standards for the protection of the environment, and the provinces
and municipalities establish specific standards and implementing regulations.
Control of proper zoning, land use, building codes and other restrictions is carried out by provincial
and municipal authorities. Environmental compliance is controlled at the federal, provincial and
municipal level.
v. Treatment of foreign investment in the rendering of public services
a. introduction
Argentina is organised as a federal system. The Federal Government coexists with 24 local
governments (ie, 23 provinces and the City of Buenos Aires) and more than 2,000 municipalities.
Administrative law is of a ‘local’ nature. The Federal Government, each province, the Autonomous
City of Buenos Aires and the municipal governments may enact or issue their own laws or
regulations on administrative matters. Such laws and regulations must comply with the Argentine
Constitution, as well as with the constitution of the relevant province or the Autonomous City of
Buenos Aires. In most cases, provincial administrative law has not been autonomously developed,
so generally speaking, the same administrative law jurisprudence and principles are followed at
federal and local levels.
b. procurement regulations
Public procurement is considered a typical administrative matter, so it is governed by administrative
law. Contracts executed by administrative agencies are governed mostly by administrative law rather
than civil or commercial law.
22 Doing Business in Latin America OCTOBER 2018
Administrative law is local as opposed to federal. Each province and the Autonomous City of Buenos
Aires may enact its own laws and regulations regarding public procurement. Procurement laws
and regulations are generally applicable to most of the contracts entered into by the government
including, among others: (1) public works contracts; (2) public service concessions or licences (eg,
utilities); (3) supply agreements; and (4) consulting services agreements. Generally, government
contracts are governed by the rules set forth in the relevant legislation, as supplemented by the
specific bidding terms and conditions issued ad hoc when the bidding and tender process is called,
and the particular terms of the contract.
The general principle is the need that procurement must be done by means of a competitive
bidding process that must ensure transparency and equality between all bidders. Under exceptional
circumstances, procurement may be privately tendered or contracted directly.
The bidding terms and conditions usually impose certain economic and technical requirements (eg,
expertise in similar works, a minimum net worth and certain debt ratios) for the granting of public
contracts. ‘Buy Argentine’ requirements are also applicable at both federal and local levels.
c. public works and utility concessions
Depending on their location and scope, contracts for public works and utilities may be subject to
federal, provincial or municipal regulations. Thus, the authorisations required to carry out public
works or to operate a utility may vary from one jurisdiction to another.
The Federal Government is currently developing Plan Belgrano, a programme of infrastructure
projects to enhance the development of the provinces in the north of Argentina. It includes railways,
highways, roads and ports. Another programme, called Plan Patagonia, is for infrastructure projects
to foster the development of the southern provinces, including by building airports, railways, roads,
and conventional and renewable power generation projects.
B. Offshore vehicle providers in Latin American countries
i. Introduction
Argentina has a continental law system and it is organised as a federal republic. Consequently, in
accordance with the Argentine National Constitution, each of the 23 provinces and the Autonomous
City of Buenos Aires (which also is the Federal Capital of Argentina) pass their own provincial
constitution and laws, and certain powers are delegated to the Federal Government. As a result,
the National Congress is vested with the power to enact, among others, federal law, general law
and, specifically, the national civil and commercial codes, which include those matters related to
companies with profit-making purposes. In October 2014, The National Congress passed Law No
26,994 of the new National Civil and Commercial Code and abrogated the prior national codes,
namely the National Commercial Code and National Civil Code, that were applicable for the last 150
years in Argentina.
On the other hand, pursuant to the aforementioned delegation of powers, in 1984, the National
Congress also enacted the General Company Law (Ley General de Sociedades 19,550, hereinafter
Doing Business in Latin America OCTOBER 2018 23
as amended, referred to as the ‘GCL’), which is still in effect and regulates all matters related to
the different types of companies, including those issues concerning the recognition of companies
organised abroad as well as the activities they perform in Argentina.
As introduced above, due to the federal organisation of Argentina, each province is autonomous
and retains the power to regulate on local control and registration of companies that aim to perform
their main activities within their respective territories. As a result of such autonomy of powers,
registration rules may vary from one provincial jurisdiction to another. The most representative case
of this autonomy is the one of the Autonomous City of Buenos Aires, which is the capital city and the
principal port of Argentina, thus being the hub destination for most foreign investors.
Because of the limitations of this article, we do not intend to cover all the aspects regarding the legal
treatment offshore companies in Argentina, but rather to present a short practical guide about the
most prominent aspects to be taken into consideration pursuant to the law of Argentina, and most
importantly, the local regulations adopted in the Autonomous City of Buenos Aires.
ii. Offshore companies under the GCL
The GCL does not contain any special regime for offshore companies as such, other than the general
regime for foreign companies that are regulated by the provisions therein concerning the recognition
of companies organised abroad and the way they may perform business in Argentina. However, as
introduced above in the first section, it is important to mention at this point that offshore companies
are subject to certain restrictions imposed by state law. Therefore, for the sake of clarity, it is worth
insisting that a company organised abroad shall always consider both the federal law and the state law
of the jurisdiction where it intends to perform its main activities in Argentina.
a. recognition of companies organised abroad
First, it must be stressed that the GCL upholds the constitutional principle of equality under
the law; consequently, companies registered in Argentina and those organised abroad must be
treated equally. Furthermore, in connection with the constitutional principle of the sovereignty
of Argentina, the GCL requires companies organised abroad willing to do businesses in Argentina
to be duly registered and to comply with certain formalities before the corresponding Registr y of
Commerce of the chosen jurisdiction.
Second, the general principle regarding recognition of the existence of companies organised abroad
is provided by Article 118, the first part, of the GCL, which upholds the locus regit actum canon and
thus prescribes that ‘the existence and form of a company set up abroad shall be governed by the laws
of the place where it was organised’.
b. different forms for companies organised abroad to perform activities in argentina
The GCL regulates three legal ways for companies organised abroad to perform activities in
Argentina. In such a respect, a foreign company can: (1) carry out isolated acts; (2) establish a
permanent representation (ie, branch, agency, etc); or (3) organise or participate as members of
local companies (ie, subsidiaries). Different requisites apply in each case, as follows:
24 Doing Business in Latin America OCTOBER 2018
In the first place, companies organised abroad are qualified to perform isolated acts and to be on
trial without need of prior registration or any further formalities.
In the second place, companies organised abroad may regularly perform activities consistent with
their main business by setting up a branch, agency or any other type of permanent representation
in Argentina. For this purpose, the foreign company must fulfil certain prerequisites, among them,
the company must: (1) prove its existence pursuant to the laws of the country of origin; (2) set a
legal domicile in Argentina; (3) comply with certain publications and registrations similar to those
required by the GCL to local companies at the time of incorporation; (4) justify the decision to create
such representation with the corresponding resolution; and lastly (5) appoint a representative who
shall be in charge thereof.
Finally, companies organised abroad may opt to form or participate in local companies. For this
purpose, the company must fulfil the following requirements first: (1) it must produce evidence that
it has been incorporated in accordance with the laws of its country of origin; (2) it must register its
by-laws and other qualifying documents; and (3) it must appoint its legal representatives in Argentina.
Furthermore, it is worth mentioning that the GCL upholds the phenomenon of companies formed in
fraudem legis. In this regard, when a company organised abroad has its principal place of business, or
its main purpose is to be accomplished in Argentina, then it shall be deemed to be a local company
insofar as its incorporation, charter of amendments and supervision are concerned. Consequently,
the company will only be recognised as a regular entity once it fulfils all the relevant requirements to
register a local company under the GCL.
Regarding listed companies, capital markets regulations also apply the principle of equality before the
law. However, all companies applying for a permit to make a public offering of securities in Argentina
have to demonstrate that they have no restriction or legal prohibition to perform activities according
to their by-laws within the country of organisation or registration. Consequently, offshore companies
are excluded from participating in such a public offering.
iii. Applicable laws regarding offshore companies in the Autonomous City of Buenos Aires
In the last 15 years, offshore companies have been subject to different regulatory provisions adopted
by local registries in some jurisdictions of Argentina. For instance, in 2003, the Public Registry of
the Autonomous City of Buenos Aires (the ‘PR’) initiated an integral regulatory reform upholding
a standard that restricts the activities of offshore companies. Succinctly, the PR’s regulations were to
enhance the level of transparency, supervision and protection of stockholders and creditors through
increased preventing measures (ex ante legal strategies). This reform also obeyed the international
legal trend promoted by, among other international organisations, the Financial Action Task Force
(FATF), also known as Groupe d’action financière (‘GAFI’), and the Organisation for Economic
Co-operation and Development (OECD) through the recommendations to fight against terrorism,
money laundering and tax matters.
For a little bit of context today, it is worth mentioning that on 20 June 2018, MSCI announced the
recategorisation of the MSCI Argentina Index from ‘Frontier Markets’ to ‘Emerging Markets’, status
beginning in June 2019: Argentina’s new categorisation, comes two years after the judicial settlement
Doing Business in Latin America OCTOBER 2018 25
of its long defaulted international debt (almost 14 years). Argentina aims now to be invited by OECD
to join as a member country because it has been largely working towards that goal.
a. offshore vehicle providers: general concept
According to General Resolution 7/15, offshore companies are those companies organised abroad,
which pursuant to the laws of organisation, incorporation or registration thereof have imposed on
them prohibitions or restrictions regarding all the business or main business transacted thereby,
within the territory of application of such laws. Likewise, General Resolution 7/15 defines offshore
jurisdictions as those jurisdictions – in the broad sense of the term, including independent or
associated states, territories, domains, islands or any other territorial units or areas, whether
independent or not – in which, pursuant to the applicable laws, prohibitions or restrictions are
imposed upon all companies or a given type of company organised, incorporated or registered
therein with regard to all business or the main business transacted thereby within the area of
application of such laws.
Additionally, General Resolution 7/15 also refers to companies which, without being offshore per se,
are companies organised in states, domains, territories, jurisdictions, associated states and specific tax
regimes other than those considered jurisdictions that cooperate with Argentina for the purpose of
fiscal transparency; or are organised in jurisdictions that do not cooperate in the fight against money
laundering and transnational crime. Those are so-called de facto offshore companies, and they are
also subject to specific regulations under General Resolution 7/15.
b. registration of offshore companies with the pr
As mentioned above, one of the purposes of General Resolution 7/15 is to restrict and control
the use of offshore companies organised abroad. Hence, a foreign company that requests to be
registered with the PR (Autonomous City of Buenos Aires), whether for setting up a branch,
agency or to participate in a local subsidiar y, must comply with three additional and essential
requirements to those general requirements described above and prescribed under the GCL.
In this respect, the company must provide the PR with documentation, signed by its corporate
officer, whose representation powers shall be attested to by a notar y public, evidencing that: (1)
the company is not subject to any prohibition or restriction to carr y out all its business activities
or its main activities at its place of organisation, incorporation or registration; (2) the company
has, outside Argentina, one or more agencies, branches or representative offices in good
standing and/or non-current fixed assets or rights to operate third-party property qualifying
as non-current fixed assets and/or interests in other non-listed companies and/or customarily
engages in investment transactions on stock exchanges or securities markets as provided for in its
corporate purpose; and (3) the company must also identify its partners at the time of adopting
the decision to apply for registration.
Consequently, the general principle is that the PR shall not register offshore companies originating
from offshore jurisdictions. Offshore companies intending to perform activities for the attainment of
their purpose and/or organise or hold an ownership interest in local companies, shall first comply in
full with Argentine laws similarly to local companies.
26 Doing Business in Latin America OCTOBER 2018
Also, General Resolution 7/15 provides for specific exceptions to this principle (see below).
Regarding so-called de facto offshore companies (see definition above), the PR shall apply a
restrictive criterion upon assessing the fulfilment of the following requirements: the company is
actually engaged in significant business at its place of organisation, registration or incorporation
and/or in other countries; and the identification of its partners. For such a purpose, the PR may
request the company to provide, among other documents: (1) its most recent approved financial
statements; (2) a description, in a document to be signed by the competent authority of the
countr y of origin or a company officer – whose capacity and sufficient powers shall have to be
duly evidenced – of the main transactions carried out during the fiscal year to which the financial
statements refer or during the next preceding year if the periodicity of such statements were
shorter, stating the transaction dates, parties, purposes and amounts; (3) documents evidencing
title to non-current fixed assets or contracts conferring rights to operate non-current fixed assets,
if the document mentioned in (2) above is deemed insufficient; and (4) background information
about its partners’ financial and tax condition.
For the sake of clarity, General Resolution 7/15 explains that upon assessing the business carried out by
companies abroad for the purpose of determining whether it should be construed as the main business
in comparison with the activities carried out by its office, branch or representation office in Argentina,
the PR shall avoid focusing its review exclusively on the value of assets and/or volume of transactions,
being entitled to ponder – based on the documentation to be submitted for registration purposes –
other relevant factors such as: (1) the nature of the company’s activities; (2) its integration in a group of
internationally renowned companies characterised by the division and/or interrelationship of activities;
(3) the extent of human resources involved; and (4) any other element that reasonably evidences the
localisation and significance of the activities carried out abroad by the company.
c. maintenance of the regular status: annual report
Once the company organised abroad has been registered with the PR, it must comply annually with a
reporting duty, performed within 120 days as from the closing of its fiscal year. Basically, the company
must provide evidence that it continues to carry out its main activities within the jurisdiction of
organisation, registration or incorporation and/or in third countries. In addition, the company must
provide evidence of its ownership structure, if there are variations therein.
Non-compliance with the reporting duty may constitute an indication that the company organised
abroad is in fact a company in fraudem legis, and thus the PR may require the company to start a
regularisation procedure to fulfil Argentine laws within a period which shall not exceed 180 days.
Otherwise, the PR shall request in court the cancellation of the registration and the liquidation of
assets, as applicable.
d. legal eXception: vehicles for investment means
As already indicated, acknowledging the reality of international businesses and the proliferation
of groups of companies worldwide, General Resolution 7/15 provides for an exemption
appropriate to offshore companies when they apply for registration solely for the purpose
of acting in Argentina as a vehicle or investment means of other companies that directly or
Doing Business in Latin America OCTOBER 2018 27
indirectly control them. In other words, a company acting as a mere investment vehicle of
another company within the same group is exempt from submitting: (1) that it is not subject
to prohibitions or legal restrictions to carr y out, in its jurisdiction of incorporation, all of its
activities or the most important of them; and (2) evidence regarding activities performed abroad.
Instead, the controlling company must comply with these two requirements and the remaining
ones described above. Furthermore, the vehicle company must submit: (1) a certificate issued
by the controlling company declaring that the vehicle company is an investment instrument that
it uses solely for that purpose; (2) a certificate issued by the vehicle company declaring that it is
an investment instrument that the controlling company created solely for that purpose; (3) an
organisational chart showing the controlling interest regarding the vehicle company; and (4) a
certificate identifying the vehicle’s shareholders. For avoidance of doubt, both the controlling
company and its vehicle (whether offshore or not) must be registered with the PR, and accordingly,
they must comply with the annual reporting duty as explained in the previous section.
iv. Final words
The applicable legal standards for companies in Argentina, for example, equal treatment to both
foreign and local companies, plus the requisites for the incorporation of those legal entities (in this
chapter, limited to offshore companies), on top of a federal system such as Argentina, urges foreign
investors to learn about not only the legal requirements provided by the GCL but also the local law
in the jurisdiction where the company intends to perform its main activities. Qualification of ‘main
activities’ is always a matter of fact, and as such, it demands case-by-case analysis.
Finally, it is very important to highlight that to be in good standing under the GCL, the offshore
company needs to be registered with a local register in the place where it will perform its main
activities to do business throughout Argentina.
C. Development of ample/integrated capital markets and joint activities between Latin American countries
i. Merger of stock exchanges: attempts versus realities
A local example of a merger of capital markets that became effective is Bolsas y Mercados Argentinos
SA (‘ByMA’). ByMA was formed as a result of the association between Mercado de Valores SA
(‘Merval SA’) and Bolsa de Comercio de Buenos Aires (BCBA). The main objective of ByMA is to
create a local capital market that offers more quality, technology and options for its investors.
One of ByMA’s main scopes is to apply new technologies so that investors can operate with shares and
all types of financial assets in any part of the country and all over the world.
The ByMA was formally established in September 2016, and started operating on 23 May 2017. On
the opening day, the President of ByMA, Ernesto Allaria, summarised the aims and ideas of the
referred new stock exchange: ‘Today BYMA makes available to all economic players the conversion of
investment in production and services, and the transformation of savings into productive investment
28 Doing Business in Latin America OCTOBER 2018
to be used in financing projects, which contributes to the generation of employment and the growth
of the national economy’.
The traded volume in the ByMA during 2017, measured in Argentinean Pesos was $2,558bn, which
represented an annual increase of 92.4 per cent. The same traded volume in ByMA for the same
period of time (2017) measured in US dollars was US$153,833m, which represented an annual
increase of 71 per cent.
On the other hand, we can mention the Lima Stock Exchange (Bolsa de Valores de Lima (BVL))
and the Colombia Stock Exchange (Bolsa de Valores de Colombia (BVC)) as an attempt to integrate
different capital markets. Both markets were in negotiations to merge both stock exchanges. The
scope of the aforementioned merger was to create a new entity capable of affording globalised capital
markets challenges, complementing the aims of the Latin American Integrated Market (LAIM –
Mercado Integrado Latinoamericano (MILA)) and strengthening commercial ties between the two
countries. In August 2011, the merger was suspended, and currently there are no signals to resume
negotiations of the merger between both stock exchanges.
ii. MILA: current results and expectations
MILA is the result of an agreement signed by the stock exchanges of Bogotá, Santiago and Lima,
together with the central securities depositories (CSDs) Deceval, El Depósito Central de Valores
(DCV) and Cavali.
On 30 May 2011, MILA began to operate. The main achievement of this integrated market is to
enable investors to purchase and sell shares and equities from the three referred stock markets in
their local currency and through the local broker.
The integration of the three stock markets is the result of three measures:
1. the use of technological tools;
2. the adaptation and standardisation of the regulations on trading in capital markets; and
3. the custody of securities in the three markets.
Thus, MILA is not a merger of markets or a global corporate integration. The three markets not only
complement each other, but maintain their independence and regulatory autonomy.
a. current results
To show the significance of this market, below we specify the traded volume in the MILA markets for
certain months of 2017 and 2018 (Source: official page of MILA).
In September 2017, the total traded volume in the MILA markets was US$14,379,873,099. In 2017,
the total traded volume in the MILA markets was US$130,434,022,420. In June 2018, the total traded
volume in the MILA markets was US$16,313,227,738. In 2018, the total traded volume in the MILA
markets was US$104,908,052,400.
Doing Business in Latin America OCTOBER 2018 29
b. eXpectations
The expectations are to continue promoting the participant growth of financial businesses, integrate
the stock markets of Chile, Colombia, Peru and Mexico (the ‘Member Countries’) and become the
most attractive securities market in the region.
iii. Pacific alliances: governmental action and proposed treatment and agreements
The Pacific Alliance is a regional integration initiative created on 28 April 2011. It is comprised of
four countries: Mexico, Colombia, Peru and Chile.
The main objectives of the alliance are:
• free movement of goods and people among the Member Countries; and
• to create a more dynamic flow of trade among the members.
The official page of the Pacific Alliance states that ‘the purpose of the Pacific Alliance is the
integration of Member Countries in order to move progressively closer to the free movement of
goods, and generate a greater dynamism in the flow of trade between countries’.
In this sense, on 10 February 2014, the presidents of the member states of the Pacific Alliance
subscribed to an agreement that consisted in the elimination of 92 per cent of the universal tariff (the
remaining eight per cent will be eliminated progressively and according to what the parties agree).
There are also some topics that are currently being discussed, such as promoting multilateralism and
rules-based global order, as well as open, transparent and inclusive free trade agreements (FTAs) in
accordance with the World Trade Organization (WTO) to improve competitiveness and promote
sustainable socio-economic development and social inclusion.
Nevertheless, the more ambitious aim that was proposed by the governments of the referred states is
the free movement of people, goods and services among the countries within the alliance. It is a huge
challenge, but realistic and possible, taking into account the achievements of the states concerning
trade matters and integration.
iv. IPOs of multilatina companies in Latin American capital markets
Multilatina companies are gaining power in the world business landscape. The most important
multilatina companies are in Mexico, Brazil and Chile. It is important to understand that these
companies were local leader companies that, with management innovations and investment, have
been able to expand all over the region.
Furthermore, LATAM Airlines could be named as the biggest hallmark case within the region. In
August 2010, LAN Airlines and TAM Airlines, Chilean and Brazilian respectively, merged in order to
create the largest airline in Latin America: LATAM Airlines.
Nevertheless, capitalisation is essential to accomplish such an objective. Some examples of initial
public offerings (IPOs) of multilatina companies in the Latin American markets show this fact.
30 Doing Business in Latin America OCTOBER 2018
In December 2017, Petrobras Distribuidora SA launched an IPO in the São Paulo Stock Exchange
(BOVESPA), increasing its capital for an approximately amount of R$5.024bn.
In July 2018, Mall Plaza (a subsidiary of Plaza SA), a Chilean shopping mall business, performed
the biggest IPO in the history of the Chilean capital markets, resulting in an increase in the
aforementioned stocks’ corporation of approximately US$520m.
However, the current main goal of multilatina companies is to attract investments and to be at the
same level as traditional global companies.
It is worth highlighting the importance of encouraging multilatina companies in the region, but
always keeping the balance of foreign and local investments that are not opposite but complementary.
D. Rendering of public services
i. General framework
During the 1990s, Argentina embarked on a privatisation programme as part of major economic
reform.
Following the noticeable trend observed in the region, state-owned companies, which had been in
charge of rendering telecommunications services, electricity and gas supply, oil production, water
and sewerage services, airports and railways, among others, were declared subject to privatisation after
more than five decades of state’ monopoly.
This process was aimed at improving market efficiency and increasing private investment in order to
enhance the quality of public utilities. The state changed its role from supplier to regulator. Foreign
private investment in public utilities was also encouraged.
After Argentina’s 2002 economic crisis, some public utilities returned to state control through
different mechanisms – for example, nationalisations, expropriations and state intervention – such as
water and sewerage services (at both national and local level), railways and the major oil producer.
In addition, public services rendered by private companies were greatly affected by the measures
taken since Law 25,561 (the ‘Emergency Law’) was passed. As a result of this major political shift,
nowadays, Argentina shares state-owned enterprises and private companies in the public utility sector.
ii. Governmental monopoly versus private initiative
The Argentine Constitution remains silent as to whether public services should be rendered by the
state or private companies. According to Article 42 of the Constitution, ‘Legislation shall establish…
regulations for national public utilities’.
This constitutional provision leaves the decision open to the legislator. Therefore, the legislative
branch has discretion to decide which economic activity will be performed by the state or the private
sector and, in the last case, which legal requirements should be complied with.
Doing Business in Latin America OCTOBER 2018 31
The Argentine Constitution also promotes the introduction of competition and market mechanisms
wherever possible. Article 42 of the Argentine Constitution calls the public authorities to defend
‘competition against any kind of market distortions’, which naturally includes economic activities
declared as public services.
iii. Privatisation general rules
Argentina lacks a general framework of public utilities. Each industry has its own regulatory
framework that covers its particular features.
The most important public utilities that are still rendered by private companies are power, natural gas
and telecommunications.
a. power
The regulatory framework of the power sector (still privatised) was approved by Law 24,065 in
1992. Its main features are: (1) electricity transportation and distribution are considered ‘public
services’ (ie, natural monopolies), while generation has been qualified as an ‘activity of general
interest’ carried out within the framework of a competitive market; (2) there are cross-ownership
restrictions for private companies between these economic activities; and (3) the creation of: (i) the
Wholesale Energy Market Administrator (Compañía Administradora del Mercado Mayorista Eléctrico
(‘CAMMESA’)), whose main functions involve coordinating dispatch operations, determining
wholesale prices and administering the economic transactions; and (ii) an autonomous government
agency (Ente Nacional Regulador de Electricidad (ENRE)), which regulates the market and controls
public utilities.
In addition, a company willing to operate through the wholesale market is required to be previously
authorised by CAMMESA.
Transportation and distribution services are rendered by concessionaires.
The transportation system is divided into: (1) high-voltage energy transportation that links electric
power regions; and (2) trunk distribution electric power transportation, which is supplied within
each region.
Tariffs charged by electricity transportation companies include: (1) a connection charge; (2) a
transport capacity charge; and (3) a charge that rewards the energy transported. Revenues incoming
from system expansion are regulated separately.
The main features of the distribution concession agreements are: (1) service supply quality
standards are defined, and failure to meet these standards would entail penalties on the distributors
and compensation to affected users; (2) a 95-year concession agreement for service supply was
granted; and (3) tariffs were originally fixed on the basis of economic criteria (price caps, following
predetermined procedures concerning their calculation and adjustment) until the Emergency Law
entered into force in 2002.
32 Doing Business in Latin America OCTOBER 2018
b. natural gas
Production of natural gas is governed by Hydrocarbons Law 17,319. As a result of the enactment of
Law No 24,076 in 1992, transportation and distribution segments were vertically divided, and where
applicable, horizontally split.
Transportation and distribution were characterised as a public utility due to their monopolistic nature.
The main features of the licence agreements for the distribution of natural gas are: (1) service supply
quality standards were defined, and failure to meet these standards would entail penalties upon the
distributors and compensation to affected users; (2) a 35-year licence agreement for service supply was
granted with the possibility for the licensee to extend this term once for a ten-year period; at the end
of the stated term, the majority stock of the corporation had to be offered for sale again; and (3) tariffs
were fixed on the basis of economic criteria, until the Emergency Law entered into force in 2002.
c. telecommunications
Telecommunications services were privatised in 1990, and two private companies were granted
exclusivity rights until 1997.
In 2000, Decree No 764/00 entered into force and provided full deregulation for the
telecommunication industry.
The main features of this sector are: (1) free competition; (2) transparent licensing rules (only
one licence is sufficient to provide any telecommunications service); (3) a universal service
regime (which tends to grant access to the services to the population at affordable prices); (4)
national interconnection rules based on a non-discriminatory and transparent criteria; (5) the
telecommunication spectrum is administrated exclusively by the state.
iv. Limitations and/or prohibitions to private parties in the rendering of public services
As a general rule, there are no limitations or prohibitions to private parties for rendering public
services in Argentina.
Unless the service is a legal or natural monopoly (eg, natural gas or electricity transportation and
distribution), private companies are allowed, as a general principle, to render public services under
state regulations.
E. Real estate: limitations for private parties
i. Real estate: limitations for private parties
As a general principle, Argentina’s National Constitution grants the right to private property and
states that expropriation due public use has to meet specific requirements to be admissible.
More specifically, real estate in Argentina is mainly regulated by the Argentine Civil and Commercial
Code. The Argentine legal system regards ownership under the numerus clausus principle, therefore real
estate rights are only those expressly recognised in the Civil and Commercial Code or special laws.
Doing Business in Latin America OCTOBER 2018 33
Real estate may also be affected by Border Security Zone regulations and by Law No 26,737 (Rural
Lands Law) that impose restrictions on the ownership (and holding in the case of Border Security
Zone) of rural properties by foreign citizens.
Properties are subject to provincial and local regulations related to the organisation and use of the
properties, as well as regulations protecting historic places (which may also appear on a national
level). Many jurisdictions also have laws on large commercial zones that regulate the use of large plots
of land affecting mainly supermarkets, malls and department stores.
Environmental regulations may appear on a federal (national), provincial and municipal level.
Federal laws provide the minimum standards, and provinces and municipalities establish specific
standards and implement specific rules and obligations in order to comply with those standards.
These regulations may result in limitations on the use of properties or in obligations for the owners,
among other effects. Environmental laws apply to both urban and rural properties.
Finally, limitations may arise from agreements or conditions imposed by private parties in the manner
of easements or conditions of sale, as the case may be, that are usually registered in the Real Estate
Public Registry and/or arise of the title to the property. There may also be so-called ‘administrative
easements’ that are imposed by local authorities usually for the use or provision of public services
companies (energy, water, etc).
It is also worth mentioning that investment in the acquisition or development of real estate projects
may need to give proper consideration in their structuring to other general regulations (exchange
controls, taxes, etc) that may have specific rules for real estate investments.
ii. Urban properties
Limitations for private parties in the use of urban properties are mainly those related to zoning, land
use and construction codes. These regulations are enacted on a municipal level (following directives
of general rules or standards issued at a provincial level).
Zoning regulations rule those matters related to a more general use given to the property
(commercial, residential, etc). Land use refers to the specific activities developed in such properties
(restaurant, shop, etc). Each city has its own urban planning code or a similar regulation including a
zoning map of the city.
Construction codes include regulations on the construction itself and on the requirements to
obtain authorisations. These regulations also have provisions on the square metres and heights that
constructions may have on a given plot of land.
On a provincial level, many provinces have regulations regarding large plots of land when they are
used for certain commercial purposes (clothing, food, construction materials, etc). These regulations
establish particular requirements that owners or developers of these plots have to fulfil, as well as
how the activities should be developed on those plots. In addition, there might be regulations for
properties on riversides and coastlines that may result in limitations on the development and use of
properties located in those areas.
34 Doing Business in Latin America OCTOBER 2018
In reference to Border Security Zone Law, although it is applicable both to rural and urban
properties, there are many urban areas within the Security Zones where plots are excluded from the
application of this law.
Limitations imposed by laws or regulations may also be imposed not as a general rule but to a
particular property. In this sense a property may be subject to a so-called ‘administrative easement’,
which is an easement imposed by regulations and usually related to the provision of public services
(energy, water supply, etc). These limitations affect only a portion of the property and shall be
mentioned in the title and the corresponding registry in the Real Estate Public Registry.
Other limitations may arise as a consequence of the regime to which a property is subject due to
decisions in its development. An example of this type of limitation would be those resulting from the
subdivision according to Propiedad Horizontal. For the subdivision under this regime the parties
have to execute a deed in which, on the one hand, the units or dwellings are identified as well as
the common areas and, on the other hand, includes rules on the use that those units may have
(housing, offices, etc, always as permitted by zoning and construction codes), how the decisions
are made, and how the owners of each unit shall contribute to the expenses of common areas and
services, among other matters. In addition, the parties may issue internal rules of use that provide for
more contingent matters, such as schedules and places for the disposal of garbage, procedure to use
common salons, and so on.
Other limitations that may be a result of the decision or agreement by private parties are easements
granted to neighbours in order, for example, to give right of way or conditions or charges imposed
by the seller or donor of a property that a specific use is given to the property (eg, for a sports
club). This type of limitation has to be included in the title and mentioned or referred in the Public
Registry in order to have an effect on a subsequent buyer.
It is important to mention that transfer of real estate as well as the creation, change or extinction
of real rights, has to be made through a public deed with the intervention of a notary that has the
obligation to verify the status of the title, verify the existence of registered limitations and restrictions
of the property, and obtain certificates from the authorities in regards to the property.
In reference to the exploitation of an urban property, leases are subject to regulations by the
Commercial and Civil Code. According to these regulations, the minimum length of a lease is two
years, regardless of the purpose, and the maximum length is 20 years for housing leases and 50 years
for commercial leases.
Tenants may also terminate lease agreements provided that six months of the lease agreement have
passed, and subject to previous notification. In case tenants terminate the lease (after six months and
with previous notice), they shall pay the equivalent of one and a half times the monthly price of the
lease if the termination is during the first year and one month if the termination is after the first year.
Another restriction that may affect leases, especially in an inflationary scenario, is the prohibition of
indexation or adjustment of prices, according to which it will require the inclusion of a mechanism in
the contract to maintain the price of the lease with respect to market prices throughout the term of
the contract.
Doing Business in Latin America OCTOBER 2018 35
iii. Rural properties
Limitations for rural properties resulting from local (municipal or departmental) or provincial levels
would probably be mainly related to the possibility of subdividing the plot or to particular rules for
specific activities or uses of rural land, as well as environmental laws, water regimes, and so on.
In addition, there are legal obligations to give right of way to properties that have no access to routes
or other ways. If applicable, this obligation will most probably be regulated in an easement between
the parties, with an agreement on how the right of way is granted. Other easements that are common
to find in rural properties are those related to the use of water or access to water sources, in addition
to or in accordance with those provisions of the water regime laws of the jurisdiction that rules the
use of rivers, lakes and water reserves in each jurisdiction.
All rural properties within Border Security Zones are reached by regulations that impose restrictions
on foreign entities and individuals regarding acquiring properties in the so-called Border Security
Zones that are determined in these regulations.
In case a foreign individual or company intends to acquire real estate located within these zones,
special authorisation granted by the National Commission of Security Zones is required in order
to complete the acquisition. It is important to mention that local companies controlled by foreign
shareholders are deemed to be foreign companies for this regime and thus, any acquisition of
properties by these companies shall require authorisation. In the same sense, if a foreign individual
or company intends to acquire a local company that owns properties in the Security Zones, the
acquisition will have effects due to these regulations.
The term to obtain this authorisation is around three months, but in some cases, it takes longer.
Moreover, in December 2011, Law No 26,737 (the ‘Rural Lands Law’) was enacted, which provides
for the Regime for the Protection of National Domain on Ownership and Possession of Rural Lands.
In February 2012, the Rural Lands Law was completed by Regulatory Decree No 274/2012, and in
June 2016, Decree No 274/2012 was modified by Decree No 820/2016.
The Rural Lands Law intends to regulate the limits to ownership and possession of rural land by
foreign persons – individuals or companies – irrespective of its use or the production to which it
might be dedicated.
The Rural Lands Law considers the following as ‘foreign persons’:
1. foreign individuals;
2. entities controlled by foreign individuals or entities;
3. trusts that have more than 25 per cent of foreign (individuals or entities) beneficiaries;
4. joint ventures (JVs) in which foreign persons participate in a percentage that is over that
authorised by the Rural Lands Law;
5. foreign public entities; and
6. simple associations controlled by foreign individuals or entities.
36 Doing Business in Latin America OCTOBER 2018
The Rural Lands Law establishes the following limits to ownership or possession by foreign persons:
1. as a general limit, a maximum of 15 per cent of ownership or possession by foreign persons
in the Argentine territory; this 15 per cent is calculated over the province, municipality or
administrative body territories (eg, departments) in which the property is located;
2. persons of a single nationality may not own or possess more than 30 per cent of the limit
mentioned in (1);
3. each proprietor shall have a limit of 1,000 hectares or the equivalent according to the location;
4. prohibition of ownership or possession of land next to permanent and relevant bodies of water;
and
5. if the property is inside a Security Zone and does not fit the exceptions from Decree No
15385/44 (modified by Law No 23,554), it was also required previously that the transfer must
be authorised by the Border Security National Commission.
The Rural Lands Law also creates a National Registr y of Rural Lands that will have a registr y of
land with foreign proprietors, and that may impose sanctions in the case of non-compliance with
the Rural Lands Law.
iv. Expropriation events
As a general principle, the right to private property is granted by the Federal Constitution, which only
admits expropriation for cause of public utility if:
• Congress has declared the public interest; and
• prior and due compensation has been paid to the owner.
On a provincial level, the respective constitutions include similar provisions.
Both on a federal and provincial level, there are laws that regulate the process of declaration of public
interest or utility and the procedure to determine the compensation of the owner. According to
this procedure, if the parties (ie, the Executive Branch and the owner) do not reach an agreement
regarding the amount of the compensation the determinations shall be made by the courts, taking
into consideration the constitutional guaranty and applicable law.
Doing Business in Latin America OCTOBER 2018 37
Bolivia
38 Doing Business in Latin America OCTOBER 2018
II. Bolivia
A. Foreign investment
i. Authorisations versus limitations or prohibitions
As part of a nationalistic trend, inaugurated in Bolivia in 2006 with the assumption into power of
President Evo Morales Ayma’s indigenous and popular movement, a Constitutional Assembly proposed
and a national referendum approved a new Political Constitution enacted on 7 Februar y 2009.
This long and complex set of legal rules is contained in 411 Articles and ten interim provisions.
Two main general features constitute the distinctive mark of the Constitution: the pre-eminence of
indigenous peoples’ rights and the preeminence of the state as the responsible entity for the social and
economic direction of the economy, within a framework of a democratic republic, with the traditional
separation of the three powers (legislative, executive and judicial – ordinary and constitutional), plus an
electoral power and special separate jurisdiction for agro environmental affairs.
Among numerous rights contained in different chapters of the Constitution, Article 56 recognises
the right of ever y person to individual or collective private property provided this complies with a
social function. Expropriation can occur for the reason of public need or use, determined pursuant
to the law and with prior just compensation. Urban real estate property generally cannot be subject
to reversion.
The Bolivian economic model is defined as plural. A plural economy is constituted by economic
community organisations, state, private and social-cooperative forms, which are to interact between
them under certain principles. Among the features of this economic system, the Constitution
provides: (1) the state is to exercise the integral direction of economic development and its planning
processes; (2) natural resources belong to the Bolivian people, to be managed by the state; (3)
industrialisation of natural resources is a key element; (4) the state can participate in all of the
productive chain of strategic sectors (such as oil and gas, mining and others); (5) entrepreneurial
initiative and legal security are respected; and (6) the state is to promote the communitarian area of
the economy as a solidarity alternative in rural and urban areas.
Under Article 308 of the Constitution, the state recognises, respects and protects private initiative, for
it to contribute to economic and social development, and to fortify the economic independence of
the countr y. Freedom of enterprise is guaranteed, as well as full exercise of entrepreneurial activity,
to be regulated by law.
Bolivian investment is to have priority treatment as compared with foreign investment. Foreign
investment is subject to Bolivian jurisdiction, laws and authorities. It cannot claim any exceptional
treatment or appeal to diplomatic claim in order to obtain favourable treatment.
The relationship with foreign states and companies is to be conducted on grounds of independence,
mutual respect and equitable treatment.
Doing Business in Latin America OCTOBER 2018 39
As required by the 2009 Constitution, on 4 April 2014, a new law (Law No 516) for the Promotion of
Investments was enacted. Under this law:
1. General direction: The state, in its promotional and directional role of economic and social
development, directs investments to activities promoting economic and social development,
generating dignified employment and contributing to the eradication of poverty and the
reduction of inequalities.
2. Destination: Investments can be made in any sector of the economic activity of the country,
and are to be implemented by entrepreneurial and contractual forms as permitted by
applicable law. There are a number of laws and regulations by sectors of the economy: mining,
hydrocarbons, financial and banking, telecommunications, electricity, insurance, and so on.
Rules by sectors do and may contain specific and diverse rules dealing with authorisations,
limitations or prohibitions, which cannot be generalised for all investments.
3. Means: Investments are made through private commercial companies, public companies,
mixed economy companies (sociedad anónima mixta (SAMs)) with state participation and
other agreements or instruments of joint investments. Commercial entities (companies of
different structures) can freely be organised to operate in the diverse areas of the economy.
Requirements for specific sectors of economic activity are to be met pursuant to applicable
regulations (see 1.3 to 1.7 below).
The basic incorporation of commercial companies is governed by the Commercial Code, and
by Law No 466 of 26 December 2013, the Law of the Public Enterprise, in the case of state
companies or companies in which the state or state entities have majority participation.
All commercial companies, local, mixed or foreign, depending on their specific structure
(stock company, limited liability, etc) need to be registered with the Commercial Registry,
independently from the specific authorisations or requirements to be accomplished or met
depending on their economic activity and purpose. No specific general authorisation to
invest is required. The Investment Law requires that all foreign investments and international
transactions be registered with the Bolivian Central Bank. Registration with the Bolivian
Internal Revenue Service and the municipality where the company is to have activity is
compulsory. Registration with the private entrepreneurial association corresponding to the
company’s purpose and activity is also compulsory.
4. General limitations or prohibitions include: (1) no foreign individual or company can hold
title or possession on property within 50 kilometres of international borders (security zone)
whether directly or indirectly; and (2) neither can it receive direct adjudication of rural land
from the state.
ii. Treatment of foreign investment in infrastructure initiatives
Foreign companies can be established and registered as any other local company wishing to concur
with the infrastructure initiatives’ market. While there are no restrictions to operate in the private
market to the extent allowed by applicable rules, as it concerns the more relevant market of state and
public initiative, and projects, the state would commonly use one of the following methods to hire
40 Doing Business in Latin America OCTOBER 2018
companies (local and/or foreign) as part of its procurement for infrastructure projects, depending
on the characteristics, scope and cost/price of each specific project: international public bidding,
national public bidding, direct national and/or international invitations.
A project could be of national importance, in which case it is the central government that applies the
corresponding procurement laws and regulations; if it is a departmental or municipal project, then
the procurement laws and regulations corresponding to these jurisdictions apply. Specialised agencies
of the state may be involved. For example, the so-called national Autoridad Boliviana de Carreteras
(ABC) is actively, constantly and regularly applying procurement procedures for the construction
of national roads. State companies entrusted with specific areas would call for procurement of
infrastructure projects. For example, the Empresa Nacional de Electricidad (ENDE) would procure
services for state infrastructure projects in the electricity sector that it controls. The state oil and gas
company Yacimientos Petroliferos Fiscales Bolivianos (YPFB) would proceed similarly in respect of
infrastructure projects.
iii. Treatment of foreign investment in oil and gas, and mining activities
With respect to oil and gas, the state company YPFB exercises a monopoly of most of the activities in
the hydrocarbons sector. Under the Constitution, however, it is authorised to contract with private
investors, whether national or foreign, for the implementation of any, a part or all of the activities
of the productive oil and gas chain (exploration, development and exploitation). Those contracts
take the form of service agreements. Industrialisation, transportation and trading (internally or
externally) are to be carried out by YPFB, which, however, can constitute mixed economy companies
for conducting these and other activities of the chain. YPFB is to hold at least 51 per cent of the
paid in capital of said companies. All contracts and mixed companies require approval by law of the
Legislative Plurinational Assembly (Congress). A new Law of Hydrocarbons is pending approval in
Congress for the implementation of the general rules of the Constitution.
On mining, the 1997 Mining Code, which regulated mining activities, has been substituted by a new
Mining and Metallurgical Law No 535 of 28 May 2014. All pre-existing mining concessions are to
be transformed into administrative mining contracts with the Jurisdictional Administrative Mining
Authority. Under a separate law, a number of concessions have been reverted to state control due
to inactivity. Exploration or exploitation rights in free areas can be obtained from such authority
complying with a number of requirements, including the presentation of a working and investment
plan. A licence can be issued by the authority for a maximum period of five years. A preferential right
to enter into an administrative mining contract for development and exploitation is recognised; such
a contract applies for direct recognition of rights for exploration, exploitation, and so on. Any such
contract (other than a contract for transforming current rights, yet pending implementation during
2015) requires approval by the Bolivian Congress. State mining companies can enter into association
agreements or with respect to their mining rights, upon the condition of holding a participation in
net profits of 55 per cent. Recognition of mining rights generally, does not create ownership rights or
title on the mining areas. Title is obtained only on production.
Development of lithium resources has been conducted for many years now under the control of
the state. More recently, a new state company by the name of Yacimientos de Litio Bolivianos has
Doing Business in Latin America OCTOBER 2018 41
been created. Two main projects are being undertaken. The construction of a lithium carbonate
plant to be operated by the state, and a project for a chain of production that will conclude in the
manufacturing of lithium batteries for electric cars by means of a mixed company consisting of a
German company and a Bolivian lithium company, the latter to have majority participation and control.
iv. Treatment of foreign investment in real estate (rural and urban properties) and in agribusiness activities
There are very distinct and specific laws and regulations regarding rural and urban properties. For
rural properties there are numerous sets of rules (constitutional and others) that have resulted
from the Agrarian Reform of 1953. As they relate to private holdings and investments, agro
livestock and agro commercial – industrial activities are recognised and protected, provided they
meet requirements of maximum extension and working obligations to avoid reversion of title to
the state. A general condition and obligation to hold and retain title on rural land is conducting
work compliance, for which the obligation is subject to supervision and verification by a specialised
administrative state entity.
The specialised jurisdiction for agro-environmental cases and controversies is also in place. Urban
properties are subject to standard private civil and commercial law rules. Investments can be made
to acquire and trade urban properties. Municipal requirements are to be met and respected. Private
construction projects, condominiums and similar are extensively implemented.
B. Rendering of public services; treatment of foreign investment
i. General framework
Besides other systems, Law No 1178, of 20 July 1990 on Governmental Administration and Control
creates the state System of Goods and Services Administration, which establish the procedures for
procurement, handling and disposition of state goods and services.
It is an attribution of the Minister of Economy and Public Finance to act as the fiscal authority
and governing body of the public governance and procurement rules, with faculties of updating
the systems of governmental administration and the regulations of the state System of Goods and
Ser vices Administration.
Supreme Decree No 181 of 28 June 2009 (as amended) approves the regulations currently in place
for the state System of Goods and Services Administration, as a technical and administrative set of
rules that regulates the procurement of goods and services, and the handling and disposition of
goods belonging to public/state entities.
The purposes of the regulations are: (1) to establish the principles, rules and conditions applicable to
the administration of state goods and services, and the obligations and rights related thereto; and (2)
to establish the fundamental elements of organisation, operation and internal control related to the
administration of state goods and services.
Fundamental principles set by the regulations are:
42 Doing Business in Latin America OCTOBER 2018
1. solidarity: public resources must benefit all Bolivian citizens;
2. participation: Bolivian citizens have the right to participate in the procurement of goods and
services;
3. social control: Bolivian citizens have the right to look after the proper implementation of
public resources, results, impacts and quality of goods and public services;
4. good faith: there is a presumption of the righteous and ethical behaviour of public officers;
5. economy: procurement procedures must be developed with celerity and saving resources;
6. effectiveness: procurement procedures must allow the achievement of the programmed
objectives and results;
7. efficiency: procurement procedures must be developed in a timely manner and with the lowest
possible costs;
8. equality: proponents may participate in equal conditions, restrictions and in accordance with
their capacity to produce goods and offer services;
9. free participation: state contracting must allow free participation, that is, the broadest
attendance of proponents through publicity mechanisms, in order to obtain the best
conditions regarding price and quality;
10. responsibility: public officers must comply with current regulations on procurement, handling
and disposal of goods and services and assume the consequences of their actions and
omissions during office; and
11. transparency: activities, documents and information on procurement procedures, handling
and disposal of goods and services are public.
Public entities must prepare their own internal regulations for the System of Goods and
Ser vices Administration using the model prepared by the governing body, which revises and
approves the document.
The regulations of the system, approved by Supreme Decree No 181 of 28 June 2009 have been
amended several times by means of the following main instruments: Supreme Decree No 843 of
13 April 2011; Supreme Decree No 956 of 10 August 2011; Supreme Decree No 1,200 of 18 April
2012; Supreme Decree No 1,497 of 20 Februar y 2013; Supreme Decree No 1,999 of 14 May 2014,
Supreme Decree No 2,728 of 13 April 2016; Supreme Decree No 2,753 of 1 May 2016; and Supreme
Decree No 3,548 of 2 May 2018.
The regulations must be applied in all public entities, with no exceptions, comprising the state’s
presidency and vice-presidency, ministries, administrative units of the General Comptroller and
electoral courts; the Central Bank of Bolivia, Authorities of Supervision and Social Control,
Development Corporations; public financial intermediation entities; the military and police;
departmental and municipal governments; and all other entities for which the state owns the majority
of the patrimony.
Doing Business in Latin America OCTOBER 2018 43
Legislative and judicial branches must also apply the regulations to their administrative units in
accordance with their purposes, plans and policies.
The regulations apply to contracts with private participants (mostly of an administrative and not of a
commercial nature) for the procurement of goods, construction works, and rendering of general and
consulting services.
There are several procedures to be followed for the procurement processes, which vary depending on
the amount/value of the contract to be awarded and other factors. This will also determine whether
a public bidding process is needed or not, and the possibility of direct contracting. Certain state
companies are treated as a strategic interest, and authorised to directly procure and acquire goods
and services, whether in Bolivia or abroad. A contract with a foreign supplier that is not domiciled
in Bolivia (rules may require that it be domiciled) can be subject to foreign laws and clauses freely
negotiated on applicable law, jurisdiction and resolution of controversies (including arbitration,
which is not allowed in Bolivian contracts).
There can be public bidding procedures in which foreign entities may participate. The Basic
Document of Procurement, depending on the scope and nature of the required goods or services,
would determine whether the foreign entity is required to set up a local branch or subsidiary. So
there is no general rule, and both methods have been used in bidding procedures. Typically, for
example, if a bid is for the construction of public works the foreign beneficiary would be required to
set up a local branch or subsidiary, both for tax purposes and for purposes of compliance with other
laws, like labour and social security laws.
ii. Governmental monopoly vs private initiative
In Bolivia, there are currently two forms of public–private partnerships (PPPs), as mentioned above,
one is association agreements in the mining sector under Law No 535. However, the additional Law
No 849 allows the state mining company Corporación Minera de Bolivia (‘COMIBOL’) to negotiate
and sign mining production agreements with private parties in mining areas belonging to it. Under
this form, the private party would be the operator and COMIBOL would receive perceptual royalty
participation on production. One of the requirements for such new association agreements is that
the state mining company holds at least 55 per cent participation on net profits, which does not apply
under mining production agreements. Only under the former, the state mining company should also
have control of management of the contract.
The associative second form is by way of a so-called SAM, mixed state company (empresa estatal mixta
(EEM)) or mixed company (empresa mixta (EM)), which are stock companies with the participation
of a state company or entity and a private participant, either national or foreign. In EEMs, the state
has a participation of more than 70 per cent and in the case of EM the state has a participation
between 51 per cent to 70 per cent.
These companies are governed by the Commercial Code and Law No 466 of 26 December 2013,
and the Law of the Public Enterprise in the case of EEM or EM. A SAM should not be subject to
estate procurement regulations. In the case of EEM or EM, there are several rules of procurement
contained in Law No 466, and in some cases, the said companies have special procurement rules.
44 Doing Business in Latin America OCTOBER 2018
These types of companies may apply to state participation in various economic sectors as needed
(hydrocarbons, telecommunications, energy, electricity and others, depending on rules by sector).
In the case of hydrocarbons, the Political Constitution of the States determines that for this type of
company, the state shall have at least 51 per cent of the capital.
Public entities may directly purchase goods or procure services provided by other Public Entities as
explained above. There are no regulations on public–public JVs as such. Mixed intergovernmental
companies are foreseen as a specific tool under the so-called Law of Public Companies.
iii. Privatisation general rules
Since the beginning of the first term of the current Bolivian Government, in 2006, state policy
has been ‘contrary’ and adverse to privatisation. Most of the assets, companies and ventures that
were privatised before by various methods, especially during the 1990s, have been partly or totally
nationalised or rights have reverted to the state. Prior privatisation rules have been totally derogated
and a ‘nationalisation’ policy implemented.
At present, the Bolivian Government is fostering a policy of attracting private investment (both
foreign and national) under new rules in which the state and state entities and enterprises are and
will be the key players.
iv. Limitations and/or prohibitions to private parties in the rendering of public services
As mentioned above, the new Political Constitution of 7 February 2009, with a strong nationalistic
orientation, provides that economic policies are declared to be based on the plurality of participants
(state, private and community sectors). Private investment is guaranteed in order for it to contribute
to social and economic development. Numerous rules govern the various sectors of economic activity.
Regarding specific public services, the Constitution determines that:
• The development of the productive chain in generation, transportation and distribution of
electricity is the private faculty of the state. This could be achieved through public companies,
SAMS, non-for-profit organisations, cooperatives, private companies and communal enterprises.
It also determines that the energy productive chain cannot be subject solely to private interests
and cannot be granted under concession. The law must regulate private participation, and the
new electricity law to implement this constitutional provision is still pending enactment.
• The provision/supply of basic services is the state’s responsibility through public entities, SAMs,
cooperatives and communal companies. In the cases of electricity (as explained above), gas to
domiciles and telecommunications, said services may be rendered through contracts with private
companies.
• Access to water and sewerage systems cannot be subject to privatisation and concession, and are
subject to a licence regime in accordance with the law. The new water law to implement this
constitutional provision is still pending enactment.
More generally, procurement of goods must be aimed towards national production. For goods not
produced in the country, the entity may purchase imported goods. Public entities are prohibited
Doing Business in Latin America OCTOBER 2018 45
from incorporating technical requirements in the Basic Document of Procurement focused only on
the external appearance of the good, and must guarantee its functionality and usefulness.
Special preferential margins and adjustment ratios apply to the purchase of goods in certain cases.
Micro and small enterprises, associations of minor suppliers and peasant organisations also benefit
from preferential treatment.
C. Real estate
i. General overview
The legal system in effect in Bolivia focuses the property phenomenon, from a dual perspective. First
of all, under the chapter corresponding to the economic and social rights, the Political Constitution
of the State of Bolivia (Constitución Política del Estado (CPE)) consecrates the right of property as a
fundamental human right. Second of all, the aspects inherent to the creation, exercise, modification
and extinction of the right to property, are found regulated in a detailed manner within the norms
of the Civil Code of Bolivia (CCB), as well as within the laws and special norms, related mainly to
agrarian, registration and expropriation matters.
In this sense, the protection provided within the juridical system in effect in Bolivia to those who
acquire property rights over urban or agrarian properties is found to be adequately developed from a
normative point of view, allowing the effective exercise and enjoyment of the attributions inherent to
the condition of the owner.
On the other hand, the value of equality constitutes one of the essential foundations of the
Bolivian state. Discrimination based on reasons of nationality, among others, is found to be
prohibited and sanctioned in an express manner. Consequently, within the exercise of the
attributions inherent to the right of property, both nationals and foreigners are found to be
legally situated on an equal footing.
Notwithstanding the foregoing, the CPE establishes a subjective limitation regarding the acquisition
of the right of property. Attending to reasons of security of the state, the CPE establishes a
frontier security zone of 50 kilometres, starting from the border line. Within this zone, no foreign
person, individually or in a partnership, can be the title-holder of property rights, directly or
indirectly, or, due to any title rights, possess water, soil or subsoil. In all cases, the CPE reduces the
aforementioned limitation in cases of state necessity duly declared by an express law approved by
two-thirds of the Plurinational Legislative Assembly. Finally, the CPE states that the property or
possession affected in cases of non-compliance with this limitation will pass to the benefit of the
state, without any class of indemnification.
From an objective point of view, the CPE contains an additional limitation that links both nationals
as well as foreigners. No person can be the title-holder of, or possess, surfaces of land greater than
5,000 hectares.
Finally, the CPE establishes that the expropriation of urban or agrarian properties proceeds only with
the prior declaration of public need and interest, and with the payment of a just indemnification.
46 Doing Business in Latin America OCTOBER 2018
ii. Holding title to real estate
Within the subject of immovable properties located in the urban area, the registration of real estate
rights is found to be at the charge of the Office of Registration of Real Rights (Oficina de Registro de
Derechos Reales (ORDR)). Under this framework, and in accordance with the provisions of the CCB,
the condition of owner or title-holder of any other real estate right subject to registration, acquires
publicity, opposability and is definitively perfected in front of third persons, from the moment of its
registration in the ORDR.
On the other hand, the ownership of immovable properties located in rural areas is perfected
through the granting of the respective title by the National Institute for Agrarian Reform (Instituto
Nacional de Reforma Agraria (INRA)). Subsequently, once the INRA issues the ownership title over
rural immovable properties, the same is registered at the ORDR. However, the determining and
central aspect within matters of property rights over agrarian immovable properties centres on the
issuance of titles and the registration of land in the charge of the INRA.
iii. Transferring real estate
From a legal viewpoint, the right of property is a right of a strictly patrimonial content. In virtue
thereof, its title-holder possesses the attribution to freely dispose and alienate (ius abutendi) the
property over which the right is constituted. The purchase and sale is the main operation through
which the ownership right is transferred.
The forms or manners used to acquire the right of property are found normed mainly in the CCB, as
well as within the legislation regulating the activities of the INRA.
Regarding the agrarian subject, some classes of properties are found to be excluded from acts of
transfer by reason of their scarce surface extension or due to their collective ownership in favour
of determined groups. This is why, for example, the CPE prohibits the transfer (purchase and sale,
exchange or donation) of rural land that would have been given freely in favour of native indigenous
farmers, native intercultural communities, Afro-Bolivians and farmer communities.
Concerning urban immovable properties, the transfers are registered in the ORDR in a direct
manner. In cases of rural immovable properties, the transfers must be previously registered before the
INRA and subsequently before the ORDR.
The onerous transfer of urban or rural immovable properties generates tax effects. The rate of
applicable tax is three per cent of the price of the transfer. The law states that the seller is the taxable
person that is found to be obligated to pay the tax; notwithstanding, in practice, the tax burden for
an act of disposition is usually negotiated among the parties participating therein. In all cases, it
is convenient to clarify that no private agreement entered into among individuals has enforceable
results or renders effects before the Tax Administration.
Doing Business in Latin America OCTOBER 2018 47
iv. Financing real estate acquisitions
The financial markets in Bolivia are scarcely developed and are less profound. The ways of financing
real estate projects and acquisitions concentrate mainly on the loans granted by banking entities
authorised to operate within the local financial system.
Likewise, the Bolivian state has tried norms that tend to promote access to credit for social interest
housing projects. Since 2013, maximum active interest rates have been set for housing loans, and
the percentages or minimum portfolio levels that must be maintained within this class of loans have
been established. The impact has been quick; local banks have created new products, which include
financing options without the need to contribute an initial fee.
v. Leasing real estate
The urban real estate leasing market is extensively developed and regulated in Bolivia. The CCB
distinguishes between the leasing of properties destined for commercial use and those used for
housing purposes.
Currently the judicial proceedings for the eviction of leased immovable properties are processed at a
relatively slow pace; however, from 6 August 2015, a new Civil Procedure Code will enter into effect,
for which verbal bases seek to speed up the processing of the generality of the civil proceedings,
among which are found precisely the eviction of properties subject to the leasing regime.
On the other hand, regarding the leasing of rural land, the CPE of 2009 prohibits all types of land
income generated by the speculative use of the land. In accordance with local norms, which date
back to 1953, the leasing of land represents a form or type of land income. Consequently, it could
be interpreted that from 2009, the leasing of rural land remained at the margin of the juridical acts
allowed by the Agrarian Law.
Notwithstanding the foregoing, at present, there are no case law precedents pronouncing on
this regard, so we have to wait to know the manner in which the constitutional provisions will be
implemented that will prohibit the leasing of rural land, with regard to the function of the prevalence
of the principle of ‘the land belongs to its workers’.
vi. Construction
The economy of Bolivia has grown in an accelerated manner since the mid-2000s. This growth
brought about the extraordinary dynamisation of the construction sector. Currently, Bolivia continues
to go through a real estate boom, which found a certain stability between 2011 and 2012.1
Likewise, the recently approved norms regarding the maximum interest rates and minimum portfolio
levels applicable to housing loans constitute a factor that tends to consolidate the favourable
environment for the construction sector, of which expansion has been notorious, mainly in the most
important capital cities of Bolivia, La Paz, Cochabamba and Santa Cruz.
1 Cerezo Aguirre, Sergio, Central Bank of Bolivia, Boom within the Real Estate Sector in Bolivia: Bubble or economic fundamentals? www.bcb. gob.bo/eeb/sites/default/files/6eeb/docs/sesiones%20paralelas/6EEB%20SP-08-3.pdf accessed 22 August 2018.
48 Doing Business in Latin America OCTOBER 2018
vii. Expropriation events
The juridical institute of expropriation is regulated by the CPE, as well as the CCB and other
special laws.
Among the latter, special laws can be highlighted that are applicable within matters of rural land,
mining, hydrocarbons and, particularly, the Law of 30 December 1884 regarding the expropriation of
urban immovable properties for conducting and executing works declared of public interest.
a. eXpropriation from a constitutional perspective
The CPE establishes that expropriation will be imposed due to a cause of public necessity or interest,
qualified in accordance with the law and with a prior just indemnification.
In this sense, the only cause that would allow the expropriation pursuant to the CPE is the public
need or interest. Likewise, the constitutional conditions to allow expropriation are: (1) that the
public need or interest would have been qualified in accordance with the law; and (2) the existence
of a prior and just indemnification.
b. reversion of rural land
Rural land, as well as immovable properties located in the urban area are subject to expropriation.
However, this is not the only mechanism legally recognised that can be employed by the State of
Bolivia to extinguish the right of property of private persons over rural land. The reversion to the
domain of the state, without the payment of any compensation, also constitutes a legal way through
which the property may be extinguished.
The causes that motivate the reversion of rural land are set forth in the CPE and within law. The
CPE foresees that the non-compliance of the economic social function and the holding of land with
surfaces greater than 5,000 hectares (latifundium), constitute causes for reversion. On its part, the
law states that the abandonment of land or the holding of land in a manner that is contrary to the
collective interest would give rise to reversion. The absence of payment of taxes for the property
would allow the presumption that the land has also been abandoned.
Finally, it is important to highlight that the CPE expressly excludes urban properties from any type of
reversion.
Doing Business in Latin America OCTOBER 2018 49
Brazil
50 Doing Business in Latin America OCTOBER 2018
III. Brazil
A. Foreign investment
i. Introduction
Brazil is a federative republic divided into 26 states, a federal district (with Brasilia the capital
since 1961) and 5,570 municipalities. With more than 200 million inhabitants, Brazil is the fifth
most populous country in the world after China, India, the US and Indonesia. Brazilians share a
common multi-ethnic and multiracial background, and due to Portugal’s influence, Brazil is the
only Portuguese-speaking nation in the Americas. Immigration from Europe, Africa and Asia (mostly
Japan) was the primary source of Brazilian population growth up to the 1930s.
Inflation was a major problem in Brazil during the 100 years that followed the proclamation of the
republic in 1889. The problem became more severe after the 1970s, and several measures were
taken to control inflation in the 1980s and early 1990s. Over a period of 27 years, Brazil had seven
currencies, and the inflation rate reached a historical high of 6,821.31 per cent in January 1990. After
the failure of six monetary changes, Plano Real was created in 1994 by the then Finance Minister
Fernando Henrique Cardoso, who would launch the plan as the basis of his presidential run a couple
of months later. Plano Real’s success was the hallmark of Cardoso’s two terms as president, and the
fight against inflation has also been a major theme under the presidencies of Luiz Inácio Lula da
Silva, Dilma Rousseff and Michel Temer.
Brazil has moved up the ranks of the world’s largest economies while achieving much more inclusive
growth than in the past. Stable and predictable macroeconomic policies underpinned these gains.
More recently, demand has been supported by a macroeconomic stimulus, which has encouraged
the expansion of the non-tradable sector, while manufacturing is suffering from declining
competitiveness, and supply-side constraints appear to be biting. Inflation has remained high, and has
been allowed to drift momentarily above the tolerance band, and monetary policy credibility risked
being undermined by political statements about the future trajectory of interest rates.
The Central Bank of Brazil (Banco Central do Brasil (the ‘Central Bank’)) started a tightening cycle
in recent years. The fiscal rule has also been undermined, as the inflexible fiscal target – defined in
terms of a primary surplus – has required unusual but legal measures to account for cyclical weakness
and meet the target, reducing clarity. Fiscal challenges in the longer term are rising as the population
will start to age fast in a decade from now, and pension expenditure is already rising.
In recent years, fiscal performance has deteriorated, and inflation has risen significantly.
Consequently, rebuilding confidence in macroeconomic policies remains the priority. Continuous
vigilance to ensure a return of inflation to the target is warranted. Recent government commitments
for fiscal adjustment are welcome and also lay the ground for stronger growth. More specifically,
recent adjustments of social benefits, lower support to public banks and cost-covering electricity
prices are correcting past distortions, and are important initiatives on the supply side.
Doing Business in Latin America OCTOBER 2018 51
The planned launch of a new round of concessions, especially in transport, is fundamental
to addressing bottlenecks and promoting higher growth. The recent decision to restart trade
negotiations with the European Union and the start of a wide-ranging free-trade agreement
with Mexico are welcome. Progress on a comprehensive reform of indirect taxes, lowering trade
barriers and reducing administrative burdens could spur competition and accelerate the recovery
significantly. The commitment to inclusive growth, including through further improvements in
education and well- targeted social transfers, should be maintained. Recent labour reforms brought
more certainty to the market, and full-blown pension reform is in order to address fiscal issues and
improve the ability of the state to focus on investments.
At less than 20 per cent of gross domestic product (GDP), Brazil’s level of investment has traditionally
been low by international and Latin American standards. This partly reflects Brazil’s relatively
low domestic saving. Over the years, however, investment has been trending down due to policy
uncertainties and lack of confidence. These factors have recently been compounded by years of
recession, political uncertainty and a massive corruption scandal surrounding the national oil
company Petrobras that has spread to every sector, and engulfed key politicians and business leaders.
Business investment is projected to pick up in 2018 and 2019 as activity accelerates, and some of the
previous risks will be addressed in 2019 (although the speed of economic recovery is uncertain mostly
due to political uncertainty leading to high volatility in the markets). Despite not being a member,
Brazil has been contributing actively to the OECD, and has been in negotiations to become a member
of the organisation.
ii. General features
Foreign capital in Brazil is governed by Law No 4,131, of 3 September 1962 (the ‘Foreign Capital
Law’), put into effect by Decree No 55,762/1965 and subsequent amendments, including those made
within Law No 11,371, of 28 November 2006.
According to Law No 4131/62, ‘foreign capital is considered to be any goods, machinery or
equipment that enters Brazil with no initial FX disbursement, intended for production of goods and
services, and any funds brought into the country for use in economic activities, provided that they
belong to individuals or corporate entities domiciled or incorporated abroad’.
In the Brazilian financial and capital markets, investments by non-resident investors are regulated
by the National Monetary Council (Conselho Monetário Nacional (CMN)), Brazilian Securities
Commission (Comissão de Valores Mobiliários (CVM)) and the Central Bank. The main regulation
governing such investments, Resolution 2,689/00, was replaced on 29 September 2014 by a new set of
rules enacted by Resolution 4,373/14, which became effective on 30 March 2015.
iii. Registration of foreign capital
During the last decades, Brazilian FX rules have been very strict, and remittances of funds from
abroad to Brazil and vice versa can still only be effected in the specific situations set forth by the
Central Bank. Due to this control, any cash entering Brazil must be registered at the Central Bank,
including that within the scope of Resolution 4,373/14.
52 Doing Business in Latin America OCTOBER 2018
The registration of foreign capital with the Central Bank should be performed through the Central
Bank Information System (Sistema de Informações do Banco Central (‘Sisbacen’)) using the
corresponding Electronic Declaratory Registry (Registro Declaratório Eletrônico (RDE)) number,
pursuant to Article 108-C of Circular No 3,752, issued by the Central Bank on 27 March 2015 (‘Circular
No 3,752/15’), which amended Circular No 3,689, issued by the Central Bank on 16 December 2013.
The initial RDE and its updates (eg, due to investments, redemptions, revenues, capital gains,
dividends, interests on net equity, other forms of remuneration and transfers) are compulsory. The
corresponding RDE number must be included in all FX transactions related to the remittance of
funds from abroad to Brazil, and vice versa. All FX transactions must be classified and electronically
reported to the Central Bank pursuant to specific codes set forth by applicable regulations.
iv. Currency investments
No prior official authorisation is required for investment in currency. To subscribe capital or purchase
stock in an existing Brazilian company, the investor must only transfer the funds by means of a
banking institution authorised to operate with FX. However, authorisation of the exchange contract is
conditional upon presentation of an RDE-Investimento Estrangeiro Direto (IED) registration number
for the foreign investor and for the Brazilian company receiving the investment. RDE-IED is the mode
of RDE for foreign direct equity investments.
The investment must be registered through the RDE-IED system by the Brazilian company receiving
the investment and/or the representative of the foreign investor within 30 days of closing the
exchange contract. In the event that the registration of the foreign investment is to be paid from
a non-resident account in Brazil, it can be made in Brazilian currency. All transactions relating to
such investments must be carried out through the non-resident account, with the updating of the
corresponding investment registration by means of the RDE-IED module.
For investments in securities (including publicly traded equity and equity-related securities), the
FX procedures are similar, but the investments should be made under the regime of Resolution
4,373/14, under the RDE-Portfolio mode.
Finally, foreign credits in Brazil must be registered under the RDE-Register of Financial Transactions
(Registro de Operações Financeiras) (RDE-ROF) mode, which is a specific system for cross-border
debt registration.
v. Investment via conversion of foreign credits
The conversion into the investment of foreign credits duly registered in the RDE-ROF mode is not
conditional on the Central Bank’s prior authorisation. Conversion into foreign direct investment
(FDI) is defined as ‘transactions whereby credits eligible for transfer abroad, under current rules, are
used by non-resident creditors to purchase or pay up holdings in a Brazilian company’.
In order to effect registration, however, the investor and company in which the investment is to be
made must provide: (1) a statement from the creditor and committed investor defining precisely
the due dates of installments, the respective sums to be converted and, with respect to interest
and other charges, the period they refer to, and the respective rates and calculations; and (2) a
Doing Business in Latin America OCTOBER 2018 53
binding statement from the creditor agreeing to the conversion. The conversion is effected by two
simultaneous and symbolic FX transactions: one to ‘pay’ the credit and the other to ‘effect’ the
investment.
vi. Investment via import of goods without exchange cover
Investment in the form of import of goods without exchange cover (applicable only to tangible
goods), made as a means of acquiring paid-up stock, does not require prior approval from the
Central Bank. Registration of FDI resulting from the import of intangible assets without coverage of
an exchange contract requires prior approval from the Department of Financial Compliance and
Financial Information Treatment (Departamento de Combate a Ilícitos Financeiros e Supervisão de
Câmbio e Capitais Internacionais (‘DECIC’)). For tangible assets, the value recorded on the ROF
Module of the RDE system, linked to the import declaration (declaração de importação (DI)); and
the currency stated on the corresponding ROF may be used. Registration through the RDE-IED mode
requires that both tangible and intangible assets be exclusively intended for the paying-up of capital.
Registration of foreign capital that enters Brazil in the form of assets must be made in the currency
of the investor’s country or, at the express request of the investor, in another currency, with exchange
parity preserved. Foreign capital is defined as any goods, machinery or equipment that enter Brazil
with no initial disbursement of foreign currency, intended for production or marketing of goods, or
provision of services. Imports of used goods are conditional on the absence of similar goods in Brazil.
Used goods must be employed in projects that foster the country’s economic development. Once the
tangible goods have been cleared by customs, the Brazilian company has a 90-day deadline to register
the investment with the Central Bank.
vii. Capital market investments
Non-resident investors, whether individuals or corporate entities, are allowed to invest in the Brazilian
financial and capital markets individually or collectively. Non-resident investors can now use the same
registration to invest in the fixed and variable income markets, and can migrate freely from one type
of investment to another. As mentioned above, the registration is made via the RDE-Portfolio mode,
more details of which are presented below.
According to Resolution 4,373/14, to access these markets, foreign investors must appoint: (1) a legal
representative; (2) tax representative; and (3) custody agent in Brazil.
Pursuant to Article 5, I, of Resolution 4,373/14, a non-resident investor interested in operating
in the capital markets may adopt the following structures to invest in Brazil: (1) be the owner of a
proprietary account; (2) owner of a collective/omnibus account; or (3) ‘passenger’ of a collective/
omnibus account. For a collective/omnibus account, the participating non-resident investor (ie,
passenger) will adhere to the agreement executed by and between the driver and local representative.
Before beginning operations and after filling in the identification form, each non-resident investor
must be registered at the CVM. The registration number (code) assigned by the CVM must be
included in all ‘non-cash’ asset transactions performed in the name of each ‘passenger’ participating
in a collective/omnibus account or holder of an individual account.
54 Doing Business in Latin America OCTOBER 2018
Bonds and securities belonging to foreign investors must be kept in custody by entities authorised by
CVM or by the Central Bank or, as appropriate, registered with the Special Settlement and Custody
System (Sistema Especial de Liquidação e de Custódia (SELIC)) or in the registration and financial
settlement system managed by the Clearing House for Custody and Financial Settlement of Securities
(Central de Custódia e de Liquidação Financeira de Títulos Privados (‘CETIP’)).
viii. Remittance of profits
No restrictions are applied to the distribution and remittance of profits abroad. Dividends or profits
distributed to shareholders or partners of companies headquartered in Brazil, even when remitted abroad,
are not taxed, except those derived from profits booked before 1 January 1996. Profit remittances must
be registered as such through the appropriate RDE module, considering the stake held by the
investor in the total shares or stock as a proportion of paid-up corporate capital in the company.
ix. Reinvestment of profits
Reinvestments are profits of companies established in Brazil and paid to persons or companies
residing or domiciled abroad that are reinvested in the company that produced them or in another
sector of the domestic economy. Reinvested earnings are registered in the currency of the country to
which such earnings are to be remitted, while reinvestment derived investments in Brazilian currency
are registered in Brazilian currency. Foreign investor profits to be reinvested in Brazilian companies
(even if the companies in question are other than those in which the earnings were obtained) for
the purpose of paying up or purchasing shares and/or stock must be registered as investments in
the RDE-IED system. The mechanics for RDE portfolio profit reinvestment is simpler because of the
feature of a local account that will congregate all the profits and allow for redirection of such profits
to the same or other investments available in the capital or financial markets.
Such reinvestments must be registered as foreign capital (in the same manner as the original
investment) and thereby increase bases for tax assessment on any future repatriation of capital.
In cases of reinvestment of profits, interest on net equity and profit reserves, the stake of foreign
investors vis-à-vis the total amount of paid-up capital stock in the company in which the earnings were
generated must be observed.
x. Repatriation
Repatriation of foreign investments in Brazil is conditioned on such investments being registered
with the Central Bank. A foreign investment made without proper registration is known as ‘tainted
capital’, and may face restrictions with respect to repatriation.
xi. Transfer of foreign investments
Acquirers, whether they are individuals or legal entities residing or domiciled in Brazil, or their
attorney in fact, in the case of acquirers residing or domiciled abroad, are responsible for withholding
and paying income tax on capital gains earned by individuals or legal entities residing or domiciled
abroad that transfer property located in Brazil. Foreign purchasers are entitled to register capital in
Doing Business in Latin America OCTOBER 2018 55
the same amount as the registration previously held by the selling company, regardless of the price
paid for the investment abroad. Nonetheless, the registration number on the RDE-IED module of the
Central Bank should be changed to reflect the name of the new foreign investor, which is essential to
allow the new investor to remit/reinvest profits and to repatriate capital.
xii. Restrictions on remittances abroad
As mentioned above, the remittance of funds abroad is restricted when such funds are not registered
on the RDE system because the remittance of profits, repatriation of capital and registration of
reinvestment are all based on the amount registered as foreign investment.
xiii. Restrictions on foreign investment
a. prohibitions
Foreign capital investment is prohibited for the following activities: (1) activities involving nuclear
energy; and (2) mail and telegraph services.
b. limitations
The acquisition, operation or lease of rural land by a Brazilian company under foreign control, an
alien residing in Brazil or a foreign-based legal entity authorised to operate in Brazil is subject to
certain conditions provided for in the law, as well as to congressional authorisation, in certain cases.
For national security reasons, limitations are applied to the acquisition of property alongside border
areas. Acquisition of land in such areas is conditional on prior authorisation from the Secretariat
General of the National Security Council. Restrictions are also applied to the participation of foreign
capital in financial institutions, although these restrictions may be waived in the national interest.
A concession is required for operating regular public air transport services. By law, such a concession
can only be granted to Brazilian legal entities (those incorporated and managed in Brazil) in which
at least 80 per cent of the voting capital is owned by Brazilians; this limitation also applies to increases
in capital stock. Moreover, such companies must be exclusively managed by Brazilians. Finally,
foreign capital participation cannot exceed the authorised limit of 20 per cent of voting capital
and requires approval from aeronautical authorities. Restrictions are applied to foreign ownership
and management of newspapers, magazines and other periodicals, as well as radio and television
networks. Brazilian companies, even if under foreign control, can request and be awarded permission
to operate in the mining sector.
There are also certain restrictions on the participation of foreign capital in financial institutions;
however, these restrictions can be lifted if the relevance of such foreign capital for the national
financial system is evidenced. The national interest is attested to by presidential decree. When a
foreigner intends to set up a financial institution in Brazil or acquire an equity interest in a Brazilian
financial institution held by Brazilian residents, an application must be directed at the Central Bank
for further review by the President of the Republic.
56 Doing Business in Latin America OCTOBER 2018
An unnumbered presidential decree dated 9 December 1996 already states that foreign equity
investments in financial institutions (in the form of non-voting stock, for listed financial institutions)
are in the national interest.
xiv. The Brazilian FX regime
a. general features
Historically, the Brazilian FX regime has been defined by the Brazilian Government through
exchange control measures. Exchange controls in Brazil are applied not only through FX rules and
regulations, but also by means of tax and foreign trade rules and regulations for the purpose of either
encouraging or discouraging inflows of foreign capital and investments of Brazilian capital abroad.
In this regard, Brazil has undergone consistent liberalisation in FX rules and regulations. The current
status of FX regulations allows any Brazilian entity (excluding financial institutions) or individuals to
freely remit funds abroad, maintain them abroad and use them to pay any type of obligation provided
all necessary tax rules are observed and payment of taxes are made.
Brazil, however, does not allow the entering into transactions or obligations within Brazil in any
currency other than the local currency (the real). This means that for every inflow or outflow of
currency, there is a need to convert hard currency into local currency, and vice versa. This conversion
the preserve of financial institutions with special authorisation to deal in exchange.
The Central Bank assigned to these financial institutions the obligation to verify, for every remittance,
the validity and legality of these transactions; request the payment of any taxes due; and enter into
an FX agreement with a client willing to send or receive funds from abroad. When entering this FX
agreement the bank responsible for the FX has to classify each transaction under a specific code
provided by the FX regulations.
Failure to observe these regulations, however, subjects the party contracting the FX transactions, and
in same cases, the financial institution rendering the FX services, to certain penalties. In addition,
failure to collect any taxes due by a client at the time of the inflow or outflow may bring full liability
to the bank dealing with the FX transaction.
b. fX control
Exchange control in Brazil is closely linked to the regulation of foreign capital flows. Historically, such
regulation has imposed barriers on the outflow of funds to protect Brazilian currency. In the 1930s,
following sharp reductions in the price of basic products that accounted for a high percentage of
Brazilian exports, Brazilian authorities issued the first rules designed to structure an exchange market
in Brazil.
For this purpose, rules were issued to establish the obligation that funds from Brazilian exports
should be brought back to the countr y, such as Decree No 23,258/1933, which has been revoked,
and the Brazilian Government began to apply strict controls on exporters to avoid funds from
exports from being kept abroad. Such exchange controls were justified because, back then, funds
Doing Business in Latin America OCTOBER 2018 57
from exports constituted the main source of funds to ensure equilibrium in the Brazilian balance
of payments.
It was only in the 1960s that the two main legal instruments applied to foreign capital and FX markets
were issued in Brazil: Law Nos 4,131/1962 and 4,595/1964. Law No 4,131/1962 provided key rules
for defining foreign capital in Brazil, listed categories of foreign investments and required that
foreign capital must be registered with the Central Bank upon entering Brazil. Law No 4,595/1964 set
out general rules for the Brazilian financial system and created the CMN and the Central Bank.
After this law was passed, the CMN and Central Bank began to control and regulate the Brazilian FX
market. The CMN is in charge of drawing up the general FX policy, and according to its guidelines,
exchange controls, regulations affecting foreign capital and the management of international
reserves fall under the Central Bank’s jurisdiction. Law Nos 4,131/62 and 4,595/64 changed the
legal environment of the FX market and foreign investments in Brazil, and are fundamental legal
instruments regulating these areas that are in force to this day.
At the regulatory level, the most recent rules dealing with the FX market are set forth in Circular No
3,691 of 2013 of the Central Bank, which regulated in detail CMN Resolution 3,568 of 2008.
B. Rendering of public services
i. Introduction
Brazilian law does not have a definition for the expression ‘public services’. Yet, the Brazilian
Constitution uses this expression in several articles, as do many laws and regulations. In this guide, we
will refer to ‘public services’ as those services rendered directly by the public administration or by a
party appointed by the public administration, under the regulations and controls set forth by the state
in order to satisfy certain collective needs.
Article 175 of the Brazilian Constitution allows federal, state and municipal authorities to provide
public services either directly or indirectly. In the latter case, the engagement of private parties to
render public services under a regime of concession (concessão) or permission (permissão), as the case
may be, must be preceded by a public tender (licitação).
Federal Law No 8,987/1995 sets forth the general regime for these concessions and permissions.
It establishes: (1) the basic rights and obligations of public services’ users; (2) general rules
about tariffs; (3) the framework for the public tender for concessions and permissions; (4) the
essential rules for concession contracts; (5) duties and obligations that must be borne by the
public administration, and by concession and permission holders; (6) hypothesis of governmental
intervention on concessions; and (7) rules about termination of concessions.
Federal Law No 8,666/1993 provides the general framework for public tenders and contracts with the
public administration. The rules set forth in this law apply to tenders related to public services as far
as they do not conflict with Federal Law No 8,987/1995.
The competent entity within the government structure regulates and controls the rendering of
public ser vices, even when concession or permission holders render them. Starting in the 1990s,
58 Doing Business in Latin America OCTOBER 2018
the Brazilian Government created regulator y agencies (agências reguladoras) to ser ve as the key
bodies for regulation and oversight of the rendering of different types of public ser vices. There
are regulator y agencies for power and energy (Agência Nacional de Energia Elétrica (‘ANEEL’)),
telecommunications (Agência Nacional de Telecomunicações (‘ANATEL’)), oil and gas (Agência
Nacional do Petróleo, Gás Natural e Biocombustíveis (‘ANP’)), mining (Agência Nacional de
Mineração (ANM)), land transport (Agência Nacional de Transportes Terrestres (ANTT)),
water way transport and ports (Agência Nacional de Transportes Aquaviários (‘ANTAQ’)),
civil aviation (Agência Nacional de Aviação Civil (ANAC)) and sanitar y sur veillance (Agência
Nacional de Vigilância Sanitária (‘ANVISA’)), among others. As a rule, each of these agencies has
administrative independence (their officers have fixed-term mandates), financial autonomy (they
can decide how to allocate their financial resources) and regulator y power (they have the authority
to enact rules within the respective legal framework approved by Congress and sanctioned by the
President of Brazil). Indeed, each of these agencies has issued a complex set of specific rules over
the years, and exercised its authority to apply sanctions on the private parties whose activities are
within its scope of oversight.
Some public services are rendered by the public administration throughout state-owned enterprises
(SOEs). Federal Law No 13,303/2016 regulates the general framework of SOEs in Brazil, establishing
rules of both corporate governance and procurement matters.
ii. Concessions and permissions to render public services
A concession entails a formal administrative contract, awarded to the winner of a public tender,
upon which the delegation of responsibility for providing a public service is transferred by the
public administration to a company or consortium that, for its part, assumes the risks inherent to the
business for the duration of the contract, and is remunerated by tariffs charged from the services’
users. A concession is the most stable regime for the rendering of public services by private parties,
given the more limited possibilities of the Brazilian Government to resume directly rendering public
services subject to the concession.
A permission, on the other hand, is similar to a concession – as it allows a private party to render
public services in exchange for tariffs – but less stable. It is a discretionary and ephemeral act of
unilateral delegation by public authorities through a contract of adhesion that can be revoked at any
time or to which the public authorities can add new conditions to be observed by the permission
holder. Typically, permissions are used when the permission holder: (1) does not need to allocate
considerable sums of capital to render the services; (2) can easily put the equipment in use to
render the public service to a different use; and (3) agrees to takes the risks of the lack of stability in
exchange of high returns.
The public administration is not free to award concessions or permissions for the rendering of
public ser vices; instead, prior legislative approval is necessar y to allow private parties to render
public ser vices.
Doing Business in Latin America OCTOBER 2018 59
iii. Users’ rights and obligations
Among the users’ rights set forth by Federal Law No 8,987/1995 is the right to ‘receive adequate
services’. A service is considered ‘adequate’ in Brazil when it ‘satisfies the conditions of regularity,
continuity, efficiency, safety, generality, courtesy and modesty of tariffs’ (Article 6, paragraph 1).
Recently, Congress passed Federal Law No 13,460/2017, which establishes basic rules for the
participation, protection and defence of rights of the users of public services provided directly or
indirectly by the public administration. This law regulates the provisions of Article 37, paragraph 3,
of the Brazilian Constitution and is applicable to the public administration and, to a certain extent,
private parties that render public services. Among other issues, this law:
• establishes guidelines that must be observed by public agents and public service providers,
including: (1) the prohibition of the requirement of notarised documents, except in cases
of doubt as to the document’s authenticity; and (2) the elimination of formalities and
requirements ‘whose economic or social cost is greater than the risk involved’;
• sets forth the user’s basic rights, which include: (1) accessibility; (2) participation in monitoring
the execution and evaluation of public services; (3) protection of personal information; and (4)
an integrated framework for issuing formal certificates to the user; and
• creates ‘user councils’, which will have the following attributions: (i) to monitor the provision
of services; (2) participate in the evaluation of services; (3) propose improvements in the
provision of services; (4) contribute in the definition of guidelines for the appropriate customer
service; and (5) monitor and evaluate the ombudsman‘s performance. The user councils shall
be regulated by a specific regulation issued by each power and sphere of government, but: (1)
the composition of the user councils shall observe ‘criteria of representativeness and plurality
of the interested parties, with a view to the balance in their representation’; (2) the choice of
members shall be made in a public process, differentiated by type of user to be represented;
and (3) participation in the board shall be without pay.
iv. Tariffs
As a rule, public service providers are rewarded with tariffs paid by service users. The concession
or permission contract may establish alternative sources of income in addition to tariffs, but this
additional income should be used in order to lower tariffs.
Tariffs are set by the price of the winning bid in the public tender (Article 9, Federal Law No
8,987/1995) and should be preserved throughout the term of the contract. Usually, concession and
permission contracts contain provisions for the readjustment and review of tariffs. In short, tariff
readjustment occurs in pre-specified periods in order to keep the tariff’s price updated vis-à-vis
inflation and other costs incurred by the public service provider. Tariff review, on the other hand, is
a more complex procedure that aims to maintain the financial-economic balance of the concession
contract when certain unpredictable acts outside the scope of control of the service provider (eg, new
taxes) affect its ability to generate the anticipated profit.
60 Doing Business in Latin America OCTOBER 2018
Service providers and the public administration often litigate over tariff reviews, as there are common
divergences between what acts or events influence the concession or permission contract to the point
that would justify a tariff review.
v. Possibility of intervention
Exceptionally, the public administration may intervene in a concession with the goal to secure that
the public service is adequately rendered and to guarantee that the contractual, regulatory and
legal rules are complied with. As an exceptional measure, an intervention requires that the Brazilian
Government issues a decree specifying the person in charge of the intervention, the term of the
intervention, and its objectives and limits, within the legal framework set forth in Federal Law No
8,987/1995.
Once an intervention is declared, the public administration has 30 days to initiate an administrative
proceeding to prove the determinant causes of the intervention, and to verify who is responsible
for such causes. This administrative proceeding must be concluded within 180 days, otherwise the
intervention will be considered invalid.
vi. Termination of concession contracts
A concession contract may be terminated by: (1) the expiry of the contract term; (2) a decision of the
competent entity of the public administration to take over the direct rendering of the public services
(encampação), which requires statutory authorisation and a public interest motivation, with the obligation
by the public administration to compensate the private party that was terminated; (3) a breach of contract
by the private party (concessionaire), demonstrated in a specific administrative proceeding; (4) a breach
of contract by the public administration, recognised by a decision of a competent judge or court; (5)
annulment of the concession contract due to illegality; (6) bankruptcy or extinction of the private party;
or (7) agreement of both parties to terminate the concession contract (distrato).
Upon the termination of the concession contract, all reversible assets, rights and privileges return
to the public administration in accordance with the applicable terms and conditions of the
concession contract.
C. Real estate
i. Introduction
Under Brazilian law, issues relating to property are subject to the law of the country where such
property is located (lex rei sitae). Essentially, issues relating to real estate property in Brazil are
governed by the Brazilian Civil Code. The Brazilian Civil Code classifies assets into two broad
categories: movable assets and immovable assets.
Immovable assets (land and buildings) are, by nature, immobile or fixed to the soil, naturally
or artificially, and cannot be partially or totally removed without causing their own destruction
or devaluation, that is, without substantially altering or destroying them. Immovable property
encompasses land, and anything that has been naturally or artificially incorporated thereto. Brazilian
Doing Business in Latin America OCTOBER 2018 61
law further confers certain rights with the status of immovable assets for legal purposes. This is the
case of in rem rights over real estate properties and inheritance rights to property through succession,
even when inheritance is comprised only of movable assets.
As a general rule, owners of land also own the subsoil. Therefore, a landowner may excavate to a
reasonable depth for construction of basements or subterranean garages. The landowner cannot,
however, prevent third parties from engaging in activities at depths that do not put his/her property
at risk, provided that such activities are carried out in the public interest (eg, excavation of subway
lines and passages for conduits). Land ownership rights, according to the Brazilian Civil Code, do not
encompass mineral deposits, mines and mineral resources, potential hydroelectric power sources,
archaeological sites, or other assets referred to in specific laws. It thus makes a clear distinction
between land ownership and rights to such elements of the subsoil (mineral and hydroelectric
resources), which are considered Brazilian Government property.
Thus, a Brazilian Government authorisation or a licence is required for exploitation of mineral and
hydroelectric resources. Air space is subject to similar rules. A landowner may build vertically on its
land, provided it attends to the limitations provided in law (eg, zoning rules). The built-up area cannot
interfere, for instance, with activities taking place above a certain height, and must pose no risk (aircraft
routes, installation of power lines at a safe height, etc). Also, the landowner may refuse construction by
third parties on its land, or block the building of structures that may place the landowner in jeopardy.
Foreign individuals or foreign-owned companies may acquire real estate in Brazil under the same
conditions as Brazilian individuals or companies. However, according to Internal Revenue Service
Orders (Instruções Normativas) No 1,634/2016 and No 1,548/2015, non-resident individuals or
organisations must be registered with the General Register of Corporate or Individual Taxpayers
(Cadastro Nacional da Pessoa Jurídica (CNPJ) or Cadastro de Pessoas Físicas (CPF)) prior to
purchasing any real estate in Brazil. Furthermore, special conditions and restrictions apply to the
acquisition by foreign individuals or companies of property located in rural areas, as well in coastal
or frontier zones, and in certain specifically designated national security areas. Foreign individuals or
foreign-owned companies may acquire rights in rem relating to immovable property.
Real estate in Brazil is also subject to a Land Registry System governed by federal law and organised
at state-level. Each property must have a record file (matrícula), which corresponds to an enrolment
with the local Real Estate Register Office. The property record file must identify and provide a precise
description of the real estate, its location, boundaries, area and information regarding the owners
and previous transactions.
Any modification, creation, encumbrance or transfer of real estate rights is conditioned to
registration acts at the Real Estate Register Office. Generally, a public deed is required for
implementing a real estate transaction. In addition to public deeds, other acts can also be recorded,
such as: (1) court decisions enabling undivided land to be divided among various owners; (2) court
orders winding-up the estate of a deceased person or division of property for composition with
creditors; (3) public auctions or adjudications; (4) rulings on separation, divorce and annulment of
marriage, when settlement of rights in rem to immovable properties is involved; and (5) all in rem
rights and other acts related to real property, as encumbrances, existence of lawsuits involving the
property, corporate acts (in the case in which the current or previous owner was an entity).
62 Doing Business in Latin America OCTOBER 2018
ii. Possession and ownership
a. right of possession
The right of possession can be assigned to an agent that is not necessarily the land owner. Possession
implies the right to exercise certain powers typical of ownership, such as the right to claim, maintain
or recover the possession of property; the right to its fruits (including rents and other incomes
therefrom); the right to be compensated for necessary improvements effected; and the right to retain
possession. Possession can lead to adverse possession acquisition of real estate, with the exception of
government-owned properties, which cannot be acquired by adverse possession.
Possession ceases when, by voluntary or involuntary means, power is no longer exercised over
the asset. This may occur when the property is forfeited by abandonment, transference, loss or
destruction; if it becomes ineligible for purchase or sale; if possession is lost to a third party; in
the event of failure to maintain a claim or reinstate possession; or when the party legitimately in
possession transfers his/her right to another, maintaining the asset in his/her power in the name of
the acquirer (constitutum possessorium).
b. right of ownership
The right of ownership is the most relevant of all property rights and is defined by the Brazilian Civil
Code as the right of an individual to use, enjoy, dispose of and recover the property from whoever
may unlawfully have taken possession of it. Full right of ownership implies that all the legal powers (to
use, enjoy, dispose of the asset and recover it from whoever unlawfully possesses it) are concentrated
in the same hands. Limited right of ownership implies that some such powers are in the hands of,
and may be exercised by, another person. However, in cases of joint ownership, or condominium,
in principle, full ownership rights, rather than limited ownership, apply. Under a condominium,
each co-owner has the right to an undivided fraction of the asset. As a rule, powers deriving from
ownership can be exercised simultaneously by all co-owners.
iii. Acquisition and loss of ownership
a. general provisions
Under Brazilian law, ownership of real estate property is only constituted upon the registration of the
public or private instrument of acquisition/transfer in the real estate record file of the competent
Real Estate Registry. In the case in which, the acquisition title has not been duly registered, it is
binding only between its parties and, thus, it is not enforceable against third parties. Real estate
property is acquired upon registration of the deed of transfer, which may be by: (1) a purchase
and sale agreement, donation or payment in kind, among others; (2) accession (ie, expansion of
a property as a result, eg, of a displacement of a land strip caused by natural forces); (3) squatters’
rights (ie, acquisition of ownership rights by occupation and possession over a certain period of time,
in law); and (4) inheritance.
Doing Business in Latin America OCTOBER 2018 63
One of the principles that governs the real estate registration system is the principle of priority, whereby
the person who first registers a real estate property or presents deeds for registration has priority.
The main grounds for extinguishing real estate ownership are: (1) expropriation, ie, a unilateral act of
public law whereby individual ownership is transferred to a government authority, upon prior payment
of fair compensation, in the public interest; (2) transfer, meaning transmission to a third party, by
an inter vivos transaction or as a legacy, for a payment or free of charge; (3) waiver (eg, when an heir
renounces rights of inheritance); and (4) neglect, destruction or abandonment of the property.
b. general considerations and requirements for purchasing real estate property
In Brazil, if a real estate property is acquired in its totality by an individual purchaser, as opposed
to ideal fractions in a joint ownership, then he/she has absolute title thereto. In cases of joint
ownership, that is, a condominium, more than one individual and/or entity has the title to the same
real property, each with its corresponding ideal fraction, and each owner can equally exercise any
rights of ownership, provided that it is not compromised by the indivisibility of the real property
(ie, one party to the condominium cannot sell the property without consent of all the other owners,
and any revenues from the sale of the property must be divided among them). In this sense, a
condominium can be pro indiviso or pro diviso. In a condominium pro indiviso, each co-owner has one
ideal fraction that is not divided, and is determined specifically in the real property’s area.
On the other hand, in a condominium pro diviso, each co-owner has its ideal fraction located in a
certain and determined part of the real property. A very common example of condominium pro
diviso is a condominium of apartments and/or offices, regulated by Law No 4,591/1964, being an
autonomous and independent unit of property, on a single piece of land.
Aside from specific requirements relating to the transfer of immovable property, Brazilian law
requires, for all types of contract, that parties to a sale agreement be capable of fulfilling the
transaction. They must be of full legal age, in sound mental health, or duly represented. Despite
the enactment of Law No 13,097 on 19 January 2015 (the ‘Law of Acts Concentration’), it is also
advisable that any real property acquisition be preceded by due diligence to analyse the situation
of the real estate and of its current owners, in order to avoid facts not acknowledged by the
purchaser jeopardising the transaction, and even resulting in the annulment or ineffectiveness of
the transaction. The reason for this is due to the fact that, despite the determination of the acts
concentration in the real estate record file by said law, there is a discussion about its applicability
because of Law No 13,105/2015 (the ‘New Civil Procedure Code’) and the Brazilian Registry system.
The Law of Acts Concentration, in order to improve legal security and avoid conveyance fraud,
determines that all legal business involving the constitution, transfer or modification of in rem rights
over real properties will prevail over prior legal acts not registered in the real estate record file (eg,
registration of summons, lawsuits, legal constraint and administrative restrictions, among others). The
purpose of this law is to reduce bureaucracy in real estate properties transactions, especially from the
purchaser’s perspective, and provide comfort, with the concentration of all acts supposedly related to
the real property in the record file.
64 Doing Business in Latin America OCTOBER 2018
However, the supervening New Civil Procedure Code, enacted on 16 March 2015, established that
the transfer or constitution of in rem rights over real estate properties will be deemed as conveyance
fraud when a lawsuit that could lead the seller to insolvency status was ongoing by the time of said
transaction, even if the lawsuit was not registered in the real estate record file.
The New Civil Procedure Code conflicts with the Law of Acts Concentration because lawsuits in
which the seller may become insolvent can cause the ineffectiveness of the real property acquisition,
even if they were not duly registered in the real estate record files (unlike the provisions set forth in
Law of Acts Concentration). Because the New Civil Procedure Code is subsequent to the Law of Acts
Concentration, there is a discussion about the conflict of laws, such that the regulations of the first
law supersede those of the second, leaving the solution on a case-by-case basis on judicial courts.
In addition, there is also the matter related to the Brazilian Registry System. Each state divides and
organises the Brazilian Registry System according to local laws. The recording system of the Register
Offices is not always centralised and integrated, nor does a synchronised recording system exist for all
the Register Offices. This lack of communication among the Register Offices, therefore, jeopardises
the potential registrations of lawsuits/acts that occur in a jurisdiction different than that of where the
real property is located.
Still regarding due diligence, it is advisable to obtain and analyse: (1) the updated real estate record
file and clearance certificate of liens and claims regarding the period of the last 20 years; (2) clearance
certificates of real estate taxes (eg, Imposto sobre a Propriedade Predial e Territorial Urbana (‘IPTU’)
for urban properties and Imposto Sobre a Propriedade Territorial Rural (‘ITR’) for rural properties);
(3) tax clearance certificates relating to the owners of the real estate; (4) clearance certificates issued
by the courts from the jurisdiction of the real property and the domicile of the owners in order to
verify the existence of lawsuits involving disputes on the real estate or others that could compromise
the owner’s assets (hindering, as a result, the sale of the real estate or resulting in the reversal of the
transaction); and (5) other documents based on the type of transaction and real property.
c. acquisition of rural land by foreigners
Under Brazilian law (Law No 4,504/1964), a rural property is deemed as rustic buildings of
continuous areas or land, regardless of location, devoted to agricultural, farming, livestock or agro-
industrial activities, whether by the private sector or under public land tenure policies.
A foreign individual residing abroad cannot acquire rural property in Brazil. This restriction is not
applied only in the case of legitimate succession (ie, if the foreigner is called upon to acquire the
rural property as a legal heir of the previous owner), and if the rural property is not located in an
area essential to national security. On the other hand, foreigners who have permanent residence in
Brazil, according to the laws currently in force: (1) are free to acquire or lease rural property not
exceeding three modules for indefinite exploitation (módulo de exploração indefinida (MEI)); MEI
is a unit of rural land established by the National Institute for Colonization and Agrarian Reform
(Instituto Nacional de Colonização e Reforma Agrária (INCRA)) for geographic areas sharing the
same socio-economic and ecological characteristics, according to the type of rural exploitation they
are best suited for; and (2) cannot acquire or lease rural real estate exceeding 50 MEIs. Similar
restrictions are applied to foreign legal entities.
Doing Business in Latin America OCTOBER 2018 65
Federal Law No 5,709 (‘Law No 5,709’) was enacted in 1971, and sets out the general rules and
restrictions affecting the acquisition of rural properties by foreigners, which were extended to the
lease of rural areas in 1993 by Federal Law No 8,629. In summary, Law No 5,709 provides that: (1)
foreigners who have permanent residence in Brazil can only acquire or lease rural property for the
purpose of implementing agricultural, livestock, agro-industrial or settlement projects. In addition,
in the case of foreign entities, such projects must be contemplated in their articles of association.
Depending on the type of project (agro-industrial, colonisation, agricultural, etc), it must be
approved by the Brazilian Ministry of Agriculture, Livestock and Supply (Ministério da Agricultura,
Pecuária e Abastecimento (MAPA)) or other federal government bodies in charge of the respective
activities; (2) Congress must authorise the acquisition or lease of areas exceeding 100 MEIs; (3) the
total area acquired or leased by foreign entities or individuals must not exceed 25 per cent of the total
area of any given municipality; and (4) foreigners of the same nationality (including foreigners who
control Brazilian entities) cannot hold more than 40 per cent of that 25 per cent of the area of the
municipality. All the restrictions described above also apply to transfers of rural real estate as a result
of transactions involving corporate restructuring (eg, mergers, spin-offs, acquisitions and changes in
corporate control).
Any transaction made in violation of the foregoing restrictions is null and void. However, the
President of Brazil may, by specific decree, authorise the acquisition of rural land beyond the
provisions of the current law, in cases in which such property is connected with priority projects for
national development plans. The acquisition of rural property by Brazilian companies with foreign
equity control or foreign participation with power of deliberation in general meetings is a subject that
has given rise to heated political and economic debate since mid-2010.
The Sixth Constitutional Amendment of 1995 revoked Article 171 of the Brazilian Federal
Constitution, which provided for differential treatment to companies incorporated under Brazilian
Law, that is, if they were Brazilian companies with Brazilian capital directly or indirectly controlled by
individuals residing in Brazil or not, that is, with direct or indirect equity control held by foreigners.
Since then, there has been no debate on the legality of Brazilian companies with foreign equity
control acquiring rural property in Brazil. However, the Brazilian Government was worried about the
acquisition of rural property due to a sentiment of national sovereignty, and the Federal Attorney
General’s Office issued an opinion in August 2010 arguing that Article 1 of Law No 5,709, which
subjects Brazilian companies with foreign equity control to the same regime imposed on foreign
companies, is consistent with the Constitution. After being approved by the President of Brazil, this
opinion became mandatory for all agencies of the Federal Administration, which must comply with it
strictly. In this new scenario, Brazilian companies with foreign equity control are subject to the same
regulatory framework as that imposed on foreign companies.
iv. Taxation
The Inter Vivos Property Transfer Tax (Imposto de Transmissão de Bens Imóveis Inter Vivos (‘ITBI’))
is a tax assessed by the municipalities. It is due when a real property, rights in rem to any real property
(except those in guarantee) and assignment of rights for the acquisition of the real property are
transferred for remuneration. The rate established for the municipality of São Paulo, for example,
ranges from 0.5 to two per cent, depending on the value of the transfer.
66 Doing Business in Latin America OCTOBER 2018
The ITBI tax is not assessed when the transfer of real property or rights to any such property takes
place to pay up the capital of a company or when resulting from the merger, consolidation, spin-off
or liquidation of the legal entity, unless if, in any of the aforementioned cases, the legal entity’s main
activity is the purchase and sale of such assets and rights, the lease of real property or the commercial
lease of real estate property, in compliance with the applicable provisions of the municipal law.
V. Real estate investment funds
Real Estate Investment Funds were created to provide funds for developing real estate ventures for
subsequent sale, letting or leasing. They began to be regulated by Brazilian law in the 1990s, more
specifically, Law No 8,668/1993, which was updated by Law No 9,779/1999. Ruling No 472/2008 of
the CVM (and its further amendments), regulates the establishment, management, operation, public
offer of quotas and disclosure of information for real estate investment funds. Real estate investment
funds are used for raising funds to build several shopping centres, and implementing large-scale
infrastructure projects throughout Brazil. Previously, pension funds were the main source of direct
investment in real estate projects, but, nowadays, such entities invest in this market indirectly, through
the purchase of shares in real estate investment funds.
Both individuals and corporations domiciled or with headquarters abroad are entitled to acquire
such shares, provided that the funds resulting from the investment are duly registered with the
Central Bank, allowing for the investment and respective gains to be remitted abroad. According
to the law in force, capital gains resulting from such investments are subject to income tax (imposto
de renda (IR)) at a rate of up to 20 per cent, assessed upon disposal or withdrawing of real estate
investment fund quotas.
D. Development of ample/integrated capital markets and joint activities between Latin American countries
i. Stock exchange
Stock exchanges are in charge of organising, maintaining, registering and overseeing operations
involving securities, among other responsibilities. For this purpose, stock exchanges can set additional
rules to those issued by the CVM. The main Brazilian stock exchange is the BM&FBOVESPA,
maintained by Brasil, Bolsa, Balcão SA (‘B3’).
A number of securities may be traded at BM&FBOVESPA: (1) securities; (2) rights; (3) indices;
(4) derivatives; (5) government bonds; and (6) other negotiable bonds issued by private entities
– provided previous authorisation is granted by the Central Bank and/or CVM, as appropriate.
BM&FBOVESPA offers a ‘home broker’ system, allowing investors to deliver their orders through the
internet to their brokers, who are in turn connected to the electronic systems of BM&FBOVESPA.
In December 2000, BM&FBOVESPA launched the New Market, Level 2 and Level 1, which are special
listing segments of the stock market designed for companies that accept to abide by stricter corporate
governance rules and disclosure standards than those provided for in Brazilian law. The New Market
Doing Business in Latin America OCTOBER 2018 67
is a listing segment that requires companies to comply with higher corporate governance standards
than those applied to Level 2 and Level 1.
Under the New Market, companies (or their controlling shareholders, as the case may be) undertake,
among other things: (1) to keep their capital stock represented only by common shares with voting
rights; (2) keep at least 25 per cent of their shares in the free float; in case the average daily trading
volume is up to R$25m, the free float may be decreased to 15 per cent; (3) offer to all shareholders
the same terms and conditions as those enjoyed by the controlling shareholders in the case of
the sale of the controlling stake (100 per cent tag along); (4) launch a tender offer to repurchase
their shares from all shareholders for at least the economic value, in the case of the delisting or
cancellation of the agreement with BM&FBOVESPA that formalised the company’s adhesion to the
New Market; (5) keep a board of directors made up of at least five members, 20 per cent of whom
are independent members, with a two-year mandate at most; (6) provide annual financial reports
prepared in accordance with an internationally accepted standard; (7) issue more complete financial
reports, including quarterly cashflow reports and consolidated reports reviewed by an independent
auditor; and (8) disclose, on a monthly basis, the trading by its officers, executives and controlling
shareholders in securities issued by it.
Level 2 imposes similar obligations to those of the New Market, and companies adhering to it may
have their capital stocks represented by common shares with voting rights and preferred shares with
restricted or no voting rights. Under certain circumstances, preferred shares are granted with voting
rights, such as for approval of M&A transactions involving the company, and agreements between
the controlling shareholder and the company, whenever these decisions are subject to approval at a
shareholders’ meeting.
Level 1 requires adhering companies, among other things: (1) to keep at least 25 per cent of their
shares in the free float; (2) disseminate more complete financial data; (3) issue annual financial
reports prepared in accordance with an internationally accepted standard; and (4) disclose, on
a monthly basis, the trading, by its officers, executives and controlling shareholders, in securities
issued by it.
BM&FBOVESPA also created the BOVESPA MAIS and BOVESPA MAIS Level 2, special listing
segments designed to make the stock market more readily accessible mainly to small and medium-
sized enterprises. Overall, the BOVESPA MAIS listing rules are similar to those applied to the New
Market, and companies adhering to the BOVESPA MAIS can have their capital made up of preferred
shares, which cannot, nevertheless, be traded. BOVESPA MAIS Level 2 has similar rules to BOVESPA
MAIS; however, this segment allows the company’s capital stocks represented by common and
preferred shares with special voting rights. In the case of selling the controlling stake, BOVESPA
MAIS Level 2 companies assure a 100 per cent tag along to all shareholders.
Custody and clearance of transactions involving securities are carried out by a clearing house of
BM&FBOVESPA, and are settled, as a general rule, on the second and third business days following
the respective transaction date (financial and physical settlement, respectively).
68 Doing Business in Latin America OCTOBER 2018
ii. Going regional
Back in the early 1990s, economists and policy-makers had high expectations of the prospects for
capital market development in emerging economies. This led to significant reforms, including
financial liberalisation, the establishment of stock exchanges and bond markets, and the development
of regulatory and supervisory frameworks. These reforms, together with improved macroeconomic
fundamentals and capital market-related reforms, such as the privatisation of state-owned enterprises
and the shift to privately managed defined contribution pension systems, were expected to foster
financial development.
In November 2014, BOVESPA expressed its intention to acquire up to 15 per cent of the main Latin
American stock exchanges. Even though it cannot be considered as a merger proposal between both
stock exchanges, it has prompted debate as to how important it is to move forward with regional stock
exchange integration to improve their competitiveness.
iii. The organised OTC market
The organised over-the-counter (OTC) market is a trading environment managed by institutions
authorised by and subject to the oversight of CVM that offers a trading system and establishes self-
regulatory rules and mechanisms. A number of securities may be traded in the organised OTC
market: (1) shares; (2) debentures; (3) audiovisual certificates of investment; (4) quotas of closed-end
investment funds, including private equity funds, real estate funds and credit rights investment funds;
(5) warrants; (6) indices representing share portfolios; (7) put and call options over securities; (8)
subscription rights; and (9) subscription receipts. CETIP is an organised OTC entity, also maintained
by B3, that also operates as a custody and clearing house.
iv. Brazilian Financial and Capital Markets Association (ANBIMA)
Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais (‘ANBIMA’) is a private
regulatory agent that currently represents around 300 institutions, including commercial, multiple
and investment banks; asset managers; brokers; and dealers. Over the years, ANBIMA has approved
a number of self-regulatory codes that discipline several matters regarding Brazilian capital markets,
including public offerings (the ‘ANBIMA Code for Public Offerings’). The ANBIMA Code for Public
Offerings sets out certain disclosure standards to be followed by its members while coordinating
public offerings of securities in the Brazilian market. The ANBIMA Code for Public Offerings
establishes operational standards similar to those established in more mature countries in terms of
capital market organisation.
The objective of the ANBIMA Code for Public Offerings is to establish full disclosure standards on
which the activities of financial institutions in the Brazilian capital market must be based. Going
beyond the requirements provided for in the Brazilian law, the self-regulator y regime regulated
by the ANBIMA Code for Public Offerings is similar to those adopted in modern self-regulator y
regimes throughout the world, and it creates uniform rules for the public distribution of fixed
and variable income securities in the primar y and secondar y markets. According to the ANBIMA
Code for Public Offerings, financial institutions acting as coordinators of under writing syndicates
(under writers) are also responsible for the content of prospectuses and Brazilian 10-K-like forms
Doing Business in Latin America OCTOBER 2018 69
(formulários de referência). They are also required to conduct independent due diligence to verify
all material information concerning the issuer’s business, properties and financial status, relevant
securities and other material facts that may have a bearing on an investor’s decision with regard to
offered or requested investment funding.
The ANBIMA Code for Public Offerings also establishes comprehensive rules for the minimum
content of the prospectuses and Brazilian 10-K-like forms, among others: (1) information concerning
risk factors, with no mitigations; (2) description of the issuer’s main sector-related aspects; (3)
description of the issuer’s business and corporate governance, environmental protection and
social responsibility policies; (4) management’s discussion and analysis of the issuer’s financial
condition and results of operations carried out in the three previous fiscal years; (5) information
about the issuer’s existing securities and securities to be issued; (6) relevant administrative and
judicial proceedings that affect the issuer; (7) description of operations with related parties and
underwriters for the issuance of securities; and (8) description of operations with underwriters acting
as coordinators of the offering.
v. Financial and capital market
Non-residents investing in the Brazilian financial and capital markets under the 4,373 Regime and not
resident/domiciled in a ‘tax favourable jurisdiction’ (TFJ) (ie, ‘4,373 Foreign Investors’) are subject to a
more favourable income tax treatment (the ‘Special Income Tax Regime’), as described below:
• income arising from swap transactions, whether or not registered in regulated exchange
markets, stock investment funds and other derivative transactions performed in OTC future
settlement markets are subject to taxation at a flat income tax rate of ten per cent;
• income arising from fixed income financial investments, investment funds in general (except
for stock investment funds), structured transactions certificates (certificados de operações
estruturadas (COE)) and financial transactions carried out outside the Brazilian stock exchange
are subject to a 15 per cent income tax rate; and
• capital gains derived from transactions effectively traded in regulated stock exchanges,
commodity exchanges, futures exchanges and others, as well as from transactions involving gold
(as a financial asset) performed outside such regulated exchange markets are exempt from
income tax.
The Special Income Tax Regime also provides other specific income tax ‘exemptions’ and ‘zero rates’
applicable to 4,373 Foreign Investors (eg, government bonds and private equity investment funds).
The Special Income Tax Regime is not applicable to TFJ 4,373 Foreign Investors, which are subject to
the same tax rules applicable to Brazilian resident investors.
Although dividends arising from profits earned on or after 1 January 1996 are exempt from income
tax – for both 4,373 and TFJ 4,373 Foreign Investors – interest on net equity (juros sobre capital próprio
(‘JCP’)) is subject to a 15 per cent income tax rate, where paid to 4,373 Foreign Investors; and a 25
per cent income tax rate, where paid to TFJ 4,373 Foreign Investors.
70 Doing Business in Latin America OCTOBER 2018
E. Offshore vehicle providers in Latin American countries
i. General features
After the Second World War, Brazil played a major role in efforts to establish a free trade zone in
Latin America, and was one of the founders of the Latin American Free Trade Association (LAFTA),
created under the Montevideo Treaty of 16 February 1960, signed by Brazil, Argentina, Bolivia, Chile,
Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela. The main goals of LAFTA were
the gradual establishment of a Latin American common market, and the promotion of integration
efforts at regional level.
With the signing of the Montevideo Treaty on 12 August 1980, those same states founded the Latin
American Integration Association (LAIA) ‘in order to advance the integration process and promote
economic and social development, harmony, and balance throughout the region’. The 1980
Montevideo Treaty sets forth important principles regarding the integration process: (1) pluralism;
(2) convergence; (3) flexibility; (4) differentiated treatment; and (5) multiplicity. Those principles
significantly differ from the main contours of the trade liberalisation scheme set forth by the 1960
Montevideo Treaty that established LAFTA.
Within the scope of limited trade agreements (enabled under the LAIA Treaty of 1980) Brazil and
Argentina have signed important bilateral treaties, laying the groundwork for a fast-growing bilateral
common market area. These include the Integration Development and Cooperation Treaty, signed
in Buenos Aires on 29 November 1988; and 24 protocols, followed by other bilateral agreements
on specific topics, including a Treaty for the Establishment of a Statute for Brazilian–Argentine Bi-
national Companies, signed on 6 June 1990. Further efforts on the regional integration process led
to the establishment of the Common Market of the South (‘MERCOSUR’) in 1991, according to the
provisions of the Asunción Treaty, which was concluded between Argentina, Brazil, Uruguay and
Paraguay on 26 March 1991.
ii. LAIA
The main legal framework of LAIA specifies three mechanisms for the establishment of preferential
trade areas in Latin America: (1) regional tariff preferences for products originating in a LAIA
contracting party, regarding tariffs applicable to exports to third countries; (2) regional scope
agreements to be negotiated and concluded among contracting parties; and (3) partial scope
agreements between two or more LAIA contracting parties (see, eg, Resolution 2 of the Foreign
Ministers Council of 12 August 1980 on partial scope agreements concluded under the LAIA umbrella).
Regional or partial scope agreements are designed to cover tariff relief and trade promotion, as
well as other policy aspects concerning regional integration, such as economic complementation;
agricultural trade; cooperation in financial, tax, customs and health matters; scientific and
technological cooperation; environmental protection; pharmaceutical goods in transit; tourism
promotion; technical standards; and other areas. Under the framework of LAIA, Brazil has also
signed multilateral economic agreements with Argentina, Chile, Mexico, Uruguay and Venezuela
Doing Business in Latin America OCTOBER 2018 71
in 1995; bilaterally, Economic Assistance Agreements with Chile (1996 and 2006), Bolivia (1997 and
2005) and Mexico (2002); and a Limited Economic Assistance Agreement with Suriname (2005).
Particularly with regard to limited agreements, contracting parties may negotiate several matters
related to the regional integration process, such as: (1) rules on trade conduct: subsidies and
countervailing duties, unfair trade practices, licences and import procedures; and (2) other rules on
non-tariff matters: payments, financial cooperation, tax cooperation, cooperation in animal and plant
health, customs cooperation, transport facilitation and government procurement. In addition, within
the context of LAIA, contracting parties have implemented several preferential systems comprised of
market liberalisation lists and cooperation programmes, such as in the fields of business, investment
strategies, and financing and technological support. LAIA contracting parties have also accorded
preferential treatment to certain landlocked countries in the region (eg, Bolivia and Paraguay), by
means of countervailing measures aimed at favouring their full participation in regional integration.
Because the Montevideo Treaty of 1980 is a ‘framework treaty’, the institutional and normative
development of the integration process between Latin American countries is further complemented
and shaped by other multilateral regional agreements, treaties and organisations, such as the Andean
Community, MERCOSUR, the G-3 FTA and the Union of South American Nations (União de Nações
Sul-Americanas (‘UNASUL’)). In this sense, LAIA has established a consensus as to the flexibility
and convergence of principles guiding the regional integration processes in Latin America for the
purpose of deepening and expanding a common economic area. This initiative was based on a
market-orientated approach, but also on a gradual and open development of the integration process.
iii. MERCOSUR
The Asunción Treaty signed in Paraguay on 26 March 1991 announced the creation of MERCOSUR,
with the aim of establishing a common market between Brazil, Argentina, Uruguay, and Paraguay
(the primary MERCOSUR state parties), wherein the following objectives were established:
• free circulation of goods, services and production factors among member countries by means
of the elimination of tariff and nontariff barriers to trade among such countries;
• establishment of a common external tariff, and adoption of a common trade policy at the
regional and international levels;
• coordination of macroeconomic sectoral policies among member countries, in such areas as
foreign trade, agriculture, industry, tax issues, FX, capital, services, customs policy, transport
and communications, and any other items that might subsequently be agreed upon; and
• commitment on the part of member states to harmonise their laws, with a view to achieving
full integration.
The institutional framework of MERCOSUR is based on rules established under the Asunción
Treaty and the Ouro Preto Protocol (Additional Protocol to the Asunción Treaty on the
Institutional Framework of MERCOSUR of 1994), which stresses the objectives and principles
of the organisation, particularly the implementation of a customs union as one of the stages for
consolidating a common market.
72 Doing Business in Latin America OCTOBER 2018
This process, as previously mentioned, is characterised by the gradual elimination of the domestic
tariff and regulatory constraints. Advances in the consolidation mechanisms of MERCOSUR are
proof that the integration process in Latin America, or at any rate, in the Southern Cone, are no
longer merely theoretical, but an important step towards regional integration and cooperation. After
20 years of existence, MERCOSUR has proven that its member states and associate members have
actually achieved positive and concrete results.
iv. Favourable tax jurisdictions and privileged regimes
Law No 11,727/2008 introduced a new concept of the tax haven in Brazilian legislation, recognising
the difference between favourable tax jurisdictions and privileged tax regimes. On 7 June 2010,
the Brazilian Internal Revenue Service (Receita Federal) issued two separate lists: (1) the first lists
countries and dependent territories/areas that do not tax income or tax it at a rate of less than 20 per
cent at most, or whose law does not grant access to information about the corporate structure of legal
entities or their ownership (also known as the ‘Black List’); and (2) the second lists regimes that are
considered privileged tax regimes under Brazilian law (also known as the ‘Grey List’).
According to Brazilian tax rules, the following jurisdictions fall under the classification of
favourable tax jurisdictions: Andorra, Anguilla, Antigua and Barbuda, Dutch Antilles, Aruba,
Ascension Island, Commonwealth of the Bahamas, Bahrain, Barbados, Belize, Bermuda, Brunei,
Campione D’Italia, the Channel Islands (Alderney, Guernsey, Jersey and Sark), the Cayman Islands,
Cyprus, Singapore, the Cook Islands, the Republic of Costa Rica, Djibouti, Dominica, the United
Arab Emirates, Gibraltar, Grenada, Hong Kong, Kiribati, Lebuan, Lebanon, Liberia, Liechtenstein,
Macau, Madeira, the Maldives, Isle of Man, the Marshall Islands, Mauritius, Monaco, the
Montserrat Islands, Nauru, Niue Island, Norfolk Island, Panama, Pitcairn Island, French Polynesia,
Qeshm Island, American Samoa, Western Samoa, San Marino, Saint Helena Island, St Lucia, the
Federation of Saint Kitts and Nevis, the Island of Saint Pierre and Miquelon; Saint Vincent and
the Grenadines, the Seychelles, the Solomon Islands, Swaziland, Switzerland (currently suspended
from the list by Ato Declaratório Executivo Receita Federal Do Brasil (ADE RFB) No 11/2010), the
Sultanate of Oman, Tonga, Tristão da Cunha, the Turks and Caicos Islands, Vanuatu, the American
Virgin Islands and the British Virgin Islands.
According to Brazilian tax rules, the following jurisdictions fall under the classification of privileged
tax regimes: holding companies incorporated under Danish law with no substantial economic activity;
holding companies incorporated under Dutch law with no substantial economic activity (currently
suspended from the list by ADE RFB No 10/10); international trading companies incorporated under
Icelandic law; offshore companies incorporated under Hungarian law; limited liability companies
(LLCs) settled under US state law, held by non-residents and not subject to federal income tax in
the US; entidad de tenencia de valores extranjeros incorporated under Spanish law (currently suspended
from the list by ADE RFB No 22/10); and international trading companies (ITC) and international
holding companies (IHC) incorporated under Maltese law.
Doing Business in Latin America OCTOBER 2018 73
Chile
74 Doing Business in Latin America OCTOBER 2018
IV. Chile
A. Foreign investment in Chile
Chile is a countr y that stands out due to the development of its strong institutional framework; it
is one of the Latin American countries that offers the best standards in political, economic and
social stability.
As evidence of this, Chile was the first – and is still the only – South American country that is a
member of the OECD, which has 36 developed and emerging member countries.
Furthermore, in Chile there are different and attractive alternatives for foreign investment within
different sectors: mining, infrastructure, aquaculture, energy (especially renewable energy),
services, tourism and industry, among others. In the World Investment Report of the United Nations
Conference on Trade and Development (UNCTAD) of 2017, Chile appeared within the first five
main economies in receiving foreign investment in Latin America and the Caribbean, and is the Latin
American country with the best place in the Global Competitiveness Index Ranking 2017–2018 issued
by the World Economic Forum.
Besides local regulations that govern foreign investment, Chile has international policies in order to
commit the country, with many others, to FTAs, investment promotion and protection agreements,
and treaties for the avoidance of double taxation.
In addition, Chile is a member of the International Centre for Settlement of Investment Disputes,
which provides facilities for conciliation and arbitration of international investment disputes.
i. Local rules in foreign investment
In general terms, these local rules have the purpose of, on the one hand, promoting the direct entry
of foreign capital by giving investors certain assurances and benefits, and on the other hand, keeping
the Chilean Central Bank informed of the entrance and repatriation of such investments.
Notwithstanding the foregoing, foreign investors shall enter their capital through an entity that
is a part of the Formal Exchange Market (Mercado Cambiario Formal), which is integrated by
commercial banks operating in Chile and also other entities expressly authorised by the Chilean
Central Bank (eg, currency exchange companies and certain tourism companies, among others).
In broad terms, there are two main mechanisms for purposes of entering capital into the country:
the first is the reporting system of Chapter XIV of the Central Bank Foreign Exchange Regulations
(‘Chapter XIV’), which offers a fast route to foreign investments over US$10,000, and the other is the
foreign investment regulation rules in the Foreign Investment Framework Law, which entered into
force on 21 January 2016, replacing the Foreign Investment Statute contained in Decree Law No 600
of 1974 (‘Decree Law 600’), which ruled the matter to that date. The Foreign Investment Framework
Law substantially grants to investors, among other guarantees, equal treatment compared with local
investors and other tax benefits, in accordance with the recommendations of the OECD. This law
only applies to investments for amounts over US$5m.
Doing Business in Latin America OCTOBER 2018 75
ii. Chapter XIV of the Central Bank FX Regulations
As stated above, this mechanism provides an easy alternative for foreign loans, deposits, investments
and equity contributions over US$10,000 to enter the country because there is almost no intervention
from the authorities. This mechanism requires the parties to inform the Chilean Central Bank of
all foreign investments over the amount indicated above through a simple and standard form. In
the case of foreign loans, for example, the information provided shall include some details about
the borrower, the lender, the amount, terms, interest rates and purpose of the loan, guarantees, the
schedule of payments and other special clauses. Once this form is received by the entity of the Formal
Exchange Market, the latter reports it directly to the Central Bank.
With respect to the repatriation of investments, please note that under Chapter XIV, the investor may
at any time repatriate the investment and the profits derived from it without any amount limitation,
provided this remittance of foreign currency is conducted through a Formal Exchange Market entity
and the Central Bank is informed.
iii. The Foreign Investment Framework Law
The main guarantees granted to foreign investors by the new Foreign Investment Framework Law,
also contained in the former regulations of the Foreign Investment Statute, are related to the
remittance of the invested capital and profits, access to the formal exchange market, the guarantee of
no arbitrary discrimination and some tax benefits.
This regime is granted to the entr y of foreign capital or assets owned by a foreign investor, or by
a local company controlled by a foreign investor, for amounts over US$5m. It is also granted to
foreign investments, over such amount, destined to acquire more than the ten per cent of a local
company’s equity.
Those who qualify as foreign investors, under the terms of the new Foreign Investment Framework
Law, could obtain the corresponding certificate from the Agency for Foreign Investment Promotion
to enter into the applicable regime for foreign investors.
The benefits granted to the direct foreign investment by the new Foreign Investment Framework Law
are summarised as follows:
• foreign investors have the right to remit abroad the entered investment and the net profits
obtained from it, at any time and without any amount limitation, provided there is prior
compliance with all Chilean taxes and/or duties;
• foreign investors have the right to access the formal exchange market to sell their foreign
currency to enter the capital into the country, and also to obtain the foreign currency needed
to remit abroad the entered investment and their profits, at the exchange rate freely agreed
between the parties;
• foreign investors have the right to VAT exemption on the importation of capital assets destined
for the development of the foreign investment business in Chile, provided it fulfils the VAT Law
requirements; and
76 Doing Business in Latin America OCTOBER 2018
• foreign investors have the right to be subject to the common legal regime applicable to local
investors, without any arbitrary direct or indirect discrimination. This guarantee is fully
supported by the Chilean Constitution, according to which all individuals in Chile are treated
equally under the law, regardless of their nationality, domicile, residence or any other arbitrary
criteria that the law or any authority may impose breaching these constitutional provisions.
Notwithstanding the above, the new Foreign Investment Framework Law will grant to foreign
investors who may prefer to be subject to the former regulation granted by the Foreign Investment
Statute contained in Decree Law 600, the opportunity to transfer foreign capital into Chile under the
terms of Decree Law 600 within the period of four years, counted as of 21 January 2016.
Therefore, foreign investors would enter into a legally binding agreement with the State of Chile,
under the regulation of Decree Law 600 for the purpose of bringing capital over US$5m to the
country, under certain terms and conditions that are not allowed to be modified at the sole discretion
of the state. Under this agreement, foreign investors shall bring their capital within a period of three
years, and eight years in the case of mining projects, as a general rule.
This mechanism requires that the investor files an application form with the corresponding authority,
including relevant information as to the amount and purpose of the investment in Chile, and also
providing some information regarding the identity of the investor. If the investment is approved by the
corresponding authority, a foreign investment agreement shall be subscribed before a notary public in
Chile, between the foreign investor and the Chilean state. Notwithstanding the latter, foreign investors
are allowed to enter funds on the same date that the mentioned application is filed, and allocate
these amounts to the foreign investment agreement that will be executed. Under this legally binding
agreement with the Chilean state, foreign investors have the right to be subject to a fixed income tax
rate for a period of ten years counted from the beginning of the activities of the foreign investor. This
period could be increased up to 20 years for some projects (ie, industrial and extractive investments of
US$50m or more). Otherwise, the foreign investor could prefer to be subject to regular tax rates.
Foreign investors, who had already entered into a foreign investment agreement with the Chilean state
under the Foreign Investment Statute contained in Decree Law 600, will fully maintain their rights and
obligations granted by such agreements, provided they were subscribed before 21 January 2016.
a. authorisations versus limitations or prohibitions
As a general rule, Chilean law does not provide any specific limitation or prohibition regarding
the participation of foreign investment in the different areas of the national economy. In fact, the
Chilean Constitution provides the right to develop any economic activity to all individuals, provided
its corresponding regulations are duly fulfilled.
There are some minor restrictions or limitations for foreign investment; for example, in areas
considered relevant to national sovereignty, such as the ownership of real estate at the borders of the
country. In addition, the law has imposed some restrictions to the nationality of owners, directors and
representatives in mass media businesses and the cross-border transport regime, and according to
fishing law, there are other special requirements regarding the nationality and residence of those who
operate aquaculture licences.
Doing Business in Latin America OCTOBER 2018 77
b. treatment of foreign investment in infrastructure initiatives and ppp projects
In Chile, most public infrastructure, such as highways, tunnels, airports, public hospitals, schools,
buildings, prisons and telecommunications services, among other projects, are built and operated
through a concession system created in 1991, in virtue of which the Chilean Government and
licensees are bound under a model of PPPs.
Under the PPPs model, the Chilean Government opens bidding processes to build, operate, repair and
maintain public infrastructure needed in accordance with the public interests of the country. Once the
projects are built and fully operational, the licensees are able to recover their investment and get profits
over a long-term period, through the payments of the users of the project, or through a subsidy of the
Chilean Government. Finally, the licensees transfer the public infrastructure to the state.
According to the Concessions Law, public biddings could be local or international; and the
individuals and companies either local or foreign who fulfil the legal requirements, are allowed to
participate in such biddings.
However, in order to enter into the concession agreement with the Chilean Government, foreign
licensees, as well as local licensees, shall incorporate a Chilean company with the exclusive corporate
purpose of executing, repairing, maintaining and operating such public infrastructure.
c. treatment of foreign investment in mining activities
Mining activities in Chile are regulated by the Constitution, the Constitutional Organic Mining Law,
the Mining Code and other specific regulations.
According to the Chilean Constitution, the state is the absolute and exclusive owner of all mines,
despite the property rights of individuals or companies over the real estate where those mines are
situated. The surface land will be subject to legal obligations and limitations in order to facilitate the
exploration, exploitation and profits of such mines.
There are no differences in the treatment of local and foreign investment in mining based on the
constitutional principle of no arbitrary discrimination. Therefore, individuals and companies are
able to claim for an exploration or exploitation mining concession, regardless of their nationality,
domicile, residence or any other arbitrary criteria. However, there are some minor restrictions on
foreign investors who are nationals of bordering countries regarding applying for mining concessions
located on the border of the country.
Along the same lines, local and foreign investors shall comply with the same legal obligations in the
execution of mining concessions, such as payment of mining licences, compliance with mining safety
regulations and environmental obligations, among others.
In general, exploration and exploitation concessions can be granted for private individuals or
companies over all mineral resources permitted by the law, with the exception of liquid or gaseous
hydrocarbons (oil and gas), lithium and deposits of any type located in the sea under Chilean
jurisdiction or located in areas deemed by law to be important for national security. Those mineral
resources not subject to the concession system can be explored and exploited directly by the state or
its companies, or by administrative concessions or special operation contracts.
78 Doing Business in Latin America OCTOBER 2018
Surface clay, artificial salt pits, sand, rock and other materials used directly in construction are ruled
by the common law or special provisions set forth in the Mining Code to this effect; therefore, they
are not considered mineral substances and not subject to the mining concession system described in
this section.
Mining concessions are granted by the civil courts through a non-discretionary process, once the
investor has fulfilled the requirements established by the Mining Code. Such a judicial award will
have the duration and shall set the rights and obligations that the Constitutional Organic Mining Law
indicates.
Exploration mining concessions are granted for two years. The concessionaire may request an
extension for two additional years, provided that he or she releases half of the surface originally
granted. Then, the owner of such an exploration concession can apply preferentially for an
exploitation concession, being in such case entitled to extract the mineral resources within the limits
of such an area for an indefinite period.
d. treatment of foreign investment in real estate (rural and urban properties)
As a general rule, there are no differences in the treatment of local or foreign investment in
acquiring real estate in Chile based on the constitutional principle of no arbitrar y discrimination.
Therefore, local and foreign individuals or companies who may invest in real estate shall comply
with the same regulations based in the fact that no governmental authorisations are required in
this regard.
There are, however, some restrictions. For example, and as mentioned above, real estate located
in border zones may not be acquired by foreign individuals from the neighbouring countries or
by companies located in such border countries, with more than 20 per cent of its equity owned
by entities of the same country. In these cases, the Chilean President could exempt the foregoing
prohibition, through a supreme decree.
e. treatment of foreign investment in agribusiness activities
According to the general rules stated above, there is no special treatment for foreign investors in
agribusiness activities compared with local investors. The tax benefits used by participants in this area
of the economy are available to both types of investor.
Actually, foreign investors have been very important in the development of the agribusiness industry,
which includes wine, fruit and other products, and is also related to processed food, fishing and farm
fishing, and the industry of dairy products, meat and olive oil.
The Mediterranean climate of Chile, with wet winters and warm summers, and its other natural
conditions, offers the best scenario for this sector of the economy. This natural advantage allows
year-round production, which jointly with the protection given by natural barriers such as the desert,
mountains and ice fields, makes Chile appear to be one of the countries with the best phytosanitary
conditions to develop an agricultural and export business.
Doing Business in Latin America OCTOBER 2018 79
f. treatment of foreign investment in the rendering of public services
In the public services industry, there is no difference in the treatment of local or foreign investment
in Chile. As described in relation to PPP projects, local and foreign entities are allowed to participate
in public biddings to provide public services.
Regarding the services provided by private companies to government entities, the Supply and
Services Agreements Law establishes that local and foreign entities are allowed to enter into supply
and services agreements with the Chilean state, provided they comply with some legal requirements,
and it only distinguishes between different procedures depending on the amount of each agreement.
In the case of major amounts, that provision of services will be awarded through public bidding;
in other minor agreements, through private bidding; and in some cases, Chilean Government
entities will be allowed to enter into direct contracts with the suppliers of such services. In any of
these scenarios, the candidates should be able to secure the seriousness of the offer, and the chosen
suppliers also to secure the accurate and timely fulfilment of the obligations under the contract,
according to the specific requirements established on the basis of the bid.
Notwithstanding the foregoing, as well as in PPP projects, as a general rule, foreign suppliers shall
incorporate a Chilean company or an agency of the foreign company, with the exclusive corporate
purpose of executing such an agreement.
B. Rendering of public services
i. General framework
The rendering of the public services system in Chile has changed several times throughout the last
couple of decades, thus ‘making Chile one of the first countries in introducing libertarian economic
reforms regarding public services’.
The economic world crisis in 1929 made politicians distrust the capitalist model, and several Latin
American governments, including the Chilean Government, opted for an interventionist state.
During the 1920s and 1930s, the Chilean state assumed a controlling role and reorganised the
country’s economy by creating a welfare state model.
This new model promoted the creation of various state enterprises dedicated to providing and
overseeing several public ser vices. By 1973, all (100 per cent of) public ser vices were controlled by
state companies.
By the beginning of 1974, the economic model was reformed in order to minimise the state’s
excessive intervention in matters of national economy. Thus, at the beginning of 1982,
several privatisation reforms were applied to healthcare, the housing sector, pension funds,
telecommunications and the electrical industry, among others.
The existence of several natural monopolies made it necessary to establish strong regulatory
frameworks before the privatisation of those companies.
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Currently public services are mostly provided by private companies that operate under specific laws
and regulations, and are subject to supervision and control (mainly through public agencies).
New institutions, such as area-specific agencies (superintendencias) were established under this model
(ie, Superintendency of Banks), with the objective of supervising and enforcing regulations and laws.
Finally, unlike in other Latin American countries, Chile does not have a single entity regulating the
rendering of public services. Instead, each industry is regulated by a specific legal framework that is
established and controlled by a certain institution.
ii. Governmental monopoly versus private initiative
The current institutional structure of public services in Chile is characterised mainly by the
participation of private companies operated by strictly private criteria. This is explained by the
objective of the regulatory framework, which is to stimulate entry to those potentially competitive
market segments and ensure open access to all competitors. However, in those markets where
competition is definitively not possible, fees, quality conditions and even technical norms are
established using other means.
This is strictly related to the Subsidiarity Principle established in the Chilean Constitution of 1980,
by which state inter vention in markets is neatly delimitated. Although the Constitution does not
give a definition for this principle, it can be explained as the recognition of the supremacy of
the human person above the state, and therefore, the right of individuals to create intermediate
groups through which society is structured (ie, companies). In this regard, there is a ‘negative
perspective’ of the principle, which aims to assign to the state those functions that are not
possible to delegate, such as foreign affairs, administration of justice and national defence,
among others, and a ‘positive perspective’, by which the state is allowed to provide, fulfilling
certain requirements, some ser vices or activities aimed at the common welfare, and that private
organisations fail to provide.
This principle is outlined in economic terms in Article 19 No 21, where the Chilean Constitution
notes that ‘[t]he State and its organisms may develop either corporate or business activities and
engage in them provided a law of qualified quorum authorises them to do so’. Those activities
executed by state companies must be ruled by common law, applicable to any private entity, except
for legal exceptions, also provided by a law of qualified quorum.
iii. Limitations and/or prohibitions to private parties in the rendering of public services
The rendering of public services by private parties in Chile has no major limitations or prohibitions.
The Chilean Constitution establishes in Article 19.21 the right to develop any economic activity,
provided it obeys moral conduct, public order and national security, and it respects the norms that
regulate it.
The regulatory legal framework establishes different prohibitions and limitations specific to each
industry.
Doing Business in Latin America OCTOBER 2018 81
The General Law of Telecommunications establishes a regime of public concessions. This law states
that (Article 21), only companies incorporated under Chilean Law may hold telecommunication
concessions. Also, as a prohibitory statute, this law states that individuals who have been convicted for
a simple crime or felonies that qualify for jail sentences of more than three years and a day in prison
may not act as presidents, directors, general managers, administrators and legal representatives of
telecommunication companies.
The General Law of Electrical Services defines a set of rules for public concessions, setting forth
that (Article 13) concessions in the electrical field may only be awarded to Chilean citizens and
corporations formed under the country’s laws. However, they may not be awarded to limited joint-
stock partnerships.
The Public Ports Industry Law establishes a regime of public concessions, which is developed further
in Decree No 140 from the Ministry of Public Works. Decree No 140 (Article 8) states that individuals
who have been convicted for a simple crime or felonies that qualify for jail sentences of more than
three years and a day in prison shall not be considered eligible bidders, nor the non-rehabilitated
bankrupt or representative. These causes shall not be applicable after two years since the end of
compliance of the conviction.
According to the Supply and Services Agreements Law (Article 4), in order to subscribe to an
agreement with any public entity, there are also certain prohibitions; this is the case in which providers
are condemned for anti-union practices, condemned for infringement of a worker’s fundamental rights
or have been convicted by specific crimes related to this matter, within a two-year period.
In relation to antitrust regulation, Decree Law 211 set forth (Article 26 d) that, in collusion cases, the
Antitrust Tribunal may impose, among other sanctions, the prohibition to enter agreements with any
public entity for a maximum period of five years since the final judgment was enforceable.
C. Real estate
Chilean Law guarantees private property, and grants the owner the right to freely dispose of this
property, including the right to sell, assign or transfer it in any form; lease; constitute limitations
and encumbrances; assign the right to use and occupy it; or give it as security to a third party. These
matters are mainly regulated in the Chilean Constitution and the Chilean Civil Code, in addition
to applicable particular regulations depending on, for example, the involved industry, use and
geographic area.
i. Rural properties: limitations for private parties
The main limitations to private parties regarding rural properties are:
a. the indigenous peoples act
Law No 19,253 provides that indigenous land may not be disposed of, attached, encumbered or
acquired through adverse possession, except in favour of indigenous communities or individuals
belonging to the same ethnic group. Nevertheless, they may be subject to liens upon authorisation by
82 Doing Business in Latin America OCTOBER 2018
the National Agency for the Furtherance of Indigenous Peoples (Corporación Nacional de Desarrollo
Indígena (‘CONADI’)). These liens cannot include the home of an indigenous household and the
land it needs to survive.
The quality of ‘indigenous land’ is accredited through an inscription in a public registry, which is
handled by CONADI.
Land belonging to ‘indigenous individuals’ may be leased, conveyed under bailment or assigned to
third parties for their use, enjoyment or administration for a maximum of five years, but land owned
by ‘indigenous communities’ cannot be subject to those acts.
In any case, this indigenous land, with the prior consent of CONADI, may be exchanged for non-
indigenous land that has comparable commercial value, duly ascertained; the latter will then be
deemed to be indigenous land and the former will no longer enjoy this status.
b. border territory
Decree No 1,939 establishes limitations on the acquisition of real estate or state property in border
areas.
Article 6 of the decree states that ‘public lands located at a distance of 10 kilometres, measured from
the border, can only be obtained in ownership, leasing or any other title, by Chilean naturals or Chilean
legal entities. This provision applies as well to State property located to 5 kilometres of the coast’.
In addition, Article 7 of the aforementioned decree sets forth a prohibition on nationals of countries
bordering Chile (ie, Argentina, Bolivia and Peru) to acquire ownership and other rights or possession
of state property situated wholly or partly in areas of the country declared as ‘border territory’ under
Decree with Force of Law No 4 of 1967 of the Ministry of Foreign Affairs, except in cases previously
authorised by the supreme decree of the President of the Republic of Chile, based on considerations
of national interest. This prohibition extends to companies or legal entities with headquarters in a
neighbouring country, or whose capital of 40 per cent or more is owned by nationals of any of such
country, or whose effective control is exercised by the latter.
c. access to beaches
Article 13 of Decree No 1,939 provides that the owners of adjoining land with sea beaches, rivers
or lakes must provide free access to them for tourism and fishing purposes, provided that no other
roads or public pathways are available for that purpose. However, determination of the access is not
arbitrary, but should be defined by the competent regional governor (intendente) after hearing the
owners, lessees or tenants of the land.
d. minimum subdivision
Decree No 3,516 provides in Article 1 that agricultural property may be freely divided by its owners,
but the resulting batches must not be less than 0.5 hectare. However, this limitation does not apply in
specific cases as detailed in the same article.
Doing Business in Latin America OCTOBER 2018 83
The infringement of this provision is subject to the absolute nullity of any act or contract granted in
contrary. A fine of 200 per cent of the fiscal value (for real estate tax purposes) could be applied by
the competent municipality court.
ii. Urban properties: limitations for private parties
The main limitations for private parties regarding urban properties are those resulting from urban
planning and zoning regulations, which are established mainly in the General Urbanism and
Construction Law and its Ordinance, and in the different types of planning instruments.
a. the general urbanism and construction law
The General Urbanism and Construction Law (Ley General de Urbanismo y Construcciones
(LGUC)) is the general regulation that contains the principles, roles, powers, responsibilities, rights,
sanctions and other norms that apply to public entities, professionals and private parties in relation to
urban planning, urbanisation and construction that is executed within the country.
b. the general urbanism and construction ordinance
The General Urbanism and Construction Ordinance (Ordenanza General de Urbanismo y
Construcciones (OGUC)) contains the regulations of the LGUC referring to administrative
procedures, urban planning, land urbanisation, construction, and technical standards for the design
and construction that are required to execute such activities in the country.
c. territorial planning instruments
According to the LGUC, urban planning is the ‘process conducted in order to direct and regulate
the development of urban centres in relation to the national, regional and communal policies for
socio-economic development’. Urban planning is conducted at three levels of action: national, inter-
communal and communal. Each territorial planning instrument shall have its own area of jurisdiction
in relation to a geographic area and to the specific matters covered by said instrument.
Territorial planning instruments or zoning plans may determine the permitted uses of land for a
specific area, and what uses of land are excluded or prohibited in that area (zoning classification).
Territorial planning instruments also determine the regulatory framework applicable to
constructions executed within the specified area.
There are six types of uses, which may be applicable simultaneously within a given area, as
determined by the territorial planning instrument: residential, equipment, productive activities
(industries), infrastructure, public spaces and green areas.
In order to determine which zoning classification applies to a specific land, a Certificate of Previous
Information may be requested from the corresponding municipality, which will identify the area
or sub-area where the land is located, and the applicable regulatory framework according to the
respective territorial planning instrument.
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The only manner to change the permitted uses of land (zoning classification) established in a
territorial planning instrument for a specific piece of land is by means of an amendment to the
applicable territorial planning instrument.
iii. Expropriation events
Article 19 No 24 of the Constitution states that:
‘Nobody can, in any way, be deprived from his/her ownership, the underlying asset or any of the
attributes or essential faculties related to the ownership, except by virtue of a general or special
law qualified by the legislature that authorizes its expropriation by reason of public benefit or
national interest. Anyone whose ownership has been expropriated is enabled to claim before
the ordinary courts about the legality of the expropriation act and shall have in any event the
right to receive compensation for patrimonial damage effectively suffered, which will be defined
by mutual agreement or by the above-mentioned courts in a final judgment pronounced in
accordance with the law’.
Based on the foregoing, any real estate is subject to the possibility of being expropriated by a public
benefit or national interest cause, according to Decree No 2,186, which establishes the specific
expropriation requirements and its conditions. Consequently, prior to acquiring real estate, it is
necessary to review the existing expropriation projects of the municipality, the Housing and Urban
Service, and the Ministry of Public Works.
As provided in the Constitution, in the case of an expropriation, the Chilean state shall compensate
the affected owner, who will have the right to file a complaint before the Chilean courts if he/she
considers that the offered compensation is not fair.
D. Development of ample/integrated capital markets and joint activities between Latin American countries
i. Merger of stock exchanges: attempts versus realities
The Republic of Chile currently has three stock exchanges: Bolsa de Comercio de Santiago, Bolsa de
Valores (Santiago Stock Exchange); Bolsa de Corredores, Bolsa de Valores (Brokers Stock Exchange);
and Bolsa Electrónica de Chile, Bolsa de Valores (Electronic Stock Exchange). In Chile, the stock
exchanges were formed as open corporations. Thus, a possible merger of stock exchanges would be
regulated by Law No 18,046 (the Corporations Act).
There have been no merger plans between different stock exchanges existing in Chile. Nor have
there been any formal intentions to merge with other Latin American stock exchanges.
Notwithstanding, the São Paulo Stock Exchange (BOVESPA) acquired in 2015 about eight per cent of
the Santiago Stock Exchange. This acquisition has prompted debate as to how important it is to move
forward with regional stock exchange integration to improve their competitiveness.
Doing Business in Latin America OCTOBER 2018 85
ii. MILA market: current results and expectations
The MILA market is the first multinational stock market integration initiative without any mergers
or corporate integration at a global level, and initiated using only technological tools, along with
the adaptation and standardisation of the regulations on trading in capital markets and the custody
of securities in the four countries. The initial idea was to move forward as much as possible with
the integration without having to make any legislative changes. MILA began operating on 30 May
2011, with the involvement of Chile, Colombia and Peru. Since August 2014, Mexico has also been
incorporated to MILA.
The purpose of MILA is to increase the international exposure and profile of the markets that
integrate it, as well as broaden the offer of products and opportunities for local and foreign investors,
originating more liquid, visible, attractive and diversified securities markets.
Part of this initiative has consisted in the mutual recognition of public offer securities issued in each
country, thus making possible the free trading of shares by order routing through the brokers of the
participating exchanges of Chile (BCS), Colombia (BVC), Peru (BVL) and Mexico (BMV) to the
markets of origin.
One of the most important characteristics of MILA is the fact that none of the exchanges sacrifices
their independence or regulatory autonomy. However, the premise of the participating markets is to
jointly achieve growth in a context of complementarity.
Likewise, all MILA transactions are performed in the respective local currency, and with book-entry
through the local broker; thereby providing easier international transactions with this tool.
Currently, MILA is number one in Latin America, with over 700 listed companies in total in the four
countries, the largest market in Latin America following Brazil in terms of market capitalisation, and
number three in terms traded volumes, making it one of the most attractive markets in the region. In
addition, several investment funds follow this market, and indices have been created in relation to it:
S&P MILA Andean 40, S&P MILA Pacific Alliance Financials, S&P MILA Pacific Alliance Industrials,
S&P MILA Pacific Alliance Composite, S&P MILA Pacific Alliance Select, S&P MILA Pacific Alliance
Select Mexico Domestic and DJSI MILA Pacific Alliance.
The total traded volume in the MILA market in May 2018 was US$178.8bn. The BMV represented
79.05 per cent (US$138.7bn), followed by the BCS with 10.84 per cent (US$24.9bn), then the BVC
with 8.08 per cent (US$12.5bn) and the BVL with 2.03 per cent (US$2.6bn)
Although in 2016 MILA planned to incorporate the negotiation of fixed income securities in the
stock markets of Member Countries, as well as new indices for the quotation of energy and mining
sectors, so far those plans have not materialised.
Among the main challenges for MILA are the incorporation of credit risk agencies and the adoption
of rules that will lead to operational and regulatory harmonisation.
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iii. Pacific Alliances: governmental action and proposed treatment and agreements
The Pacific Alliance is a regional integration initiative whose member states are Chile, Colombia,
Mexico and Peru. The Pacific Alliance was created on 28 April 2011.
The Pacific Alliance is a strategic platform that seeks to achieve a deep integration of services, capital,
investment and movement of people. It is an open and non-exclusive integration process, consisting
of countries with related visions of development, and that promote free trade as a driver for growth. It
is a dynamic initiative with high business potential.
It is focused on modernity, pragmatism and political will to establish an initiative to address the
challenges required by the international economy. It offers competitive advantages for international
business, with a clear focus on the Asia Pacific region.
As a whole, the Pacific Alliance constitutes the eighth largest economy and represents the seventh
largest exporting entity worldwide. In Latin America and the Caribbean, the block represents 37
per cent of GDP, concentrates 52 per cent of total trade and attracts 45 per cent of direct foreign
investment that flows to the region.
The Pacific Alliance has competitive advantages in the following industries: mining, forestry, energy,
agriculture, automotive, fishing and manufacturing, among others.
It is an effective environment of cooperation that promotes innovative initiatives in areas such as free
mobility of people; preservation and respect for the environment; creation of a network of scientific
research on climate change; academic and student exchange; cultural promotion; integration of
securities markets; opening of joint commercial offices and participation in fairs and exhibitions
in shared space; improved competitiveness and innovation of micro, small and medium-sized
enterprises; and tourism.
The following are some of the milestones achieved by the Pacific Alliance:
• on 24 August 2012, the General Rules of the Platform for Academic and Student Mobility
(Reglamento General de la Plataforma de Movilidad Estudiantil y Académica) that seeks to
grant up to 100 scholarships per year for undergraduate and postgraduate studies conducted in
one of the Member Countries, as subscribed in Chile;
• in September 2012, the promotion agencies of all member states opened a joint Trade Office
in Turkey;
• on 21 May 2013, Peru removed the requirement of a temporary visa for business travellers for
nationals of Mexico, Colombia and Chile;
• on 22 May 2013, during the 7th Pacific Alliance Summit, the Agreement for establishment
of the Cooperation Fund of the Pacific Alliance (Acuerdo para el establecimiento del Fondo
de Cooperación de la Alianza del Pacífico), which allows the joint development of projects in
various areas, was signed;
• on 19–20 June 2013, in Cali, Colombia, the I Business Matchmaking of the Pacific Alliance (I
Macrorrueda de Negocios de la Alianza del Pacífico) was performed, where 700 exporters and
Doing Business in Latin America OCTOBER 2018 87
importers from all four countries were involved, closing business transactions for an aggregate
of US$3.8bn;
• on 23–24 August 2013, in Santiago de Chile, the first meeting of the Ministers of Finance of the
Pacific Alliance was held, where issues such as fiscal and tax exchange information, customs
matters, treatment of and restrictions on capital flows, coordination in international financial
bodies, regulatory and tax rules for capital markets and volatility in public debt markets were
analysed, among others;
• on 26 August 2013, the conclusion of negotiations on the trade component was announced,
waiving tariffs on 92 per cent of the products immediately and the remaining eight per cent
gradually. This was part of the comprehensive agreement included in the Additional Protocol to
the Framework Agreement;
• on 10 February 2014, the Additional Protocol to the Framework Agreement was signed;
• on 10–11 June 2014, the II Business Matchmaking Pacific Alliance was performed;
• on 20 July 2015, the Framework Agreement of the Pacific Alliance came into force;
• on 1 May 2016, the Additional Protocol to the Framework Agreement of the Pacific Alliance
came into force. The protocol agreed 100 per cent trade liberalisation (92 per cent of that tariff
immediately applicable and eight per cent over a period to 2030); and
• on 2 June 2017, Decision No 1 guidelines applicable to the associated states of the Pacific
Alliance. In the guidelines, the associated state concept was defined. Australia, Canada, New
Zealand and Singapore have begun negotiations to become associated states. This category will
allow the generation of more investment, tourism and employment opportunities.
In connection with small and medium-sized enterprises (SMEs) of the Pacific Alliance, the
Entrepreneur Capital Fund of the Pacific Alliance has been created, with support from the Inter-
American Development Bank Multilateral Investment Fund (IDB-MIF) to facilitate the financing and
investment in SMEs and entrepreneurships in the Pacific Alliance.
Furthermore, an SME Regional Observatory was also created as a virtual information platform, which
systematises and disseminates support programmes, statics, studies and research on current status of
the entrepreneur ecosystem and the development of micro and SMEs.
In the Cali Declaration (30 June 2017), the Presidents instructed that analysis should be conducted,
in coordination with the private sector, to project a strategic vision for 2030 on the Pacific Alliance.
The aim is to give a boost to the mechanism to remain an open platform with concrete results despite
the backdrop of an increasingly protectionist world.
88 Doing Business in Latin America OCTOBER 2018
E. Offshore vehicle providers in Latin American countries
i. General concept: legal framework and scope of general activities
Law No 20,712 on the management of third-party funds and individual portfolios came into
force on 8 May 2014 (the ‘Third-Party Funds Law’), with the aim of transforming Chile into an
exporter of financial ser vices, particularly by turning Chile into a preferred domicile for funds
with a LatAm strategy.
To encourage foreign investment in Chilean funds, the Third-Party Funds Law provides several
tax incentives. Before the Third-Party Funds Law was enacted, foreign (ie, non-resident) investors
participating in closed-end Chilean funds had to pay a tax at a rate of 35 per cent on capital gains
that resulted from such investments. In replacement of the current and higher withholding rates, a
withholding tax rate of ten per cent on capital gains and dividends will now apply (the ‘ten per cent
Flat Tax’).
In addition, net benefits, dividends and capital gains paid to foreign investors are exempt from the ten
per cent Flat Tax, provided the locally registered fund has invested primarily in non-Chilean assets.
Indeed, the income and capital gains tax exemption for foreign investors will apply provided the
following conditions are met: (1) no less than 80 per cent of the fund’s portfolio should be invested
abroad in those securities described by the Third-Party Funds Law; and (2) said percentage should
be fulfilled at least during a period of 330 continued or discontinued days in a calendar year. Capital
gains from the transfer of the shares of the fund are eligible for the exemption, provided these
requirements were fulfilled during the two years preceding the transfer of title.
None of these tax exemptions apply to foreign shareholders investing in private investment funds (ie,
non-registered funds, in Spanish fondos de inversión privados (FIPs)). In this case, the current 35 per
cent tax burden on capital gains and dividends (with the corporate tax credit in the latter case) will
remain in force.
As to the VAT applicable to commissions owed to fund managers at a 19 per cent rate, it should be
noted that it will not be levied on those fees charged to foreign investors.
The above exemptions (capital gains, dividends and VAT) are designed to create an incentive for
foreign fund sponsors to choose Chile as a domicile for their funds with a LatAm strategy and to use
local asset management capabilities.
Doing Business in Latin America OCTOBER 2018 89
Colombia
90 Doing Business in Latin America OCTOBER 2018
V. Colombia
A. Foreign investment in Latin American countries
i. Authorisations versus limitations or prohibitions
a. general absence of restrictions
According to Decree No 1,068 of 2015 (‘Decree No 1,068’), foreign investments are allowed in all
sectors of the economy, except for the following activities:
• defence and national security; and
• processing and disposal of hazardous or radioactive products not produced in Colombia.
The Colombian FX regime is divided into two markets: (2) the FX market; and (2) the free market.
The FX market consists of all FX transactions that must be completed through: (1) authorised FX
intermediaries; or (2) compensation accounts (foreign bank accounts registered with the Colombian
Central Bank and subject to periodic reports). Because FX transactions must be completed entirely
through the FX market, they cannot be offset or condoned, in principle.
Pursuant to Regulation 1 of 2018 issued by the Colombian Central Bank (‘Regulation 1’), the
following transactions are deemed regulated FX transactions and thus must be registered in a
timely manner before the Colombian Central Bank: (1) import and export of goods; (2) foreign
indebtedness operations; (3) foreign investments; (4) guarantees and collateral in foreign currency;
and (5) derivatives transactions.
The FX market is strictly regulated by the Colombian Central Bank, and its compliance is jointly
supervised by the Superintendence of Companies, the Finance Superintendence and the Tax
Authority. Failure to duly conduct FX transactions through the FX market is a violation to applicable
regulations and may result in the imposition of fines.
Please note that foreign investments that are duly registered with the Colombian Central Bank
confer foreign investors the right to: (1) remit abroad or repatriate proven net profits generated
by the relevant investment; (2) reinvest profits or retain them as surplus undistributed profits; (3)
capitalise amounts with remittance rights and finally, to remit them abroad; and (4) remit any income
received from purchasing the investment in Colombia, from liquidating the company receiving the
investment, or from reducing its capital.
Moreover, investment repatriation conditions are those in force on the date on which investments
are registered and may not be modified in any way that may be detrimental to the foreign investor,
except on a temporary basis when Colombia’s international reserves fall below the equivalent of three
months’ worth of imports.
Doing Business in Latin America OCTOBER 2018 91
b. definition of foreign investment
Article 2.17.2.2.1.2. of Decree No 1,068 defines direct foreign investment as: (1) any contributions
and/or participation in the capital of a Colombian company; (2) investments in trusts; (3) acquisition
of real estate; (4) contributions in kind, subject to specific restrictions and registration procedures;
(5) initial or supplementary investment in the assigned capital of a local branch of a foreign
company; and (6) investment in private equity funds.
Furthermore, portfolio investment is defined as any investment in securities registered in the
National Securities and Issuers Registry (Registro Nacional de Valores y Emisores).
c. national, fair and equitable treatment
Pursuant to Decree No 1,068, foreign investors shall be treated equally vis-à-vis Colombian investors.
This represents a guiding principle set forth in Colombian FX regulations.
d. free choice of law and jurisdiction
As a general rule, Colombia’s legal system adopts the principle of International Private Law of lex
loci solutionis. This principle states that the applicable law to any contract is the law of the place of its
performance. Particularly, Article 869 of the Code of Commerce, states that agreements executed abroad
but performed in Colombia are governed by Colombian law. Also, it is generally accepted that dépeçage
operates under Colombian law, therefore if the obligations under a contract are to be performed in
different places, each obligation shall be governed by the law of the place of its performance.
Consequently, there is no private free will regarding the applicable law to contracts performed in
Colombia, considering that the lex loci solutionis principle is mandatory. Nonetheless, it has been
generally accepted that, exceptionally, the parties may choose a different substantive law if they have
validly agreed to international arbitration, regardless of the place of performance of the agreement.
Pursuant to international arbitration, Law No 1,563 of 2012 (‘Law No 1,563’) states that the parties
to a contract that provides for disputes arising thereunder to be resolved by international arbitration
are entitled to choose a foreign law as the governing law of the contract. Therefore, the parties to a
contract may agree on a foreign substantive governing law, provided the agreement is included in an
international arbitration clause.
According to said law, arbitration is considered to be ‘international’ when there is an international
element. If the parties, at the time of entering into the arbitration agreement, are domiciled
in different countries or if the place of performance of the substantial part of the contractual
obligations directly related to the subject matter of the controversy is located outside the country in
which the parties have their principal domicile, it is understood that the international element is met.
Therefore, parties may agree to international arbitration with a foreign choice of law if one of the
following conditions has been met: (1) the parties to have their domiciles in different countries; (2)
a substantial part of the obligations of the agreement is to be performed outside of the country in
which the parties have their principal domicile; or (3) the dispute affects international commerce or
trade interests.
92 Doing Business in Latin America OCTOBER 2018
e. operation permits
As previously mentioned, foreign investments in Colombia are generally permitted in all sectors of
the local economy (except for those referred to above), and no additional permits are required from
the FX perspective.
Notwithstanding, foreign investment in Colombian financial institutions is subject to the prior
authorisation of the Financial Superintendent of Colombia.
ii. Treatment of foreign investment in infrastructure initiatives and PPP projects
During recent years, there has been a significant development in infrastructure matters in Colombia,
particularly due to the enactment of the PPP legal framework, that is, Law No 1508 of 2012, Law No
1682 of 2013, Law No 1882 of 2018 and all their regulatory decrees. These laws seek to attract foreign
investors in the infrastructure field, in order to contribute to the development of the country in areas
where it is urgently needed.
During 2012, the Colombian Government launched an ambitious infrastructure project called the
fourth-generation of road concession contracts (‘4G’), which comprises 42 projects aiming to build
roads of approximately 8,000 kilometres (4,970 miles) long and requires investment in the order of
US$24.4bn. The 4G roads are now in the construction phase and facing environmental, social and
financial challenges that may prove the strength of certain Colombian institutions (eg, the Attorney
General’s Office and the Superintendence of Industry and Commerce), and may also test the suitability
of the legal framework in order to achieve the successful completion of current and future projects.
In this regard, for the purpose of attracting first-tier international contractors and investors to the 4G
projects, the Colombian Government developed a series of incentive policies or measures, which are
summarised as follows:
On 10 January 2012, the Colombian Congress enacted Law No 1508 (the ‘PPP Law’). This law
comprises a series of elements that are typical in traditional project financing arrangements that are
intended to establish basic principles to contribute to the bankability of those infrastructure projects
that are to be developed under a PPP model.
The PPP Law includes elements typical in traditional project financing structures that are intended
to provide comfort for lenders. As an example, this law requires that the project’s resources must
be administered through a trust fund, to which all assets and liabilities of the project must be
transferred. This requirement provides greater reassurance to lenders with respect to outstanding
payments and enforceability of any security interests. Likewise, the PPP Law expressly confers project
lenders step-in rights in the event of default under the applicable loan agreement. Additionally, the
PPP Law requires that any PPP contract must include an early termination payment that should
be determined by a formula, which serves as additional security for lenders as an instrument to
effectively cover the debt service obligations of the concessionaire under the financing agreements if
the contract is terminated early. These provisions constitute important legislative developments that
significantly improve lenders’ comfort and encourage them to finance projects to an internationally
commercial standard and in a cost-efficient manner.
Doing Business in Latin America OCTOBER 2018 93
In addition to the foregoing, during 2013, the Colombian Congress enacted Law No 1,682 (the
‘Infrastructure Law’). This law provides mechanisms to solve the major bottlenecks that infrastructure
projects in Colombia have encountered in the past, which are those related to the acquisition
of legal rights over the land required to develop the project, obtaining environmental licences,
and the removal and/or relocation of utilities networks and related infrastructure affected by the
construction of the works.
For the purposes of dimensioning the impact of the aforementioned bottlenecks and highlighting
the importance of Law No 1682 of 2013, a survey undertaken by the Colombian National Planning
Department (Departamento de Planeación Nacional) concluded that 53 strategic national infrastructure
projects have issues related to said bottlenecks as follows: 80 per cent have issues regarding environmental
permits and 23 per cent are encountering problems pertaining to land acquisition.
According to the Colombian Government, with the enactment of Law No 1682 of 2013, the time to
complete land acquisition activities required by an infrastructure project is expected to have a 50
per cent reduction by the implementation of, among others, the following measures: (1) setting out
the obligation of the court to force the tenant or owner to deliver the land required to execute the
infrastructure project as from the filing of the corresponding expropriation law suit and not at the
end of the expropriation process when the indemnification to the tenant or owner is established; (2)
providing a clear set of rules regarding land appraisal; and (3) reducing the timeframes set forth to
exhaust the steps and requirements in the land acquisition process from the direct negotiation to the
expropriation ruling.
On the other hand, aiming to expedite the process for obtaining an environmental licence for an
infrastructure project, Law No 1682 of 2013 provides different mechanisms, such as establishing
that environmental authorities are to be held liable for the damages suffered by third parties if the
authority fails to comply with the term to issue environmental licences as set forth by environmental
law; establishing that projects that entail maintenance, improvement and rehabilitation works do
not require an environmental licence; and providing that minor modifications to the project during
the execution of the works do not require a modification to the environmental licence previously
approved for the project.
Finally, with respect to the relocation of public utility networks, Law No 1682 of 2013 includes a clear
set of rules regarding which party (ie, project company or owner of the network) is responsible to
bear the removal or relocation costs, and provides that, in the event the owner of the networks fails
to initiate the relocation works in a given period of time, the Concessionaire is entitled to directly
undertake the relocation works. In line with the foregoing, the Colombian Government has amended
the specific regulation dealing with the proceeding for obtaining environmental licences, which is
expected to have a positive impact on project development in general.
The significant number of PPP projects that have been awarded and structured indicates that
Colombia will significantly increase its investment in infrastructure. This scenario entails an
opportunity to reinforce and improve the new but solid legal framework in this field, as well as the
capabilities of Colombia’s public institutions to supervise the projects while managing potential crises.
In this regard, the enactment of Law No 1882 of 2018 represents an improvement in the Colombian
public procurement system, introducing mandatory provisions regarding transparency, competition,
94 Doing Business in Latin America OCTOBER 2018
efficiency and specific rules of procedure for events whose regulation was unclear until now.
Moreover, Law No 1882 provides further solutions and regulation for issues that are considered to
cause bottlenecks for projects currently underway regarding land management and environmental
permits. The new law also seeks to overcome the standstill in project financing as a result of
corruption scandals by means of adopting provisions to assure investors that their investments are
safe in the event of unlawful conduct of the other agents involved in the projects.
In addition, the recently enacted Law No 1882 of 2018 provides the option to pay the concessionaire
with real estate rights over properties that are not necessary in the provision of the utility associated
with the infrastructure. Furthermore, Law No 1882 broadens the projects in which it is possible to set
functional units, including airports, water treatment facilities, tunnels and railways, hence facilitating
the remuneration of the works performed therein. Regarding territorial entities, Law No 1882 repeals
the restriction that prevented districts and capital cities of the departments from executing PPP
agreements in the respective local government’s last year of administration. This provision will allow
local administrations to move forward with several projects that are currently being structured.
a. participation of foreign bidders
In order to determine the role that the foreign investors play and the status that the Colombian legal
framework gives to these investors in comparison with Colombian investors, it is important to establish
that Colombian public procurement law sets forth a reciprocity principle that allows foreign bidders to
participate in public procurement to execute contracts with state entities in Colombia under the same
conditions as a Colombian bidder may participate in procurement procedures in the foreign bidder’s
origin country. Additionally, the requirements in terms of experience, financial and legal capacity are
included in the terms of reference or requests for proposals issued by the contracting entity, creating a
scenario where both types of investors participate under the same conditions.
The Public Procurement Statute provides many possibilities for participating in public procurement
in Colombia. Both national and foreign individuals and companies, with or without domicile or a
branch in Colombia, are allowed to participate in these bidding processes, provided they comply with
the particular requirements set forth in the corresponding request for proposal. Pursuant to Law
No 816 of 2003 and its regulatory decrees, foreign entities are allowed to participate in government
bidding proceedings on equal basis with offers submitted by Colombian nationals when:
• a free-trade agreement so provides;
• Colombian offers are treated as national in foreign jurisdictions; and
• the corresponding bidder is a member of the Andean Community of Nations.
Furthermore, it is important to establish the modalities by which foreign companies or individuals
may participate in Colombian procurement procedures, as follows:
1. Direct participation
Foreign individuals or companies that do not have a branch in Colombia are allowed to participate
directly in the public entities’ procurement procedures by submitting the documentation required
Doing Business in Latin America OCTOBER 2018 95
by the terms of reference. In this case, if the foreign bidder is awarded with the contract and its
contractual obligations entail the development of permanent activities in Colombia, the bidder must
open a branch before beginning to perform its obligations under the awarded contract.
2. Through a branch
Foreign bidders are able to participate in procurement procedures through a branch registered
in Colombia. Bearing in mind that the branch is not a separate legal entity, it is possible for it
to credit the experience, financial capacity, technical capacity and organisational capacity of the
parent company.
3. Through a subsidiary
Foreign bidders may already have a Colombian subsidiary of their companies, usually with the
purpose of participating in public procurement through a special purpose vehicle, which allows them
to separate liabilities. However, by adopting this method, and depending on the terms of reference of
each particular procurement procedure, they may or may not be allowed to credit their experience,
technical capacity and/or organisation capacity with the experience of their parent companies, given
that a subsidiary is a different legal person from its parent company.
Additionally, the Public Procurement Statute has provided various ways for investors to associate
and present a joint proposal by using one of the following associative forms: (1) consortiums; (2)
temporary unions (uniones temporales); and (3) promises of establishment of future companies. A
distinctive feature of these associative forms is that all the members thereof shall be jointly liable with
respect to the liabilities arising from the submitted offer and the contract, if awarded. In the case
of consortiums and temporary unions, once awarded with the contract, no separate legal entity is
incorporated, while when the selected form of association is the promise to incorporate a company,
the company must be incorporated prior to the execution of the awarded contract.
iii. Treatment of foreign investment in oil and gas and mining activities
In accordance with Article 332 of the Colombian Constitution, in Colombia, ownership of the subsoil
and non-renewable natural resources belongs to the state. The said disposition sets forth that all natural
hydrocarbons and mineral reservoirs in existence within the Colombian territory, whatever their nature
may be, including those inside national boundaries and under the territorial seabed, the continental
platform and in the exclusive economic zone belong exclusively to the Republic of Colombia.
In that sense, the exploration and exploitation of minerals require the awarding of a mining title,
materialised through the execution of a concession contract granting the contractor the right to
explore the subsoil seeking for particular minerals and exploit them for a certain period of time.
Concession contracts are granted by the Mining National Agency (Agencia Nacional de Mineria
(ANM)), the entity in charge of the management of mineral resources. The concession contract shall be
registered at the National Mining Registry (Registro Minero Nacional) to be valid and enforceable.
On the other hand, as from 1 January 2004, pursuant to Decree No 1,760 of 2003 (as amended by
Decree Nos 2,394 of 2003, 409 of 2006 and 4,137 of 2011), in order to carry out the exploration and
96 Doing Business in Latin America OCTOBER 2018
exploitation of hydrocarbons in Colombia, both onshore and offshore, a contract shall be executed
with the National Hydrocarbons Agency (Agencia Nacional de Hidrocarburos (ANH)) in the form of
an exploration and production (E&P) contract or technical evaluation agreement (TEA).
According to Decree No 381 of 2012 (as amended by Decree Nos 1,617 and 2,881 of 2013), the MME
is vested with the power and authority to administer the non-renewable resources belonging to the
state. Notwithstanding the above, the MME has delegated such power for the management of mining
matters to the ANM, as well as to certain territorial entities, and for the management of oil and gas
matters to the ANH. Both agencies are national public entities ascribed to the MME having its main
seat in the city of Bogotá, DC.
a. regulatory bodies
1. National Hydrocarbons Agency (ANH)
The ANH is the regulatory body responsible for the Colombian crude oil industry. In particular, the
ANH is responsible for managing hydrocarbons resources and defining the contracting policy for the
exploration and exploitation of hydrocarbons.
By means of Decree No 1,760 of 2003 (as amended by Decree Nos 2,394 of 2003, 409 of 2006 and
4,137 of 2011) the management and control of Colombian hydrocarbon resources were transferred
from the state-owned company, Ecopetrol, to the ANH. Ecopetrol conducted its E&P business
through several types of contractual forms with the Colombian Government or third parties, where
the most significant is the association contract, whose purpose is the E&P of hydrocarbons.
2. National Mining Agency (ANM)
The ANM is the regulatory body responsible for the Colombian mining industry. The ANM is
responsible for managing Colombian mining resources and defining the contracting policy for its
exploration and exploitation.
Decree No 4,134 of 2011 establishes the faculties, responsibilities and duties in charge of the ANM, as
the governmental entity in charge of managing Colombia’s mining resources.
It is important to note that certain territorial entities in Colombia have been vested in the past
with the authority to grant mining titles (ie, Antioquia, Bolívar, Boyacá, Caldas, Cesar and Norte
de Santander). Nevertheless, currently, the only department that still holds the power to grant and
monitor mining titles is the department of Antioquia through its Secretary of Mines.
3. The Ministry of Mines and Energy (MME)
The MME is the governmental entity responsible for the management and regulation of mines and the
energy economic sector (including hydrocarbons and mining sector). This entity is empowered to adopt
and execute policies, guidelines and technical regulations related to hydrocarbons and mining activities.
Doing Business in Latin America OCTOBER 2018 97
4. The Ministry of Environment and Sustainable Development (the ‘Ministry of Environment’)
The Ministry of Environment is a branch of the executive power in charge of managing the
environment and renewable natural resources, and is responsible for guiding and issuing
environmental planning and development policies and regulations.
5. National Authority of Environmental Licensing (Autoridad Nacional de Licencias Ambientales (ANLA))
The ANLA is a specialised administrative unit in charge of granting environmental licences to
large-scale projects, including those of the oil and gas, and mining sector. The ANLA is in charge of
granting environmental licences to the activities listed in Article 2.2.2.3.2.2 of Decree No 1,076 of
2015 on environmental licensing (projects that are considered of national importance or may cause
severe environmental impact due to their magnitude). The ANLA also surveils projects, works or
activities subject to environmental licences in order to ensure that said projects effectively comply
with the environmental regulation currently in force.
b. development of oil and gas activities
Oil and gas activities are mainly regulated in the Colombian Petroleum Code set forth in Decree No
1,056 of 1953 (as amended), which declares the petroleum industry and its activities of exploration,
exploitation, refinement and transport as of public utility (utilidad pública e interés social); Decree No
1,073 of 2015; and the administrative regulations issued by the MME and ANH, including a set of
agreements (acuerdos) issued by the ANH to regulate the execution of activities by contractors and the
process to allocated areas for the execution of said activities.
Under Colombian laws: (1) E&P contracts shall be governed by Colombian law and subject to the
jurisdiction of Colombian courts; and (2) foreign companies must establish a Colombian branch
domiciled in Bogotá, DC in order to enter into contracts in the hydrocarbons sector and perform
exploration and exploitation activities in Colombia.
1. Contractual regime
In accordance with the existent regulations (ANH Agreement 2 of 2017), the exploration and
exploitation of hydrocarbons owned by the state can be carried out by private investors through one
of the following contractual structures:
The purpose of a technical evaluation agreement (TEA) is to allow the investor to evaluate an area of
interest in order to determine its production potential. Said contract consists of evaluation activities
related to geology, geophysics, geochemical, cartography, phonology, surface exploration activities
and stratigraphic well drilling, among others, excluding exploration drilling. Part of the areas covered
by TEA may be converted into an E&P contract upon the contractor’s request to ANH.
The purpose of an E&P agreement is to grant the contractor the right to explore the subsoil seeking
hydrocarbon reserves and exploit them for a determined period of time. The E&P contract consists
98 Doing Business in Latin America OCTOBER 2018
of four2 phases: preliminary, exploration, evaluation and exploitation. The preliminary phase has
a term of 24 months, and its purpose is to confirm the presence of ethnic communities in the area
of the project and, if applicable, perform prior consultation processes. The exploration phase has a
term of six years and is normally divided into yearly exploratory phases. Once a discovery is made,
the area enters into a two-year evaluation programme to determine the commercial potential of
the discovery. After said evaluation, the contractor shall inform the ANH of its decision on whether
to commercially exploit the discovery. The production phase is usually of up to 24 years and is
extendable for a similar term or up to the commercial economic limit of the field. Special terms
have been set for the development of activities in unconventional reservoirs and offshore activities,
including increasing the exploration and production periods as follows: the exploration period
increased to nine years and the production period increased to 30 years.
Special agreements are exploration and/or exploitation agreements with special characteristics
set forth by the Board of Directors of the ANH depending on the technological advancements and
new developments of the sector with respect to exploration, operation, production, incremental
production, shared production and utilities.
2. Awarding of areas
The terms of the allocation of areas for exploration and exploitation of hydrocarbons through E&P
contracts are regulated by means of Agreement 2 of 2017 of the ANH. In this respect, the awarding
of areas for the exploration and exploitation of hydrocarbons shall be made through one of the
following processes:
i. Open competitive bidding process (generally named rounds (rondas)): Pursuant to an
open competitive process, ANH awards based on certain capacity requirements set out
in the relevant Terms of Reference issued for each open competitive bidding process.
Currently, open competitive bidding processes are the most common processes for awarding
hydrocarbon areas. Several rounds have taken place since 2004, totaling 262 E&P contracts
and 14 TEA currently in force as of December 2017. Among those are the Ronda Caribe 2007
with nine contracts, MiniRonda 2007 with 12 contracts, Heavy Oil process with eight contracts,
Ronda Colombia 2008 with 22 contracts, Mini Ronda 2008 with 41 contracts, Ronda Colombia
2010 with 68 contracts, Ronda Colombia 2012 with 50 contracts allocated and finally, Ronda
Colombia 2014 with 26 contracts allocated (see Resultados, Retos y Estrategias de Crecimiento
del Sector de Hidrocarburos, ANH 2015). In 2017, the ANH launched a competitive bidding
process for 15 areas located in the Sinu San Jacinto sedimentary basin for which six companies
qualified. The process is ongoing.
The qualification criteria are determined in each open competitive process in accordance with
the provisions of Agreement 2 of 2017.
The particular steps and requirements for the participation in the corresponding open
competitive processes are provided in the relevant Terms of Reference issued by the ANH for
each process.
2 As of May 2017, ANH included a preliminary phase in E&P contracts. Some contracts executed as a result of Ronda Colombia 2014 also include a preliminary phase.
Doing Business in Latin America OCTOBER 2018 99
ii. Permanent competitive bidding process: ANH Agreement 2 of 2017 introduced a permanent
competitive bidding process by means of which the ANH will select areas over which proposals
will be received at any time, without the need of launching specific bidding procedures for
their allocation. Once the ANH receives a proposal over a selected area, it will make public
such proposal and invite the public to compete for its allocation.
iii. Closed competitive bidding process or invitation: In the closed competitive process, the ANH
will invite a pre-established group of companies that meet certain capacity requirements to
submit a proposal. Then the ANH will initiate the negotiation process with the bidder that has
a satisfactory contracting proposal.
iv. Direct assignment: Finally, for the direct assignment of the corresponding contract for
hydrocarbon exploration and exploitation, prior authorisation from the board of directors of
the ANH is required. Please note that the ANH will exceptionally allocate areas that have been
specially selected for said purpose in accordance with the following conditions:
• special nature and geographical localisation;
• social and/or environmental restrains of the area;
• limited technical information about the subsoil or required exploratory study;
• for purposes of public interest, national security or public order; and
• special considerations on energy and economic policies.
Stakeholders Registry: ANH Agreement 2 of 2017 also created a Stakeholders Registry
(Registro de Interesados) as a prequalification tool of companies willing to participate and
develop oil and gas activities in Colombia. Companies will have to accredit their technical,
financial, corporate social responsibility, environmental and legal capacity based on the terms
of ANH Agreement 2 in order to be registered in the Stakeholders Registry and update the
registry annually.
3. Obligations of the contractor
Once the corresponding contract is granted, the contractor shall comply with the obligations
resulting from the contracts and the relevant regulations. The following are the main obligations
applicable to E&P contracts:
Payment of surface fees: The contractor shall pay an annual fee for the exclusive right to use the
subsoil for evaluation, exploration and production of the relevant hydrocarbon deposit under the
corresponding E&P contract or TEA. In the exploration period and during the evaluation period,
the fee is based on US dollar fee per hectare, which varies depending on the location of the area
(onshore, offshore with less than 1,000 metres in depth and offshore with more than 1,000 metres in
depth). During the production period, the fee is based on a US dollar fee per barrel of crude oil or
cubic fee of natural gas.
Payment of royalties: The contractor shall pay royalties consisting of between eight per cent and 25
per cent of the daily gross production based on the monthly average of hydrocarbon production
100 Doing Business in Latin America OCTOBER 2018
under the relevant E&P contract. The royalty is reduced by 20 per cent for onshore gas fields and
offshore gas fields at depths less than or equal to 1,000 ft, and by 40 per cent for offshore gas fields at
depths greater than 1,000 ft and for unconventional hydrocarbon deposits.
High prices fee (windfall profit): Under certain E&P contracts, the contractor must pay to the ANH a
fee for ‘high prices’, when a certain production level is reached and the international prices exceed
a base price, which represents between 30 per cent and 50 per cent of the production calculated in
accordance with a set formula.
Environmental and labour bonds and guarantees: Under the corresponding E&P contract, the
contractor is obliged to grant guarantees to cover labour and environmental liabilities in the
execution of activities.
Proper performance guarantee: Under the corresponding E&P contract, the contractor shall grant a
guarantee for the performance of each phase of the corresponding contract.
Civil liability guarantee: Under the corresponding E&P contract, the contractor shall grant a
guarantee to cover contractual damages arising out of the execution of activities.
Creation of the abandonment fund: Under the corresponding E&P contract, the contractor must
establish a fund to guarantee the financing of the required activities to perform the abandonment
programme of the wells and the environmental restitution of the assigned areas for the production at
the end of the production period.
Transfer of technology: Under the corresponding E&P contract, the contractor agrees to perform
certain scientific and technological activities, whose objectives, terms, conditions and beneficiaries are
determined by the ANH during the term of the contract.
Interest over production (X factor): If an E&P contract is awarded through a bid process, the
contractor must pay to the ANH, in cash or in kind, the so-called X-factor, which is the percentage of
gross production after royalties offered by the contractor during the bidding process.
Additional interest over production: In the event of extensions to the production phase, the
contractor is obliged to pay to the ANH, in cash or in kind, a percentage of gross production after
royalties equivalent to ten per cent of the base production of conventional hydrocarbons or five
per cent of the base production of unconventional hydrocarbons, natural gas, heavy crude oil and
offshore reservoirs.
c. development of mining activities
Law No 685 of 2001 (the ‘Mining Code’), the law currently in force for the awarding of mining
areas and mining titles, establishes the concession contract as the only valid mining title.
However, said new form of contracting through the concession agreement does not impact
preexisting mining titles (licences, aportes and concessions), which shall continue to be in force
until their expiration.
The term for concession contracts is 30 years counted from their registration in the National Mining
Registry, divided into the following phases:
Doing Business in Latin America OCTOBER 2018 101
• exploration: three years (extendable for additional periods of two years up to 11 years);
• construction and assembly: three years (extendable for one additional year); and
• exploitation: 24 years (extendable for 30 additional years).
As per Colombian law, foreign individuals and corporations that are mining concessionaires have the
same rights as Colombian individuals and corporations. Thus, Colombian Governmental regulatory
bodies shall not request any additional or different requirements from such foreign parties.
The sole particular requirement, specifically established for foreign companies, is to incorporate a
branch, subsidiary or affiliate in Colombia to be the titleholder of the mining concession.
In general terms, to protect and preserve the rights of applicants in accordance with the time and
date of the application for the concession contract before the mining authority, Colombian mining
law applies the principle ‘first in time, first in right’. Nevertheless, there are certain areas that can be
temporarily or permanently excluded from the areas to be granted in concession. These areas are:
• special reserve areas: areas where informal and traditional mining activities are developed or
areas for the development of a high-scale mining project;
• national security areas: areas with respect to which the Colombian Government determines that
mining activities are not permitted for security reasons;
• excluded areas: areas that have been legally declared and bordered as protected zones for the
development and protection of renewable natural resources and the environment;
• restricted mining zones: areas that allow mining activities under certain restrictions; and
• areas reser ved for formalisation purposes: areas that are reser ved for the formalisation of
small mines.
However, Law Nos 1450 of 2011 and 1753 of 2015 created Strategic Mining Reserve Areas and Areas for
Mining-energy Development, which are areas that must be granted through competitive bidding procedures
after their delimitation and declaration. These are areas with a high potential for strategic minerals3 that are
reserved in order to allow an organised management of non-renewable natural resources.
Therefore, in Colombia, mining titles may be acquired through three main mechanisms:
• concession contracts granted by the mining authority prior to the request of the interested party;
• concession contracts for strategic mining areas through public bidding; and
• total or partial transfer of concession rights, which requires prior approval from the ANM.
Once the concession contract is granted, duly executed and registered in the National Mining
Registry, the concessionaire shall comply with all the obligations derived from Mining Code and the
relevant concession contract. Particularly, it is important to indicate that said obligations depend on
each stage or phase of the concession contract. Below are the main obligations that shall be complied
with by the concessionaire under corresponding mining concession contracts:
3 Resolution 180,102 of 2012 of the MME. The following are the strategic minerals for Colombia: (1) gold; (2) platinum; (3) copper; (4) phosphates; (5) potassium; (6) magnesium; (7) coal; (8) uranium; (9) iron; and (10) niobium and tantalum (also known as coltan) and/or black or industrial sands.
102 Doing Business in Latin America OCTOBER 2018
1. Mining environmental insurance policy
The concessionaire shall obtain a mining environmental insurance policy that covers compliance
with environmental mining obligations, the payment of potential fines and the consequences of an
eventual early termination by the ANM of the mining title.
2. Payment of a surface fee
The concessionaire must pay a surface fee in order to undertake exploration activities in the
concession area during the exploration, assembling, construction and exploitation periods.
3. Payments of royalties
The concessionaire shall pay royalties, which consist of a percentage, fixed or progressive, of the
exploited gross product, and its sub-products, calculated or measured on the mine head, payable in
currency or in kind, as established in the relevant law.
4. Recent developments
It is also important to mention two recent developments that have impacted the development of
mining activities in Colombia.
Per recent rulings of the Constitutional Court and the Council of State, the ANM must reach agreements
through consultation processes with local governments on the execution of mining activities in the
territory prior to the granting of any mining title. Such consultation agreements shall consider the
protection of the environment and the economic, social and cultural development of citizens.
Through the consultation, the ANM and local governments jointly determine areas of the territory
that are compatible with mining activities based on an analysis of the following items: (1) overlap in
areas in which mining is excluded by law; (2) overlap in areas in which mining is restricted by law; (3)
overlaps with other environmental limitations; (4) overlaps with other mining areas; (5) overlaps with
different uses of land set forth by the land planning instrument currently in force; and (6) mining
potential in the area.
After an agreement has been reached, the ANM and the mayor of the municipality execute
consultation minutes summarising the commitments of both the ANM and the local government. The
minutes are then included in all concession agreements granted in the territory of the municipality as
an obligation and guideline for grantees of those concessions.
On the other hand, and pursuant to Article 2594 of the Mining Code, the ANM has devised a process
of public hearings with local communities to take place before a mining title is granted, and after the
consultation process with local governments has taken place and a consultation agreement has been
reached. The purpose of this process is to provide information to citizens, community leaders and
concerned groups in a given territory about existing mining title proposals in their territory, and to
guarantee the exercise of effective participation rights in the process of granting a mining title.
4 See Article 259. When the participation of third parties, community representatives and social groups in the concession agreement granting procedure is required, the invitation to participate shall be sent in an effective way, within the terms set forth by law and through appropriate means.
Doing Business in Latin America OCTOBER 2018 103
As a result of this public hearing, minutes are recorded and become part of the concession contract,
with the purpose of being the first initiative of the Social Management Plan (Plan de Gestión Social)
of the mining contract. In this sense, the public hearing reaffirms the proponents’ commitment to
work with the community and contribute to its development through mining activity.
As of the end of June 2018, 38 public hearings have been held by the ANM in nine departments.
d. colombian socio-environmental regime
In Colombia, any project, work and/or activity that involves the use of natural renewable resources
and/or that may affect the environment, will require the interested individual/company (the
‘beneficiary’) to request and obtain before environmental authorities (either national, regional
or district) the environmental licences, concessions, permits and/or authorisations (the ‘control
instruments’), prior to the execution of the corresponding project.
Moreover, the Colombian Constitution defines Colombia as a multicultural state in which several
ethnicities coexist. Particularly important are indigenous and afro-descendant communities
because they have special protection according to Colombian legislation currently in force, and
the right to prior consultation. Apart from ethnically differentiated communities, other social
actors are also entitled to actively participate in the environmental procedures aimed at granting
environmental permits and licences, and shall also be considered as an integral part of any mining,
and oil and gas projects.
In Colombia, the key administrative instrument for the preservation of the environment and
for controlling the use and exploitation of natural resources (the control instrument) is the
Environmental Licence. This control instrument is regulated essentially by Law No 99 of 1993 and
Decree No 1,076 of 2015.
The Environmental Licence shall only be applicable to those projects or activities that may imply
serious deterioration of natural renewable resources, or that have the capacity to introduce
considerable modifications to the landscape. Please note that in Colombia, said activities
are limited and clearly defined in Articles 2.2.2.3.2.2 and 2.2.2.3.2.3 of Decree No 1,076 of
2015, which means that the Environmental Licence shall only apply to those activities that are
effectively listed.
iv. Treatment of foreign investment in real estate (rural and urban properties)
When acquiring real estate property in Colombia, a foreign investor must consider that: (1) Colombia
protects private property, considering that by means of the Constitution, legally acquired ownership
rights cannot be affected by ulterior laws; (2) both nationals and foreigners have, in principle, equal
rights concerning the acquisition of real estate property; and (3) the use for a specific activity must
be in compliance with the corresponding zoning dispositions. Therefore, all regulations regarding
foreign investment in real estate property is subject to the dispositions and procedures set forth in
Section C below.
104 Doing Business in Latin America OCTOBER 2018
v. Treatment of foreign investment in the rendering of public services
a. a general legal framework
From the enactment of the Constitution of 1991, the privatisation of public utilities started in
Colombia, allowing private parties to initiate the provision of public utilities under a free market
scheme, subject to strict regulation.
Under the Constitution, the Colombian Government, although responsible for ensuring the
provision of domiciliary public utilities, was instated with the power to supervise and regulate public
utilities rather than operate the provision of such services. Prior to 1991, the Colombian Government
either provided public utilities directly through specialised providers or granted concessions to
private parties to provide such services.
In this regard, the Colombian Government has significant powers to dictate policy, and monitor and
regulate public utility companies in order to ensure the continued availability of public utilities.
In Colombia, unlike several other jurisdictions, the telecommunications sector and public utility
provision sectors differ in several ways. Therefore, for the purpose of the present document, it is
important to bear in mind that we will address the following public utility services: electricity, gas,
water, sewage and solid waste management.
There are two main structural laws that compose the public utility sector. The first, Law No 142
of 1994, established the overall general market structure defined by Congress for the provision
of public utilities. In addition, Law No 143 of 1994, a special law regulating the electricity and gas
sectors, established additional rules and incorporated additional regulations solely applicable for the
previously mentioned sectors. In this regard, Law No 143 of 1994 is specially applied – compared with
Law No 142 of 1994 – when analysing matters applicable to the electricity and gas sectors.
Under the aforementioned laws, utilities providers, consumers and other market participants operate
under a uniform set of rules guided by principles of efficiency, quality, improved service coverage,
financial sustainability, and fair and equitable participation regardless of government affiliation.
The current legal and regulatory regime promotes competition for the benefit of consumers in areas
such as pricing, quality and coverage. Government entities and government-owned entities that
provide public utility services must ensure that they remain competitive in these areas, without solely
relying on their dominant position.
b. foreign investment in public utilities
Colombia’s public utility sector provides multiple business opportunities for local and foreign
investors. Although it is a strongly regulated sector, our strong legal and administrative structure
facilitates the incorporation of public utility companies by any agent – either foreign or national – in
the sector. There are no restrictions for foreign investors to participate in the provision of public
utilities as shareholders of public utility companies.
Doing Business in Latin America OCTOBER 2018 105
c. governmental participation and restriction in public utilities
As we have mentioned above, the Colombian Government was the primary responsible party to
provide public utilities before the enactment of the 1991 Constitution. Currently, the Colombian
Government owns and has equity participation in different utility companies at the national,
regional and local levels.
Nonetheless, under current regulations, the Colombian Government’s participation in new projects is
subsidiary to the participation of private individuals in the provision of public utilities. Therefore, as
a rule of law established pursuant to Articles 6 (for the local level), 7 (for the department level) and 8
(for the national level) of Law No 142 of 1994, the Colombian Government will enter directly in the
market and provide the public utilities itself only in such circumstances where private agents are not
willing to provide the utilities themselves.
d. water, sewage and waste management
The Colombian Government has recently pursued a high standard in the provision of water, sewage
and waste management public utilities. Because of this, major governmental programmes have been
enacted to meet such shortcomings in water, sewage and waste management infrastructure.
Among others, in matters pertaining to water and sewage, the Colombian Government has
undertaken ‘Water for Prosperity’ programmes, where several investors, including foreign investors,
participate in the construction and operation of water and sewage infrastructure. According to the
latest information published by the Ministry of Housing, City and Territory, during the last years
the Colombian Government constructed 1,135 water and sewage infrastructure projects, reaching
an overall value of almost COP$2.3bn (approximately US$766m). During 2018, the Colombian
Government foresees terminating the construction of 212 projects for a total value of COP$1.03bn
(approximately US$334m). Furthermore, other important programmes have been enacted, for
example, the Departmental Water Management Plans, where by joining regional efforts, different
municipalities may access funding from the national government and initiate the procurement
process for the construction of 76 projects to achieve, during this government, the construction of
1,623 projects in 32 departments for an overall value of COP$3.6bn (approximately US$1,200m).
It is important to mention that there are several reservoir recovery projects and, in this regard, several
municipalities and departments are publishing projects related to waste water treatment plants. The
new government that took office on August 2018 announced its intention to advance the projects
regarding the provision of water and sewage to rural areas to achieve coverage of 70 per cent.
In matters related to waste management, there are currently several projects related to the recovery
of waste in order to make some waste productive. These projects are mainly being led by the waste
management public utility companies already incorporated in Colombia’s territory; nonetheless, it
is a major opportunity for foreign investors to verify the possibilities to be included in this special
activity in the waste management sector.
106 Doing Business in Latin America OCTOBER 2018
e. electricity and gas
From the electricity sector perspective, the Colombian Government enacted Law No 1715 of 2014
on Renewable Energies, establishing certain tax benefits for foreign and local investors interested in
advancing the constructing of renewable energy projects. Law No 1715 of 2014 promotes investment
in renewable energies (mainly wind and photovoltaic) by introducing tax breaks, such as deductions
in income tax, accelerated depreciation, exemption from VAT, and reduction of custom duties for
equipment, machinery, supplies and services. In the same vein, the Regulatory Commission for
Energy and Gas is issuing new regulations to ensure the bankability of these projects, and foster
the rebalancing of Colombia’s power generation portfolio. These initiatives are complemented by
regional transmission line projects undertaken by the Mining and Energy Planning Unit, which are
under tender, to transmit power generated in the northern part of Colombia.
In this regard, The Ministry of Mining and Energy issued Decree No 570 of 2018, which regulates
public policies to implement long-term energy contracts for non-conventional renewable energy
projects. In addition, the Energy and Gas Regulatory Commission has had discussions with energy
market agents about new regulations regarding the awarding of firm energy obligations under the
scope of the reliability charge.
In addition, Colombia is endowed with the largest coal reserves in the region, ranking second
in the world in hydroelectric potential, and is one of Latin America’s top five countries in terms
of oil reserves. Colombia’s electric and gas energy industries have undergone constant internal
restructuring over the last century, mainly permuted by the innovative encroachment of the private
sector and the need to promote competition in the market.
Finally, it is important to mention that the Colombian Government is structuring a project for a
regasification facility on the Pacific coast, which, along with the brand new floating storage and
regasification unit (FSRU) located at Cartagena, will ensure the supply to gas-fired power plants that
generate power during El Niño–Southern Oscillation periods.
f. telecommunications
The current general framework applicable to information and communication technologies was
established in Law No 1341 of 2009. According to this law, the provision of telecommunications
networks and ser vices, including fixed telephony, is considered a public ser vice under the control
of the state, separate from other public utility ser vices covered by Law No 142 of 1994. Law No 1341
of 2009 also sets forth a general legal habilitation for the provision of telecommunications networks
and ser vices, which allows any private party to be part of it. This habilitation is not applicable
to television and radio broadcasting ser vices. Regarding all other networks and ser vices, no
particular restrictions or limitations are imposed over foreign investors. The general habilitation,
nonetheless, does not cover the use of the spectrum. In order to use it, the Ministr y of Information
and Communication Technologies must authorise interested companies through a bidding process
(proceso de selección objetiva).
The only requirement in order to operate telecommunications networks or render
telecommunications ser vices different from radio and television is to obtain registration before
Doing Business in Latin America OCTOBER 2018 107
the Ministr y of Information and Communication Technologies. All companies that provide the
mentioned networks or ser vices, or that use the spectrum must have said registration. Additionally,
telecommunications networks and ser vices providers must pay an amount equivalent to 2.2 per
cent of their gross income in the form of a consideration. Other fees applicable to the use of
the spectrum are established in function of particular criteria, such as the quantity of spectrum
granted, number of potential users, expansion plans of the company and availability of the
spectrum (determined based on supply and demand). In some exceptional cases, for reasons
related to national defence, attention to and prevention of emergencies, and public safety, the
Colombian Government may establish other obligations.
Different regimes govern the provision of television and radio broadcasting services. In order to
render these two types of services, a company must obtain a concession by means of a public bidding
process. Only Colombian citizens or legal entities duly organised in Colombia can be granted with
a concession. Moreover, foreign investment in companies that provide television services cannot
be greater than 40 per cent of the share capital of the respective company. These dispositions were
included among the approved non-conforming measures in the FTA between Colombia and the US.
B. Rendering domestic public services
i. Legal framework
Article 365 of the Colombian Political Constitution, establishes the constitutional framework for
public services or utilities in Colombia. Under this article: (1) public services are inherent to the
social purposes of the state; (2) the state must ensure that such services, including domestic public
services, are made available to all Colombian citizens in an efficient manner; (3) private parties are
entitled to provide such services, subject to regulation by the state.
These principles were developed by means of Law No 142 of 1994, which sets out the overall legal
framework applicable to said services (ie, water and sewage, sanitation, electricity, natural gas
distribution and telephone services), as well as to activities complementary to those services, such as
power generation and transmission, natural gas transport and others.
The law sought to limit the involvement of the state in the provision of domestic public services in
order to focus on policy-making and regulation while leveraging resources by encouraging the private
sector to participate in the provision of high-quality services.
Under Law No 142: (1) Colombian Government entities of the national, departmental and municipal
level have the responsibility to ensure that public services are provided efficiently to citizens by public,
mixed capital or private entities; (2) citizens have the right to choose their service providers; and (3)
any person (Colombian or foreign) has the right to organise and operate companies dedicated to the
provision of public services.
Law No 142 specifically indicates that no concession or permit will be required to provide domestic
public services or to engage in activities complementary to them, without prejudice to other permits
that may be required for any economic activity, such as environmental licences and/or permits,
municipal zoning and health permits.
108 Doing Business in Latin America OCTOBER 2018
The reform introduced by Law No 142 has achieved many of its policies. Local and domestic private
investors have invested significantly in the electricity, natural gas, telecommunications (particularly in
mobile telephony) and drinking water, and both the coverage and quality of services has improved.
By 2016, the electricity service reached 99.7 per cent of households in municipal capitals, while in other
populated centres and the rural sector, the coverage of this service was 95.0 per cent. The coverage of
domestic water supply services in municipal capitals was 97.5 per cent, although challenges remain,
especially in the dispersed rural sector, where coverage is approximately 60.1 per cent.5
ii. Public utility companies
In order to ensure a level playing field between government-owned and privately owned providers,
domestic public services may only be provided by certain types of entities, the most important being
utility companies (empresas de servicios públicos (ESPs)), which may be owned by private (including
foreign) investors or by the Colombian Government and are subject to a special legal regime whereby
their acts and contracts are subject to private law, regardless of whether they are state or privately owned.
They are also required to ensure that services are provided continuously and cost-efficiently; to
refrain from practices that restrict competition, when such competition is possible; to facilitate access
by lower income users using subsidies provided by the Colombian Government; and to facilitate
access and interconnection by other service providers to their networks and assets used for the
provision of such services.
ESPs, whether private or government-owned are subject to regulations issued by national regulatory
commissions (see below), and are required to meet efficiency standards established by such
regulatory commissions and enforced by the Superintendency of Domestic Public Services (the
‘Superintendency’), which are updated from time to time. They must also implement systems and
procedures to deal with complaints from their clients/users.
The Colombian state at the national, departmental (provincial) and municipal level may participate
in public utility companies, but may not grant or receive from them subsidies or benefits other than
those expressly established in Law No 142, which essentially means that government-owned ESPs must
compete on market terms with private operators.
It should also be noted that ESPs are subject to a special insolvency proceeding established by
Law No 142 and administered by the Superintendency applying the same rules applicable to the
administrative receivership and liquidation of financial institutions.
Therefore, if an ESP is unwilling or unable to render adequate public services or becomes insolvent,
the Superintendency may take over management of the ESP and appoint a fiduciary entity or new
management under its authority and subject to oversight by an advisory board. At least two of the
major creditors of the utility must be represented in this board. As a result of the takeover: (1)
all judicial attachments over the public service company’s assets may be terminated; (2) all credit
enforcement proceedings initiated prior to the takeover are terminated, and creditors may join the
takeover proceedings to seek payment of their credits; and (3) the Superintendency has two months
5 Presidency of the Republic of Colombia Government Informative System, 2017.
Doing Business in Latin America OCTOBER 2018 109
to determine whether it has to liquidate the company or administer it with a view to rehabilitation for
up to two years.
Liquidation will be supervised by a board of creditors, appointed by the Superintendency and
consisting of five members, three of whom will represent the largest creditors and the two remaining
being appointed by the Superintendency.
iii. Tariff rates
Tariff rates charged by ESPs are regulated by the relevant regulatory commission, except when they
do not have a dominant position in their market, as determined by the commission.
Pursuant to Law No 142, the tariff structures for public utilities are based on several principles which
include: (1) the principle of financial feasibility; (2) the principle of economic efficiency; and (3) the
principle of solidarity.
Under the first principle, tariff rates must allow the service provider to recover operational costs
and expenses, and a return on investment comparable to the return that would be obtained by an
efficient company in a sector of comparable risk.
Under the second principle, the tariff scheme must provide for a mechanism that sets prices for such
services in a manner similar to that in which prices are set in a competitive market. In addition, under
such principle the service provider should share the benefits of productivity increases with its customers,
as it would do in a competitive market, and may not transfer to the consumer the costs of inefficiencies in
its operations. Under the principle of solidarity, higher income and commercial users, together with the
Colombian Government must subsidise lower income users. For this purpose, municipalities are zoned to
determine lower and higher income areas and surcharges applied to higher-income families that are used
to subsidise lower-income families, along with contributions from the Colombian Government.
Regulatory commissions typically issue general methodologies to calculate various components of the
tariffs and the review calculations of the actual tariffs to be charged by a particular company based on
the investments made in their service infrastructure. Tariff cases are typically updated every five years
for each company.
iv. Competition regime
One of the stated objectives of Law No 142 is to introduce competition in the provision of public utilities.
Therefore, there are numerous provisions in the law and in the regulations issued by the Regulatory
Commissions aimed at promoting a level playing field, including by ensuring adequate access to the
infrastructure networks of incumbent service providers (in many cases, legacy municipal utility companies).
Pursuant to Article 2 of Law No 1,340 of 2009, all agents of the economy are bound by competition
laws and regulations. No person, governmental entity, company or association, whether public or
private is above or outside the regulatory scope of competition laws and regulations.
Therefore, despite being subject to a special regime, public utility providers are subject to general
competition regulations, as well as specific rules for their particular sectors. Responsibility for the
enforcement of these regulations lies with the Superintendence of Industry and Commerce.
110 Doing Business in Latin America OCTOBER 2018
v. Institutional framework
Colombian Government entities that play an important role in the domestic public service sectors
are: (1) the MME; (2) the Ministry of Housing (responsible for water and sewage); (3) the Ministry
of Information and Communications Technology; (4) the Energy and Gas Regulatory Commission
(Comisión de Regulación de Energía y Gas (CREG)); (5) the Regulatory Commission for
Telecommunications (Comisión de Regulación de Telecomunicaciones (CRT)); (6) the Regulatory
Commission for Water, Sewage and Sanitation (Comisión de Regulación de Agua Potable y
Saneamiento Básico (‘CRA’)); and (7) the Superintendence of Public Utilities (Superintendencia de
Servicios Públicos Domiciliarios (SSPD)).
Each of the energy, water and sewage and telecommunications-information technology (IT) sectors
is under the overall jurisdiction of the relevant ministry, which is responsible for adopting the
Colombian Government’s policies for each sector.
The regulatory commissions, CREG, CRA and CRT are administrative bodies comprised of the
following members: the ministers of the relevant sectors (in the case of CRA, they include the
Minister of Housing and Minister of Environment or their delegates), Minister of Mines and Energy,
Minister of Finance and Public Credit, Director of the National Planning Department and a number
of independent technical experts appointed by the President of Colombia.
The principal purpose of the regulatory commissions is to ensure that ESPs in the sector provide
economically efficient and high-quality public services. The commissions fulfil this purpose by,
among other things: (1) issuing resolutions applicable to the provision of services; (2) promoting
competition through open and non-discriminatory access to and use of networks; and (3) establishing
the tariff structure for the provision of services subject to its jurisdiction.
ESPs are subject to the oversight of the Superintendence of Public Utilities, which is an administrative
body created by Law No 142 that is primarily responsible for: (1) inspecting, controlling and monitoring
all companies providing public utility services; (2) enforcing regulations, imposing penalties and
generally overseeing the financial and administrative performance of public utility service companies;
(3) developing the accounting norms and rules for public utility service companies; and (4) in general,
organising statistical and other information networks and databases pertaining to public utilities.
C. Real estate
Any person – whether an individual or a legal entity, foreign or national – is entitled to acquire real
estate property in Colombia, subject to the limitations indicated below.
i. Rural properties: limitations for private parties
a. environmental restrictions
Under Colombian law, rural properties may be classified by the environmental authorities as a so-
called ‘ecological area’, whenever there are ecosystems or renewable resources located therein.
In such cases, the property must be preserved in order to guarantee its sustainable development.
Doing Business in Latin America OCTOBER 2018 111
In these protected ecological areas, the development of industrial, agricultural or farming projects
must respect the land use restrictions and, in some cases, these projects are entirely prohibited.
The environmental authorities adopt these protection measures by issuing Regional Development
Plans, as well as the so-called Units of Rural Planning (Unidades de Planificación Rural), through
which the environmental protection measures and land use restrictions are implemented.
b. special limitations to the purchase of rural properties
1. Family agricultural units (unidades agrícolas familiares)
Colombian regulations provide for a special rural property limitation regarding family agricultural
units (unidades agrı́colas familiares (UAF)). These land units are comprised of the minimum
extension of land that a single family is entitled to receive as a governmental economic grant.
If a company is willing to purchase some of these land units, the competent authority (Instituto
Colombiano de Desarrollo Rural (‘INCODER’)) must authorise the purchase, provided that the
company proves that it does not own any other rural property in the country.
2. Land parcel licence (licencias de parcelación)
In order to divide a rural property into smaller extensions of land, the owner must obtain a land
parcel licence. The licence-holder is entitled to carry out certain work within these properties.
3. Property tax (impuesto predial)
In Colombia, real estate properties are levied with a property tax. The owners must declare and pay
this municipal tax, usually once a year, but in some municipalities on a quarterly basis. The tax basis
is assessed in accordance with the cadastral record and an estimated value of the property made by
the same owner. Depending on the economic use of the property, the tax rate generally oscillates
between 0.3 per cent and 3.3 per cent.
4. Capital gains tax (impuesto de plusvalía)
Whenever the owner of a property carries out any improvement, the capital gain resulting thereto
will be subject to a capital gains tax, which ranges between 30 per cent and 50 per cent of the gain.
Capital gains tax is usually levied when the property is transferred, or when a construction licence for
improving the property is granted.
5. Betterment tax (impuesto de valorización)
In the case in which the Colombian Government decrees a public betterment that would benefit the
surrounding properties, the corresponding owners would be charged with the betterment tax on the
basis that these betterments increase the value of their properties.
112 Doing Business in Latin America OCTOBER 2018
6. Urban development tax (impuesto de delineación urbana)
Real estate owners in Colombia are levied with an urban tax when they create new constructions,
additions or modifications of existing constructions on their properties. This particular tax applies to
both urban and rural properties, despite its denomination.
ii. Urban properties: limitations for private parties
a. regional development plans (rdps) and partial plans (pps)
Both RDPs and PPs regulate the development of construction projects, especially regarding urban
properties. RDPs define the organisation of urban areas, indicating their specific land uses, while PPs
develop and complement RPDs by establishing what type of construction projects can be developed
in the areas determined under the RPDs.
b. building and planning permissions
Every construction, addition or modification of built structures in urban properties must be authorised
by local governments by means of a planning permission. The authorities verify land use compliance, the
potential development index (índice de edificabilidad), accessibility and other technical key features.
c. taXes
The following taxes: property tax, capital gains tax, betterment tax and urban development tax, also
apply to urban properties, on the same terms as indicated above.
iii. Expropriation events
a. eXpropriation for public purpose
The Colombian Political Constitution provides that any land expropriation must be preceded by a
court proceeding, and, in any case, the owner will be entitled to a proper compensation. This judicial
expropriation takes place when a governmental authority declares that a specific property must be
expropriated for the sake of a public purpose or social interest.
Exceptionally, governmental authorities are entitled to carry out an administrative expropriation,
which in any case will still require economic compensation for the owner. This expropriation will be
subject to a judicial review aimed at protecting the rights of rural and urban property owners.
b. eXtinguishment of ownership
Regarding rural properties, there is a special expropriation proceeding in the case in which a rural
property is not used or exploited by its owner in more than three years.
Other extinguishment proceedings also apply when the property has been acquired in violation of
money laundering regulations or other illicit means.
Doing Business in Latin America OCTOBER 2018 113
iv. Due diligence
In addition to the aforementioned restrictions, it is important to bear in mind that prior to the
acquisition of real estate in Colombia, it is advisable to review at least the following documents to have
a complete status of the property at the time of the transaction: (1) the certificate of and tradition of
the property (certificado de tradición y libertad) up to the date of the transaction; (2) the public deeds
containing the acquisition titles and other legal acts that have been carried out on the property in the
last 20 years (eg, mortgages, attachments and servitude); (3) certificates related to the payment of
taxes affecting the property; and (4) the land use certificate.
The following aspects must be taken into consideration:
• analysis of the titles of the property: this is carried out by an expert lawyer for the purpose of
determining if there is any circumstance that affects or limits, or is likely to affect or limit, the
right of ownership over the real estate; this analysis is to verify mainly that there are no legal
risks in the transaction, or in the chain of transactions, and verify the quality of the owners or
the sellers;
• analysis of land use: this is carried out by a lawyer or an expert technician who seeks to
determine what type of construction (including volumetric aspects) and activities are allowed to
develop on the property object of the transaction, allowing the investor to have total certainty of
the feasibility of developing the respective project according to the applicable specifications set
forth for the property in which the project would be performed; and
• in relation to the acquisition of rural properties, it is important to take into account that there
is a special regulation that imposes certain limitations on the acquisition and development of
these properties, as occurs, for example, with the limitation established in Article 72.9 of Law
No 160 of 1994, which prohibits the acquisition of vacant lots if the size of the UAF is exceeded.
v. Contracts for transferring ownership of a property
For purposes of transferring real estate in Colombia, prior to the execution of the property purchase
contract, the parties execute a promise to purchase agreement. In this agreement, the buyer and
seller agree the essential elements of the contract of sale (the corresponding real estate, price and
terms of payment) is usually celebrated when the parties have established all the conditions of the
contract, and only the legal formalities are pending.
The contract for the purchase of real estate must be granted through a public deed. The cost of this
procedure is approximately 0.3 per cent of the value of the sale.
Moreover, it is important to point out that the ownership of a real estate is transferred with the
registration of the public deed of sale in the Office of Registration of Public Instruments (Oficina
de Registro de Instrumentos Públicos). The registration of the public deed generates a registration
tax that can range between 0.5 per cent and one per cent of the value of the purchase agreement
contained in the public deed, as well as the so-called registry rights equivalent to 0.5 per cent of the
value of the price of the sale, and generally are paid by the buyer.
114 Doing Business in Latin America OCTOBER 2018
D. Development of ample/integrated capital markets and joint activities between Latin American countries
i. Merger of stock exchanges: attempts versus realities
The integration of the stock markets of Chile, Colombia, Peru and Mexico (the Member Countries)
through MILA was structured to be implemented in two stages. The initial stage, which Member
Countries of MILA have completed, consisted of the entry into operation of an order routing system
allowing the sale and purchase of equity-based securities (ie, equity, participation units in funds
bound to stock indices and equity, etc). Orders are placed by local residents through a local stock
broker dealer to buy/sell the securities in any of the Member Countries; however, the negotiation
and actual sale/purchase of such securities is conducted by the broker-dealer of the country were
the securities are negotiated, and with whom the local broker-dealer has entered into an agreement.
Other important aspects related to transactions conducted through MILA are still disparate in
each Member Country, including clearing and settlement of transactions, fiscal, FX regulation and
surveillance standards.
In the second stage of the implementation, it is expected that local broker-dealers will be authorised
to sell/purchase securities in any of the Member Countries (equity based or fixed income securities)
without the intermediation of broker-dealers of the countries where the securities are negotiated. In
order to implement this stage, a standardisation of trading rules and definition of a model of cross-
border clearing and settlement are required. To achieve the former, effort has already been made to
eliminate disparities between the legislations of the Member Countries. For instance, in Colombia,
important legislation in different fields has been enacted. The most important regulation is reflected
in Decree No 4,087 of 2010 (‘Decree No 4,087’); Decree No 1,850 of 2013 (‘Decree No 1,850’);
and Part I, Title II Chapter II of External Circular No 29 of 2014 issued by the Colombian Financial
Superintendence (‘Circular No 29’). Decree No 4,087 authorised the listing of equity-based securities
in foreign securities’ quotation systems (sistemas de cotización de valores del extranjero) administered by
the BVC and negotiated in foreign stock exchanges, pursuant to agreements entered into by BVC
with foreign stock exchanges (eg, the case of MILA). It was the first regulatory amendment, which
opened the door to integration. Decree No 4,087, also allowed that orders placed through a local
broker-dealer in Colombia to purchase/sell securities listed in foreign securities’ quotation systems
are registered in the electronic entry-book registry of the foreign broker-dealer of the country where
the securities are negotiated, rather than in the electronic entry book of the local broker-dealer.
Decree No 4,087 also made important progress by allowing foreign clearing houses to register equity-
based securities transactions in accounts held in the Colombian securities depositary,6 and also by
allowing the latter to register equity-based transactions cleared and settled in foreign clearing houses.
On the other hand, Decree No 1,850 authorises foreign issuers and local securities intermediaries
(ie, broker-dealers and financial corporations), to promote foreign equity-based securities that make
part of an IPO in Colombia. In addition, Decree No 1,850 authorised local securities intermediaries
to enter into underwriting agreements for the placement of foreign equity-based securities issued in
a different country and negotiated in another stock exchange (eg, those of the Member Countries
of MILA). Finally, Circular No 29 establishes the minimum requirements that must be included in
6 The current equity-based securities depositary in Colombia is Deposito Centralizado de Valores-Deceval SA.
Doing Business in Latin America OCTOBER 2018 115
agreements entered among stock exchanges (eg, the stock exchanges of Member Countries), as
well as those entered into among broker-dealers of different countries. Today, more than 60 broker-
dealers are authorised to operate in MILA.7
On the other hand, in other Member Countries such as Chile, the legal framework has also been
evolving during recent years in order to implement an internationally integrated securities market.
In January 1999, Law No 19,601 (‘Law No 19,601’) created an offshore market that allowed the
registration of foreign securities by an issuer or its legal representative in order to trade them in Chile.
In June 2007, Law No 20,190 (‘Law No 20,190’) authorised the registration of foreign securities, now
by third parties called sponsors (patrocinadores) simplifying, in that sense, the trade of these securities
in the offshore market. With the enactment of Law Nos 19,601 and 20,190 in November 2010, the
implementation of the first stage of MILA in Chile did not require changes in law.
From the regulatory authority’s point of view, the Chilean Commission for the Financial
Market (Comisión para el Mercado Financiero (CMF)), which supervises, among others,
corporations, insurance companies, stock exchanges and broker-dealers, has also contributed to
the implementation of MILA in Chile. The CMF, through its regulatory framework, has issued a
significant number of standards. First, Circular No 1,046 dated 17 December 1991 (amended by
Circular No 1,371 dated 30 January 1998) authorised, as a complementary activity for broker-dealers,
advice and specific commission for the purchase and sale of securities in foreign stock markets. Then,
on 12 June 2008, Norma de Carácter General (NCG) No 215 (amended by NCG No 357 dated 18
December 2013) established the requirements and conditions to be met by companies in order to
sponsor the registration of foreign securities in Chile. Finally, during recent years, and in order to
ease the implementation of the second stage of MILA, the CMF issued NCG No 352 (21 October
2013) that established the standards for the public offering of foreign securities in Chile, and on
14 July 2014, the CMF issued NCG No 366, which provided instructions on the negotiation of those
securities in Chile.8 As in the legal Chilean framework, some of the rules of the CMF were previously
issued to MILA, and without seeking said purpose, they have facilitated its implementation in Chile.
The surveillance authorities of the Member Countries, excluding Mexico,9 have also entered into several
cooperation agreements (acuerdos de entendimiento or memoranda of understanding (MOUs)) seeking
to implement mechanisms for combined surveillance, an exchange of information, cross-border risk
administration and cooperation during investigations, and sanctioning processes involving transactions
or entities that make up part of MILA. In this regard, agreements include: (1) a cooperation agreement
entered on 28 October 2009 among the Member Countries, excluding Mexico, which set forth the main
tasks to be performed by regulators for the implementation of MILA; (2) a cooperation agreement
entered on 15 January 2009 among the Member Countries, excluding Mexico, establishing mechanisms
for the exchange of information and assistance intended to facilitate the compliance of securities
regulations of each of the countries party to this agreement; and (3) an amendment to the cooperation
agreement entered on 15 January 2009 among the Member Countries, excluding Mexico, and dated
15 January 2010, establishing a combined surveillance committee in charge of the following functions:
7 See http://mercadomila.com/quienes-somos/que-hacemos accessed 27 August 2018.
8 Furthermore, NCG No 304 dated 10 March 2011, establishes, among others, the registration procedure of debt securities issued by foreign states, international and supranational organisations and foreign entities in the Chilean securities registry.
9 The supervision authorities of the Member Countries, excluding Mexico are: (1) Comisión para el Mercado Fiananciero de Chile; (2) Superintendencia Financiera de Colombia; and (3) Comisión Nacional Supervisora de Empresas y Valores (Perú).
116 Doing Business in Latin America OCTOBER 2018
(i) creating the guidelines for the operation of the committee and the compliance of its functions; (ii)
determining, in accordance with the aforementioned guidelines, the most suitable channels for the
exchange of information and documentation requested by authorities of the Member Countries, and
promoting their implementation; (iii) setting forth mechanisms for the recollection of evidence in any of
the Member Countries required for the administrative processes conducted by the surveillance authorities
of the Member Countries; (iv) enabling mechanisms to coordinate and provide support in connection
with any investigation process related to transactions performed in MILA and conducted by any of the
surveillance authorities of the Member Countries, excluding Mexico; (v) creating working teams to study,
analyse and develop strategies to improve supervision standards related to MILA; and (vi) procuring that
information is kept confidential by its members.
Despite the aforementioned advances, in the regulation to implement MILA, there are still several
regulatory challenges for the full implemenation of stage 2. Further regulatory amendments are
required in each of the Member Countries to achieve homogenisation in clearing and settling rules,
as transactions performed through MILA’s platforms are cleared and settled in each of the Member
Countries according to their own risk administration standards (ie, establish the characteristics of
intermediated routing; and qualify the activity for broker-dealers and mechanisms for the exercise of
political and economic rights of investors, subscriptions of MOUs between local authorities and the
supervisory authorities of other participants in MILA, etc).
Homogenisation is additionally required in tax regulations pertaining to transactions performed
through MILA’s platforms. For example, taxes on dividends are different in each of the Member
Countries: in Colombia, dividends from profits generated before fiscal year 2017 paid to non-resident
holders of securities will be subject to a withholding tax of 33 per cent if such profits were not taxed at
the corporate level. Dividends generated out of profits as of fiscal year 2017 on investments registered
as FDI will be subject to a withholding tax of five per cent if profits generated by the corporation have
been previously subject to income tax at the corporate level or 38.25 per cent rate (35 per cent plus five
per cent on the balance that results after applying the initial 35 per cent withholding tax) if dividends
are paid out of profits not subject to tax at the corporate level. In addition, dividends generated out
of profits as of fiscal year 2017 on a foreign portfolio investment will not be subject to withholding tax
if profits generated by the corporate have been previously subject to income taxes at the corporate
level, or at a 25 per cent rate if they are paid out of profits not subject to tax at the corporate level: in
Chile, there is a withholding tax of 35 per cent over dividends for non-residents; in Peru, there is a
withholding tax of 6.8 per cent for 2016, 8.0 per cent for 2017 and 2018, and 9.3 per cent for 201910
(applying to non-residents); and in Mexico, there is a withholding tax of ten per cent,11 which generates
regulatory arbitrage, which can cause a disincentive for investors. As another example, while in
Colombia capital gains are not taxed if resulting in a sale of shares of a publicly listed company provided
that they do not exceed ten per cent of the total capital of the company, in Mexico non-residents are
taxed differently (zero per cent12 depending on treaties subscribed with different countries or ten per
cent if there is no treaty). In addition, the standardisation of rules for the negotiation of securities in
the stock exchange of each Member Country will allow local broker-dealers not only to place, but also
to negotiate transactions over securities in a foreign stock market without the intermediation of their
10 See http://mercadomila.com/wp-content/uploads/2018/04/MILA_Info_Tributaria.pdf accessed 27 August 2018.
11 Ibid.
12 Ibid.
Doing Business in Latin America OCTOBER 2018 117
fellow counterparties. Moreover, in order to reach the standardisation of regulation, further efforts are
required for the implementation of combined surveillance by the authorities of the Member Countries.
For example, combined surveillance is necessary in connection with risk administration of transactions
conducted through MILA, including the assessment of risk derived from the implementation of new
financial products and instruments (ie, fixed income securities and derivatives); the transfer of risk from
one market to another, including systemic risk; continuity plans derived from operational failures in the
negotiation platforms of MILA; and crisis situation management. Furthermore, regulatory changes are
essential to permit that a single authorisation by any of the authorities of the Member Countries allows
issuers to perform IPOs in the Member Countries without further authorisation. To achieve the former,
the standardisation of information presented to investors and authorities by issuers is required (ie,
offering memoranda and public information on the web pages of issuers and authorities).
On the other hand, it is important to point out that, currently, MILA limits negotiations to equity-
based securities. It is expected that fixed-income securities are authorised to be negotiated within the
MILA platforms, including corporate bonds and public debt (ie, TES (Colombia), CKD (Mexico) and
títulos emitidos por la Tesorería General de la República de Chile (Chile). Other financial instruments, such as
derivatives and structured products, shall be gradually included to attract the interest of more investors.
As a public policy to develop capital markets in the Latin American region, and specifically in the
Pacific Alliance, at the end of 2017, the regulator issued the Decree No 1,756 of 2017 (‘Decree No
1,756’) known as the funds passport (pasaporte de fondos).
Pursuant to Decree No 1,756, any Colombian investor can invest in a foreign investment fund or
vehicle (‘FIF’) if: (1) the FIF is a collective investment fund that has been authorised in its local
jurisdiction; and (2) its local regulator and the Superintendencia Financiera de Colombia (SFC) have
signed supervision and information exchange agreements.
Any Colombian investor, either retail or institutional, can invest in a FIF provided the investment is
not restricted or forbidden according to its local investment regime.
A FIF distribution must be done using a mutual funds special distributor (distribuidor especializado),
such local commercial banks (establecimientos bancarios), broker-dealers (sociedades comisionistas de
bolsa), trust companies (sociedades fiduciarias) or investment management companies (sociedades
administradoras de inversión) through omnibus accounts.
With respect to the interest of investors and issuers in MILA, it is believed that a more aggressive
and educational campaign has to be conducted by MILA among them to show the potential benefits
of conducting business through MILA (see the next section for information on the objectives of
MILA). As will be explained in the next section, numbers show that the current results for the volume
of negotiations and liquidity in MILA has not reached the desired levels. This is explained in part
because of the regulatory challenges pending to implement stage 2 of MILA described above, but also
the lack of knowledge of investors and issuers of the benefits of negotiating securities through MILA.
ii. MILA: current results and expectations
Since the commencement of the operations of MILA on 30 May 2011, its Member Countries have pursued
seven main objectives: (1) to promote a higher level of integration between the economies of the region;
118 Doing Business in Latin America OCTOBER 2018
(2) to provide investors with diversified investment opportunities by granting access to a combined stock
exchange market with a market value of US$991,416bn and 657 issuers as of 1 September 2017;13 (3) as a
consequence of the latter, to increase the volume of negotiations carried out in the combined stock
market using MILA’s order routing systems, which as of April 2018 reached a volume of negotiations of
US$16,105,249,990;14 (4) to provide liquidity to the stock markets of the Member Countries to obtain
growth in the sources of financing of issuers on the combined stock markets; (5) for broker-dealers,
to increase the range of products to distribute to their customers; (6) the creation of new investment
vehicles; and (7) to obtain a technological strengthening and adoption of international standards.
The above objectives have been partially achieved. Even though investors currently have access to the
combined stock markets of the Member Countries, now the second largest after BOVESPA of Brazil, the
volume of negotiations using MILA’s platforms and the liquidity of the combined stock markets have not
reached the desired levels. This is for two main reasons: (1) the regulatory challenges pending to implement
stage 2 of MILA (see section D(i) above); and (2) the lack of knowledge of investors and issuers of the
benefits of negotiating securities through MILA. A more aggressive and educational campaign on MILA
has to be conducted – mainly by the authorities of each of the Member Countries – to show the potential
benefits of business conducted through MILA, which were described at the beginning of this section.
iii. Pacific Alliances: governmental action and proposed treatment and agreements
The Pacific Alliance is a regional and economic integration initiative whose members are the same
Member Countries of MILA, and it was created in 2011. The objective of this alliance is to build an
area of deep economic integration to achieve the free circulation of goods, services, capital and
persons. Furthermore, it was created as a platform for trade integration, among other objectives, to
foster economic development and growth.
Taking into consideration the above, MILA has an important role in this integration process. Allowing
the Member Countries to have a free trade of their securities with equal regulatory standards will
enhance the economic growth of the Member Countries and development of their corporate sectors.
iv. IPOs of companies in MILA
During 2017, several companies performed IPOs through the stock exchange markets that
integrate MILA.15 Among the issuers were companies such as Cencosud SA, Clínica Las Condes SA,
Parque Arauco SA, COFACE Seguro de Crédito Perú SA, Colegios Peruanos SA and HDI Seguros SA.
However, and as mentioned before, current regulations do not allow performing IPOs without
the joint authorisation of each of the authorities of the Member Countries that integrate MILA.
We believe that allowing issuers to file a single authorisation request with any of the authorities to
perform an IPO in any of the Member Countries would substantially increase the number of IPOs
in MILA because fewer regulator y obstacles would make the process faster and less costly.
13 See http://mercadomila.com/datos-del-mercado/capitalizacion accessed 27 August 2018.
14 See http://mercadomila.com/datos-del-mercado/volumenes accessed 27 August 2018.
15 According to MILA.
Doing Business in Latin America OCTOBER 2018 119
Costa Rica
120 Doing Business in Latin America OCTOBER 2018
VI. Costa Rica
A. Foreign investment
Costa Rica has long been recognised for being open to foreign investment. Its stable social climate,
highly educated workforce and solid legal framework make the country a favourable ecosystem for
foreign investors. Just between January and September 2017, Costa Rica received US$2,165.6m in FDI.
The Ministry of Foreign Trade (El Ministerio de Comercio Exterior (‘COMEX’)), the Export
Promotion Agency (La Promotora del Comercio Exterior de Costa Rica (‘PROCOMER’)) and the
Investment Promotion Agency (Coalición Costarricense de Iniciativas de Desarrollo (‘CINDE’)) all
provide information and resources for potential foreign investors in Costa Rica.
i. Authorisations versus limitations or prohibitions
a. absence of limitations
Generally, there are no limitations or prohibitions on foreign ownership or investment in Costa
Rica, and prior approval or special registration is not required. The only exception applies to energy
projects, terrestrial maritime zone concessions and border area concessions, which limit the equity
ownership of foreign investors in a specific project to 65 per cent in energy projects and 50 per cent
in the two other cases.
b. fair and equitable treatment
Following the fair and equitable principles contained in the Constitution, nationals and foreigners
are treated equally under the law. All investors, foreign or domestic, must fulfil the same basic
requirements to organise and operate a business in Costa Rica.
c. free choice of law
With the exception of government contracts and certain cases that require the application of Costa
Rican law (eg, employment contracts), parties to a commercial agreement can freely choose the
governing law of the contract. Furthermore, parties may agree to submit disputes arising under such
an agreement to arbitration or other alternate means of dispute resolution, or to the Costa Rican
courts or the courts of a foreign jurisdiction.
d. operation permits
Any person or business entity wishing to engage in commercial activity must register as a taxpayer
before the General Directorate of Taxation (Dirección General de Tributación (DGT)). The
applicant will be granted a Taxpayer Identification Number to be used when paying and filing
national taxes.
Doing Business in Latin America OCTOBER 2018 121
Furthermore, if the investor seeks to operate facilities in the country, a series of local permits will be
required, including a business licence, issued by the respective municipality, and a health permit,
issued by the Ministry of Health. Some business activities, such as mining, energy or high-risk activities
in general, require an environmental feasibility permit granted by the National Environmental
Technical Secretariat (Secretaría Técnica Nacional Ambiental (‘SETENA’)), prior to requesting the
health permit from the Ministry of Health.
Finally, in order to hire employees, a person or business must register before the Costa Rican Social
Security (Caja Costarricense de Seguro Social (CCSS)). All employees hired must be reported to
the CCSS. Additionally, the employer must also obtain workers’ compensation insurance from the
National Insurance Institute (Instituto Nacional de Seguros (INS)) and insure all employees under
this policy.
ii. Treatment of foreign investment in infrastructure initiatives and PPP projects
a. concessions in general
In December 2016, the Costa Rican Government issued a regulation for procuring PPPs called
the Regulation for Public–Private Collaboration (‘Regulation 39,965’) to encourage this type
of collaboration between the public and private sector. This regulation has to comply with the
procurement legal framework of the country, such as General Law on Concessions of Public
Works with Public Services (‘Law No 7,762’), as well as the General Regulation on Concession
of Public Works with Public Services Regulation (‘Regulation 27,098’), and the Regulation of
Unsolicited Proposal Projects of Public Works Concession or Public Work with Public Service
Concession (‘Regulation 31,836’). Other related laws are Article 3 of the Government Procurement
Law (‘Law No 7,494’); Constitutive Law of the Aqueduct and Sewer Authority (‘Law No 2,726’);
Telecommunication Sector Modernisation Law (‘Law No 8,660’); Municipal Code (‘Law No 7,794’);
and Regulatory Law of the Activity of the Mixed Economy Companies (‘Law No 8,828’). This last law
is intended for projects of municipal interest and not for those of national coverage. There are also
two specific laws created to promote the improvement of two of the major Costa Rican highways: the
Law on the Development of Public Works in Corridor San José-San Ramón through Trusts (‘Law
No 9,292’); and the Law on the Development of Public Works in Corridor San José-Cartago through
Trusts, (‘Law No 9,397’).
However, Costa Rica does not have a specific legal framework for PPPs. Regulation 39,965 mentioned
above was issued based on Article 55 of Law No 7,494, but there is no legal framework for PPPs in
Costa Rica different from the General Law on Concessions and the two new specific laws that were
created to improve two of the country’s major highways.
Pursuant to Law No 7,762, and its regulation, the Costa Rican Government can grant a private entity a
concession to develop a public work or provide a public service; the concession is established through
a contract between the public and private entities. A concession may be granted for the construction
of any public work or provision of any public service, provided there is a legitimate public interest.
Certain activities, such as electricity, telecommunications, postal services, lottery and health, have
their own special laws and regulations regarding concessions.
122 Doing Business in Latin America OCTOBER 2018
Generally, the concession is granted through a public tender or bidding process; this process may be
initiated either by the Costa Rican Government entity or the private party (‘unsolicited proposals’).
The process is composed of four stages: (1) project development, planning, preliminary financial
and environmental feasibility studies; (2) preparation of tender and bids; (3) bidding, concession
awarding and contract signing; and (4) construction and/or operation of the project.
The governmental entity responsible for promoting, developing and implementing public works’
concessions is the National Concessions Council (Consejo Nacional de Concesiones (CNC)), an
entity associated with the Ministry of Public Works and Transport (Ministerio de Obras Públicas y
Transportes (MOPT)).
With the exception of concessions in energy generation and transmission, and concessions in the
terrestrial maritime zone, which have limitations on foreign participation, there are no restrictions
regarding foreign investments in concessions.
In addition, Law No 7,762 allows and briefly regulates unsolicited proposals, which are further
regulated in detail by Regulation 31,836.
According to Law No 7,762, the procuring authority will examine unsolicited proposals, and if
considered feasible, of public interest and consistent with the National Development Plan, shall
procure them.
The process to evaluate unsolicited proposals is regulated in detail in Regulation 31,386. Article
14 summarises the process, explaining that the private sector proposal will be in accordance with
the procedure laid down in following articles and comprise two stages. In the first (‘application’),
the proponent will deliver the information and preliminary studies of the project – profile or
prefeasibility level – depending on the nature and magnitude of the project, so that the procuring
authority can assess whether the project lies within its sphere of competence, whether it is possible
to be granted in concession of public work or work with public service, and whether there is public
interest in their implementation.
In the case that the procuring authority, in a duly reasoned decision, indicates that there is public
interest in the project in accordance with the terms approved by the administration, a second stage
(‘proposition’) will start in which the proponent will submit the necessary studies to determine the
technical and financial feasibility, and their social, environmental and legal feasibility.
Article 20 of Law No 7,762 states that the original proponent will participate in equality with other
bidders in the competitive procurement process to award the concession. Following this provision,
Article 24 of Regulation 31,836 establishes that the procuring authority will be ultimately responsible
to prepare the public procurement notice and, if the unsolicited proposal is accepted, will proceed to
the call for tenders in maximum of one year from the final approval of the unsolicited proposal. Also,
Article 36 of the same regulation establishes that the procurement process will follow the same rules
applicable for other concessions.
According to Article 31.2 of Regulation 31,836, if the procurement process results in a signed
contract and the original proponent is not the winner or part of the winning consortium, then
the proponent will have the right to recover the amount that the administration has accepted as
development costs projected and established in the bid.
Doing Business in Latin America OCTOBER 2018 123
b. concessions in energy
The generation and transmission of electricity is reserved for the state. However, by virtue of the
Law Authorising Autonomous or Parallel Electric Generation (Law No 7,200), the Costa Rican
Government can grant a concession to a private party for the commercial generation of electricity.
The National Electricity Service (Secretaría Nacional de Energía (SNE)) may grant concessions for
operating power plants of limited capacity of up to 20,000 KW, and for a period of up to 20 years, a
term that may be extended. The energy generated by the private concessionaire would then have to
be sold to the Costa Rican Electricity Institute (Instituto Costarricense de Electricidad (ICE)) or the
National Power and Light Company (Compañía Nacional de Fuerza y Luz (CNFL)), given that only
public entities are authorised to distribute energy in the country.
Given that Law No 7,200 declared the purchase of energy of public interest, a company wishing to
obtain a concession and consequently sell energy to the state cannot be wholly owned by foreign
persons; that is, at least 35 per cent of the company’s stock must be owned by Costa Rican citizens.
c. concessions in the terrestrial maritime Zone
The Terrestrial Maritime Zone Law (Law No 6,043), enacted in 1977, created the terrestrial maritime
zone, which consists of the first 200 metres of land inward from the main high tide line along the
shores of the Pacific Ocean and the Caribbean Sea. The terrestrial maritime zone is divided in two
parts: the first 50 metres is called the public zone and the inner 150 metres is called the restricted
zone. Private parties are not allowed to use the public zone for any purpose. Investors may use the
restricted zone through a concession granted by the local governments (ie, municipalities). The
concession is a contract between the respective municipality and the private counterparty, whereby
the former gives the latter the authority to develop the restricted zone for personal or commercial
purpose. Concessions are granted for a minimum of five and a maximum of 20 years. Prior to the
expiration of the concession, a renewal may be obtained from the respective municipality.
There are limitations regarding foreign investment in beachfront properties with concession rights.
For example, a non-Costa Rican company, or a non-Costa Rican individual that has not lived in Costa
Rica for at least five years, cannot be granted concession rights in the Restricted Zone.
However, a foreign investor does have legal options to indirectly acquire concession rights in the
Restricted Zone. The most common way is through stock ownership of a Costa Rican company that
holds the concession rights. It should be noted, however, that pursuant to the Terrestrial Maritime
Law, the foreign investor cannot own more than 50 per cent of the stock of the company holding
such rights.
iii. Treatment of foreign investment in oil and gas, and mining activities
There is currently a ban on oil exploration and extraction in Costa Rica’s continental and marine
territory. In 2011, the Costa Rican Government signed an executive decree establishing a moratorium
for oil exploration and extraction, and in July 2014, the President signed Executive Decree No
38,537-MINAE, extending the moratorium to 15 September 2021. Analysts have stated that the
moratorium appears to exclude exploration and extraction of natural gas.
124 Doing Business in Latin America OCTOBER 2018
Regarding activities concerning the thermal processing of solid waste to produce biogas, in
September 2015 a regulation on the operational conditions and emission control of co-incineration
facilities of solid waste came into force (Executive Decree No 39,136). This regulation does not
contain any disposition concerning direct foreign investment. Thus, provided the facility complies
with all the requirements and conditions set forth in the regulation, a company may operate
regardless of the equity ownership of foreign investors.
Mining exploration and extraction is permitted, but is limited in scope. Pursuant to the Mining Code
(Law No 6,797), and its Regulation 29300-MINAE, individuals or companies wishing to engage in
mining exploration must request a permit from the Directorate of Geology and Mining (Dirección de
Geología y Minas (DGM)). The permit is issued for three years and may be extended for a period of
two years. During this term, the permit holder may obtain an extraction concession from the DGM.
The extraction concession may be issued for a maximum of 25 years and may be extended for a
period of ten years.
Pursuant to the Law No 6,797, mining of most minerals and natural resources is permitted, with
certain exceptions, such as oil, water and carbon, among others, which are reserved for the state.
With the exception of oil, these may be given in concession to third parties. As of 2010, open pit
metal mining is strictly prohibited.
In general, oil, gas and mining activities are a sensitive subject in Costa Rica, given the country’s
great focus on environmental protection and conservation. Therefore, concessions are limited and
investors may face a great deal of pressure from activist environmental groups in the country.
It should be noted that these bans and limitations apply to all investors alike, whether foreign or
domestic.
iv. Treatment of foreign investment in real estate (rural and urban properties)
It is no wonder that foreign investors have shown an interest in Costa Rica for a long time: Costa Rica
has been recognised as a regional leader in Latin America for social and economic development.
It guarantees economic stability with the highest standard of living, and political stability with the
longest-standing democracy in Latin America. As a result, the business environment in Costa Rica is
generally stable.
Costa Rica enjoys highly developed communication, electric and transport infrastructure, and maintains
a self-sufficient power supply. ICE controls several hydroelectric power plants that produce enough
electricity to fulfil the country’s needs. New electricity production projects that include Eolic and
geothermal generators, are currently being developed to meet the country’s needs for the next century.
Costa Rica has over 15,000 miles of roads that run from coast to coast. There are two international
airports (Juan Santamaría Airport, which is located in Alajuela and offers access to principal
markets all over the world, and Daniel Oduber Airport, which is located in the western province of
Guanacaste and is used particularly for tourism) and several small airports around the country for
local flights in the metropolitan area; the most important is Tobías Bolaños in San José.
Doing Business in Latin America OCTOBER 2018 125
Furthermore, thanks to its geographical position, Costa Rica has two international ports covered
by important shipping lines on both the Atlantic and Pacific coasts. The Costa Rican Government
welcomes foreign investment. All major political parties back this positive attitude. Since 1982, Costa
Rica has consistently improved investment conditions. CINDE, an association of private sector leaders,
actively promotes investment through offices located in several countries.
Past governments have been moving away from state control and towards an open economy in
anticipation of FTAs with nations such as the US, Mexico (already in force), Chile, Panama,
Trinidad and Tobago, Venezuela and Colombia. A number of bilateral investment treaties (BITs)
have been signed, such as those with Germany, France, Taiwan, Spain, Switzerland, Canada,
Chile, the United Kingdom, Venezuela, Argentina, Holland, Paraguay, South Korea, Poland and
others. Foreign investment in Costa Rica is strongly encouraged, as evidenced by the wide range
of incentives available for different sectors, such as export orientated operations (free trade
zones and special drawback), mining, agriculture, tourism and the forest industr y. As tourism
and the forest industr y are directly related to real estate, we consider it appropriate to explain
the incentives.
a. tourism incentives
Costa Rica is a tourist destination with a wide spectrum of tourist opportunities, including adventure
tourism, eco-tourism, conventional five-star tourism and medical tourism.
The Costa Rican Government has implemented strong environmental legislation that has promoted
the conservation and protection of an important extension of natural ecosystems located in the Costa
Rican territory.
The hotel sector may obtain different incentives to operate in Costa Rica. A very attractive incentive is
the Tourism Declaration that the Costa Rican Tourism Institute (Instituto Costarricense de Turismo
(ICT)) can issue for companies and activities that meet established requirements, which is a prior
step necessary for the award of a Tourism Contract, which grants benefits and tax incentives to
individuals or legal entities. Non-compliance with the obligations set forth in the Tourism Declaration
implies the immediate termination of the Tourism Contract. Applicants to this contract must comply
with legal, financial and technical requirements.
Once granted, the agreement will contain the name of the beneficiar y, description of activity,
detailed list of incentives, list of duties and obligations, term of the contract and any other
information included in the agreement. Tourism contracts with hotels, for example, have a
maximum legal validity of 25 years. Beneficiaries must submit yearly reports to the ICT, within 90
days after the end of the fiscal year indicating the use given to all exempt goods. Beneficiaries of
the incentives granted by the Tourism Incentives Law are not allowed to sell, lease, lend or in any
other way negotiate the exonerated goods without prior approval by the ICT, or to use the goods
for unauthorised purposes.
Specific incentives and benefits that can be granted to ser vice providers in the hotel business are
as follows:
126 Doing Business in Latin America OCTOBER 2018
• exemptions to import taxes or taxes on local purchases of goods for the operation or establishment
of new companies, or for those companies already established that offer new services;
• conferment of municipal licences and permits that are required by the companies for the
development of their activities within 30 days of application, including an alcohol licence for
local or imported alcohol within the authorised establishment; such a licence can be used in
the buildings and places that the licence includes, and authorises but cannot be used within
another establishment;
• authorisation from the Costa Rica Central Bank for Costa Rican companies engaged in
international tourism to function as auxiliary cashiers to provide currency exchange services to
foreign tourists on behalf of such institution. The contract between the Central Bank and the
company shall establish terms and conditions for reimbursement transfers; and
• other incentives and benefits may apply for other tourism activities. Thus, the law and its
regulations contemplate in its articles incentives and benefits that the enterprises of the
following branches can opt for: tourist air or water transport companies, and tour operators,
among others.
b. forestry incentives
Under Law No 7,575, the Costa Rica Government grants Certificates for Forest Conservation
(Certificado para la Conservación del Bosque (CCB)) to compensate proprietors or landowners for
environmental services rendered to Costa Rica through the preservation of forests that are located
on the respective property. However, prior to the application of the certificate, the law requires a
certification that no lumbering activity has taken place during the two preceding years and that there
will be no lumbering during the duration of the certificate, which carries a minimum of 20 years.
These certificates are marketable instruments that may be bought and sold or used for the payment of
tax liabilities or other contributions. The value of the certificates has not yet been determined under
the new forestry regime. The holders of the certificates are also entitled to the following benefits:
• full property tax exemption;
• full asset tax exemption; and
• special protection by police authorities against squatters that may invade the property.
The certificates must be registered with the National Registry as lien against the property for a
specific period that is indicated in the signed contract. Another incentive exists for property owners
who manage natural forests and provide environmental services to Costa Rica or those who engage in
reforestation activities. People that engage in reforestation activities without the use of resources from
prior forestry regimes will enjoy an additional incentive of a full income tax exemption on all income
derived from the commercialisation of their products. In cases in which the reforestation activities
have been financed with benefits granted under prior forestry regimes, the income tax exemption
would be proportional.
Doing Business in Latin America OCTOBER 2018 127
v. Treatment of foreign investment in agribusiness activities
In Costa Rica, agribusiness activities occupy around ten per cent of the country’s land use and
represent almost 6.5 per cent of the national GDP. The high quality of its products, including coffee,
bananas, pineapples, tropical fruits and ornamental plants, among others, are well known worldwide,
and those products are frequently exported to Europe, North America, China and Japan. The
country is the main exporter of fresh pineapples in the world, and during winter in the Northern
Hemisphere, it represents the leading melon provider for Europe.
The main specific objectives pursued by public policies for the next few years in this matter are the
increase of agricultural productivity using the same land extensions; more efficient use of natural
resources; reduction of the amount of energy required for agricultural process; and the incorporation
of clean and renewable energies. Also, the production processes must be executed under social and
environmental responsibility policies, looking forward to Costa Rica accomplishing international
recognition as a carbon-free country.
Costa Rican fresh products are guaranteed by the GLOBALGAP, which certifies good agricultural
proceedings during the entire productivity process, and this is expected to concede economic
benefits in the near future. According to environmental policies and legislation in force, Costa Rica
is promoting environmentally friendly products, with standard agricultural proceedings that must
include organic agriculture, green products, free/fair trade and the incorporation of biotechnology
techniques. Also, according to the trend that concedes priority to organic products, many exported
commodities are produced under 100 per cent natural procedures, which are also certified under
high-quality standards, according to Ocia, BSC, OkO, Ecocert and Skal.
PROCOMER and CINDE work together to promote and offer all the facilities that foreign investors
require to settle agribusiness in Costa Rica.
vi. Treatment of foreign investment in the rendering of public services
Costa Rica has an open and non-discriminatory government procurement system and concession
regime, under which nationals and foreigners can freely participate and bid for public contracts.
a. public contracting in costa rica
Public contracting in Costa Rica regulates the form in which the Costa Rican Government plans,
selects its partner, executes, controls, supervises and closes its procurement processes on a balance
between the principle of legality and private law.
This type of contracting has a constitutional basis, specifically Article 182 of the Constitution,
which establishes that contracts for the execution of public works held by government authorities,
municipalities and autonomous institutions, purchases made with the funds of those entities, and
sales or leases of assets belonging to them will be developed by public tender in accordance with the
law governing the amount involved.
128 Doing Business in Latin America OCTOBER 2018
b. concession regime
The award of concession agreements to private companies for the construction, maintenance,
conservation, restoration and operation of works, services and other infrastructure projects is
governed by a special law, the Administrative Contracting Law and its regulations, as well as the
General Law on Concession of Public Works with Public Services. Furthermore, an executive decree
was recently enacted to regulate the Public Private Collaboration Agreement, which is another PPI to
which the Costa Rican Government may resort to develop infrastructure projects.
Public concessions generally grant the right to build and operate infrastructure projects, and collect
tolls and other fees from users of the project under the supervision of a regulatory agency. The award
of concessions regarding power generation and distribution, telecommunications and ports, among
others, are governed by sector-specific laws and are subject to different rules.
Foreign companies can participate by setting up a subsidiary, registering a branch in Costa Rica or
entering into a joint venture arrangement with local or foreign companies already established in the
country. As a general rule, the government agency seeking to purchase or grant a concession for the
goods and services is the entity responsible for conducting the procurement process and awarding
the contract. Contracts are awarded to the qualified participant that submitted the best bid in
accordance with the tender documents.
Once the contract is awarded, the provider or supplier and the government agency enter into a final
agreement in the form prescribed by the tender documents. This contract must then be recorded
and countersigned by the Comptroller General of Costa Rica.
As mentioned above, Costa Rica has a generally open and non-discriminatory government
procurement system and concession regime, under which nationals and foreigners can freely
participate and bid for public contracts under equal conditions. Notwithstanding the foregoing, one
main exception to this general rule remains, which is the Maritime Zone Law.
c. maritime Zone law
The Maritime Zone Law represents one of the limitations to the treatment of foreign investment in
Costa Rica’s public procurement system and concession regime. Article 31 of said law states that only
Costa Rican natural or legal persons who may have concessions may intervene in tourism development
in the maritime zone, and foreign entities may intervene if they constitute tourism companies for which
more than 50 per cent of the development capital belongs to Costa Rican citizens.
Concessions in tourist areas require approval by the ICT, while in other areas of the maritime
zone, such approval corresponds to the Rural Development Institute (Instituto de Desarrollo Rural
(‘INDER’)) and Costa Rican Housing and Urban Planning Institute (Instituto Nacional de Vivienda
y Urbanismo (INVU)). If the concession is referred to an island or islet sea, or part thereof, then the
approval of the legislature is required.
Furthermore, Article 47 of the Maritime Zone Law provides that no concessions will be granted to:
Doing Business in Latin America OCTOBER 2018 129
• foreigners who have not resided in the country for at least five years;
• corporations with bearer shares;
• companies or entities domiciled abroad;
• entities established in the country by foreigners; and
• entities for which more than 50 per cent of shares, quotas or capital correspond to foreigners.
Entities that already have concessions may not assign or transfer quotas or shares, nor its partners, to
foreigners. In any case, transfers made in violation of the above will have no validity.
d. the cabotage service law
In order to exploit the coastal shipping service in a regular and ongoing way, it is essential to
obtain a licence from the Costa Rican Government through the Public Security Ministry, subject
to the provisions of said law and its regulations. This law used to represent one of the limitations
to the treatment of foreign investment in Costa Rica’s public procurement system and concession
regime. Nonetheless, Article 7 of the Cabotage Service Law was declared unconstitutional by the
Constitutional Chamber’s Resolution 6,837 of 29 April 2009, in which it states that the granting of the
correct line to exploit said service, will be granted to Costa Rican citizens and foreigners to provide
equal conditions if they comply with certain limitations established by law and by the Constitution.
The granting of new lines will be made through public bidding and awarded to people or companies
offering greater guarantees of security and service, preferring, in equal conditions, those that are
organised and have provided services of this nature. In order to ensure the compliance of their
obligations, dealers will constitute a reservoir or guarantee established by the Public Security Ministry.
B. Rendering of public services
i. General framework
Costa Rica does not have general restrictions for rendering public services. However, limitations
related to public property and state monopolies do exist. Private entities can offer public services
if, in compliance with national regulations, they were previously awarded authorisation from the
corresponding institution, usually a ministry. By means of a public grant procedure, the state may
contract the execution of public works and the rendering of public services with private parties.
Public services regulation is not a matter of a sole national entity, but of several authorities that
regulate the diverse public services. The Regulatory Authority of Public Services (Autoridad
Reguladora de los Servicios Públicos (‘ARESEP’)) regulates public utility services, such as water,
electricity, sanitation, postal services, fuels and terrestrial, maritime and aerial transport. Meanwhile,
the Superintendence of Telecommunications (Superintendencia de Telecomunicaciones (‘SUTEL’)),
Superintendent General of Financial Institutions (Superintendencia General de Entidades
Financieras (‘SUGEF’)), Superintendency of Insurance (Superintendencia General de Seguros
130 Doing Business in Latin America OCTOBER 2018
(‘SUGESE’)) and Superintendence of Pensions (Superintendencia de Pensiones (‘SUPEN’)) regulate
the rendering of telecommunications, banking, insurance and pensions services, respectively.
ii. Governmental monopoly versus private initiative
In Costa Rica, antitrust and competition law are mainly regulated by Law No 7,472 for the Promotion
of Competition and Effective Consumer Defence and Executive Decree No 37,899. Law No 7,472 sets
legal principles and regulations that seek to safeguard and promote competition and free market
participation by restricting and forbidding monopolistic practices and concentrations. This law
assigns the responsibility to investigate and correct anti-competitive practices to the Commission for
the Promotion of Competition (Comisión para Promover la Competencia (‘COPROCOM’)). This
law is applicable to monopolies, absolute or relative; mergers; and unfair competition. Acquisitions
carried out for the purpose of diminishing, affecting or impeding free market competition for law
also prohibits similar, identical or substantially related goods.
Under Costa Rica’s antitrust and competition law, absolute monopolistic practices (horizontal
agreements) are those that have direct effects on price fixing, quantitative restrictions of goods or
services, and arrangements made by competitors to divide the market. Relative monopolistic practices
(vertical agreements) refer to those that have direct effects on competitors, inducing them to leave
the market, limiting supply or enacting predatory pricing. According to Law No 7,472, concentration
implies the merger, acquisition of control, or any other law whereby two or more companies’
partnerships, shares, equity, trusts or assets in general are concentrated into one, with the object
or purpose of diminishing, affecting or impeding free market competition for similar, identical or
substantially related goods.
On 5 April 2013, an important reform to Law No 7,472 came into force that shifted the approval of
concentrations of companies subject to this law away from industry-related administrative authorities.
The new procedure requires previous and mandatory reporting before the COPROCOM. In the
case of the telecommunications industry, SUTEL still shares the responsibility of investigating and
correcting anti-competitive practices in the sector.
The aforementioned law clearly states that if any of the following situations occur, then the merger
must be notified to COPROCOM, regardless of the assessment of the effects that the merger or
acquisition may or may not have on market competition: (1) the total amount of the productive assets
of all the economic agents involved and their headquarters exceed 30,000 minimum wages; (2) the
sum of the total revenue generated in the country during the last fiscal year of all the agents involved
exceeds 30,000 minimum wages; or (3) one of the companies involved in the merger has productive
assets or income that exceeds 30,000 minimum wages. Executive Decree No 37,899 has clarified that
only mergers or acquisitions that involve at least two companies that hold operations in Costa Rica
and meet at least one of the aforementioned conditions must undergo the previous and mandatory
reporting procedure before COPROCOM.
It is also important to note that, as part of the application process to be admitted by the OECD,
the Costa Rican Congress is discussing and making efforts to approve Bill No 19996, which aims to
correct the weaknesses of the Costa Rican competition authority (COPROCOM) that were pointed
out by the OECD in the 2014 Peer Review. Thus, the bill proposes to transform COPROCOM into
Doing Business in Latin America OCTOBER 2018 131
the National Council for Competition (Comisión Nacional de la Competencia (‘CONACOM’)).
This council would have greater technical, administrative and economic independence than
COPROCOM, which is currently part of the Ministry of Economy, Industry and Commerce, as well as
greater powers to control and sanction anti-competitive practices.
As part of the efforts to have a much more independent competition authority, the bill also
proposes important modifications such as: (1) full-time councillors, rather than the five part-time
commissioners who currently make up COPROCOM; (2) more resources and powers to perform
market studies and carry out inspections; (3) faculties to impose punitive fines; and (4) clearer
structure of the proceedings, depending on the complexity of the matter.
iii. Privatisation general rules
Costa Rica does not have a specific framework for the privatisation of assets, companies or services,
and does not have an active privatisation agenda. During the 1980s, Costa Rica initiated limited
public sector reforms, seeking to increase state decentralisation of public services, thus allowing
the Costa Rican Government to contract operations with private suppliers, and designating the
Ministry for National Planning and Economic Policy (Ministerio de Planificación Nacional y
Política Económica (‘MIDEPLAN’)) as the government’s privatisation administration. Nonetheless,
privatisation initiatives have not implied the actual sale of state-owned companies and institutions to
the private sector. Instead, Costa Rica allowed for concessions and authorisations in public service
areas, assigning the management or provision of certain public services to private individuals.
As mentioned, ARESEP is the entity that regulates water, electricity, sanitation, postal services,
fuel, and terrestrial, maritime and aerial transport public services, setting norms, regulations and
technical standards on these matters. In order for private companies to be able to become a provider
of regulated services, they must: (1) comply with ARESEP’s requirements; (2) obtain the required
licence or concession from the Environmental and Energy Ministry (Ministerio de Ambiente y
Energía (‘MINAE’)); and (3) be registered before the Costa Rican Public Registry. Furthermore,
state-owned enterprises have their own independent board of directors, internal operating
regulations and procedures, and may establish specific public tenders in order to allow private parties
to manage or provide certain services.
The most restricted sectors for privatisation have been electricity, petroleum, telecommunications and
insurance. After the Dominican Republic–Central America FTA (‘CAFTA-DR’) entered into force, the
liberalisation and privatisation process in Costa Rica accelerated, and the telecommunications and
insurance monopolies were finally opened.
Costa Rica reserves the right to legislatively grant concessions for the transmission, distribution
and trade of electricity based on service demand. Priority will be given to concessionaires already
supplying the service. In the telecommunications sector, important regulatory framework changes
took place with the enactment of the General Law of Telecommunications, new regulations for the
supply and quality of services, and the creation of new governmental agencies, such as SUTEL, the
Ministry of Science, Technology and Telecommunications (Ministerio de Ciencia, Tecnología y
Telecomunicaciones (‘MICITT’)) and the National Telecommunications Fund (El Fondo Nacional
de Telecomunicaciones (‘FONATEL’)).
132 Doing Business in Latin America OCTOBER 2018
As stated above, wireless services cannot be permanently removed from state ownership. Private
parties may supply wireless services through the following models: (1) authorisations, where they are
authorised to provide services through wireline networks or networks owned by other operators; and
(2) concessions, granted to those providing wireless services.
The insurance sector monopoly was eliminated in 2008 when the law regulating the insurance
market came into force. SUGESE was created as the super visor y body in charge of overseeing
the legal and technical requirements for the opening of the insurance market. Pursuant to the
aforementioned law, and in order to provide ser vices, private entities must be authorised to offer
insurance products and ser vices.
iv. Limitations and/or prohibitions to private parties in the rendering of public services
According to Law No 7,494, foreign private parties may participate in a public bid to obtain a
concession or contract with the public administration. However, private parties may never render
public services that are considered part of the ‘ordinary activity’ of the public administration, such as
granting permits or licences.
Pursuant to Article 121, subsection 14 of the Costa Rican Constitution, the state may grant the
possibility of using, developing and benefiting from goods and services of its property to a private
party through a public concession. Concessions are regulated by law, executive decrees and
stipulations held in the concession contract between the state and party. The main applicable laws
are the General Framework for Public Administration Law; Law No 7,494 regulating administrative
contracting; Law No 7,762 regulating concessions for public services and public works; and Law No
8,422 against corruption and illicit enrichment in a public function. Public institutions may sub-
contract with private parties in order to successfully provide certain public services if their organic law
allows it, as is the case of the Costa Rican Institute of Electricity and the Costa Rican Water Supply and
Sewerage Institute.
Finally, the public administration may also arrange interested management contracts, with private
entities in which the administration itself renders a certain public service by means of a private
manager (eg, the interested management contract of the Juan Santamaría International Airport).
C. Real estate
i. Rural properties: limitations for private parties
The definition of rural properties or agricultural parcels implies that they are destined for
agricultural purposes. The Regulation of Urbanism and Fractionalisation issued by the INVU has
established that the minimum size of such properties must be at least 5,000 square metres, and the
survey for such properties must indicate that their use is ‘agricultural’. Construction restrictions
may also apply as the regulation referenced allows a maximum coverage of 15 per cent. The density
allowed as well as a height restriction is established by each local government through its regulatory
plan and its zoning regulations.
Doing Business in Latin America OCTOBER 2018 133
It is not allowable to utilise the land for any use that is not compatible with the uses allowed and
determined by the specific zoning plans of each local government. In order to verify compliance
with the use pretended for a specific property, the owner must obtain a zoning certificate issued by
the municipality. This certificate will indicate details about density allowed, coverage (as said, the
maximum allowed is 15 per cent), setbacks and others.
The National Housing Institute will not allow the development of a property that is located outside
of the zoning limits if it is far away from public services and facilities due to the high cost of such
services and facilities, due to distance to inhabited areas, or because of any other health or security
reason. If the proposed project is located outside the zoning limits but utility services are available, or
the property owner will cover their connection costs, the National Housing Institute has no grounds
to deny permission.
For this type of property, it is strongly recommended to keep the property lines of the land clearly
visible by means of a fence or 3-metre width lane.
According to the Law for Use, Management and Conservation of Soil No 7,779, an owner can request
a special tax incentive up to 40 per cent exemption of the property tax payment for land that is
being used according to its classification, and good practices of management, conservation and soil
recuperation are applied.
It is possible to request a change in the classification of the land through the Ministry of Agriculture,
which will review and take into consideration the national plans and area plans, as well as regulations
provided by SETENA and criteria issued by the Committees for the Use, Management and
Conservation of Soils by Area, and will determine if a change of use is feasible or not.
ii. Urban properties: limitations for private parties
Each local government has the obligation to issue a regulatory plan for its territory in order to
protect interests related to health, security, comfort and public welfare for its community. This
regulatory plan must contain regulations related to the minimum size of a lot, the use of land, and
the distribution of properties dedicated for residential use and commercial, industrial, education
or recreational use. Even if all regulatory plans share some common values, they present different
regulations depending on the specific needs of the community. It is thus recommended to request a
zoning certificate in the corresponding municipality, which shows the use permitted for the property
in order to be able to verify the possibility of carrying out the project proposed on the property.
In the absence of a regulator y plan, general guidelines issued by the National Housing Institute
will be applicable. These general guidelines include rules related to the size of the property; the
obligation to perform a preliminar y study of soil and terracing for land with slopes greater than
15 per cent in order to determine the minimum size of a lot; and maximum height of a building,
among others.
In the case in which the property is located near an airport, the Directorate of Civil Aviation will
indicate specific requirements related to height; and should the property be located next to a railway,
the Rail Institute shall issue the respective alignment and setbacks to the railway.
134 Doing Business in Latin America OCTOBER 2018
iii. Expropriation events
The property right is a constitutionally protected right in Costa Rica. As in most countries, Costa
Rican law recognises eminent domain; however, the Costa Rican legal system provides a compensation
system in cases of expropriation. Expropriation can only be carried out in cases of a legally verified
public interest.
Law No 7,495 from 1995 regulates aspects related to expropriation, including provisions such as:
• declaration of public interest;
• that appraisal of a property’s value must be rendered in a time frame of one month; once
rendered, the administration proceeds to inform the owner of such an appraisal, who will be
given five business days to accept or reject the amount established by the appraisal;
• if the appraisal is accepted, then the owner will be paid; if the appraisal is rejected, a special
procedure in the Costa Rican courts is initiated to determine the fair value of the land; and
• in the case in which the property is not used for its intended purpose within a time frame of ten
years, the original owner (or his/her heirs) may request in writing that the property or portion
of property not used for public purposes be returned to the original owner. This request must
be stated within three years after expiration of the ten-year period, and the owner must cover
the current value of the property. Once the property is expropriated, the NPR takes note of
such a transfer in order to register the property under the Costa Rican Government’s name.
As part of the protection for consumers in the real estate market, due to the real estate crisis, the
Costa Rican Government enacted Decree No 37,899-MEIC (September 2013), by which all future
sales or presales of real estate development are regulated. This decree included the mandatory
registration of all real estate developers before the Consumer Support Office (Dirección de Apoyo al
Consumidor (DAC)) and the obligation to get pre-approval of option and sales contracts.
The new regulation includes minimum provisions required for future sales/presales. All real estate
development companies issuing future sales will become part of the List of Registered Companies
maintained by the DAC.
The new rules apply to contracts entered into with final consumers for the future sale of: (1) all types
of goods, such as real estate, apartments and houses; (2) memberships or affiliations in programmes
such as vacation plans, vacation clubs or similar structures; and (3) unbuilt real estate developments,
such as social and tourism centres and urbanisations and/or condominiums.
Contracts regulated by these regulations will be those in which performance by the seller/developer
depend on a future event. A contract for future sale that depends on a future event is defined as one
where a buyer and seller execute a contract for the purchase of a good, service and/or development
on a certain date, but the good, service or development is completed, provided and/or delivered to
the buyer at a later date. Moreover, the obligation to complete/provide/deliver the good, service
and/or development is assumed by the seller.
The other element to fall into this category for the application of the new provisions is that the
transaction is structured through an instalment plan, where the buyer is required to make partial
Doing Business in Latin America OCTOBER 2018 135
deposits and payments to the seller/developer before the real estate project is completed and the
transfer of title takes place. The registration filing therefore needs to include the plan for the future
sale of goods, services and/or developments (including the presale of real estate units).
The pre-approval of the intended contract for future sales shall be submitted before the DAC for its
approval. The DAC will review the contract template in order to determine if there are abusive or
unconscionable provisions such as those that would: (1) restrict the consumer’s statutory rights; (2)
exonerate the seller from the payment of damages; (3) grant unproportioned benefits to the seller;
or (d) allow the seller to unilaterally modify the contract. Moreover, the DAC will review the draft of
the contract to guarantee the proportional relation between the payments being made by the buyer
and the terms and conditions of the contract.
If future sales are performed without authorisation, a complaint may be filed before the National
Consumer Commission that may issue a precautionar y measure to cease future sales; refer the
case to the Prosecutor Office; and impose a fine. The administrative ruling of the precautionar y
measure will be communicated to the appropriate municipality, the Ministr y of Public Safety and
the Ministr y of Health.
The administrative fine that may be imposed by the current Consumer Protection statute could
amount to up to 40 minimum wage salaries for these types of events.
D. Development of ample/integrated capital markets and joint activities between Latin American countries
i. Merger of stock exchanges: attempts versus realities
In the 1970s, the country’s first stock exchange, BNV, was created and is currently regulated by
Securities Market Regulatory Law No 7,732. In 1993, the Electronic Stock Exchange was founded
(Electrónica de Valores de Costa Rica (‘BEVCR’)), and in 1999, a merger occurred between BNV and
BEVCR in which BNV prevailed. The public offering of securities, as well as the provision of security
intermediation services in Costa Rica are regulated by the General Superintendence of Securities
(Superintendencia General de Valores (‘SUGEVAL’)).
To promote, inter alia, capital investment, as well as the development of an equity market in Costa
Rica, the BNV created an alternative equity market for medium-sized, fast-growing companies called
Mercado Alternativo para Acciones; which operates under private placement rules.
The integration of the stock markets in the region is a project that has been analysed by Central
American stock exchanges for many years, with the goal of expanding opportunities for market
participants and providing issuers with access to a larger investor base. In 2007, the stock exchanges
in Costa Rica, El Salvador and Panama signed a cooperation agreement called the Central American
Markets Alliance (Alianza de Mercados Centroaméricanos (‘AMERCA’)) to facilitate securities
transactions and securities market integration in the Central American region.
An integration process between securities markets requires complex regulations. One of the main
obstacles for integration efforts has been the need for a common process to validate the offering of
136 Doing Business in Latin America OCTOBER 2018
securities that are authorised in the different markets (recognised jurisdiction rules), and the ability
for brokerage firms to cross-access information and trading within the integrated market.
ii. MILA market: current results and expectations
The MILA market is an initiative aimed at integrating the stock exchange markets of Chile, Colombia,
Mexico and Peru. While Member Countries maintain their regulatory autonomy and process
transactions in their local currency, they benefit from joint market growth. Through the integration of
capital markets, MILA aims to develop the capital market through the integration of the four countries,
and to give investors a greater supply of securities and issuers, and larger sources of funding.
MILA resulted from an agreement signed between the stock exchanges in Colombia, Peru and Chile
in 2009, aspiring to set up an equity exchange regional market. MILA began operating in 2011,
opening up opportunities for brokers from the three countries to sell and purchase shares from any
of their stock markets through local brokers. In December 2014, the stock exchange in Mexico joined
MILA. It does not look like Costa Rica will be joining this initiative in the near future.
iii. Pacific Alliances: governmental action and proposed treatment and agreements
a. pacific alliance
The Pacific Alliance is a regional integration initiative created on 28 April 2011 by Chile, Colombia,
Mexico and Peru. The Pacific Alliance aims to deepen economic integration and free trade, promote
the growth of its members’ economies, and serve as a forum for political interaction, and economic
and trade integration. Costa Rica has FTAs with the four countries. Costa Rica currently has an
Observer State Candidate status in the Pacific Alliance. In February and December 2014, Costa Rica
undertook initial steps towards starting its accession process in the first half of 2015. In March 2015,
however, the process was suspended due to outstanding results from technical cost benefit analyses.
Despite the beneficial results presented in late May 2015, Costa Rica is still cautiously expressing
interest in the accession process. The Ministry of Foreign Trade initiated a process of information
and consultation with the different sectors of civil society, with the aim of promoting a debate on this
issue. A data-based management process was also carried out to determine the possible results of a
possible inclusion of Costa Rica in this initiative.
b. wto
In July 2014, Costa Rica and 13 other members of the WTO started negotiating an Environmental
Goods Agreement. The aim is to promote sustainable global development and promote the access
of goods linked with technologies that allow the protection of natural resources, the management of
waste and the reduction of the effects of climate change, among others.
Also, Costa Rica is one of the 24 members of the WTO currently negotiating a plurilateral initiative on
trade in services (Trade in Services Agreement (TiSA)). Negotiations are based on proposals made by
members seeking the improvement of rules and the opening of markets, including financial services.
Doing Business in Latin America OCTOBER 2018 137
c. korea
Also, as an FTA in process, in February 2018, Costa Rica and the Republic of Korea signed an MOU
for the promotion of trade, investment and cooperation, in addition to the activities of the FTA
between the countries of Central America and the Republic of Korea.
This memo provides the basis for Costa Rica to learn from the Korean experience regarding the
design, implementation and evaluation of policy mechanisms to improve production capacities and
productivity, in the context of trade opening.
Costa Rica has concluded FTAs with several countries and regions, as follows:
d. caricom
Costa Rica has concluded an FTA with Caribbean Community (‘CARICOM’) countries that has entered
into force with Trinidad and Tobago (2005), Guyana (2006), Barbados (2006), Belize (2011) and
Jamaica (2015), and the aim of which is to strengthen trade and investment between Costa Rica and the
Caribbean countries. In November 2008, an FTA between Costa Rica and Panama entered into force,
including a chapter on financial services. Moreover, since 1 January 2009, Costa Rica has been part of
the Central America Free Trade Agreement (CAFTA), which contains provisions on financial services,
investment and, inter alia, capital flows and controls between its Member Countries.
e. china
The People’s Republic of China is one of the main players in the international economic context
and is Costa Rica’s second-largest individual trading partner after the US. Costa Rica and China
have traded since the early 1990s; however, it is since China’s accession to the WTO in 2001 that
this trade relationship has experienced steady growth. In June 2007, Costa Rica announced the
establishment of diplomatic relations with the People’s Republic of China, thus initiating a process
of greater economic and trade ties between the two countries. The FTA entered into force on August
2011. China is emerging as a market of high potential for the country due to its large size and a
population of more than 1,300 million people, of which Costa Rica can take advantage for different
market niches. The country is currently working on consolidating access to new products, as well as
identifying trade and investment opportunities to take full advantage of this trade instrument.
f. aacue
Costa Rica has concluded an Association Agreement between Central America and the EU
(‘AACUE’) that entered into force in October 2013. The agreement includes political dialogue,
cooperation and the creation of a free trade zone.
g. efta
The negotiation of the FTA with the European Free Trade Association (EFTA) states in 2014 was a natural
step in the process of consolidating the country’s foreign trade platform. In conjunction with the AACUE,
this treaty promotes preferential access for Costa Rican products on the European continent.
138 Doing Business in Latin America OCTOBER 2018
h. singapore
Another important FTA is that signed with the Republic of Singapore that entered into force in July
2013, and the aim of which was to open the Costa Rica export market to Singapore. Due to the structure
of its domestic market, Singapore depends, to a large extent, on the import of goods, which opens a
window of opportunities for demand for products that could be supplied by Costa Rican exports.
With regard to BITs, Costa Rica has concluded negotiations with several countries to promote
the creation of a favourable climate for investors under conditions of predictability, security and
transparency, as well as to include provisions on investment promotion and protection, non-
discriminatory treatment, expropriation and compensation and dispute settlement. Currently
following BITs are in force: Germany, Argentina, Canada, Chile, Taiwan, Korea, Spain, France,
Netherlands, Paraguay, Czech Republic, Switzerland, Venezuela and Qatar.
iv. IPOs of multilatina companies in Latin American capital markets
There have not been any IPOs of multilatina companies in the Costa Rican capital markets.
Nonetheless, some Costa Rican companies that hold operations in other Latin American countries
have conducted IPOs at the Costa Rican Stock Exchange, such as Florida Ice & Farm Co, BCT Bank,
ILG Logistics and Café Britt.
E. Offshore vehicle providers in Latin American countries
i. General concept: legal framework and scope of activities
Costa Rica is a favourable country for establishing offshore vehicles. The stable social and legal
climates, coupled with a territorial tax system, have attracted many individuals and foreign companies
to use Costa Rican vehicles for investments worldwide. Investors have an array of legal options for
secure offshore asset protection and tax planning, including the limited liability company (LLC –
sociedad de responsabilidad limitada), stock corporation (sociedad anónima) and Costa Rican trust.
ii. Applicable legal regimes in Costa Rica
a. llc
A Costa Rican LLC possesses many of the same attributes as a corporation. In LLCs, the liability of the
partners is also limited to their respective capital contributions. However, for US persons, the Costa
Rican LLC offers the benefit that it may be considered a disregarded entity under the applicable US
tax regulations.
An LLC’s capital is represented by registered quotas (or units) of 100 Costa Rican colones each (or
exact multiples of this amount). The quotas must be transferred by an assignment agreement and
not by simple endorsement. Any assignment must be recorded in the LLC’s legal books, and such
assignments require the unanimous approval of the LLC quota holders. Quotas cannot be issued in a
foreign currency.
Doing Business in Latin America OCTOBER 2018 139
One or more managers must be elected by the quota holders to represent the LLC. These managers
must be physical persons (Costa Rican nationals or foreign persons), and may be jointly liable with the
LLC for their actions vis-à-vis third parties. If at least one manager is not a resident of Costa Rica, the
LLC must appoint a Costa Rican attorney as a resident agent. No comptroller is required for the LLC.
For tax purposes, an LLC and corporation are treated in the same manner in Costa Rica.
b. corporation
A Costa Rican corporation may be established either by private capital (closely held) or public
subscription. At least two shareholders (individuals or registered legal entities) are required to create
a corporation, but once incorporated, one single person or entity may own 100 per cent of the stock
capital. Generally, there is no limitation regarding the ownership of shares by foreign entities. The
stock capital of corporations is represented in shares, which are transferable by simple endorsement
and registration in the corporation’s private shareholders’ registry book. Shares may be issued in
Costa Rican colones or foreign currencies.
Furthermore, there is no minimum capital requirement, but at least 25 per cent of the subscribed
capital must be fully paid at the time of incorporation.
Common shares have equal rights and one vote each. However, different classes and types of shares
may be established, which may in turn offer different preferences, privileges, restrictions, terms and
limitations to the shareholders.
A shareholders’ meeting must be held at least once a year, and may be held in any place authorised by
the corporation’s charter. The shareholders’ meeting is the main governance body of the corporation.
A board of directors comprised of a minimum of three directors (president, secretary and treasurer)
manages the affairs of the corporation. Directors are named in the deed of incorporation or are
later appointed by a shareholders’ resolution, which may also remove them at any time. Costa Rican
nationals or foreign individuals may be appointed as directors, but legal entities may not hold
positions on the board of directors of a corporation.
The representation of the corporation is given by law to the president of the board, but other
directors or powers of attorney may be appointed in the corporation’s charter or by subsequent
shareholders or board of directors’ resolutions.
A comptroller must be appointed in the corporation’s charter. The comptroller cannot be a legal
representative or have any powers of attorney to act on behalf of the corporation. Furthermore,
if none of the directors are Costa Rican residents, a Costa Rican attorney must be appointed as a
resident agent.
In October 2016, the Minority Investor Protection Act No 9392 was published, which included Article
32-ter to the Code of Commerce, which was intended to protect the interests of minority shareholders
of the commercial entities governed by this code, such as corporations and LLCs. In general
terms, the new regulation requires these entities to approve internal rules regarding situations or
transactions where a certain conflict of interest could arise, and also requires corporate authorisation
140 Doing Business in Latin America OCTOBER 2018
to be issued prior to any transactions involving the acquisition, sale, mortgage or pledge of assets
representing ten per cent or more of the company’s total assets.
c. trust
A trust is a binding agreement whereby one party transfers certain assets and/or rights to another
party for a specific purpose, and consequently, to the fulfilment or not of such purpose, to transfer
back such assets and/or rights to the original transferor (in the case of fulfilment) or to a third party
(in the case of a breach), as outlined in the respective trust agreement. The trust is composed by
three parties: the settler, which is the party that transfers the assets and/or rights into the trust; the
trustee, which is the party to which such assets and/or rights are transferred, and which holds custody
and administration over them according to the instructions given to it in the trust agreement; and the
beneficiary, which is the person in whose benefit the trust is created.
There are two types of trusts that are mostly used in Costa Rica: guarantee trust and administration
trust. The guarantee trust is used to secure the fulfilment of an obligation, usually of a financial
nature (eg, a loan or credit transaction), where usually the debtor is the settler, the creditor is
the beneficiary and the trustee is a third party that holds the settler’s assets transferred to it in
trust or fiduciary property (entrusted assets) until the secured obligation has been satisfied. The
administration trust is a trust in which the settler transfers certain assets to the trustee, so the latter
can administer or invest the assets in accordance with the trust agreement for the benefit of the
settler or other beneficiaries. Entrusted assets constitute a separate patrimony from that of both the
settler and trustee.
Pursuant to the Money Laundering Law (Law No 8,204), individuals or companies that manage
third-party funds must register before SUGEF. Consequently, trustees of an administration trust
must register before SUGEF; whereas trustees of a guarantee trust are not obliged to register,
provided they merely hold the settler’s property and do not manage or invest it in any way.
However, there may be some tax benefits if the trustee of a guarantee trustee is registered before
SUGEF, as the transfer in trust property of real estate is exempt from taxes if the trustee is
registered before SUGEF and the purpose of the trust is to secure a credit transaction granted by
an entity also registered before SUGEF.
Doing Business in Latin America OCTOBER 2018 141
Ecuador
142 Doing Business in Latin America OCTOBER 2018
VII. Ecuador
A. Foreign investment
i. Legal regime of foreign investment in Ecuador
The legal regime of foreign investment in Ecuador comprises the following norms, guarantees and
protections:
a. the constitution
The Constitution of the Republic of Ecuador (the ‘Constitution’), which is the supreme law of
Ecuador, contains several provisions that deal with different aspects of investment, both domestic
and foreign:
• Article 277 of the Constitution provides that investment, and the development of economic
activities in general, must be consistent with the concept of sumak kawsay (best translated as
‘the good life’ or ‘good living’), which is an ancient indigenous concept that integrates living in
harmony with the community, culture and nature;
• Articles 321 and 322 of the Constitution recognise and guarantee the right to property in all
forms, including intellectual property;
• Article 339 of the Constitution provides that the state has the duty to promote private, domestic,
foreign and public investment. With respect to foreign investment in particular, the provision
indicates that it must strictly comply with the country’s legal framework and regulations, that
it is complementary to domestic investment, and that domestic investment will enjoy priority over
foreign investment. This priority is mainly evidenced in public procurement laws and regulations; and
• finally, the Constitution allows for disputes with domestic and foreign investors to be decided
in arbitration.
b. international treaties and conventions signed by ecuador
The Constitution states that international treaties and conventions that Ecuador is party to prevail
over domestic laws but enjoy lesser hierarchy than the Constitution, except those treaties and
conventions regarding human rights if they provide for more favourable rights to individuals.
Ecuador is a member of the WTO, which provides a general trade regulation framework
worldwide. The WTO Treaty includes guarantees, such as national treatment, most favoured
nation and market access.
Similar provisions are contained in the Andean Community of Nations (Comunidad Andina (‘CAN’))
Treaty, to which Ecuador is a member, along with Peru, Bolivia and Colombia.
Until mid-2017, Ecuador was also party to several international investment agreements or BITs that
provided specific guarantees to foreign investors doing business in Ecuador, including protection
Doing Business in Latin America OCTOBER 2018 143
against expropriation and dispute resolution mechanisms. Although all of these agreements have
been denounced by the Ecuadorian Government, some contain sunset clauses that are still in force
and protect investments made before the treaties were terminated. The Ecuadorian Government is
currently planning to negotiate new BITs to replace those that have been terminated.
Finally, Ecuador is also party to several international agreements to avoid double taxation. These
treaties include the following foreign jurisdictions: Germany, Belgium, Brazil, Canada, Chile, Spain,
France, Italy, Mexico, Romania, Switzerland, Uruguay, Singapore, Korea, China, and the CAN.
c. organic code of production, commerce and investments
The Organic Code of Production, Commerce and Investment (Código Orgánico de la Producción,
Comercio e Inversiones (COPCI)) and its implementing regulation are the main pieces of legislation
on the subject of investment in Ecuador. There are other laws and regulations that address certain
specific aspects of investment in certain specially regulated areas such as energy, oil and gas, mining,
telecommunications, finance and banking, securities and insurance, among others.
The COPCI sets forth both general and specific rules, incentives, guarantees and protections for
domestic and foreign investment in Ecuador, as explained in more detail below.
d. regulation of the ppp regime
In December 2015, a new law was issued to promote and give incentives for PPPs for public projects.
The law created a committee within the Executive Branch in charge of these PPPs that is now in
charge of overseeing these partnerships.
The PPP law regulates the participation of private investors in the performance of public contracts,
including construction, maintenance and other productive activities in areas of public interest. In
exchange, not only will the Ecuadorian Government pay the developer, but it will also offer additional
incentives, such as tax exemptions (including a ten-year exemption from income tax), simplified
administrative procedures and regulatory security, which means that changes in key current
regulatory norms will not apply to the developer.
Also, private investors can take the initiative regarding these projects, which means they need not wait
for the Ecuadorian Government to launch a particular project.
ii. General guarantees and protection for foreign investments
In general terms, the COPCI sets forth the following guarantees and protection for all investments,
regardless of their origin, amount and destination:
a. non-discrimination
The COPCI guarantees equal footing (non-discriminatory treatment) to both foreign and domestic
investors, and their investments with respect to the management, operation, expansion and transfer
of their investments.
144 Doing Business in Latin America OCTOBER 2018
The investor has the right to control, use, convert to any currency, and transfer or send abroad any
funds derived from or related to its investment. The investor does not have the obligation to keep
such funds in Ecuador or convert them into national currency. Investments are not subject to any
restriction other than taxes and deductions applicable under Ecuadorian law.
From a tax perspective, both national and foreign investments are subject to the same applicable
regime, except in the case that the investor has signed an investment agreement as provided in the
COPCI, which provides for the additional and specific protection of tax stability.
b. ownership rights
The property of investors is protected in the terms set forth in the Constitution, the COPCI and other
relevant laws.
Both the Constitution and COPCI prohibit all forms of confiscation. Additionally, expropriation is
subject to adequate and prompt compensation (ie, payment of the price). The investor may challenge
in the courts the price proposed by the state if unreasonable.
c. other rights of investors
In addition to the protections and guarantees outlined above, the COPCI recognises the following
rights of investors:
• freedom of production, commercialisation and pricing of legal goods and services.
• access to administrative and control actions that the state establishes to avoid any disloyal
competition practices;
• freedom of import and export of goods and services, in accordance with the international
agreements to which Ecuador is a party;
• free transfer abroad of the periodical earnings or profits that come from registered private
investment once tax, profit sharing and other obligations are complied with;
• freedom to send resources abroad that are obtained through total or partial liquidation of the
companies in which the registered foreign investment was made, or through the sale of shares,
participations or acquired rights in investments;
• freedom to acquire or transfer shares, participations or rights of ownership to third parties,
within Ecuador or abroad;
• freedom of access to the national financial system and to the stock market, to obtain financial
resources; and
• freedom of access to the mechanisms for technical cooperation and technological assistance.
iii. Specific guarantees and protections for investments
The COPCI allows investors to sign investment agreements with the state in certain special
circumstances. Such agreements give the investor the specific protection of tax stability for the
Doing Business in Latin America OCTOBER 2018 145
duration of the agreement, generally up to 15 years, and are renewable. These agreements are
generally reserved for investments in certain areas deemed as strategic (eg, minerals, forest resources
and oil). Tax stability may be lost if the investor fails to comply with the requirements, amounts,
commitments and deadlines set forth in the investment agreement.
iv. Incentives for investors
The COPCI sets forth both general and specific incentives for investors. General incentives are
available to any new investment carried out in any part of the national territory. They include:
• the progressive reduction of three percentage points of corporate income tax;
• those established for special growth zones, provided they comply with the criteria for their
formation;
• additional deductions for calculating corporate income tax as mechanisms to encourage the
improvement of productivity, innovation, and eco-efficient production;
• the benefits for companies opening their capital for the benefit of its workers;
• special payment arrangements for taxes on foreign trade operations;
• deduction from the corporate income tax of the additional compensation mandated by
Ecuadorian law;
• exemption from the currency transfer tax for operations with external financing;
• exemption, for five years, of anticipated income tax payments for all new investments; and
• reforms on the calculation of the anticipated income tax payment.
The specific incentive of total exemption of corporate income tax for a period of five years is available
to new investments that fulfil the following criteria laid out in the COPCI and applicable tax law:
• the new investment must contribute to the change of the energy matrix, strategic substitution of
imports, fostering of exports, rural development in all of the country and urban development
in certain designated areas; and
• the new investment must be made outside urban jurisdictions of Quito or Guayaquil, and must
be made in any of the following economic sectors, considered as a priority for the country:
production of fresh, frozen and industrialised foods; forestry and agroforestry and related
processed products; metalworking; petrochemicals; pharmaceuticals; tourism; renewable
energies including bioenergy or energy from biomass; foreign trade logistics services;
biotechnology and applied software; and the strategic sectors of import substitution and export
promotion, as determined by the President of the Republic.
If the investment is made in an area defined by the Ecuadorian Government as an ‘economically
depressed zone’, it will enjoy an additional tax benefit for a period of five years, of twice (an additional
100 per cent) the deductibility of payroll cost for new employees.
146 Doing Business in Latin America OCTOBER 2018
Further, public projects executed under the PPP regime give access to income tax exemptions for ten
years, in addition to certain exemptions on tax on remittances abroad, customs duties and others.
v. Special Economic Development Zones
Special Economic Development Zones (Zonas Especiales de Desarrollo (‘ZEDEs’)) are special areas
within the national territory, designated and duly authorised as such by the state, which allows them
to enjoy a special customs and legal regime.
ZEDEs are generally located near larger cities. In their selection and authorisation, investors and
the state generally consider conditions such as environmental preservation, location, access to road
infrastructure, and existence of other basic and required infrastructure, including access to utility
services and connectivity, among others.
The special legal regime that ZEDEs enjoy consists essentially of the exemption from taxes and
tariffs on foreign goods entering these areas for specific authorised purposes, which mainly refer
to technological development and innovation, industrial diversification and the development of
logistical infrastructure and capabilities.
vi. Dispute resolution
Based on the principle of party autonomy, all persons and legal entities, public or private, can
establish a method agreed between them to resolve their disputes, other than recourse to ordinary
courts. Alternative dispute resolution, such as negotiation, mediation and arbitration, are procedures
recognised by the Constitution.
Thus, if at the time of execution of the arbitration agreement the parties are domiciled in
different states, or the issue being litigated relates to an international trade operation susceptible
to settlement and not affecting or impairing the national or collective interest (as in the
case of foreign investment), the parties may establish in their agreement that the arbitration
will be international. These types of arbitrations, according to Article 42 of the Arbitration
and Mediation Law (AML), shall be regulated by the appropriate treaties, conventions, and
instruments signed and ratified by Ecuador.
Article 11 of the Organic Law for the Office of the Attorney General and Article 4 of the AML set
forth that public sector entities may submit their disputes to arbitration, provided there is a prior
signed arbitration agreement. If a dispute has already arisen when the arbitral agreement is being
considered, then the authorisation of the Attorney General is required. This authorisation is also
necessary to submit disputes to international arbitration.
The Organic Code of Planning and Public Finance also requires the authorisation of the Attorney
General for agreements of submission to an outside jurisdiction and to foreign legislation for the
settlement of disputes relating to contracts concluded by the state.
Additionally, Article 27 of the COPCI establishes that conflicts that arise from an investment may be
resolved through arbitration, but the arbitration clause must be included in an investment contract.
Doing Business in Latin America OCTOBER 2018 147
The mandatory applicable law will be Ecuadorian law, and there is a mandatory mediation phase that
needs to be exhausted before arbitration commences.
Finally, and as mentioned above, many of the BITs that were signed by Ecuador in the past (and
which still protect investments already made even if the treaties have been denounced) include
dispute resolution mechanisms, such as investor-state arbitration.
vii. Future changes
As of June 2018, Ecuador’s National Assembly has been discussing a new economic incentives bill
that, if it ultimately becomes law, will create tax cuts for new private investments, pardon tax interests
and penalties, and reform several laws that will promote and facilitate private investment in the
coming years.
B. Public services
i. General framework
The Constitution sets forth the general framework for the provision of public services in Ecuador,
which is developed through laws and regulations. This framework has as one of its main principles
that enjoying public services of optimum quality is a right of all persons, who shall have the ability to
freely select them (Article 52), and that services should make effective the principles of sumak kawsay
and solidarity (Article 85).
More specifically, the Constitution establishes that the state is responsible for the provision of
drinking and irrigation water, sanitation, electricity, telecommunications, roadways, ports and
airports, and all other public services determined by the law (Article 314). The Constitution
contemplates the possibility that the state may delegate the provision of public services to mixed-
economy enterprises where it is the majority shareholder, or exceptionally, to the private sector
(Article 316).
This rule, of exceptionally delegating public services to the private sector, is referenced in Article
100 of the COPCI, enacted in 2010. The COPCI establishes various specific delegation regimes for
the provision of public services by the private sector, such as concessions, strategic alliances and
other contractual modalities that are specific to the required public service delegation. Concessions
are regulated through sector-specific norms and a heavily amended law from the 1990s (the
‘Modernisation Law’). Strategic alliances between the Ecuadorian state and private entities are the
subject to the aforementioned law on PPPs.
ii. Rules and limitations for the delegation of the rendering of public services to private parties
During the 1990s, the need arose in Ecuador to carry out a process of privatisation and concession of
public services in order to support the state in its obligations to carry out a number of functions for
which it had limited capacity, and to allow Ecuadorians to have greater and more effective access to a
series of public services. For this reason, the so-called ‘Modernisation Law’ was enacted in 1993. This
law sought to facilitate the intervention of the private sector in the rendering of public services.
148 Doing Business in Latin America OCTOBER 2018
The current Constitution, which came into force in 2008, and the COPCI, enacted in 2010, brought
significant changes to this general framework. As mentioned above, they establish the state as the
default and main provider of public services, and allowed the exceptional delegation to the private
sector. The privatisation of water and social security services is expressly forbidden in this new
framework, although the concessions for water services that pre-existed the Constitution (eg, that for
Guayaquil, the most populous city in the country) have been allowed to remain.
The changes brought forth by the 2008 Constitution and COPCI have not fully eliminated the
legal framework for the rendering of public services that was established in the Modernisation
Law. However, they have modified it significantly and put limits on its implementation, making its
application more relevant when exceptional circumstances are present.
Aiming to define these ‘exceptional circumstances’ with some more specificity, the COPCI establishes
that in order for the state to delegate the provision of public services to the private sector, the
following conditions must be met:
• the delegation of the public service must be of public interest;
• the state should not have the technological and/or economic capacity to provide the service;
and
• the demand for the public service cannot be met by the participation of public enterprises
and/or mixed companies.
If these conditions are met, the state may delegate the rendering of the public service of electricity,
and provision and management of roads, ports and airport infrastructure, railways, and others. As
mentioned above, the COPCI allows for various modalities of delegation, such as concessions and
strategic alliances, among others. This is also regulated in the law on PPPs. The delegation must
follow the appropriate tender processes, although, in the case of foreign governmental entities, the
delegation can be made directly, that is, without the need to follow these processes.
In practice, delegation is possible and continues to occur in a number of areas, although the
possibility for private parties to participate in the rendering of public services can vary notably
depending on the sector. Thus, for example, in the area of electricity, power plants may be operated
by private companies, provided their generated power does not exceed 50 MW. In the area of
telecommunications, the participation of the private sector has been more significant, as the majority
of users are served by two large foreign-owned private concessionaires.
C. Real estate
i. Constitutional framework for real estate
The Constitution guarantees to all people the right to property in all its forms, including real
property. Foreigners who are in Ecuadorian territory have the same rights and duties as Ecuadorians,
with the limitations established in the Constitution. One of those limitations is that foreign
individuals or legal entities may not acquire any title to land or any concessions in national security
areas or protected areas established by law.
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Notwithstanding the protection of property rights as a general rule, the Constitution provides that
state institutions may declare the expropriation of property for reasons of public utility or social and
national interest, subject to fair valuation, compensation and payment.
ii. Legal framework for real estate
The basic legal framework for real estate is in the Civil Code, which contains rules that apply to
both urban and rustic properties, unless there are express exceptions. The lease of urban real estate
is governed specifically by the Tenancy Act (Ley de Inquilinato). The Organic Code of Territorial
Organisation, Autonomy and Decentralisation (Código Orgánico de Ordenamiento Territorial,
Autonomía y Descentralización (COOTAD)) establishes the powers of municipal governments with
regard to the regulation of urban organisation and development, construction of buildings, cadastre
and valuation of properties, and the establishment of taxes on real property. Municipal ordinances
regulate the different aspects of competence of municipalities in real estate. Horizontal property is
regulated by the Horizontal Property Act (Ley de Propiedad Horizontal) and its regulations.
iii. Registration system
Real estate is subject to a public registration system, made up essentially by the land registries that
exist in each municipal district. Each property has a numbered registration file, which contains
information on boundaries and dimensions; ownership history; liens and rights over the property;
divisions and mergers to which it has been subject; judicially ordered restrictions; and lease contracts,
the survival of which is desired in the event of a transfer of ownership of the property (see below). All
of these acts and contracts must be registered with the appropriate land registry.
iv. Real estate development
The establishment of standards for urban development and construction of the responsibility of the
municipalities, and is implemented through ordinances. These ordinances determine, in detail, the
requirements and technical specifications that developments and buildings must meet, as well as
the procedures for approval of the plans and technical reports that are necessary for the granting of
construction permits. Such requirements include approvals from the fire department and from the
entities in charge of the public services of electricity, telephone, water supply and sewerage. These
ordinances also regulate the subsequent process for granting authorisations for sale and occupation.
v. Horizontal property regime
The horizontal property regime is made up generally by the Horizontal Property Act and its
regulations. Additionally, there are municipal ordinances applicable in the relevant constituencies,
determining requirements for properties subject to the horizontal property regime.
The municipal declaration of submission of a property to the horizontal property regime, as well as the
general plans establishing common and exclusive spaces, must be registered with the Land Registry.
The right of every owner over the value of common spaces is proportional to the value of the floor,
apartment or space that he/she owns, which is his/her share of co-ownership. Each owner must
150 Doing Business in Latin America OCTOBER 2018
contribute in that proportion to the expenses necessary for management, maintenance and repair of
the common property and the payment of the insurance premiums.
Co-owners should approve, by a vote of at least two-thirds, a set of rules according the General Rules
of the Condominium Act, in which their mutual rights and obligations are established. This set of
rules must be notarised and registered at the Land Registry.
The regulations must contain rules on the management and conservation of the common spaces; the
functions corresponding to the Assembly of Co-Owners; the rights, duties and form of election of the
administrator; the distribution of management fees among the co-owners; and all that concerns the
interests of the co-owners and the maintenance of the building.
Each co-owner has a right to vote on the General Assembly equivalent to his/her share of ownership.
Decisions of the General Assembly are taken by a majority of votes representing more than half of the
votes held by those attending the General Assembly. However the following qualified majorities are
required by law:
• 75 per cent of the votes of co-owners to allow a co-owner to carry out works that involve
modifications of the resistant structure, or vertical or horizontal building additions;
• 60 per cent of the votes of co-owners to allow modifications to the facade, provided that they do
not involve changes or affect the structure; and,
• two-thirds of the votes of those attending the respective meeting for the imposition of
extraordinary burdens, the building of improvements, or the making of any material alterations
affecting the enjoyment of the common areas.
The legal, judicial and extrajudicial representation of the condominium is exercised either
individually or jointly by the President or the administrator.
vi. Transfer of title or encumbrance of real property
Contracts for the sale or encumbrance of real property must be performed by public deed authorised
by a notary, and must be registered at the Land Registry. In the case of a transfer of title, it is only with
the registration in the Land Registry that the transfer of title is perfected.
The transfer of property generates a tax known as alcabala, referred to in the COOTAD, and certain
additional taxes established by special laws. The COOTAD also sets a tax on property value gains and
the profit on the transfer of urban properties, which is ten per cent of the difference between the
purchase price and the sale value, minus a deduction of five per cent of such difference for each year
elapsed since the purchase (which means that this tax cannot be collected after 20 years have passed
from the acquisition year).
vii. Real estate leasing
The lease of rustic properties is regulated by the Civil Code. The lease of urban properties is
specifically regulated by the Tenancy Act, the Civil Code rules being supplementary.
Doing Business in Latin America OCTOBER 2018 151
The lease can be executed by private instrument; the law does not require the formality of the public
deed before a notary. However, the lease must be registered with the corresponding department of
the municipality, which has to set the maximum monthly lease payment (which cannot exceed the
sum of: (1) one-twelfth of the ten per cent of the commercial value that the property has recorded in
the municipal cadastre; and (2) the value of the municipal taxes imposed on urban property).
Automatic increases in the monthly rental fees for residential properties during the minimum term
of the lease are not allowed, but this prohibition only applies when the monthly rental fee is less than
two minimum wages (US$708 as of June 2015). The term of the lease is binding on both parties, and
the lessee has the right to a minimum period of two years. Non-payment of the rental fee for two
months is a cause for the termination of the lease.
The transfer of ownership of a leased property terminates a lease, provided the tenant is given notice
within one month of the registration of the transfer in the Land Registry. This provision does not
apply to the case of leases concluded by public deed and registered at the Land Registry, which must
be respected by the new owner of the property.
The tenant needs authorisation from the lessor to sublease the property. Subletting without such
authorisation is cause for termination of the lease.
The Tenancy Act applies to leases of rural property only with respect to the competence and
procedure for resolving disputes, and to a few discrete aspects relating to the state of the property.
D. Development of ample/integrated capital markets and joint activities between Latin American countries
i. Merger of stock exchanges: attempts versus realities
Ecuador has two stock exchanges: one in Quito and one in Guayaquil. Both were created as
corporations in the late 1960s, and changed their corporate form to non-profit entities in the 1990s,
as required by the Securities Market Law.
In May 2014, the Securities Market Law was amended to require stock exchanges to once again
adopt the form of corporations. Even though this amendment may be seen to have presented
an opportunity for stock exchanges to merge (corporations can merge while non-profit entities
cannot), it is not a foreseeable scenario in the near future. In fact, when a proposed amendment to
the Securities Market Law included the obligation for stock exchanges to merge, this proposal was
opposed by the stock exchanges.
It is worth noting that after the Stock Exchange National Council ordered stock exchanges to adopt
a single trading system in 2011, there has been one interconnected system. This technological
requirement has resulted in common trading processes and rules for both stock exchanges.
ii. MILA market: current results and expectations
There is no current process of adhesion of Ecuador’s stock exchanges to the MILA integrated market.
Moreover, it is not legally possible for local stock markets to be interconnected to international stock
152 Doing Business in Latin America OCTOBER 2018
markets. A reform to the law would be necessary in the case in which Ecuador wants to become part
of MILA.
iii. Pacific Alliance: governmental action and proposed treatment and agreements
Recently, Ecuador has changed its position regarding the country’s participation in the Pacific
Alliance. A meeting recently took place where it was decided that Ecuador will no longer be an
official observer, but instead will participate as an invitee. Ecuador’s Foreign Commerce Ministry
has stated that the country is seeking to become a member of the Pacific Alliance, for which it is
necessary to strengthen relationships with all member states. Furthermore, Ecuador will begin
negotiations with the US in order to reactivate a Commercial and Investment Treaty.
iv. IPOs of multilatina companies in Latin American capital markets
There have not been any IPOs of multilatina companies in Ecuador. However, in the last few years,
multilatinas, such as Arca Continental, and other large companies, such as Lafarge, have conducted
buy-outs of Ecuadorian companies through local exchanges, as required by local laws.
Doing Business in Latin America OCTOBER 2018 153
El Salvador
154 Doing Business in Latin America OCTOBER 2018
VIII. El Salvador
A. Foreign investment
i. Authorisations versus limitations
a. general absence of restrictions
In October 1999, the Legislative Assembly passed the new Investment Law. The regulation for this law
was enacted in 2014. Foreign investments are defined in the law as being those resources or assets,
tangible or intangible, provision of services, or finance readily convertible currencies destined for
the initiation, additional investment or improvement of economic activities for the creation of goods,
provision of services and generation of employment.
Generally, there are no restrictions for foreign investors. However, the law does consider some
limitations that apply to foreign investment. These limitations are restricted as follows:
Small trade, industry and provision of services, specifically inshore fishing, are exclusive activities for
citizens that are Salvadoran by birth and Central American citizens by naturalisation.
The underground area belongs to the Salvadoran state; however, the state might grant a licence
for exploitation.
Ownership of rustic real estate cannot be acquired by foreigners whose countries of origin do not
grant equal property rights to Salvadorans. This limitation does not apply when the land is acquired
for industrial establishments.
An individual or legal entity cannot not acquire more than 245 hectares. This limitation is not
applicable to cooperatives and farmers’ associations that are subject to a special regime.
The Salvadoran state has the power to regulate and supervise the rendering of public services
provided by private enterprise, the approval of their fees, with the exemption of those established in
international conventions.
For the exploitation of ports, railways, canals and other constructions of public use, a licence issued
by the Salvadoran state is needed. This licence will be granted under the specific provisions of the
relevant law.
All foreign investments must be registered with the National Investment Office at the Ministry of
Economy. The El Salvadoran legal framework for foreign investments is considered attractive for
having tax incentives and providing equal treatment for local and foreign investors. Despite this
fact, in 2014, El Salvador had an exponential decrease in foreign investment, and was in last place
compared with other Central American countries.
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b. national, fair and equitable treatment
The aforementioned law also recognises the equal treatment of foreign and national investors
and investment (ie, non-discrimination of foreign investments), and allows investment freely in all
economic activities, except those restricted by law to national or certain forms of ownership (ie, small
business, exploitation of natural resources, and ownership for agricultural purposes, ports, railways
and others.)
c. legal framework for foreign investment
The legal framework to regulate foreign investment is mainly composed of the following:
1. The Constitution
Economic freedom is guaranteed by the Constitution, insofar as it does not oppose the social interest;
the Constitution recognises the freedom of contract right of every individual and his/her right to
dispose freely of his/her property.
2. The Investment Law
This law has as its main and fundamental goal to promote investment in general and foreign
investments to contribute to El Salvador’s economic and social development. This law pursues
guaranteeing equal treatment for national and foreign investment, freedom to invest in almost all
activities, except those restricted by law. No discrimination based on nationality, domicile, race, sex
or religion will be allowed. There is no repatriation of profit limitation, and in 2001, the US dollar
could freely circulate in El Salvador, making it easier to transfer money overseas. Registered foreign
investors are entitled to repatriate their investment plus any capital gains and are exempt from tax
withholdings on dividends; but investors cannot argue this right to repatriate to avoid their labour,
tax, social security, bankruptcy or other legally established obligations.
The Investment Law also allows foreign investors to obtain the status of resident investor when their
investment is above 4,000 times the then in force minimum monthly salary. Residency benefits
are extended to the family of the investor, if a natural person, or the legal representative and his/
her family, if a legal entity. A specialised office was created called the National Investment Office
(Oficina Nacional de Inversiones (ONI)). This office is responsible for centralising and coordinating
governmental procedures related to national and foreign investors, creating statistics of investments
in El Salvador, among other activities.
3. The Legal Stability for Investments Law
The main purpose of this law is to attract and promote national and foreign investment through
a legal framework that assures legal stability to the investor. This legal guarantee is effective
through the implementation of legal stability contracts. The subjects of this regulation are legal
entities or individuals, national or foreign, that carry out investment projects in areas such as
aeronautics, electronics, energy, logistic, health services, tourism, agribusiness, strategic structure,
telecommunications, manufacturing, long distance corporate services, technology and science.
156 Doing Business in Latin America OCTOBER 2018
The legal entities responsible for applying this law are the Ministry of Economy and the Export and
Investment Promotion Agency of El Salvador (Organismo Promotor de Exportaciones e Inversiones
del El Salvador (‘PROESA’)). To obtain the benefits, the investment must be equivalent to 4,220
times the minimum wage in the industrial sector for new projects or expansion of those projects.
4. The International Service Law
The principal purpose of this law is to regulate the establishment and operation of service parks,
as well as the benefits and responsibilities of owners of companies that develop, manage or use
them. The entity responsible for applying this law is the Ministry of Economy, which, therefore, will
authorise the establishment, administration and operation of service parks and service centres, as
well as grant benefits and tax incentives. On the other hand, the monitoring and effective control of
customs and tax regulations of service parks and service centres corresponds to the Treasury Ministry.
The law establishes and defines the only activities that benefit from tax incentives as follows:
international distribution, international logistics operations, international call centres,
information technology, research and development, repair and maintenance of marine vessels,
repair and maintenance of aircraft, business processes, medical and hospital ser vices, and
international financial ser vices.
5. The Industrial and Commercial Free Trade Zones Law
This law regulates the operation, benefits and responsibilities of the owners’ use and management
of a place. The Ministry of Economy is the entity responsible for applying the law. The monitoring
and control of the tax regime corresponds to the Treasury Ministry. Regulated under the provisions
of this law are free trade zones, known as developer, administrator, user and warehouse for inward
processing. This law grants tax exemptions from ten per cent up to 15 per cent of income tax. These
exemptions are orientated to the manufacturing and export activity of local companies located in
free trade zones.
6. The Tourism Law
This law has as its main purposes to promote and regulate industry and tourist services provided
by individuals or legal entities, national or foreign. This law grants benefits and incentives to those
projects that are classified as National Touristic Interest. If the investment is over US$50,000, then
the approval of the Treasury Ministry, Ministry of Environment and Natural Resources, Presidential
Secretariat of Culture, and Ministry of Tourism will be needed. If the investment is under US$50,000,
only the approval of the Ministry of Environment and Natural Resources and Presidential Secretariat
of Culture will be needed.
7. The Incentive for Renewable Energy Law
The fundamental purpose of this law is to promote investment in renewable energy sources through
the exploitation of hydraulic, geothermal, wind and solar resources for the generation of electric
energy. Companies that perform any of the aforementioned activities may enjoy tax exemptions from
custom duties and income tax for five to ten years.
Doing Business in Latin America OCTOBER 2018 157
8. PPP Law
The main purpose of this law is to establish the legal framework for the development of PPP projects.
According to this law, the Executive Branch and its dependencies, independent institutions and
municipalities may carry out PPP projects.
ii. Treatment of foreign investment in infrastructure initiatives and PPP projects
Since May 2014, a new law called Ley Especial de Asocios Públicos Privados was approved by
Congress. The main purpose of this law is to establish a legal framework to develop PPP projects for
the rendering of public services and infrastructure in an efficient manner. Under this scenario of
legal stability, the private sector might provide the essential economic resources and technical skills
for the Salvadoran state to develop PPP projects to achieve general benefits. Under the provisions
of this law, PPP projects can be carried out by the Executive Branch and any of its dependencies,
independent institutions and municipalities.
This law is applicable to all contracts where public institutions entrust to a private investor (national
or foreign) the design and construction of infrastructure and related services, repair, improvement,
equipment and any other activity involved in the operation and maintenance of the infrastructure. In
addition, investment in infrastructure for rendering public services and exploiting the execution of
an activity of general interest are part of the scope of application of this law. Projects in health, social
security, public security, justice, rehabilitation and penitentiary work, water and education, including
the national university, are excluded.
The Attorney General is the legal representative of the state in contracts for PPP projects. These
contracts might have different modalities. PROESA was created by Ley Especial de Asocios Públicos
y Privados to, among other activities, regulate the execution of contracts for PPP projects. PROESA
was created not only to regulate but also to promote investment and legal stability. To execute a PPP
project, the Chairman of PROESA has to approve it. The process for approving a PPP project starts
with the request for bids or concessions. Generally, the Legislative Assembly do not intervene in
this process. However, if the tender process implies any tax contingency for future fiscal years, the
Legislative Assembly has to intervene. The supervision of the execution of these contracts is carried
out by an institution called Organismo Fiscalizador de Asocios Público Privados (OFAPP). This
institution oversees all the aspects of the execution, especially during the exploitation phase.
Among the formalities, contracts for PPP projects have to be granted in public deed and under the
terms of the tender basis. Contracts for PPP projects are supervised from the beginning until the end
of the PPP project. As a rule, the Treasury Ministry does not intervene in these contracts unless a
modification to the contract may involve tax aspects.
In the case in which any dispute regarding the interpretation, application or execution arises as a first
stage, the parties must try to reach an arrangement directly. If no arrangement is reached, then a
specialist roundtable should be set up. If this roundtable does not achieve an agreement, arbitration
is the final stage. Thus far, the effectiveness of this law remains uncertain because no PPP project has
been approved.
158 Doing Business in Latin America OCTOBER 2018
iii. Treatment of foreign investment in oil and gas, and mining activities
In El Salvador, activities regarding oil and gas are subject to prior authorisation from the El Salvador
Government. Since 2017, mining has been forbidden, and therefore, it is not possible to conduct
mining activities in El Salvador.
iv. Treatment of foreign investment in real estate
a. financing real estate
For the financing for the purchase of real estate, no special rules apply.
b. construction
There are no special restrictions regarding construction. For foreign investors in the construction
sector, their treatment will be as if they were nationals. No special limitations exist.
v. Treatment of foreign investment in agribusiness activities
In the agribusiness area, El Salvador is considered as a regional leader in the production of juices and
snacks. El Salvador offers opportunities for the establishment of production centres, and processing and
distribution of foods orientated to being exported. For agribusiness investors that seek to produce and
export, El Salvador offers attractive opportunities in the following sectors: fruit farming, aquaculture,
ornamentals, nourishment and beverages. El Salvador offers equal treatment of foreign and national
investors. In addition, El Salvador offers tax incentives for importing and exporting agricultural products.
vi. Treatment of foreign investment in rendering public services
a. concession regime
The award of concessions regarding power generation and the distribution of energy,
telecommunications, paid and open television, ports, airport operations and construction in
maritime zones are governed by sector-specific laws and are subject to different rules. El Salvador
has an open and non-discriminatory government procurement system, under which nationals and
foreigners can freely participate and bid for public contracts. All foreign companies can participate
by setting up a subsidiary, or registering a branch in El Salvador, entering into a joint venture
arrangement with local or foreign companies already established in El Salvador or just by having
a Salvadoran legal representative. The award of concessions regarding power generation and
distribution, telecommunications, paid and open television, ports, mining exploration and extraction
are governed by sector-specific laws and are subject to different rules.
b. contract laws
All foreign investors, when contracting with the Salvadoran state are subject to the Ley de Adquisiciones
y Contrataciones con la Administración Pública. Generally, no special restrictions apply. However,
Doing Business in Latin America OCTOBER 2018 159
usually, the tender basis establishes that foreign providers have to have at least a legal representative in
El Salvador. Another basis determines that a physical presence is needed to participate in the tender
process. In addition, foreign providers have to demonstrate they are duly registered and in compliance
with all regulations in their country of origin.
Recently, the Law of the Contentious Administrative Jurisdiction (Ley de la Jurisdicción Contencioso
Administrativo) was enacted, changing significantly the judicial rules and procedures by which courts
deal with claims against governmental entities. This includes disputes regarding the public tender
process and contracting with the state.
B. Rendering of public services
i. General framework
In El Salvador, a law that considers the concept of public services does not exist. However, Salvadoran
case law establishes that, to consider a service as public, three aspects must be considered:
1. A necessity or interest shall be satisfied: This element is fundamental. The interest or need to
be satisfied must be collective. A collective interest is understood, in Salvadoran case law, as
‘the sum of all individual necessities or interests’.
2. The ownership of the service provider: For Salvadoran case law, in the term ‘public service’,
the word ‘public’ alludes to the addressee not the provider of the service. Therefore, the
service can be provided by the state or a private party.
3. Legal regime. Based on the nature of the service, these types of services must be regulated
under the scope of public law. Public law is orientated to prevent or avoid any type of abuse
coming from the service providers.
Thus, when a service is orientated to satisfy collective needs, is regulated under public law and is
provided either by the state or a private party, it is considered as public. However, not all private
parties can carry out activities that shall be performed by the state. To render these types of services
in Salvadoran territory, a concession or privatisation process must exist. The Salvadoran state renders
some services, such as waste collection. The rendering of other services is designated to private
parties to carry out the service through a concession granted by the Salvadoran state.
The privatisation process began in El Salvador in 1989 with Salvadoran banking. This process was
conceived as a demand to liberalise the financial system. The belief was that macroeconomic stability
and trade opening would be reached. This process entailed the creation of a new legal framework
and new institutions. The Superintendence of Financial System (Superintendencia del Sistema
Financiero) was created to supervise and regulate all financial activities. The Central Reserve Bank of
El Salvador’s powers were diminished.
Currently, banking is a service rendered by private and public parties. Foreign financial
conglomerates are dominating the market of banking services. This is a regulated sector. The
fundamental law that regulates financial services is the Banking Law (Ley de Bancos), enacted by the
160 Doing Business in Latin America OCTOBER 2018
Legislative Assembly in September 1999. This law repealed the Banks and Financial Entities Law (Ley
de Bancos y Financieras).
In 1996, the privatisation process was orientated to other sectors, such as power distribution,
telecommunications and pension funds. The process entailed the creation of a new legal framework
for telecommunications and electricity sectors. The Legislative Assembly enacted three main laws in
1996 that were conceived as the basis of the legal framework for rendering these services: the Law
for the Creation for the General Superintendence of Electricity and Telecommunications (Ley de
Creación de la Superintendencia General de Electricidad y Telecomunicaciones (‘SIGET’)), the
General Electricity Law (Ley General de Electricidad) and the Telecommunications Law (Ley de
Telecomunicaciones) to regulate the energy and telecommunications markets.
In relation to power generation, the Salvadoran state was the largest power generator through the
national company called Comisión Ejecutiva Hidroelectrica del Río Lempa (‘CEL’). Nevertheless,
because of the process, private parties were also allowed to participate in the power generation
market. This participation needed to be regulated. Participation was regulated in the General
Electricity Law, and the Tariff List was approved every year. Regarding power distribution, the
privatisation process was carried out between April 1997 and January 1998.
Four companies resulted from the restructuring of the power distribution system: Compañía de
Alumbrado Eléctrico de San Salvador, SA de CV (CAESS), Compañía de Luz Eléctrica de Santa Ana,
SA de CV (CLESA), Distribuidora del Sur, SA de CV (‘DELSUR’) and Empresa Eléctrica de Oriente
(EEO). Each of these companies owns a distribution network that orientates their service by region.
Thus, currently CAEES is distributing power in the central-north region, DELSUR in the central-
south region, CLESA in the western region and EEO in the eastern region.
Until the mid-1990s, telephone services were mainly provided by the state. The Salvadoran
state rendered the service through a national company called Administración Nacional de
Telecomunicaciones (‘ANTEL‘). Because of the privatisation process, the company was divided into
two corporations: Compañía de Telecomunicaciones de El Salvador, Sociedad Anónima de Capital
Variable (‘CTE’) and Companía Internacional de Telecomunicaciones, SA de CV (‘INTEL’). A
legislative decree established that the majority of the shares would have to be sold to strategic partners
with the financial and technical capabilities required to render and invest in telecommunications
services and the related infrastructure. The remaining shares would have to be sold either to
eligible employees or through a public auction. Therefore, ANTEL was promptly dissolved. The
Telecommunication Law was enacted to regulate the transition from a public monopoly regime to
competition and private investment.
Currently, foreign companies dominate the telecommunications market. The concept
of telecommunications does not only consist of telephone, radio and television services.
Telecommunications also include mobile services and internet services. Furthermore, the operators
are also internet service providers. Unfortunately, the Salvadoran legal framework is not sufficiently
advanced. There are no specialised laws that regulate internet service providers, their behaviour in
relation to the consumers and their liabilities.
Regarding water supply, this service consists of providing drinking water and managing aqueducts
and the sewage system. The operation of the water supply market has a particular characteristic.
Doing Business in Latin America OCTOBER 2018 161
This characteristic is that the provision of drinking water is shared between the national company
and private parties. The national company is called Administración Nacional de Acueductos y
Alcantarillados (‘ANDA’). However, only this company has the power to manage the sewerage
systems. The rendering of this service is also subject to special laws, and other national entities may
participate, depending on the activity that is being carried out. For instance, if the activity is power
generation SIGET and the Environment and Natural Resources Ministry (Ministerio de Medio
Ambiente y Recursos Naturales (MARN)) may take an active part in the regulation of the activity.
Other public services, such as the management of pension funds or transport, can be either rendered
by the state or a private party. In the case of the management of pension funds, a national entity
called Instituto Nacional de Pensiones de los Empleados Públicos still exists. Notwithstanding, public
employees are not obligated to pay contributions to this institution. The service may also be rendered
by private parties known as pension fund managers (Administradoras de Fondos de Pensiones
(AFP)). Regarding public transport, until recently, the service was provided only by third parties.
However, since March 2014, the state started rendering this service. The so-called Sistema Integrado
de Transporte del Área Metropolitana de San Salvador (‘SITRAMSS’) is an articulated transport
system for the metropolitan area of San Salvador, which is the capital city, and its surroundings.
Public service providers must comply with the Consumer Protection Law (Ley de Protección al
Consumidor (LPC)), which establishes several provisions regarding quality of services, fundamental
consumer rights, providers’ obligations, transparency of information and sanctions in the case of
contravention. The Consumer Protection Office (Defensoria del Consumidor) oversees the law’s
enforcement, and is actively addressing consumers complaints and disputes with providers. Public
service providers have the burden of proof regarding the compliance of their obligations and duties
with consumers in the case of disputes. Sanctions range from 50 to 500 current minimum wages
depending on the severity of the infraction.
ii. Governmental monopoly versus private initiative
The concept of monopoly is not defined but prohibited in the Competition Law. Article 110 of the
Salvadoran Constitution regulates a monopoly as a prohibition, but also as an authorisation. Thus,
two types of monopoly are established in this article. The first is known as a monopoly itself and is
prohibited for being considered detrimental to collective interests. The other type is known as a
social monopoly.
Because there is no concept of monopoly in the Competition Law, the Constitutional Chamber of
the Supreme Court established in its case law has helped to define Article 110. Case law states that
only social monopolies can exist in El Salvador, giving a definition of the term. For the Constitutional
Chamber, a social monopoly ‘can only be created through a law in its formal and material law and
directly in favor of the State or the Municipalities, when social interest makes it essential to the sole
purpose to protect the social interest of the population acting as consumers’.
Before the privatisation process, a governmental monopoly existed. However, since private parties
could participate in the rendering of public ser vices, the governmental monopoly has been
diminished. Currently, private parties are rendering most public ser vices. Nevertheless, a social
monopoly still exists. The monopoly relies on the managing of the sewerage system. Only ANDA
162 Doing Business in Latin America OCTOBER 2018
provides this ser vice. To date, no private party has been interested in rendering this ser vice.
Regarding the market for providing water supply, for the ser vice of providing drinking water,
ANDA holds most of the share market, without committing any anti-monopoly practices. ANDA
holds the leading position in the market and is the supplier that also holds 55.05 per cent of
the complaints filed before the Defensoría del Consumidor, which is the entity responsible for
safeguarding consumers.
On the other hand, in services such as power generation, distribution and telecommunications,
private parties have the leading positions. The participants in the telecommunications and power
markets need special authorisation granted by the state to provide services. This authorisation is
called a concession. The telecommunications sector holds second place in the top ten list of sectors
that have the most complaints regarding consumer protection as of December 2014. In addition,
two of the leading operators in this market are also in the top ten of service providers with the most
complaints in the same period.
In addition, there are markets, such as the management of pension funds and the healthcare system,
that are being shared by the state and private parties. However, in the market of the management
of pension funds, private parties known as AFP hold most of the market share. By contrast, for
healthcare rendering services, the state holds most of the market share. This leading position is not
based on the quality of services but the level of income of the population. Most of the population
cannot afford health insurance or pay for private healthcare.
iii. Privatisation rules
The El Salvadoran Government decided that the privatisation process of the telecommunications
and power sectors must follow some basic rules. However, no general rules for the privatisation
processes were enacted. The process of the privatisation of ANTEL was a special case. The rules of
the privatisation process of ANTEL were included in the Ley de Privatización de la Administración
Nacional de Telecomunicaciones. The law stated that, to be dissolved, ANTEL had to be divided into
two corporations: CTE and INTEL.
All assets, rights and obligations of ANTEL necessary to keep the company operating had to be
transferred to CTE. In addition, all rights over frequencies owned by ANTEL to operate the mobile
personal communication system of 1,950 to 1,965 MHz and 1,870 to 1,885 MHz had to be transferred.
The rights to use the frequencies to operate the wireless telephone system from 880 to 890 MHz and
835 to 845 MHz had to be transferred to INTEL.
The privatisation process was supervised by a special commission that included the Economy Minister,
the Finance Minister and a special representative appointed by the President, where the latter was the
president of the commission. The sale of both corporations’ assets and stock required that strategic
partners, that is, investors with the financial and technical capabilities to invest in telecommunications
services and the related infrastructure, needed to be the majority shareholders. The remaining shares
were sold either to eligible employees or through a public auction.
Specifically, the distribution of CTE shares had to be offered under special rules, with 51 per cent to
a prequalified strategic partner, ten per cent to active and retired employees and 14 per cent to the
Doing Business in Latin America OCTOBER 2018 163
public auction, and two per cent of the shares had to be sold by the state in a public bid through an
international or national stock exchange. Regarding INTEL shares, 51 per cent had to be sold to a
prequalified strategic partner and 49 per cent to the public.
In the case of power generation, two parts of the business of CEL, the government-owned electrical
energy supplier, were segregated into two corporate entities: one that operated the electrical
transmission system and the other maintaining it. Corporations derived from the privatisation of
CEL’s assets that were tasked with the generation and distribution of electrical energy had to be
awarded a concession by SIGET to continue operating. CEL’s distribution and thermal energy
generating assets were auctioned off. Concessions for the rendering of electrical energy had to be
modified pursuant to the General Law on Electricity because some of them were awarded before the
privatisation of CEL’s assets.
iv. Limitations and/or prohibitions to private parties in the rendering of public services
The rendering of public services by private parties in El Salvador has no major limitations or
prohibitions, except some laws require the state to provide that services, such as power generation,
cannot be performed by individuals, only by corporations.
C. Real estate
i. Holding title to real estate
a. who can hold the title?
The El Salvadoran Constitution recognises property rights as fundamental rights. Under the El
Salvadoran Civil Code, any person, legal entity or individual, national or foreign, can hold a title to
real property, with no more restrictions established by law or the will of the owner. Based on this,
the essential characteristics of property are that it is exclusive, absolute and permanent. However,
case law of the Constitutional Chamber of El Salvadoran Supreme Court determined that property
cannot be deemed as absolute because the social function may be considered as a limit. In addition,
property cannot be considered as exclusive because there are a few restrictions, such as easements,
that may affect the use of the property. In addition, it cannot be considered as permanent because
expropriation events may occur.
There are not many restrictions for ownership in El Salvador. The restrictions are covered in the El
Salvadoran Constitution. The first restriction is addressed to foreigners only. Foreigners may own
property in El Salvador if their country of origin’s law allows El Salvadoran citizens to hold title to
property in that country. The second restriction arises because of political processes. In the early
1980s, the El Salvadoran Government enacted the Agrarian Reform Law, with limitations pertaining
to the transfer and ownership of land that conforms to certain features listed in that law, which are
still in force. However, a constitutional provision states that a single plot of land of more than 245
hectares cannot belong to single individual or legal entity. The third restriction is orientated towards
civil or religious non-governmental organisations (NGOs). These entities may not hold in property
any real estate other than that destined and related to the main purpose of the entities.
164 Doing Business in Latin America OCTOBER 2018
b. recordation of title
El Salvador has established a nationwide public recordation system, where all matters regarding real
property are registered. This recordation system is managed by the Registro de la Propiedad Raíz e
Hipoteca of the Centro Nacional de Registros. Once a titled property is filed before the Registro de
la Propiedad Raíz e Hipotecas, a filing number is assigned. When the registration process is being
carried out, a corresponding file is opened. This file contains all registered records pertaining to the
title to property, such as encumbrances and liens or any other instrument that may modify the status
of the property.
The registry’s staff review public deeds, which affect the status of a registered property, before any
change to the affected property’s record is registered. Records include information regarding the
name of the property’s owner, area, liens and filing of instruments pertaining to the property, and the
percentage of the property encumbered by any lien or belonging to different titleholders. Once the
registration process is finished, a registration number is given to the titled property.
Any potential buyer can verify the record for a given property by accessing the corresponding system
at the National Registry Center’s offices. Actual buyers can record their acquisition of any property by
registering the corresponding public deed. This instrument contains the terms of the purchase and
the sales contract of the property, triggering the registry to change the property’s record to reflect the
change in ownership.
Another way to acquire real estate is through prescription, which, attending to the circumstances of
the possessor of a determined property, can lead to the possessor acquiring the title to the property
after requesting the competent court to render a decision ordering the change in ownership, after
being in possession of the property for ten or 30 years. The court’s sentence is then registered at the
Centro Nacional de Registros and the change in the title holder is recorded.
c. horiZontal property
El Salvador’s Legislative Assembly enacted a law establishing a horizontal property regime to which
buildings and projects that wish to be regulated in a condominium-style format can adhere to.
The purpose of the regime is to regulate the rights and obligations of owners of property built on
land that belongs to all, such as parks and sidewalks. Thus, for example, the regime divides these
properties into common and private areas, and establishes the rights, obligations and limitations that
each unit owner has with respect to these areas. The law also requires that property that is meant to
adhere to this regime must be registered as such in the Registro de la Propiedad Raíz e Hipotecas.
Unlike other legal systems, in El Salvador, condominiums lack legal personality. The law also requires
that for individual condominiums to each have a different owner, they must comply with certain
structural characteristics, such as having direct access to the outside of the building or access to a
common area that leads to the outside. Buildings under construction can adhere to the horizontal
property regime, as well as finished buildings.
The Horizontal Property Regime Law requires that owners of buildings or projects intended to
adhere to the regime develop regulations, called the administration rules, that will apply to the
property, which must be registered at the Real Property Registry. The enforcement of these rules is
Doing Business in Latin America OCTOBER 2018 165
entrusted to an assembly of owners, constituted of owners or lessors of property within the building.
The rules should include, among other things, the use of common areas and objects; proprietors’
contributions to common and administrative expenses; requirements for the election of the
building’s administrator and causes for its destitution; payment of the administrator; powers given to
the administrator; establishment of the date when the administrator is required to render accounts;
method for the call to install meetings of the assembly and their periodicity; and majority necessary
for ordinary and extraordinary sessions, as well as for the adoption of decisions where the law
requires no majority.
ii. Transferring real estate
a. recordation of transfer
All transfers of real property must be registered in the Registro de la Propiedad Raíz e Hipotecas to
be effective against any third parties. Any document pertaining to any change in a property’s registry
record must be executed in a public deed witnessed and sealed by a notary public. Thus, contracts
for the sale of real property must adhere to these requirements, as well as other formalities required
by the Civil Code. The same applies to documents that deal with real property transfers, for example,
encumbrances. When a transfer of property is going to take place, a tax of three per cent must be
paid if the property exceeds US$28,571.43. In addition, registration fees will have to be paid. The fees
are calculated at US$0.63 per hundred dollars.
b. instruments of conveyance
The transfer of property is documented in a definitive purchase and sale agreement, which must be
executed in a public deed before a notary public, and is registered in the Registro de la Propiedad
Raíz e Hipoteca. The registration of the deed of sale in the registry is essential to effectively execute
the transfer of title to the purchaser; otherwise, the public deed only contains an agreement to sell
with no actual practical effects.
c. special limitation
Because of political processes in the 1980s, the Agrarian Reform Law prohibits the sale of rural land
granted to cooperative associations and eligible workers to other individuals or legal entities not
entitled to that land under that law.
iii. Financing real estate acquisitions
Real estate acquisitions in the Republic of El Salvador can be financed by local or foreign lenders.
The buyer usually provides security to the lender in the form of a real property mortgage over the
property. Mortgages must be granted in the form of a public deed before a Notary Public in El
Salvador and registered at the Real Property Registry at the National Register Office to create the
encumbrance over the property.
166 Doing Business in Latin America OCTOBER 2018
iv. Leasing real estate
El Salvador’s Civil Code is the main legislation regulating leasing agreements; however, a special
Financial Leasing Law exists. This law regulates other leasing agreements when the lessor is a business
whose main commercial activity is the purchase and leasing to third parties of real property and the
Real Estate Lease Law applies to residential and commercial leases, as described below.
a. types of leases
Applicable legislation establishes different obligations to both the lessor and lessee according to the
type of property being leased. As such, leasing agreements in El Salvador can be classified in the
following way:
Leases that exceed US$22.45 per month must be executed in writing.
Rural or urban property: Essentially, the lessor is required to give the leased property to the lessee in
the condition necessary for its intended use under the corresponding leasing agreement and protect
the lessee’s peaceful possession of the property. Likewise, the lessee is required to return it when
the lease expires, in the same condition. Certain variations on these basic rights and obligations are
applicable, depending on the nature of the leased property.
Leases under the Financial Leasing Law and Civil Code: As described above, financial leasing
agreements grant the lessee the right to purchase the leased property. On the other hand, the lessor
is a merchant operating in the real estate market, purchasing property and leasing it afterwards.
Leases under the Real Estate Lease Law: Certain residential and commercial leases fall under the
scope of this law, which protects the lessor much more robustly than the Civil Code. The protection
consists in the safeguard of certain rights that the lessor can exercise against the lessee because of the
lessee’s individual features or occupation, or the leased property’s intended use. In all cases, the lease
agreement is required to be in writing and the lack of a document is imputable to the lessor.
b. lease agreements
Lease agreements should contain, among others, the following provisions:
The right of the lessee to waive the agreed lease term and terminate the agreement at any time. This
termination must be made through a written notice sent at least within a term equal to the time that
transpires between installments.
Whenever the lessor agrees, the lessee has the right to sublet the property.
Lease agreements can be automatically renewed. The renewal will be understood in the same terms,
for three months, when the leased property is of an urban nature and for the time necessary to finish
commenced works and collect the natural produce of rural real property. Whenever a lease expires or
is terminated, the lessor has the right to require the return of the property.
In residential leases, the lessee has the right to exercise his/her profession within the leased property,
unless it exclusively uses the leased property for that purpose instead of housing.
Doing Business in Latin America OCTOBER 2018 167
Lease agreements are generally executed by means of a private document that is authenticated
afterwards in another document, which is sealed and signed by a notary public. Leases, both
residential and commercial, can be recorded at the National Register Office so third parties can
ascertain the existence of the lease. Note that leasing agreements have to be executed, as described
previously, when the total value of the lease is undetermined or more than US$22.85 per month.
v. Construction
Investors planning to execute construction projects in El Salvador are required by laws, regulations
and municipal ordinances to submit the construction plans to the local municipal Urban Planning
Office to have them approved. In addition, the Vice-Ministry of Urban Development may approve the
plans if the corresponding municipality does not have an Urban Planning Office. These plans must
be signed and executed into a finished building by a duly accredited and registered civil engineer or
architect. After being submitted to the competent authority, the plans are studied, and their feasibility
and compliance with applicable construction regulations analysed. Once the plans are approved,
construction personnel may begin work. An environmental permit also must be approved. Once the
construction permit has been awarded by the competent public office, the finished building can be
occupied. When the construction is finished, a permit granted by the Health Ministry must be issued.
vi. Expropriation events
El Salvador’s Political Constitution establishes expropriation as another limitation pertaining to the
title to property in real estate. The Constitution establishes that whenever urgent social interest or
public utility require it, expropriation may be made effective after payment of just compensation
made to the affected title holder. Compensation for expropriation can be paid in a lump sum or
in instalments; however, when certain circumstances occur, it is possible to be compensated after
being expropriated.
D. Development of integrated capital markets and joint activities between Latin American countries
i. Merger of stock exchanges
At the end of the last century, stock exchange mergers were uncommon. In the present century,
however, these unions have become a global phenomenon. Companies seeking to enlarge their
market presence benefit from being listed on a domestic exchange and in foreign markets through
arrangements that cross international borders. When stock exchanges merge, the benefits can be
significant for the exchanges, listed companies and investors.
Currently, and historically, El Salvador has had one sole stock exchange: Bolsa de Valores de El
Salvador. Unfortunately, currently, domestic legislation and regulation on stock exchanges and
securities do not specifically contemplate the merger of stock exchanges.
168 Doing Business in Latin America OCTOBER 2018
Even though the local stock exchange has not merged – nor is it anticipating a merger – with other
exchanges, it has established cooperation agreements with the stock exchanges of other Central
American countries, including Guatemala, Honduras, Costa Rica and Panama.
ii. MILA
MILA is a product of the Pacific Alliance. This market is the result of an agreement signed between
the stock exchanges of Colombia; Santiago, Chile; and Lima, Peru. Since 2009, these stock exchanges
began the process of integrating the equity markets of the three countries. MILA officially started
operations in May 2011. One of MILA’s formation objectives related to its ability to compete with
other regional stock markets. MILA represents Latin America’s second-largest trading venue by
market capitalisation after Brazil’s BM&FBOVESPA. However, by number of listings, MILA is the
largest trading venue in Latin America, ahead of BM&FBOVESPA.
El Salvador does not form part of MILA; however, jointly with the stock exchanges of Costa Rica
(BNV) and Panama (BVP), it has established AMERCA. This initiative aims to standardise the rules
of negotiation of the markets in these jurisdictions and offer an efficient mechanism for cross-
border trading, where local intermediaries could operate in any such markets using a single trading
platform. It seeks to broaden the spectrum of issuers registered in all three markets, increasing
investment opportunities, portfolio diversification, convergence of intermediaries, liquidity, product
diversity and competitive pricing. However, AMERCA does not contemplate a merger of the three
stock exchanges into one. Further, its actual implementation remains on hold while local regulators
negotiate a final legal framework.
iii. Pacific Alliance
Although El Salvador does not form part of the Pacific Alliance, it is part of the Central American
Common Market (Mercado Común Centroamericano). This ‘common market’ has existed since 1960
between El Salvador, Guatemala, Honduras and Nicaragua, while Costa Rica joined a few years later.
The main objective was to create a common market among member countries, achieving a free trade
zone in 2001, excluding certain agricultural products. El Salvador has also entered into FTAs with
Chile, the Dominican Republic, Colombia, Panama, Taiwan, the US and Mexico.
In the first trimester of 2018, El Salvador, along with other Central American countries, signed an
FTA with South Korea. This agreement is expected to be ratified before the end of the year by the
Legislative Assembly.
E. Offshore vehicle providers in Latin American countries
i. General concept: legal framework and scope of general activities
Offshore companies are foreign entities that do not engage in any economic or commercial activity
in El Salvador, characterised by establishing themselves in a foreign country, generally a tax haven.
Offshore companies are also known as non-resident companies.
Doing Business in Latin America OCTOBER 2018 169
From a fiscal perspective, it is important to note that residents who execute commercial operations
with persons domiciled/resident in tax havens shall transact under market prices. Some of these
operations also require special disclosures to the Treasury Ministry. Further, payments made by
residents to offshore entities are generally subject to a 20–25 per cent income tax withholding, and a
13 per cent VAT withholding.
In El Salvador, the most commonly used offshore vehicles are: (1) Panamanian entities or
foundations, due to their straightforward and flexible incorporation laws, easy corporate
bookkeeping and secrecy laws, among others; (2) Delaware entities (eg, LLCs), essentially for the
same reasons above – note that the Panamanian corporation regulation is based on the same model
as that under the State of Delaware; and (3) Spanish entities, principally due to the existence of a
bilateral fiscal treaty between Spain and El Salvador, which establishes certain preferential tax rates
and seeks to avoid double taxation.
ii. LLCs
El Salvador legislation recognises and regulates LLCs that engage in economic or commercial activity
in the country. In the context of members’ limited liability, there are two traditional companies
available: (1) the sociedad de responsabilidad limitada, which is a share participation form of company,
where the personal dimension of the partners is an essential component of the entity, and their
share in the entity’s capital is divided into personal participations (participaciones sociales); and
(2) the sociedad anónima, which is a stock participation form of company, where the shareholders’
participation in the entity’s capital is divided into stock (acciones). In El Salvador, LLCs need to be
formed and maintained by at least two members; and the members’ corporate liability is limited to
the amount of their respective share participation in the entity’s capital.
iii. Foundations and trusts
Regarding foundations, El Salvador’s regulations lack a private foundation regime such as that
available in Panama for the fundaciones de interés privado, but do regulate the form of foundation that
seeks the public interest (fundación).
Regarding local trusts (fideicomisos), these are of limited use in El Salvador because the administration
of a local trust – the fiduciary duty of the trustee – may only be delegated to and exercised by a bank
duly authorised and licensed in El Salvador. Salvadoran trusts have, in general, a 25-year term and
shall be remunerated. Local trusts and their amendments are generally subject to registration at
the Registry of Commerce, and for the case of real estate trusts, filing with the local Real Estate and
Mortgage Registry is also necessary.
Note that the setting up of a foreign trust on a cross-border basis is not a regulated activity in El
Salvador. However, pursuant to El Salvadoran tax law, an offshore trust – even if regulated by foreign
law – would be deemed a taxable subject in El Salvador if most of the beneficiaries reside and are
taxable subjects in El Salvador, and/or when the activities of the trust involving local assets give rise to
taxable events imposed on the trust’s beneficiaries.
170 Doing Business in Latin America OCTOBER 2018
Doing Business in Latin America OCTOBER 2018 171
Mexico
172 Doing Business in Latin America OCTOBER 2018
IX. Mexico
A. Foreign investment
i. Authorisations versus limitations or prohibitions
In Mexico, there are some activities that shall be carried out by the Mexican Government such as:
• extraction and exploration of oil and hydrocarbons;
• electric energy distribution and transmission;
• generation of nuclear energy;
• radioactive minerals;
• telegraphs;
• radiotelegraphy;
• postal services;
• issuance of paper currency;
• production of coins; and
• control, supervision and surveillance of seaports, airports and helipads.
Mexican legislation also considers certain activities reserved exclusively to Mexicans or Mexican
companies, with a clause excluding foreign nationals. According to this clause, any foreign individuals
that invest in Mexican corporations have to act as Mexicans in the said investment and renounce their
consular protection over that particular investment. These activities are as follows:
• domestic land transport of passengers and cargo, excluding parcels and couriers; and
• development bank institutions.
Mexican corporations with foreign investment are only able to carry out certain activities if the
foreign investment does not exceed up to 49 per cent of:
• manufacture and sale of explosives, firearms, cartridges, ammunition and fireworks, excluding
the acquisition and use of explosives for industrial and mining activities, and the development
of explosive mixtures for use in such activities;
• printing and publication of newspapers for circulation in the national territory;
• series ‘T’ shares of companies owning agricultural, livestock and forestry land;
• freshwater, coastal waters and exclusive economic zone fishing, excluding aquaculture;
• the Integral Port Administration;
• port services piloting ships;
Doing Business in Latin America OCTOBER 2018 173
• shipping companies engaged in the commercial exploitation of vessels for inland and coastal
navigation, excluding tourism cruises and exploitation of dredges and floating structures for
port construction, conservation and operation;
• supply of fuels and lubricants for ships, aircraft and railway equipment;
• radio broadcasting: this threshold limitation will be subject to the reciprocity that exists with the
country of incorporation of the investor or economic agent who exercises control, in the last
instance, directly or indirectly over such an investor; and
• air services, including domestic, whether scheduled or non-scheduled; international air
transport services, whether scheduled or non-scheduled; aerotaxi transport; and, specialised air
transport services.
Every other licit activity may be carried out by foreign investors with the proper registration in
the National Foreign Investment Registry, controlled by the Ministry of Economy. The Foreign
Investment Law contemplates the registry for:
• Mexican corporations whose capital is comprised of foreign investment, neutral investment and
Mexicans living abroad that have acquired another nationality;
• any foreigner, foreign corporation or Mexican living abroad that has acquired another
nationality that carries out commercial activities in the Mexican territory; and
• trusts that result in foreign investment rights.
The registration must be made within 40 days after the foreign investment is carried out.
ii. Treatment of foreign investment in infrastructure initiatives and PPP projects
The National Infrastructure Programme 2014–2018 is focused on promoting and creating more
economic activity and jobs to support infrastructure development, with a long-term vision based on
three guiding principles of the National Development Plan: (1) balanced regional development; (2)
urban development; and (3) logistic connectivity in order to achieve all national targets.
According to the National Democratic Planning System and through the National Infrastructure
Programme 2014–2018, the Federal Government seeks to guide the comprehensive functionality of
existing and new infrastructure of the country, through the following specific objectives per sector:
• have an infrastructure and logistics platform for transport and modern communications to
promote greater competitiveness, productivity, economic and social development;
• optimise the coordination of efforts directed at energy infrastructure, ensuring the proper
development of this specific sector in order to have enough energy of good quality and offer
competitive prices;
• increase water infrastructure, both to ensure water for human consumption and agricultural
irrigation, as well as ensuring water protection in the case of floods;
• contribute to strengthen and improve interagency health infrastructure to guarantee effective
access to quality health services;
174 Doing Business in Latin America OCTOBER 2018
• promote urban development and the construction of quality housing, equipped with
infrastructure and basic services, with orderly land access; and
• develop competitive infrastructure that promotes tourism as a strong guiding principle of
regional productivity and as a welfare detonator.
Projects (with an exchange rate at the time of the elaboration of the planned projects)
Total estimated investment Planned projects 2014–2018
$505,395.39m 743
According to the statistics from Centro de Estudios Económicos del Sector de la Construcción
(‘CEESCO’), the maximum calculated progress by the end of 2018 will be 73 per cent.
a. communication and transport
Objective: Have an infrastructure and logistics platform for transport and modern communications
to promote greater competitiveness, productivity, economic and social development.
Total estimated investment Planned projects 2014–2018
$86,081.27m 223
Total funds per sector (millions of dollars)
Total $86,081.27 Public resources $36,384.32 Private resources $49,696.92
According to the statistics from CEESCO, by the end of 2018, the communication and transport
sector is expected to make 80 per cent progress according to the investment programme.
b. territorial agricultural and urban development
Objective: Promote urban development and the construction of quality housing, equipped with
infrastructure and basic services, with orderly land access.
Total estimated investment Planned projects 2014–2018
$124,703.35m dollars 4
Total funds per sector (millions of dollars)
Total $124,703.35 Public resources $65,758.26 Private resources $58,945.00
c. energy (reserved for public investment only)
Objective: Ensure the proper development of energy infrastructure in order to have enough energy
of good quality and offer competitive prices.
Total estimated investment Planned projects 2014–2018
$35,582.45m 133
Doing Business in Latin America OCTOBER 2018 175
d. energy
Objective: Ensure the proper development of energy infrastructure, in order to have enough energy
of good quality and offer competitive prices.
Total estimated investment Planned projects 2014–2018
$225,647.68m 129
Total funds per sector (millions of dollars)
According to the statistics from CEESCO, by the end of 2018, 57 per cent progress is expected.
Policies and strategies for 2018–2019 in the energy sector:
• identify the supply of the energy sector and track the committed investments;
• encourage the participation of national companies in infrastructure projects; and
• develop talent, innovation and technology on behalf of infrastructure projects to develop and
work towards the implementation of technology and international certifications.
For productivity and efficiency:
• develop better financial instruments, in coordination with Nacional Financiera (‘NAFIN’),
Banco Nacional de Obras y Servicios Públicos (‘Banobras’) and other entities in order to allow
private companies to access competitive credits.
Total $225,647.68 Public resources $189,925.84 Private resources $71,304.28
e. hydraulics
Objective: Increase water infrastructure, both to ensure water for human consumption and
agricultural irrigation, as well as ensuring water protection in the case of floods.
Total estimated investment Planned projects 2014–2018
$27,997.22m 84
Total funds per sector (millions of dollars)
Total $27,997.22 Public resources $24,808.50 Private resources $3,188.72
According to the statistics from CEESCO, the expected progress by the end of 2018 in the water
sector is about 44 per cent.
f. health
Objective: Contribute to strengthening and improving interagency health infrastructure to guarantee
effective access to quality health services.
176 Doing Business in Latin America OCTOBER 2018
Total estimated investment Planned projects 2014–2018
$4,878.96m 87
Total funds per sector (millions of dollars)
Total $4,878.96 Public resources $4,807.74 Private resources $71.17
According to the statistics from CEESCO, the expected progress in the health sector by the end of 2018
is 61 per cent.
g. tourism
Objective: Promote the development of tourism infrastructure that consolidates priority destinations
and helps to diversify the offer to new destinations.
Total estimated investment Planned projects 2014–2018
$12,146.50m 83
Total funds per sector (millions of dollars)
Total $12,146.50 Public resources $4,626.86 Private resources $7,519.63
According to the statistics from CEESCO, the expected progress in the tourism sector by the end of 2018
is ten per cent.
iii. Treatment of foreign investment in oil and gas, and mining activities
The Mexican Federal Constitution was reformed in 2013, allowing the participation of private
investments in the oil and gas industries, although, as mentioned above, the extraction and
exploration of hydrocarbons is still an activity reserved for the Federal Government, which can
be made through productive public companies and agreements with the private sector. The
corresponding acts and regulations to execute the constitutional amendment were made in 2014.
a. oil and gas
• The Federal Constitution expressly provides that the exploration and extraction of oil and any
other hydrocarbons will be carried out exclusively by the state through its public companies
(Pemex) and agreements with the private sector.
• As part of round zero, the Ministry of Energy gave Pemex 83 per cent of hydrocarbons reserves
and 21 per cent of prospective resources.
• Pemex announced ten strategic partnership opportunities in the following four projects (over a
period of 13 months beginning in November 2014):
Doing Business in Latin America OCTOBER 2018 177
– mature fields: over a probable 1,600,000 barrels of crude petroleum equivalent; as a ‘2P’
reserve;
– extra heavy raw petroleum fields: will focus on the three areas of extra heavy crude oil;
– development of gas: associated with the development of two giant gas fields in deep waters
containing 212 million barrels of crude oil equivalent; and
– deep waters: deep water fields; as a 2P reserve;
• As part of round one, the Ministry of Energy announced that it will offer 169 blocks to bidders
in round one: 109 blocks for exploration and 60 blocks for extraction.
• The reserves to be offered are estimated at around 3.8 billion barrels of oil equivalent for 2P
reserves, and about 14.6 billion barrels of crude oil equivalent (‘BOE’) for prospective reserves.
• Mexico expects the annual investment in these projects to be in the region of U$S8bn for
2015–2018.
• For these activities, foreign investment is permitted through a public bid that contemplates the
best technical and economic conditions of the bidders.
• Pemex announced in 2016 its 2017–2021 business plan, in accordance with Pemex’s official
statement on its business plan.
• The actions contained in the business plan are based on conservative scenarios and realistic
parameters.
• With the announced measures, Pemex will reach a financial balance in 2019, and in 2021, it will
overcome the losses in the National Refining System.
• The business plan is already in execution, and has made important breakthroughs:
– Pemex risk has decreased by 50 per cent, 148 basis points;
– the launch of first farm outs: Trion block in deep waters, Ayin-Batsil in shallow waters and
Cárdenas-Mora-Ogarrio onshore fields; and
– Gasoductos de Chihuahua divestiture.
b. mining
• The Mining Act establishes that the exploration and exploitation of minerals can be granted
to the private sector, and even Mexican companies with foreign investment in their capital.
These activities can be carried out by the private sector through a concession on the conditions
established in the act.
• To obtain the concession, a company must comply with the following requirements:
– its corporate objective must include the exploration and exploitation of minerals; and
– It must have its corporate domicile in the Mexican territory.
178 Doing Business in Latin America OCTOBER 2018
Every concession granted will be only for a specific mining lot. The concession will be granted to
the first applicant if this applicant satisfies the operation requirements necessary for exploring the
mining lot; this concession will have a length of 50 years.
iv. Treatment of foreign investment in real estate
The Mexican Law does not have any restrictions on the acquisition or lease of real estate in Mexico
by foreigners or foreign investment companies. However, there is a special procedure for real estate
acquisition in the restricted zone, which is within 100 kilometres of the frontiers and 50 kilometres of
the coast.
The special procedure is as follows:
• Mexican corporations with foreign investment:
– outside the restricted zone: there is no limitation on the acquisition of real estate; and
– within the restricted zone:
– for residential purposes: the real estate property can be acquired by a trust in which
the fiduciary has the property of the real estate but the beneficiary has the usage and
enjoyment of the property; and
– for non-residential purposes: the real estate property can be acquired directly, with
registration at the Secretariat of Foreign Affairs.
• foreigners and foreign corporations:
– outside the forbidden zone: the real estate property can be acquired directly with registration
at the Secretariat of Foreign Affairs; and
– within the forbidden zone: for residential and non-residential proposes, the real estate
property can only be acquired through a trust.
v. Treatment of foreign investment in agribusiness activities
Mexico has very rich land for agriculture production, especially because of its climate. Mexico’s
agribusiness activities are ruled by the Agrarian Act. The Federal Government promotes the
development of the rural sector through the promotion of productive activities and social action to
improve the welfare of the population and its participation in national life. There are no limitations
to the exploitation of private property real estate for agricultural activities.
The Agrarian Act includes a land property regime called ‘ejido’ for rural communities. Ejido
communities own massive parcels of land for their own agrarian exploitation. Ejidos can be turned
into private property through a complex procedure, and even be owned by foreigners, with the real
estate limitations mentioned above.
Although agricultural products can be imported into Mexico without apparent limitations, except for
illegal drugs, the Foreign Trade Act establishes policies to prevent subvention and dumping practices.
Doing Business in Latin America OCTOBER 2018 179
The protection to the agribusiness industry can include the imposition of countervailing duties in
certain products that may threaten the Mexican production.
In accordance with the National Institute of Statistics and Geography (Instituto Nacional de
Estadística y Geografía (‘INEGI’)), the main agricultural products in Mexico are the following:
• sugar cane;
• corn;
• sorghum;
• orange;
• wheat;
• banana;
• tomato;
• green chilli;
• lime;
• mango;
• potato;
• coffee cherry;
• avocado;
• beans;
• apple;
• barley;
• grapes;
• rice;
• strawberry;
• peach; and
• soy.
vi. Treatment of foreign investment in the rendering of public services
The Public Service of Electric Energy Distribution is reserved exclusively for the Mexican
Government, however the provision of other services may be performed by private investment.
Therefore, given the limitations established in the Foreign Investment Law mentioned in the first
section of this chapter, some of these services can only be provided by the private sector through
public bids and the granting of concessions; the remainder are conducted through PPPs.
180 Doing Business in Latin America OCTOBER 2018
a. ppp agreements
The Public–Private Partnership Act establishes the contractual rules for PPP agreements. The private
party of these agreements can only be a company in which the corporate objective is exclusively the
activities necessary to develop the specific project in the agreement. The authority publishes the rules
of the bid that contain specific regulations for the corporate structure of a company that wants to
obtain the contractual right to be part of a PPP.
The agreement must establish the following:
• objective of the agreement, which will be the provision of the services and the execution of the
necessary infrastructure works;
• rights and obligations of the parties;
• product features, specifications, technical standards, performance standards and quality for the
execution of the work and service delivery;
• a list of the real estate and merchandise needed for the project, and its destiny at the
termination of the agreement;
• the financial regime of the project;
• distribution of risks;
• the constitution of a surety for any possible breach;
• the term for the development work, the beginning of the service provision and the duration of
the agreement; and
• the corresponding authorisations (concession, permits, etc) for the service provision.
B. Rendering of public services
i. General framework
The Constitution determines what is considered as a public service; this is categorised by political
jurisdictions: the federation (Articles 25, 27, 28 and 73), the states (Articles 116, 122 and 124) and the
municipalities (Article 115). The federal and municipal levels concentrate on the rendering of these
services, leaving the state with a mere coordination role. The federal level is responsible for issues
related to hydrocarbons, electricity supply, postal service, financial system and communication, as well
as health, education and roads. For the state and municipal levels, on the other hand, public services
comprise mostly education, water utility services, public lightning, pavements, waste collection,
markets, graveyards, public safety and transit systems, among others.
These services can be rendered either by means of a state monopoly, by joint participation with
private parties or by coordination with other political jurisdictions.
The Constitution sets out principles for the participation of the private initiative in rendering public
services. These can be found in Article 25, whereby it is established that public, social and private
Doing Business in Latin America OCTOBER 2018 181
sectors shall contribute to national economic development, with social responsibility. Social and
private sector enterprises shall be supported under the criteria of social equity, productivity and
sustainability. This article also mentions that, in order to develop and organise the nation’s priority
development areas, both public and private sectors will concur.
Besides concessions, another common scheme for rendering public services is through PPPs,
especially with respect to roads and water utility services. PPPs are regulated by the Federal Public–
Private Partnership Law (Ley de Asociaciones Público-Privadas) as well as the respective state’s PPP
laws, if any. The most common PPP modality used in Mexico is through contracts whereby the private
parties are obliged to provide a service, whether it is water supply or public lightening supply, or
conduct a construction project (ie, road projects). It is important to mention that PPPs are forbidden
in terms of the Hydrocarbon Law for exploration and production activities.
Concerning water utility services, the municipality is responsible for rendering the service in
coordination with Congress. Generally the municipal authority grants a concession for this purpose.
The title granted under the concession represents an exclusive right for the concessionaire, subject
to the terms and conditions set out in the contract entered into with the municipality, in order to
ensure the avoidance of abusive practices that could prejudice users. Likewise, for the energy supply
or public lightening, the municipality will generally issue a concession or PPP through which private
parties will participate, upon approval by Congress.
ii. Governmental monopoly versus private initiative
Governmental or state monopolies in Mexico can be understood as one of the following concepts:
(1) decentralised public entities; (2) state-owned enterprises; (3) public trusts; and (4) state
productive enterprises.
State monopolies in Mexico are closely linked to the strategic areas concept, which encompasses
economic sectors such as post, telegraphs, radiotelegraphy, radioactive minerals, nuclear energy,
and the control and design of the National Electric System; as well the exploration and production
of petroleum and other hydrocarbons. Similarly, it is also related to the concept of priority areas for
national development, such as satellite communication and railways. Nevertheless, as mentioned
above, the Constitution allows the participation of the private initiative in public services for both
strategic and priority areas by means of concession, permits or titles, as may be the case.
In the federal level, concessions and permits are generally granted by the Executive Branch
through its respective office, whether it is the Secretariat of Energy (Hydrocarbons, minerals,
etc) or the Secretariat of Communications and Transportation (roads, ports, etc), among others.
The only exception is for the broadcasting and telecommunications sectors, where the Federal
Telecommunications Institute is the body granting such concessions.
As for electricity supply, market liberalisation is now in process after the Constitutional amendment
of 2013. As part of this process, in the energy sector, generation and commercialisation of power are
no longer strategic activities of the state; in turn, CFE alongside other private parties will develop
such activities. Nevertheless, the state will hold exclusive control over the National Electric system,
as well as the transmission and distribution of power. The Regulatory Commission of Energy
182 Doing Business in Latin America OCTOBER 2018
(Comisión Reguladora de Energía (CRE)), as a coordinated energy regulator, is the body in charge
of controlling the sector. It grants permits for producers and determines the tariffs for the delivery
of the service. No concessions are to be granted in this sector; however, the state may enter into
agreements with private parties under the terms of the respective regulations.
iii. Privatisation general rules
Over the past three decades, Mexico’s Government has pursued a policy that aims at the privatisation
of public entities. Two main purposes have driven this path: first, to strengthen public finances,
macroeconomic stabilisation and to expand the productivity of strategic sectors; and second, to open
up non-strategic economic sectors to public access.
In Mexico, privatisation of public enterprises is generally executed by Presidential Decree. The
Federal Law of State-Owned Enterprises (Ley Federal de Empresas Paraestatales) sets the basis for
the privatisation of public companies. It establishes that when a state-owned enterprise ceases to
fulfil its purpose or becomes economically unattractive, the Secretary of Finance may suggest to the
executive power (ie, the President), that it is sold, disposed of or dissolved. This process is conducted
by the Inter-Secretariat Commission of Public Expenses, Financing and Disincorporation (Comisión
Intersecretarial de Gasto Público, Financiamiento y Desincorporación).
iv. Limitations and/or prohibitions to private parties in the rendering of public services
Antitrust regulations are applicable to private entities rendering public services. The Federal
Economic Competition Commission (Comisión Federal de Competencia Económica (CFCE))
enforces the Economic Competition Law (Ley Federal de Competencia Económica) in all economic
areas, including those comprising public services under the Constitution, with the exception of
broadcasting and telecommunications sectors. The law is applicable to all economic agents, which,
according to the legal definition, comprises any legal person or individual, as well as any public
entity, with the exception of activities that the state exercises as strategic areas. The CFCE regulates
monopolistic practices and economic concentrations concerning all activities related to the public
sector, with the exception of those executed by the state under the concept of strategic areas.
However, it is unclear yet how state productive enterprises will be affected by these regulations as they
will participate as equals with other private parties. In accordance with the Hydrocarbon Law and
Electric Industry Law, the CFCE has to ensure that the activities of the new energy sector are carried
out under the criteria of fair economic competition.
For the broadcasting and telecommunications sectors, the body responsible for this regulation is the
Federal Telecommunications Institute (Instituto Federal de Telecomunicaciones (IFT)). Its main
tasks are, among others, to regulate, promote and supervise the development of the radio spectrum,
telecommunications networks and satellite services. It is the authority that regulates economic
competition in this sector, in conformity with the Economic Competition Law.
Doing Business in Latin America OCTOBER 2018 183
C. Real estate
Article 27 of the Mexican Constitution regulates land ownership in the country by establishing that
the nation originally owns the land and waters within the national territory. However, it has the right
to transfer the domain of them to private parties, therefore constituting private property.
i. Holding title to real estate
a. who can hold title?
While it is clearly stated that only Mexican nationals can have the right to hold title in real estate,
foreign nationals are also entitled to do so if and only when they convene with the Ministry of Foreign
Affairs that they shall be considered as nationals in matters concerning the real estate they acquire and,
therefore, will not invoke protection from their government regarding the real estate they obtain.
b. recordation of title
Each state in Mexico has its own public recordation system where matters relating to real property are
recorded, including titles of property, transfers, encumbrances and limitations on ownership. Each
titled property is identified by a number given by the recordation offices.
Any person can verify title to a specific property in the local records, which is advisable when interested in
acquiring property. Mexican laws require that transactions involving real property are granted in public
deed, including their purchase. Therefore, people who are interested in acquiring property must do
so through a notary public who will issue a deed of property, including the terms of purchase and sale
contract. This deed must be registered in the recordation offices, a procedure normally carried out by the
notary public who issues the deed. Once the deed is recorded, it will have effects before third parties.
ii. Limitations and modalities to ownership
a. condominium regime
Mexican states have enacted laws that regulate horizontal and vertical (buildings) condominiums.
Their purpose is to regulate the rights and obligations of owners whose properties are located in land
divided into common and private areas. Therefore, while the owners may have exclusive rights, albeit
subject to certain limitations, with regard to their private units, they also have obligations towards
areas intended for common use (gardens, car parks and amenities), which may include participation
in the expenses required for maintenance, adherence to the condominium rules, etc.
There can be many types of condominiums based on the purpose given to their units, which can be
for residential, commercial, industrial or mixed purposes. The law requires that the regime must be
incorporated through a public deed and recorded in the property records, including the specific regulations
that apply to the condominium. These regulations must include the appointment of an administrator, the
use that can be given to each unit, and terms and conditions of use of common areas, as well as matters
pertaining to the owners’ assembly, which is the highest decision-making authority of the condominium.
184 Doing Business in Latin America OCTOBER 2018
b. agricultural land
Ejidos are population centres with legal personality and self-patrimony. Those farmers who inhabit
ejidos have use and usufruct over the common-owned land in ejidos. The Agrarian Law and the ejido’s
own regulations subject them to different rights and obligations with regard to the land they can
exploit. These rights and obligations are, among others:
• use and profit from their plot of land assigned to them and the right to dispose of it;
• use and profit from land intended for common use;
• testamentary rights with regard to the land assigned to them; and
• participation in the ejido’s governing assembly, and in the election and integration of its
representation organs.
Farmers may execute different contractual operations with regard to the use and usufruct of
their plots of land; however, there are several requirements that must be met in order for them to
alienate them.
The Agrarian Law divides land located in ejidos into three categories:
1. land intended for settlement;
2. land intended for common use; and
3. plots of land.
In principle, each and all of these lands are inalienable and not subject to a statute of limitations or
distraint. Despite this, plots of land may be alienated if they are detached from the ejido regime.
In order to detach a plot of land from the regime, the farmer must receive the full domain of his/
her plot of land from the general assembly (farmers only have the use and usufruct). Once this has
been done, the plot’s registration in the National Agrarian Registry must be cancelled. The National
Agrarian Registry will then issue the deed of property. Then, the deed must be registered in the
Public Registry of Property. It is important to point out that other farmers in the ejido have the right
of first refusal with regard to the first sale once the land is detached from the ejido.
From 1996, commercial corporations have been allowed to own and manage agricultural real estate
in Mexico. This means that corporations may own agricultural real estate for industrial, commercial
or residential use. In this case, the corporation must notify the National Agrarian Registry that the
real estate has a purpose other than agricultural, provided it receives permission from the local
authorities (uso de suelo).
• Corporations with an interest in acquiring agricultural property intended for agriculture are
subject to several terms and conditions:
• the corporation’s purpose must be limited to the production, transformation and
commercialisation of agricultural products;
• there are limits to the extension of land they can own;
Doing Business in Latin America OCTOBER 2018 185
• capital stock must have a series ‘T’ stock, which must be equal to the amount of capital invested
in agricultural land;
• foreign investors may not hold over 49 per cent of series ‘T’ stock;
• the corporation and its shareholders, as well as series ‘T’ shareholders, must be registered
before the National Agrarian Registry.
If a corporation’s agricultural land exceeds the limits set out in the law, the Mexican Government has
the authority to order its sale.
c. restricted Zone
There are also constitutional limits to foreigners holding title in the areas commonly known as the
‘restricted zone’, which is a 100-kilometre strip along the borders and 50 kilometres along beaches.
However, due to the importance of foreign investment in Mexico, the Mexican Government created
mechanisms to allow foreigners to acquire property in the restricted zone. One of them is known as
the ‘beach trust’: through the use of a trust, in which the owner of the property acts as the trustor, a
Mexican bank acts as the trustee and the foreign buyer acts as the beneficiary, it is assured that the
foreign buyer has all the rights and privileges of ownership. The Foreign Investment Law allows for
the trust to be established for a 50-year term, renewable any time during its existence.
Foreign corporations can also take part in the trust scheme in order to acquire property in the
restricted zone. As to Mexican corporations that allow foreign investment, these can acquire property
in the restricted zone, provided it is not intended for residential purposes and they give notice to the
Ministry of Foreign Affairs.
iii. Expropriation events
The Mexican Constitution states that expropriation can only be carried out when it is deemed
necessary due to public utility causes and through compensation, following a procedure described
in the federal Expropriation Law. Said law establishes a list of causes that may be considered a public
utility, which includes the establishment of a public service, and construction of streets and public
infrastructure, among others. Compensation is given based on a valuation performed by the state,
and is subject to litigation in the case in which the affected party considers it to be inappropriate.
D. Compliance programmes
i. Background
Compliance has become a relevant topic for companies and practitioners in Mexico due to the
recent enactment of the Anti-Corruption Act (Ley General de Responsabilidades Administrativas),
which incentivises the design and implementation of integrity or anti-corruption compliance
programmes. Also, recent amendments to the National Criminal Procedure Code (Código Nacional
de Procedimientos Penales) subject corporations to criminal liability if, among others, they fail to
exercise ‘adequate control’.
186 Doing Business in Latin America OCTOBER 2018
ii. The Anti-Corruption Act
The Anti-Corruption Act, which became effective in July 2017, mandates that in assessing the liability
of a company for alleged acts of corruption, the competent court must assess whether the indicted
company has an integrity policy in place and if it includes, among others: (1) an organisation and
proceedings manual clearly setting forth the responsibilities of the appropriate areas and individuals
within the organisation; (2) a code of conduct appropriately socialised within the organisation; (3)
adequate control and audit mechanisms; (4) adequate whistleblowing mechanisms and sanctions for
violations from the policy; and (5) adequate training mechanisms.
Among others, the Anti-Corruption Act punishes as corrupt acts, bribery, influence peddling, illegal
hiring of former public officers and bid rigging. Liability under the Anti-Corruption Law, on the
other hand, may include: (1) fines for an amount of up to twice the economic benefit obtained
from the corrupt act by the individual or corporation, or affiliated parties thereof; or, if no benefit
is obtained, up to approximately MXP$11.0m, in the case of individuals, or MXP$110.0m, in the
case of corporations; (2) ban from public tenders for a period of up to eight years in the case of
individuals and ten years in the case of corporations; (3) obligation to indemnify the public treasury
for losses and damages (daños y perjuicios) caused to it; and (4) solely in the case of corporations: (i)
the prohibition to engage in trade for a period not to exceed three years; and/or (ii) the order to
dissolve and liquidate the corporation.
As noted above, the existence of compliance programmes (integrity policies) and the active
participation and cooperation of the management or shareholders of a corporation in an
investigation are mitigating factors that must be weighed when imposing liability on a corporation. By
the same token, the management or oversight bodies of a corporation failing to report corrupt acts
within the organisation of which they are aware is considered an aggravating factor that thus weighs
in favour of a more severe penalty.
The statute of limitations for pursuing liability under the New Anti-Corruption Law is three years in
the case of minor offences of public officers, and seven years in the case of aggravated offences of
public officers or offences of private parties.
iii. The criminal angle
The National Criminal Procedure Code (Código Nacional de Procedimientos Penales)
subjects corporations to criminal liability for certain offences if, among others, the offences
are committed in the name and on behalf of the organisation, for its benefit or with resources
provided by the organisation, if and to the extent it is established that said organisation failed to
exercise ‘adequate control’.
While no statutory definition nor precedent or guidance exists as to what should be understood as
‘adequate control’, having compliance programmes should be considered as evidence of the prima
facie existence of adequate control.
Doing Business in Latin America OCTOBER 2018 187
iv. Privacy legislation
The Federal Privacy Act (Ley Federal de Protección de Datos Personales en Posesión de Particulares)
mandates that data controllers must, among others, take adequate measures to ensure that personal
data is handled pursuant to the principles set forth therein. The Regulations of the Privacy Act, on
the other hand, make it explicit that data controllers are required, pursuant to the Privacy Act, to
create internal policies and procedures to that end, and to ensure that the same are periodically
audited and compliance thereof verified, and that personnel is trained in data privacy.
As in the case of the Anti-Corruption Act, privacy compliance programmes weigh in favour of an
organisation that is investigated for breaching the Privacy Act.
v. Other laws
The Federal Anti-Money Laundering Act (Ley Federal para la Prevención e Identificación de
Operaciones con Recursos de Procedencia Ilícita) requires that entities and individuals that engage
in certain activities (‘vulnerable activities’), conduct know your customer (KYC) diligence and
maintain records of their customers and the transactions they enter into with those customers. Also,
this statute prohibits the use of cash for certain transactions.
In order to comply with these obligations, entities that engage in vulnerable activities must have anti-
money laundering compliance policies and procedures to avoid liability.
Finally, in the case of antitrust law, while the Federal Competition Act (Ley Federal de Competencia
Económica) does not give credit to entities that have antitrust compliance programmes, the
precedents of the Federal Economic Competition Commission (Comisión Federal de Competencia
Económica) suggest that the enforcer could take these programmes into account when assessing
the intentionality behind an antitrust offence, which is one of the factors that dictate the size of a
potential fine. Furthermore, the commission has issued guidance for the establishment of antitrust
compliance programmes.
vi. Conclusion
While there is no obligation under any statute to have and maintain compliance programmes,
criminal and anti-corruption laws clearly incentivise having compliant integrity policies and
procedures. Also, in order to stay compliant with privacy, competition and anti-money laundering
laws, these programmes appear to be critical.
E. Offshore vehicle providers in Latin American countries
i. Legal framework and scope of general activities
Mexico has been characterised through time as a jurisdiction where residents are taxed on their
worldwide income, including that derived indirectly subject to preferential tax regimes or low-tax
jurisdictions rules.
188 Doing Business in Latin America OCTOBER 2018
In this regard, Mexico maintains a strictly enforced regime whereby any items of income realised
indirectly by Mexican residents from investments made through vehicles whose income is considered
subject to a preferential tax regime are taxed in the Mexican entity, considering such income perceived
at the moment it was generated in the entity resident in the preferential tax regime country.
Mexico does not follow the criterion of tax havens, but it has implemented controlled foreign
corporation (CFC) rules. In the following, we focus on how Mexican legislation deals with the income
taxation of controlled foreign subsidiaries in the hands of resident shareholders.
ii. Applicable legal regime in Mexico
In order to fully understand the current regime established in the Mexican Income Tax Law
regarding ‘tax havens’, it is mandatory to refer to the report titled ‘Harmful Tax Competition –
an Emerging Global Issue’, published in 1998 by the OECD, which claims the need to strengthen
effective international cooperation to combat harmful tax competition through so-called tax havens
and preferential tax regimes.
The report has been considered by member countries (including Mexico) as a starting point for
corresponding adaptation and implementation in their domestic legislation, in order to combat
harmful tax practices.
Hence, the tax treatment applicable to offshore investment maintained by either Mexican individuals or
corporations (including a permanent establishment in Mexico) has changed significantly since 2005.
Since then, the Mexican Income Tax Law has provided that an income obtained, directly and
indirectly, by Mexican residents and non-residents with a permanent establishment in Mexico
through controlled foreign entities or vehicles will be considered income subject to preferential tax
regimes when income or gains obtained directly or indirectly through such entities is not taxed or is
taxed at an income tax rate lower than 75 per cent of the income tax that would have been due and
paid in Mexico on this income.
The current applicable Mexican tax rate for corporations is 30 per cent, so the rules apply to income
taxed at a rate of less than 22.5 per cent.
Mexican tax legislation provides that income subject to a preferential tax regime is that generated
in cash, kind, services or credits, or presumptively determined by the tax authorities, even if such
income has not been distributed by the entity where it was generated.
It is considered that income is subject to a preferential tax regime if the tax actually incurred and
paid abroad is lower than the 75 per cent of the income tax that would have been paid in Mexico,
even if the referenced tax incurred and paid abroad is lower because of the utilisation of a legal,
administrative or regulatory provision, authorisation, refund, credit or any other procedure.
The aforementioned law provides that when income is earned indirectly, the tax paid by each
intermediate vehicle or entity in which the Mexican taxpayer has an interest should be taken into
account in order to determine the 75 per cent rule within the whole structure.
Doing Business in Latin America OCTOBER 2018 189
Furthermore, non-residents whose income is subject to a preferential tax regime are subject to 40 per
cent fixed withholding tax in Mexico.
Under the current administrative rules, the withholding tax rate may be lowered to the extent that
the transactions carried out by the vehicle, whose income is subject to a preferential tax regime, were
undertaken with an unrelated party or related party that is a resident of a country that entered into a
broad agreement with Mexico for the exchange of information.
In addition, Mexican legislation provides that taxpayers who maintain investments through vehicles
considered subject to preferential tax regimes are obliged to file before the tax authorities, on an
annual basis, an informative return on the income subject to the preferential tax regime.
In this regard, the Mexican Income Tax Law provides that reporting obligations are applicable when
transactions are performed through entities or vehicles deemed to be fiscally transparent, which are
defined as those that are not considered taxpayers in their country of incorporation, and the income
of which is attributed to their members, partners, shareholders or beneficiaries.
In July 2013, as a part of the ‘Action Plan on Base Erosion and Profit Shifting’ (BEPS) implemented
by the OECD, it launched 15 actions designed to ensure the coherence of corporate income taxation
at an international level.
One of those actions, Action 3, highlighted the need to address BEPS by using CFC rules, considering
that those rules have existed in the international tax context for over five decades, and dozens of
countries have implemented them.
In October 2015, the OECD published the final report of Action 3, Designing Effective Controlled
Foreign Company Rules.
The draft and final report consider all the constituent elements for effective CFC rules, aimed at
having countries that do not have those rules to implement them, and countries with existing CFC
rules to modify their rules to align them more closely with said recommendations.
Accordingly, on 7 June 2017, Mexico signed the Multilateral Convention to Implement Tax Treaty
Related Measures to Prevent Base Erosion and Profit Shifting. This multilateral convention was
enacted on 1 July 2018, adopting the provision related to hybrid mismatches (transparent entities).
Additional modifications to the Mexican tax law may be derived as part of the implementation and
adoption of these actions.
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Nicaragua
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X. Nicaragua
A. Foreign investment
i. Authorisations versus limitations or prohibitions
a. general absence of restrictions
Nicaragua is the largest country in Central America, and has a strategic location in the region. With a
booming economy and the ability to move capital freely, it offers the ideal climate for investing.
Prior approvals or registration requirements are not needed for new investments. In addition, the
US dollar is the standard currency used for businesses under a few specific exchange controls by the
Central Bank of Nicaragua.
The opportunities available in Nicaragua are directly correlated to its positive growth indicators.
Human development, credit ratings, free trade and tax incentives are all on the rise. These conditions
have made the deployment of many direct foreign investment projects possible.
Among others, there has been great success in renewable energy, free trade zones,
telecommunications, mining, banking, agriculture and tourism. Nicaragua’s workforce is productive
and competitive. Tax incentives and export subsidies are offered in some areas.
ii. Law for the Promotion of Foreign Investment (Law No 344)
The Law for the Promotion of Foreign Investment was enacted to ensure stability for foreign investors.
The right of foreign investors to enjoy, use and own property related to their investment is acknowledged
in said law. The only exception is when a property is declared to be of social interest for the public benefit
by the competent authority. This is established in Article 44 of the Nicaraguan Constitution.
Foreign investors enjoy free access to buying and selling foreign currency, keeping in mind provisions
established in Nicaraguan regulations for currency exchange. Foreign investors can also transfer
capital related to their invested capital to other countries. The only rule is that it does not prejudice
the obligations the investors have in the country.
Obligations could include liquidation, voluntary sale of the foreign investment, any dividends or
gains generated in the national territory, rent and technical assistance, and payment derived from
compensation for expropriation.
Any dispute, controversy or claim arising out of or relating to foreign investments covered by said law
may be submitted to international arbitration in accordance with the agreed-upon provisions, without
prejudice to the application of national legal standards and conventions to which the Republic of
Nicaragua is a party.
194 Doing Business in Latin America OCTOBER 2018
Under this law, capital refers to all types of equity rights, property and assets that have economic value
under the modalities of convertible foreign currency.
Foreign investment is subject to the general tax regime. To benefit from certain tax exemptions,
foreign investors must strictly adhere to the benefits and tax incentives established in other laws, in
accordance with the nature of the investment.
The State of Nicaragua guarantees equal rights and obligations to foreign and national investors.
Both Nicaraguans and foreign investors must fulfil the same basic requirements to organise and
operate business activities in Nicaragua.
In addition to these principles, which are contemplated by the Constitution and local laws, the
country has signed several BITs and FTAs. These include provisions granting fair and equitable
treatment to foreign investors. The Law for the Promotion of Foreign Investment (Law No 344)
grants overall protection to all foreign and national investors.
Nicaragua has not yet signed any treaties or agreements to avoid double taxation or imposition with
any country.
Regarding arbitration treaties, Nicaragua is a signatory to the New York Arbitration Convention
and the Inter-American Convention on Arbitration (Panama Convention). In regard to investment
protection, Nicaragua recognises various bilateral treaties that establish arbitration as a means of
dispute resolution.
Nicaragua has signed BITs with the following countries: Germany, Argentina, Belgium and
Luxembourg, Chile, Czech Republic, Denmark, Ecuador, El Salvador, Finland, France, Italy, the
Republic of Korea, Netherlands, Spain, Sweden, Switzerland, Taiwan, the UK and the US.
In this context, Nicaragua is also a party to bilateral trade agreements, including agreements with
México and Taiwan, and CAFTA-DR, which is a multilateral FTA. International arbitration is the
dispute resolution mechanism provided in the BITs executed by Nicaragua, with arbitration at the
International Centre for Settlement of Investment Disputes (ICSID) or under the United Nations
Commission on International Trade Law (UNCITRAL).
Except in the case of government contracts and certain cases where common principles of conflict
of laws require the application of Nicaraguan law, parties can freely choose the governing law of the
agreements. Thus, foreign investors, as well as nationals, are free to govern their commercial relations
either by Nicaraguan law or any foreign law.
In addition, parties are also generally free to submit any dispute arising under such agreements to
the courts of Nicaragua or to the courts of a foreign jurisdiction, as well as to arbitration and other
alternative method of dispute resolution.
Doing Business in Latin America OCTOBER 2018 195
iii. Treatment of foreign investment per sector
a. agribusiness activities
Nicaragua offers significant tax incentives under free trade zone regimes for companies interested in
establishing export-orientated operations in the agribusiness industry. Some of these incentives are:
• 100 per cent exemption from payment of income tax during the first ten years of operation and
60 per cent from the 11th year onwards;
• exemption from all taxes and customs duties, and consumption associated with imports;
• exemption from customs duties on transport equipment;
• exemption from tax payment on property sales; this includes the tax on capital gains, if any;
• 100 per cent exemption from excise taxes, selective sales or consumption;
• 100 per cent exemption from municipal taxes; and
• 100 per cent exemption from export taxes on products made within the regime.
Furthermore, the Nicaraguan Tax Law (Law No 822) establishes incentives for agricultural producers,
which among others are:
• a list of goods that are exempt from transferring VAT;
• exemption of VAT and selective consumption tax for raw materials, intermediate goods, capital
goods, spares, parts and accessories for machinery and equipment for agricultural producers
and micro, small and medium-sized industrial and fishing enterprises; and
• in the forestry industry, Nicaragua has more than 1.7 million hectares suitable for precious
wood production and 2.7 million hectares of teak suitable for the intensive production of
natural rubber, a product that is currently experiencing very high demand worldwide.
Regarding investment in forestry, the main areas of investment opportunities are:
• forest plantations of commercially valuable timber;
• rubber plantations;
• cocoa bean production for export; and
• carbon credits.
Additionally, Nicaragua has a temporary admission regime that allows the entry of goods into
national customs territory without the payment of any duties or taxes.
b. tourism
The Law of Incentives for the Tourism Industry (Law No 306), offers various tax incentives for
investment in this sector, and is considered one of the most generous and competitive in the Central
American region.
196 Doing Business in Latin America OCTOBER 2018
It provides incentives and benefits for investment in the tourism industry. The incentives are:
• exemption from 80 to 100 per cent of income tax for a period of ten years;
• 100 per cent exemption from property tax (impuestos de bienes inmuebles (IBI)) for a period of
ten years;
• 100 per cent exemption from VAT applicable to design services, engineering and construction;
and
• 100 per cent exemption from import tax and duty on the purchase of materials and fixtures for
a period of ten years.
In the case of reinvestment, if at the end of the incentive regime of ten years the investor decides to
reinvest at least 35 per cent of the value of the investment originally approved, it can receive all the
benefits for ten additional years.
c. oil and gas
Under the Nicaraguan Constitution, hydrocarbon deposits are considered national goods.
The activities related to the exploration and exploitation of hydrocarbons in Nicaragua are regulated
by the Ministry of Energy and Mining (Ministerio de Energía y Minas (MEM)).
The Special Law for Exploration and Exploitation of Hydrocarbons (Law No 286) establishes
the legal framework for such activities, along with the national and international technical and
environmental norms.
Said law establishes that the state, represented by the Nicaraguan Petroleum Company, will take part
in activities included in the provisions regulated by the law.
Investors interested in developing projects of exploration and exploitation of hydrocarbons may associate,
cooperate, make alliances and enter into agreements with the Nicaraguan Petroleum Company.
Foreign investors interested in initiating direct negotiations or in bidding to enter into an exploration
and exploitation of hydrocarbons contract must be previously qualified.
The qualification is granted through ministerial resolutions that are valid for a two-year term.
Subsidiaries, affiliates or branches of companies can be qualified based on their own technical
expertise of that of the parent company.
According to information provided by the MEM, the available area for oil exploration offshore of the
Caribbean and Pacific of Nicaragua is 74,478 square kilometres.
The maximum surface per area authorised per contract is 400,000 hectares. Negotiations with the
state for oil exploration may occur by means of the concurrence of several offers in areas previously
delimited and published, or direct negotiations. The type of contract that will be subscribed to
the state for these activities are concession contracts, shared production contracts or any other
contractual form internationally recognised by the oil industry.
Doing Business in Latin America OCTOBER 2018 197
The exploration activity will not exceed six years, and it may be extended for no more than six
additional years. Once the commercial discovery of hydrocarbons is declared, the duration of the
exploitation contract is 30 years, and it may be extended for an additional ten years.
To apply for the grant of a contract it is necessar y to prove prior economical, technical expertise
and financial qualification, and the owner of the project must be a company incorporated in
Nicaragua or a branch of a foreign parent company duly registered in Nicaragua. In both cases, the
company must have a natural person who is the legal representative before the Authority and must
reside in Nicaragua.
Assigning the rights of the contract/concession is permitted if the authority is satisfied with the
technical and financial standing of the potential assignee. In the case of project financing, consent
would be necessary at the time of granting a mortgage on the contract/concession or any transfer
thereof for it to be valid.
In addition, prior approval is necessary in the case in which the secured party or a third party takes
over the management of the concession or acquires a title to the concession pursuant to a mortgage
foreclosure proceeding.
d. mining
In Nicaragua, exploration and exploitation mining activities are granted under mining concessions.
The State of Nicaragua is the owner of all mineral assets in Nicaragua. In all aspects of the applicable
law, that is, the Special Law of Exploration and Mining (Law No 387), a mining concession must be
considered as granting mining exploration and exploitation, established by Law No 387.
The concessionaire can be a company incorporated in Nicaragua or a branch of a foreign parent
company registered in Nicaragua. In both cases, the company must have a natural person who is the
legal representative before the authority; this representative must have residency in Nicaragua.
A mining concession in Nicaragua grants its title holders the exclusive rights for the exploration,
exploitation and establishment of the corresponding benefit plants over the existing mining deposits
in the area. The mining lot will have a maximum area of 50,000 hectares, and is granted for a period
of 25 years, which may be extended for a similar period.
The law establishes the mining concession to be a real right, different from the property where it is located.
These real rights arising from a mining concession are transferable and can be granted as collateral.
The transfer of a concession to a new concession holder requires state approval. It is possible that
authorisations from indigenous communities or regional autonomous communities are required if
the project is in these areas. Mining concession holders are required to pay for all mineral products
extracted: a three per cent royalty and a payment of rights of validity or surface.
198 Doing Business in Latin America OCTOBER 2018
B. Rendering of public services
i. General framework
In Nicaragua, the processes of privatisation have had several peculiarities and specific features that
have made them very different to those in other countries in the American continent. This has been
the cause of different points of view, not only at a national level but also at an international level.
At the end of the 1970s, various companies and institutions were nationalised, mainly companies
that offered public services, so they were under the domination and control of the state, which
administered them with limited resources, given the sociopolitical situation at the time.
At the beginning of the 1990s, the state had virtually collapsed. It had a public and social debt
so large that it had to make urgent decisions in the short and medium term. The Nicaraguan
Government, among the things it had to do, adapted its state policy pursuant to the Enhanced
Structural Adjustment Facilities (ESAF) promoted by the International Monetary Fund (IMF) and
World Bank, among others. These programmes established the necessity to open the state to a market
economy, decentralise, make the market more flexible, privatise public companies and function
under the logic of the ruling socio-economic system at the time.
ii. Governmental monopoly versus private initiative
Since the amendments to the Nicaraguan Constitution in 1995, the country has gone from a mixed
(private/public) economic system, with extensive state intervention and governmental monopoly in
the providing public services, to a free-market economy and foreign investment, based on principles
that recognise private property, free enterprise and the leading role of the private sector as a dynamic
engine of the country’s economy. Thus, Articles 99 and 104 of the Nicaraguan Constitution stipulate
that the state must guarantee free enterprise: it shall promote and protect the culture of free and
healthy competition, guaranteeing the full exercise of economic activities.
Furthermore, in relation to public services, Article 105 of the Nicaraguan Constitution stipulates that
it is the state’s obligation to promote, facilitate and regulate the providing of basic public services,
such as energy, communication, water, transport, roads, ports and airports to the population, and the
inalienable right of said population to have access to such public services. Private investment and its
different modalities, and concessions awarded to private entities for exploitation in these areas, will
be awarded through public and transparent processes according to the laws of the matter, and must
observe, for its operation, high efficiency and competitiveness criteria.
As shown, Nicaragua has a complete constitutional legal framework that is in favour of avoiding
governmental monopoly in the providing of services and in favour of promoting free enterprise and,
especially, market competitiveness.
In relation to this, Law No 601, Law for Promoting Competition, published in La Gaceta, Official
Newspaper, No 206 of 24 October 2006,16 constitutes the legal basis to prevent restrictive practices
of competition, repression of unfair competition and even monopolistic practices. Article 1 of
16 See www.asamblea.gob.ni accessed 27 August 2018.
Doing Business in Latin America OCTOBER 2018 199
said law determines that its objective is to promote and protect free competition among economic
agents in order to ensure the efficiency of the market and the welfare of consumers, through the
promotion of the culture of competition, and the prevention, prohibition and punishment of anti-
competitive practices.
For this purpose, Article 5 of said law created the National Institute for Promoting Competition
(Instituto Nacional de Promoción de la Competencia (‘Procompetencia’)),17 which is the entity
responsible for proceeding with an administrative procedure that can begin ex officio or by means of
denunciation, and continues with an evidentiary process and ends with an administrative resolution,
which attempts to avoid restrictive business practices, the dominant abuse of the market and illegal
economic concentrations.
The Nicaraguan legal system prohibits agreements for the fixation of prices; the imposition of trade
barriers, whether these are economic and/or legal; the allocation of markets; collusive tendering;
fixation of production quotas; collective action of agreements; and unjustified procurement or
agreement for the exclusive distribution of goods or services between economic agents who are not
competitors among themselves or others, which could cause the emergence of monopolies, whether
private or public.
Said law also prohibits bad practices in so-called ‘business concentrations’, which could diminish,
damage, prevent or restrict competition in the market through mergers, acquisitions and other forms
of business combinations.
Specifically, in reference to the matter of public services, Law No 868, Law of Amendment to Law No
601, Law for Promoting Competition, published on 29 May 2014, holds that the regulators (TELCOR,
INE and INAA) are the ones that are authorised and have exclusive competence to know, instruct
and resolve anti-competitive practices, unfair competition, concentrations and, in general, any other
practice, act or conduct determined as harmful that could, or is intended to, limit, prevent or restrict
free and healthy competition between economic agents that provide public services.
iii. Privatisation general rules
The 1990s Nicaraguan Government Administration decided to promote the privatisation of state
companies with the greatest possible flexibility. The Nicaraguan Government decided to create,
through Law Decree No 7-90 of 2 May 1990, published in La Gaceta, the official newspaper, No 94
on 17 May 1990, the General Board of National Corporations in the Public Sector (Junta General de
Corporaciones Nacionales del Sector Público (‘CORNAP’)) to manage state companies and make
recommendations to the country’s presidency in relation to the privatisation of such companies. With
this, it was intended to achieve the following objectives:
• it was considered to be a short/medium-term source of income for the state, which would go to
the national budget, allowing for the development of new social investment projects;
17 See www.procompetencianic.org 27 August 2018.
200 Doing Business in Latin America OCTOBER 2018
• reactivate the economy by attracting investment from the private sector (not only national
but also international) promoting competitiveness to revive the economy and thus give more
dynamism to business management; and
• diversify the ownership of companies, promoting access to the privatisation process for
different sectors.
Their perspectives and procedures for privatising state companies include:
• the process of returns or devolutions, in accordance with resolutions issued by the Comisión
Nacional de Revisión de Confiscaciones corresponding to the CORNAP (Decree Nos 11-90 and
23-11, published in La Gaceta No 98 on 25 May 1990 and No 100 on 3 June 1991, respectively;
and
• transformation of public entities into private companies (corporations);
• the establishment of managing contracts or administrative concessions, with or without the
option to buy;
• partial or total lease, with purchase option; the amount was previously established;
• hiring of companies or persons to perform different functions or specific activities;
• new activities usually performed exclusively by the state that are not designated by the constitution;
or
• granting of licences and concessions for the services’ operations.
It is noteworthy that not all public ser vices can be privatised given their social and political interest,
such potable water ser vices (which is currently under the state’s control) and public transport
(which has a complex organisation, a mixture of private and public, with logic based on how
cooperatives work).
However, other sectors were successfully privatised, such as telecommunications and energy/
power. For example, between 1992 and 1994, a big debate on the importance of privatising
telecommunications (TELCOR) started. The process of investing began by granting the concession
to a private company called CLARO for the replacement and technological renovation of the
existing capacity. The national coverage was increased by 67 per cent, reaching the highest
increase in Nicaraguan histor y. The privatisation was to be considered ver y positive because of the
satisfaction of the Nicaraguan people in relation to the ser vices provided and the technological
development in this sector.
iv. Limitations and/or prohibitions to private parties in the rendering of public services
The rendering of public services in Nicaragua has ceased to be an activity directed by the state. It
has been mostly passed onto the private sector through procedures of privatisation or granting of
concessions, authorisations, licences or specific permissions for more or less extended periods that
allow a more corporate notion in the rendering of services, but without forgetting consumer rights
Doing Business in Latin America OCTOBER 2018 201
regulated by the Law of Protection of Consumer Rights (Law No 842) published in La Gaceta No 129
on 11 July 2013.18
It can be stated that the rendering of public services by private entities has no constitutional
limitations or main prohibitions, except for social reasons or the national interest imposed by law.
Almost all Nicaraguan norms regarding the sector or the service rendered – except for potable water
distribution, which is a state monopoly – allow for the participation of natural or legal, and national
or foreign persons in the rendering of public services, even though they do not expressly indicate
that the company may be owned by a foreign state.
In this regard, it is noticeable that the Telecommunications Law (Law No 200), published in La
Gaceta No 154 on 18 August 1995 and its amendment, Law No 326 of 22 December 200519 stipulate a
limit or specific prohibition for participation of foreign companies in a single type of public service,
thus, in Article 29 of the first law mentioned, it is established that licences for social media will only
be granted to Nicaraguan natural or legal persons, in the case of corporations, 51 per cent of their
capital must be owned by Nicaraguan nationals.
The situation described above also happens in the public transport sector, given that, according to
Article 3 of Law No 616, that is, the General Law of Road Transportation and its reform, published
in La Gaceta No 84 on 7 May 2007, establishes that, to be able to operate in the country, foreign
companies must comply with the following requirements: (1) 51 per cent of the total of their capital
should be owned by Nicaraguan persons or be subject to the principle of reciprocity and Central
American integration agreements; and (2) the effective control and the direction or management of
the company should be in the hands of Nicaraguan nationals.
In conclusion, it can be stated that Nicaragua has had a particular historic process that sets it apart
from other countries in the Central American region. The transformations of the state have marked
strong changes, not only in its own structure but also its functioning. From the 1990s, the privatisation
of state companies was an important pillar for restoring, structuring and stabilising the state, which
was in a situation of economic crisis. As we have seen, from that time, a constitutional framework was
established, as well as a series of legal norms that promote, ensure and encourage foreign investment
in the country.
C. Real estate
The right to private property is protected by the Nicaraguan Constitution in Article 5, under
‘Principles of the Nicaraguan Nation’.
Nicaragua’s Political Constitution establishes legal guarantees for foreigners to hold the same rights
as Nicaraguans when it comes to acquiring and owning private property.
Additionally, the Law for the Promotion of Foreign Investment (Law No 344) offers investors
fundamental guarantees such as:
18 See www.mific.gob.ni/es-ni/inicio/proteccionalconsumidor.aspx accessed 27 August 2018.
19 See www.telcor.gob.ni accessed 27 August 2018.
202 Doing Business in Latin America OCTOBER 2018
• no discriminatory treatment of foreign investors;
• eliminates restrictions on the way in which foreign capital can enter the country;
• full currency convertibility;
• freedom to expatriate all capital and profits; and
• foreign investor’s right to own and use property without limitation, and in the case of a
declaration of eminent domain, to receive a proper indemnification.
Property in Nicaragua can be owned by individuals and legal entities, foreign or national. However,
property located within 5 kilometres of the border line cannot be owned by foreigners.
Additional certification may be required in the case of beachfront properties and other properties
whose title originates in agrarian reforms.
All transfers, encumbrances and any other type of limitations over real property must be granted in
a public deed before a notary public of the Republic of Nicaragua and duly registered in the public
registry to be effective against third parties.
The information registered must include the name of the owner, purchase value, location, area of the
property and boundaries, as well as any liens or any type of easements registered over the property.
To determine the legal situation of property in Nicaragua, it is advisable to obtain: (1) a copy of
the title of the property duly registered in the public registry; (2) registrar’s record issued by the
respective public registry, evidencing the history of the property; (3) certificate of good standing of
the property issued by the respective public registry; (4) proof of cadastral registration data issued by
National Territorial Studies Institute (Instituto Nicaragüense de Estudios Territoriales (‘INETER’));
(5) solvency certificate issued by the municipality where the property is located; and (6) proof of
payment of municipal tax.
The registered purchase agreement public deed is the most frequent title of a property in Nicaragua.
Other types of property titles that are valid in the Nicaraguan system are:
• fee simple: full ownership rights are recognised;
• agrarian reform titles: validly issued, these grant full ownership rights, although it is important
to confirm whether there were previous owners that were confiscated and compensated to avoid
claims from them in the future;
• supplementary title: possession rights are protected, but the title is subject to better rights
(ie, fee simple titles); transforming a supplementary title in fee simple requires a judicial
proceeding requesting adverse possession against a third party or the state; the chances of
success of proceedings against the state and municipalities, especially in coastal areas, under the
current administration, are limited;
• concession land in coastal areas: the limitations on this type of concession are that these may
only be obtained by Nicaraguans (natural or legal persons) or foreigners residing permanently
in the country and within the territorial limits established by law, which comprises from where
the public use coastal area ends, 200 metres inward to the mainland;
Doing Business in Latin America OCTOBER 2018 203
• property titles in border security zones: private property located in the border security zone
is only transferable in favour of Nicaraguans, according to legitimately acquired titles, if it is
registered in the corresponding public registry; foreign individuals and foreign legal persons
may not, in fact, or in law, acquire real estate in the border security zone in any way;
• judicial ruling: in adverse possession or property claims, the final ruling will ser ve as the
valid title; and
• Indian community property: in the Atlantic regions of Nicaragua, Indian communities
were granted by law a special property regime and exclusive ownership rights; although
use and lease agreements can be made with the communities, ownership of these titles
cannot be transferred.
After obtaining the respective documents that evidence the good and legal standing of the real
property mentioned above, the parties must authorise a purchase agreement by means of a public
deed before a notar y public to file the public deed in the respective public registr y. some of the
common steps and documents that must be obtained in ever y process of purchasing properties to
ensure the legal security of the operation are as follows:
• Certificate of Lack of Liens issued less than one month before the closing date: this certificate
states whether there are any registered liens on the property at the time it is issued.
• Certificate of Municipal Tax status: this certificate states whether there are any pending real
estate taxes for that property.
• Certificate of Cadastre information of the property: this certificate states the cadastre data and
number for that property if available. Not all real estate properties have cadastre information.
The Cadastre Office maintains the official map locating real estate property in Nicaragua. Each
property has a single number identifying this property in the official map. This information
confirms the exact location of the property and its area.
• Status Letter from the Office of Quantification and Compensation (Oficina de
Cuantificación de Indemnizaciones (OCI)) in the case in which the title is an agrarian
reform title, or an agrarian reform title appears in the chain of title: this letter helps to
determine whether a confiscated land or property was compensated by the state. If no
compensation was paid, there might be a possible pending claim against the state that
might affect the property.
• Status Letter from the Property Intendancy Office in the case in which the title is an agrarian
reform title. The Property Intendancy Office maintains a record of agrarian titles that were
issued by the state. This information confirms that the agrarian title was issued.
• Letter of No Objection: Issued by the General Attorney’s Office to the Cadastre Office, the
letter is recommended in the case of titles with an agrarian reform background, coastal
properties and supplementary titles.
204 Doing Business in Latin America OCTOBER 2018
D. Development of ample/integrated capital markets and joint activities between Latin American countries
The Republic of Nicaragua currently has one stock exchange, called Bolsa de Valores de Nicaragua
(BVDN). Legislation and regulation of stock exchanges and securities does not contemplate the
merger of stock exchanges. The current products offered through the BVDN are as follows:
• local offerings: compensation payment bonds, investment certificates and letters of the state;
and
• international markets: corporate bonds and treasury bonds.
To invest, any person, natural or legal, who participates in the stock market should take the
following steps:
1. First, contact, directly by phone or post, any exchange post authorised by the BVDN.
2. There is no established minimum investment: there have been transactions made from US$30
to US$10m. Investors can place their money in securities in córdobas indexed to the official
exchange rate of the dollar or dollars.
3. Initial operations in the exchange will require certain documentation to be presented to the
broker-dealer.
4. Once the transaction is executed on the exchange through electronic systems, the stock
exchange posts operating will issue a ballot. This is an official BVDN certification that testifies
to the terms on which the execution of the operation was reflected.
5. Every investor should receive a ballot for each executed operation. Operation ballots are
placed at the disposal of the stock post electronically by BVDN. From the terminals of the
electronic system of the exchange installed in the offices of the broker-dealer houses, their
clients can print and sign. Each document is identified with a unique registration number on
file with the BVDN.
E. Offshore vehicle providers in Latin American countries
Nicaragua does not have a differentiated tax system for companies that perform offshore operations
in its jurisdiction. Although Nicaragua’s tax system is uniform for both domestic and foreign residents
and non-residents, there are numerous laws that provide significant tax benefits to certain productive
sectors of the economy in order to promote their growth and development, such as energy, free
zones, operations of textiles and clothing industries, manufacturing, agribusiness, contact centres and
business process outsourcing (BPO), among others.
Doing Business in Latin America OCTOBER 2018 205
Panama
206 Doing Business in Latin America OCTOBER 2018
XI. Panama
A. Foreign investment
i. Authorisations versus limitations or prohibitions
a. general absence of restrictions
Panama offers one of the most open and welcoming economies to foreign investment in Latin
America. There is no need to obtain prior approvals or to fulfil special registration requirements
for foreign investments in Panama. Capital can be moved freely in and out of the country as the
US dollar has been legal tender and the common means of exchange in Panama since 1904. There
is no central bank nor currency or exchange controls in Panama. As a result, Panama is now Latin
America’s largest recipient of FDI as a percentage of its GDP.
b. national, fair and equitable treatment
Panama affords equal, fair and equitable treatment to national and foreign investors under its laws.
In addition to these principles contemplated by the Constitution and local laws, the country has
signed several bilateral investment agreements and FTAs, which include provisions granting national
treatment, most favourable nation treatment, and fair and equitable treatment to foreign investors.
According to Panama’s Constitution, nationals and foreigners are treated equally under the law. Both
Panamanian and foreign investors must fulfil the same basic requirements to organise and operate
business activities in Panama. Furthermore, the Investment Stability Law grants overall protection to
all foreign and national investors by stabilising the tax, labour and customs regime under which the
relevant investor conducted its investment for up to ten years.
In addition, since 2009, Panama has negotiated treaties to avoid double taxation with Mexico, Italy,
Belgium, Barbados, the Netherlands, Qatar, Spain, France, Luxembourg, Portugal, South Korea,
Singapore, Ireland, the Czech Republic, Austria, Bahrain, the United Arab Emirates, Israel, the UK and
Vietnam. As of 2018, tax treaties with Mexico, Barbados, Qatar, Spain, Luxembourg, Israel, Italy, the
Netherlands, Singapore, France, South Korea, Portugal, Ireland, the Czech Republic, Vietnam, the United
Arab Emirates and the UK are currently in force. Panama also has tax information exchange agreements
in force with the US, Iceland, Canada, Finland, Norway, Sweden, Greenland and the Faroe Islands.
On the multilateral front, Panama is also a party to the World Bank Convention on the International
Settlement of Investment Disputes and the World Bank convention that created the Multilateral
Investment Guarantee Agency (MIGA). Since 2017, Panama has also ratified the OECD’s Convention
on Mutual Administrative Assistance in Tax Matters, which allows collaboration on fiscal matters
between participating jurisdictions via posterior bilateral agreements.
Doing Business in Latin America OCTOBER 2018 207
c. the investment stability law
Foreign investors, as well as nationals, can benefit from stability with respect to labour, tax and
customs duties under the 1998 Investment Stability Law. Under this law, investors can register
investments in excess of US$2m in certain qualified businesses with the National Investment Registry
of the Ministry of Commerce and Industry, and obtain a guarantee from the government that these
investments will not be affected by adverse changes in labour, tax and customs laws for a period of up
to ten years.
d. free choice of law and jurisdiction
Except in the case of government contracts and certain cases where common principles of conflicts
of laws require the application of Panamanian law (eg, contracts related to land in Panama), parties
to any commercial agreement can freely choose the governing law of the agreement. Thus, foreign
investors, as well as nationals, are free to govern their commercial relations by Panamanian law or any
foreign law.
In addition, parties to a private commercial agreement are also generally free to submit any dispute
arising under such an agreement to the courts of Panama or the courts of a foreign jurisdiction, as
well as to arbitration and other alternative means of dispute resolution.
e. operation permits
Any person that intends to engage in commercial and industrial activity in Panama must obtain an
operation permit (‘aviso de operacion’) from the Ministry of Commerce and Industry (Ministerio de
Comercio e Industrias (‘MICI’)). In general, this is the only permit required for entities involved in
unregulated activities.
Certain types of businesses must register with the pertinent regulatory agency before applying for
their operation permit. These businesses include banks, insurance companies, financial entities,
companies engaged in the sale of arms, security and transport companies, brokerage houses,
construction companies and oil companies, among others.
It should also be noted that retail activities are restricted to Panamanian nationals under the
Constitution. Thus, an operation permit cannot be granted to foreigners seeking to register this type
of business.
Operation permits are not required for individuals, legal persons engaged in the following:
• agricultural agro-forestry, and similar activities;
• non-profit activities;
• activities that are not commercial or industrial in nature, conducted by natural persons or civil
partnerships;
• the practice of liberal professions, by individuals or civil partnerships, so far as they are not
considered commercial activities;
208 Doing Business in Latin America OCTOBER 2018
• businesses with a multinational business headquarters licence;
• companies operating in the Panama-Pacifico Special Economic Zone; or
• individuals or legal persons established within the international duty free zone of the Colón
Free Zone or any other free zone.
In addition, limited liability microenterprises are not required to obtain an operation permit.
An operation permit is obtained by completing a simple process through an online system,
‘PanamaEmprende’, which is administered by MICI. The user must provide information about the
company, the operations to be conducted by the company, its address and other general information.
Information registered via this system is publicly accessible and available to third parties.
The operation permit automatically conducts other registrations and processes, such as the processes
for obtaining a taxpayer identification number (registro unico de contribuyente) from the Ministry of
Economy and Finance, and a new business registry number (registro de nuevos negocios) from the relevant
municipality. The taxpayer identification number is used for the payment of national and municipal
taxes, as well as for registrations with the Social Security Administration and other institutions.
The cost of obtaining the operation permit is US$15 for individuals and US$55 for legal persons. The
annual tax incurred by holders of the operation permit is two per cent of the company’s capital, with
a minimum payment of US$100 and a maximum payment of US$60,000. Natural or legal persons
whose invested capital is less than US$10,000 are exempt from this tax.
ii. Treatment of foreign investment in infrastructure initiatives and PPP projects
Over the years, Panama’s legal scenario has been conducive to foreign investment, trade and
development through the enactment of several laws containing various types of incentives. The
creation of special economic areas, such as Panama Pacifico, and other foreign investment initiatives
has helped Panama to attract a significant amount of FDI in the region.
a. panama-pacifico special economic Zone
Built on the site of the former Howard US air force base, at the Pacific entrance of the Panama Canal,
and just 15 minutes from Panama City, the Panama-Pacifico Special Economic Zone is a 1,400-hectare
international business park. Established by special legislation in 2004, the master-planned park
includes a business centre, industrial area, town centre, residential areas, hotels, medical facilities,
schools and international airport. To qualify for the tax, labour and immigration incentives provided
by law, companies must register with the Panama-Pacifico Agency, the government agency responsible
for qualifying companies.
1. Qualifying activities
Any company that establishes itself in Panama Pacifico will receive labour and immigration benefits
under the law, as well as several tax benefits. However, companies operating in the park that engage
in one of the following qualifying activities receive additional tax benefits discussed below:
Doing Business in Latin America OCTOBER 2018 209
• offshore services;
• multimodal and logistics services;
• high-tech product and process manufacturing;
• call centre services;
• data and digital transmission;
• services related to aviation and exports, including transport, handling and storage of cargo, as
well as maintenance, repair and overhaul of aeroplanes and their spare parts;
• exports of goods not manufactured within the Panama-Pacifico area to the extent such sales are
performed by a multinational company or one of its affiliates or related entities;
• transfer of goods and provision of services to other companies established in the Panama-
Pacifico area or in fuel free zones or port facilities;
• transfer of goods and provision of services to ships in transit or on route to foreign ports and
their passengers, except by the good’s manufacturing company;
• transfer of goods and provision of services to aircraft travelling to foreign countries, except by
the good’s manufacturing company; and
• transfer of goods and provision of services to visitors and persons in transit to foreign countries,
except by the good’s manufacturing company.
2. Tax benefits
All companies established in Panama Pacifico are exempt from the following taxes:
• import duties (unless goods are sold within Panama);
• export duties;
• VAT/items (sales tax) (except for services rendered by regulated professions);
• the obligation to withhold tax on payments made to foreign creditors with respect to interests,
commissions, fees or other financial charges on financing granted to companies in the area;
• notice of operations (aviso de operación) tax;
• capital gains tax on company share transfers in certain situations; and
• stamp taxes.
In addition to these tax benefits, companies that participate in qualified business activities listed
previously are also exempt from income tax, dividend and deemed dividend tax, and withholding tax
on any goods or services sold or rendered within Panama.
210 Doing Business in Latin America OCTOBER 2018
3. Labour benefits
Companies established in the Panama-Pacifico area benefit from the following labour incentives:
• 25 per cent fixed surcharge for overtime;
• negotiable weekly resting day;
• may remain open on Sundays and holidays;
• vacation terms are negotiable with employees;
• fluctuation in market conditions or demand are recognised as just-cause for labour contract
terminations; and
• 15 per cent of the workforce may be foreign employees, with exemptions made for additional
hires that train Panamanians.
4. Immigration benefits
Companies established in Panama Pacifico benefit from the following immigration incentives:
• five-year ordinary work visas;
• three to five-year special visas;
• five-year investor visas for those who invest US$250,000;
• family visas extended to immediate family members; and
• tax-free import of up to US$100,000 of personal and household items.
All incentives established under Law No 41 are permanent for companies within the Panama-Pacifico
area.
b. the city of knowledge
The City of Knowledge is an international centre for education, research and technological
innovation intended to promote and facilitate synergy between universities, scientific research
centres, businesses, and international governmental and non-governmental organisations. The City
of Knowledge is administered by the non-profit City of Knowledge Foundation, a PPP. Companies
established within its premises enjoy a special tax regime.
1. Qualifying activities
To be established in the City of Knowledge, companies must perform activities related to the City of
Knowledge’s priority work areas:
• communication and information technology;
• biosciences;
• environmental management;
Doing Business in Latin America OCTOBER 2018 211
• human development; and
• business management and entrepreneurial culture.
Activities outside these areas may be considered by the City of Knowledge if they respond to regional or
global priorities.
In addition, companies must qualify as ‘innovative’, which requires that there is not: (1) a similar
programme or activity; or (2) a similar methodology or technology available in the country. An
application must be submitted to the City of Knowledge for affiliation. However, there are no specific
minimum capital or investment requirements, and affiliation is granted on a five-year renewable basis.
2. Tax, labour and immigration incentives
Companies operating within the City of Knowledge benefit from the following tax and immigration
incentives:
• exemption from import taxes on all machinery, equipment, furniture, vehicles, devices and
other materials;
• exemption from VAT (sales tax) on machinery, equipment, vehicles, devices and other materials;
• exemption from property taxes;
• exemption from any taxes, fees, duties or levies imposed on the transfer of funds abroad, when
the transfer of such funds is related to the companies’ operations;
• operations or activities of companies producing, assembling or processing high-tech goods within
the city of knowledge are exempt from all direct and indirect taxes, including income tax, and
such companies are exempt from taxes on capital and operation permits (aviso de operación);
• special visas are granted to foreign employees;
• visas are extended to immediate family members of foreign personnel relocating to Panama;
and
• exemption on quotas for hiring highly skilled foreign personnel.
iii. Treatment of foreign investment in oil and gas and mining activities
Title to all mineral assets in Panamanian soil is vested to the Republic of Panama. The Panamanian
Constitution states that concessions granting full possession and rights of use over those minerals
may be granted to private persons for the purposes of engaging in prospecting, exploration,
processing and transport activities, regardless of such persons’ nationality or form of corporate
organisation. Foreign states and foreign state-owned companies are prevented from holding any
interest in mining concessions.
212 Doing Business in Latin America OCTOBER 2018
The Minerals Code is the main body of law governing most activities relating to Panama’s subsurface
estate (other than hydrocarbons). The Minerals Code establishes the system of mining concessions,
and determines the relevant privileges and obligations of concession holders.
In addition, a number of laws have been passed since the 1970s to create a separate regime for the
granting of concessions relating to minerals used in the construction industry, such as sand, gravel
and clay. The Minerals Code sets forth two principal types of mining concession, the exploration
concession and extraction concession, and also allows for the granting of prospecting permits
(permisos de reconocimiento superficial) and processing and transportation concessions (concesiones de
beneficio y de transporte).
a. the general directorate of mineral resources
The General Directorate of Mineral Resources (Dirección General de Recursos Minerales
(DGRM)) is a governmental bureau within MICI. The DGRM is the administrative entity in charge
of all matters relating to Panama’s sub-soil, except for hydrocarbons. The DGRM is in charge of
receiving and reviewing applications for mineral concessions and recommending the acceptance or
rejection of the applications.
In the case of exploration, and processing and transportation concessions, once the
concessionaires and their applications have been approved by the DGRM, the concession will be
granted by means of a concession contract entered into by the concessionaire and the Minister of
Commerce and Industr y representing the state of Panama. In the case of construction materials,
extraction concessions will not require approval by the Cabinet Council. All mineral concessions
contracts will also have to be countersigned by the Comptroller General of the Republic. The
concession’s term will start to run on the date the fully signed contract is published in Panama’s
Official Gazette.
b. oil and gas activities
Although Panama is now considered an emerging country within the mining industry, with gold as
the main product, Panama has modernised the registration framework for oil and gas exploration and
extraction activities to develop the ground rules for a national petroleum policy and guides for the
development of the Petroleum Free Zones. Panama’s legal framework in oil and gas activities during
the past years have developed beyond the provisions of the National Policy for Hydrocarbons due to the
restructuring of this global industry and thus require updated legislation.
c. concessions in general
Holders of concessions are required to file certain information with the DGRM, including annual
reports of their operations, information as to each concession (or part thereof) cancelled, abandoned
or otherwise terminated, quarterly reports on royalties owed to the Panamanian Government,
detailed reports on all technical aspects of operations (which are normally required to be submitted
on an annual basis unless the DGRM requires more frequent documents), annual tax reports and
statements as to compliance with the relevant provisions relating to employment found in the
Minerals Code, among others.
Doing Business in Latin America OCTOBER 2018 213
Holders of concessions are permitted to assign their rights in those concessions, whether outright or
by way of a mortgage in financing, provided the DGRM is satisfied with the technical and financial
standing of the potential assignee. In the case of project financing, the DGRM’s consent would be
necessary at the time of the granting of the mortgage on the concession or any transfer thereof in
order for it to be valid. In addition, the DGRM’s prior approval may also be necessary in the case in
which the secured party or a third party is to take over the management of the concession or acquire
title to the concession pursuant to mortgage foreclosure proceedings.
iv. Treatment of foreign investment in real estate
Any person, whether an individual or legal entity, foreign or national, can hold title to real property
in Panama, subject to the limitation that foreigners cannot acquire land within 10 kilometres of
national land borders.
a. financing real estate
Real estate acquisitions in Panama can be financed by local or foreign lenders. The buyer usually
gives security to the lender in the form of a real property mortgage over the subject property.
Mortgages must be granted in the form of a public deed before a notar y public in Panama and
registered at the Public Registr y of Panama to perfect the security interest.
b. construction
Any investor planning to build in Panama will be required to have the necessary construction
plans approved by the Directorate of Municipal Constructions and Works of the respective
municipality (Dirección de Obras y Construcciones Municipales). The plans must be signed by
professionals duly licensed by the Technical Board of Engineers and Architects (Junta Tecnica
de Ingenieros y Arquitectos). Once the construction is finished, and prior to occupation of the
building, an application for an occupancy permit must be submitted to the Directorate of Municipal
Constructions and Works. To apply for the occupancy permit, the following permits must have
already been obtained in respect of the construction: a permit issued by the Security Office of the
Fire Department, the aforementioned construction permit, an electricity permit and a permit for the
installation of air conditioners (when applicable).
v. Treatment of foreign investment in agribusiness activities
For agribusiness activities, Panama has certain natural advantages, for example, the high number
of daylight hours, the absence of extreme summers, high soil quality and excellent humidity
conditions contribute to the products’ high quality, allowing Panama to position its exportable
goods into markets such as the US, Canada, Central America and Europe.
The constant growth and development of this industry in Panama originated a positive change in
the mechanisms usually employed by local producers. In parallel, the Panamanian Government
has pursued an aggressive plan of infrastructure development that includes the construction and
extension of irrigation systems, maintenance of roads and the implementation of a cold chain
214 Doing Business in Latin America OCTOBER 2018
to preserve perishable goods. Alongside these improvements, the legal framework regarding
agribusiness activities addresses key elements, such as credit facilities and tax incentives, that not only
encourage local producers, but also foreign investors.
One of these instruments within the agribusiness legal framework is the Certificate of Promotion to
Agricultural Exports (Certificado de Fomento a las AgroExportaciones (‘CeFA’)). This certificate,
in principle, aims to encourage the export of non-traditional products by granting local or foreign
producers and companies a tax incentive, which can be used to pay any of the national taxes.
Companies located in special zones (ie, free zones), individuals and legal entities that accept other
fiscal incentive programmes are not subject to the benefits of this certificate.
The agency for the Attraction of the Investments and Promotion of the Exports (Proinvex) is a state
agency, ascribed to the Ministry of Commerce and Industry, whose objective is to promote investment
in strategic sectors, such as logistics, tourism and agribusiness activities. This agency manages
an integrated information system that allows investors to easily identify the instruments that the
Panamanian Government has for attracting FDI, as well as all the commercialisation and promotion
of the exports of national products.
vi. Treatment of foreign investment in the rendering of public services
Panama has an open and non-discriminatory government procurement system in which both
nationals and foreigners can freely participate and bid for public contracts. Foreign companies can
participate by setting up a subsidiary or registering a branch in Panama, or entering into a joint
venture arrangement with local or foreign companies already established in Panama.
In certain cases of urgent public interest, government agencies may be allowed to enter into direct
negotiations with any provider or supplier of goods and services. In these cases, contracts must be
approved as follows: (1) by the Directorate of Public Contracting (if the contract amount is below
US$300,000); (2) by the National Economic Council (if the contract amount exceeds of US$300,000
but is below US$3m); or (3) by the Cabinet Council (if the contract amount is above US$3m).
As a general rule, the government agency seeking to purchase the goods and ser vices is the entity
responsible for conducting the procurement process and awarding the contract. Contracts are
awarded to the qualified participant that submitted the best bid in accordance with the tender
documents. Tender documents require that bidders post a bid bond of up to ten per cent of the
contract amount as a condition for submitting a bid. Once the contract is awarded, the provider
or supplier and the government agency enter into a final agreement in the form prescribed
by the tender documents. This contract must then be recorded and countersigned by the
Comptroller General of Panama.
a. concession regime
As discussed above, the award of concession agreements to private companies for the construction,
maintenance, conservation, restoration and operation of toll roads, and other infrastructure projects
is governed by a special infrastructure concessions law. Administrative concessions generally grant the
right to construct and operate an infrastructure project, and to collect tolls and other fees from users
of the project, under the supervision of a regulatory agency.
Doing Business in Latin America OCTOBER 2018 215
The award of concessions regarding power generation and distribution, telecommunications, paid
and open television, ports, mining exploration and extraction, and airport operations are governed
by sector-specific laws and subject to different rules.
Panama has an open and non-discriminatory government procurement system under which nationals
and foreigners can freely participate and bid for public contracts. Foreign companies can participate
by setting up a subsidiary, or registering a branch in Panama, or entering into a joint venture
arrangement with local or foreign companies already established in Panama.
The award of concession agreements to private companies for the construction, maintenance,
conservation, restoration and operation in connection with infrastructure projects is governed
by a special infrastructure concession law. Administrative concessions generally grant the right to
construct and operate an infrastructure project and to collect tolls and other fees from users of the
project, under the supervision of a regulatory agency.
b. contract laws
A contract law is an agreement negotiated and signed by the Executive Branch of the Panamanian
Government with a private company and then submitted to the National Assembly for approval and
enacted as a special law. Contract laws afford the maximum degree of security and stability to foreign
investors, as they can only be amended with the consent of the affected company and by means of
another law. However, it is a very time-consuming process and the Panamanian Government tends to
reserve this type of contracts for big projects of particular national interest.
B. Rendering of public services
i. General framework
In 1992, the Panamanian Government started a privatisation programme of public ser vices,
properties and companies owned or performed by the public sector. The programme resulted in
the privatisation of the telephone and power companies, a cement factor y, sugar mills, ports and
railway ser vices.
The regulatory entity for certain public services, including water and sewerage systems,
telecommunications and paid television services, energy generation and distribution is the
National Public Services Regulator (Autoridad Nacional de los Servicios Publicos (‘ASEP’)),
which is responsible for the granting of concessions, licences and authorisations, standard setting,
implementation of tariff structure, and the regulation and supervision of public services.
ii. Governmental monopoly versus private initiative
Panama’s antitrust and competition laws and regulations apply to all companies doing business in the
Panamanian market. Antitrust and competition laws are relevant to business enterprises in at least in
two ways. First, these laws identify certain practices, such as price fixing, allocation of markets and bid
rigging among competitors that are absolutely forbidden or illegal per se, as well as other practices,
such as tying, exclusive distribution agreements and exclusivity clauses, which may or may not be
216 Doing Business in Latin America OCTOBER 2018
illegal, depending on various factors, including whether or not the economic agent has market power
in the relevant market. The former practices, known as absolute monopolistic practices, correspond
in general terms to ‘per se’ violations under US antitrust laws, and the latter practices, known as
relative monopolistic practices, have as their closer equivalents conduct subject to the ‘rule of reason’
under US antitrust laws.
Panama’s antitrust laws prohibit mergers, acquisitions and other forms of business combinations
that hinder or restrict competition in the relevant market. The law does not require the parties to
a merger, acquisition or business combination to seek pre-approval from the National Authority
of Consumer Protection and Defence of Competition (Autoridad de Protección al Consumidor
y Defensa de la Competencia (‘ACODECO’)). However, this regulatory agency has the powers to
investigate and challenge in court any merger, acquisition or business combination that violates
antitrust laws and regulations. Interested parties may voluntarily seek approval from this agency prior
to any merger, acquisition or business combination. If this approval is granted, the transaction cannot
be subsequently challenged by third parties on the grounds that it violates antitrust laws.
In addition to general rules set out in antitrust laws and regulations, some sector-specific laws, such
as the laws applicable to power generation and distribution, telecommunications, and open and paid
television, contain additional antitrust and competition regulations.
iii. Privatisation general rules
The framework for the privatisation of assets, companies and services was established in Law No 16 of
1992. Privatisation entails that the Panamanian Government transfers the ownership of companies,
properties and shares to the private sector, and may also assign the management or furnishing of
public services to private individuals. The methods by which the privatisation of companies and/or
services owned and managed by the public sector occur are the following:
• the transformation of companies or state entities into corporations (sociedades anonimas);
• the transformation of state entities into corporations of mixed economies in which the
Panamanian Government is a minority shareholder;
• the establishment of management contracts or administrative concessions, with or without a
purchase option;
• partial or total lease, with a purchase option, prior to the settlement of the price;
• hiring of companies or private individuals to perform specific functions or activities;
• release of activities usually performed exclusively by the state that are not designated by a
constitutional mandate; and
• issuance of licences and concessions for the exploitation of services.
The Cabinet Council must approve the terms of the tender (which contain specific details of the
privatisation) in order to receive proposals from companies or individuals willing to render public
ser vices. The Cabinet Council is also in charge of declaring the privatisation of properties,
Doing Business in Latin America OCTOBER 2018 217
companies and state activities, subject to a technical examination. Privatisation in Panama took place
mainly during the 1990s.
iv. Limitations and/or prohibitions to private parties in the rendering of public services
The rendering of public services by private parties in Panama has no major limitations or prohibitions
except that some laws provide that such services cannot be performed by a company or entity owned or
controlled by a foreign state.
C. Real estate
i. Holding title to real estate
a. who can hold title?
Any person, whether an individual or legal entity, foreign or national, can hold title to real property
in Panama, subject to the limitation that foreigners cannot acquire land within 10 kilometres of
national land borders. It is important to point out that our legal framework in connection with real
property does not differ between urban and rural properties. Thus, both are subject to the same
provisions. Certain rules may apply, however, to land used for agricultural purposes.
b. recordation of title
Panama has a public recordation system where all matters pertaining to real property are registered,
including title to property and improvements, encumbrances and restrictions, or limitations
on ownership. Each titled property that is registered is given a plot number that identifies it.
The information registered includes the name of the owner, registered value, area, metres and
boundaries, and any liens registered on the property.
A person interested in acquiring titled property in Panama can verify title to the property in the
Public Registry of Panama. Then, through registration in the Public Registry of Panama of a public
deed containing the terms of the purchase and sale contract for the property, the buyer registers
the title to his/her name. In addition, possessory rights in some areas of the country can also be
recognised through a titling process regulated by the National Land Administration Authority
(Autoridad Nacional de Administración de Tierras). However the process of titling property held
through possessory rights can be a difficult and lengthy.
c. horiZontal property
Panama has a horizontal property regime to which buildings and projects that wish to be regulated
in a condominium-style format can adhere. The purpose of the regime is to regulate the rights and
obligations of owners of property built on common land. Thus, for example, the regime divides these
properties into common and private areas, and establishes the rights, obligations and limitations
that each unit owner has with respect to these areas. The horizontal property regime law requires
buildings or projects that wish to adhere to the regime to develop regulations that will apply to the
218 Doing Business in Latin America OCTOBER 2018
property. These regulations must be approved by the Ministry of Housing (Ministerio de Vivienda)
and registered in the Public Registry of Panama. The regulations include, among other things,
designation of the building administrator; faculties of the board of directors; determination of use
that can be given to each unit; and matters related to the assembly of property owners, including
the necessary quorum to hold meetings and votes to adopt resolutions, present an annual budget,
maintain a record of minutes and conduct an audit of the balance sheet. The horizontal property
regime law provides that the regulations can only be amended by the vote of a supermajority of
property owners, and grants juridical status to the assembly of property owners once the regulations
are registered in the Public Registry of Panama. The regulations are usually not registered until a
certain percentage of the building or project has been constructed.
ii. Transferring real estate
a. recordation of transfer
All transfers of real property must be registered in the Public Registry of Panama to be effective
against third parties. Any document that is registered in the Public Registry of Panama must be vested
with the requisite formalities, namely that it is granted in a public deed before a notary public of the
Republic of Panama or, if granted in a private document, (if the law permits) that it is formalised in a
public deed before a notary public. The law requires certain documents that deal with real property
transfers, dispositions and encumbrances to be granted in a public deed. These documents include
final purchase and sale agreements, mortgages and certain types of leases.
b. instruments of conveyance
The transfer of property is documented in a definitive purchase and sale agreement (usually just a
short document that contains the few provisions necessary to transfer title), which is executed in a
public deed before a notary public and is registered in the Public Registry of Panama. Registration
of the deed of sale in the Public Registry of Panama is essential to perfect the transfer of title to the
purchaser.
iii. Financing real estate acquisition
Real estate acquisitions in Panama can be financed by local or foreign lenders. The buyer usually
gives security to the lender in the form of a real property mortgage over the subject property.
Mortgages must be granted in the form of a public deed before a notar y public in Panama and
registered at the Public Registr y of Panama to perfect the security interest.
iv. Leasing real estate
In Panama, real estate lease agreements are governed generally by the provisions of the Civil Code
and special laws on lease agreements.
Doing Business in Latin America OCTOBER 2018 219
a. types of leases
For the purposes of regulation, leases in Panama are divided into two categories: the first covers
residential leases with a monthly rental fee of US$150 or less, while the second category covers
residential leases with a monthly rental fee of US$150 or more, as well as leases of premises for
commercial, professional, industrial or educational use, regardless of the amount of the rental fee.
Lessees in the first category are protected by the Lease Law, which grants them certain rights, such
as having the lease agreement respected by a buyer of the leased property in case it is sold; requiring
a minimum lease term of three years, with the further right to have it extended for additional three-
year terms if the lessee is in good standing regarding payment of rental fees; allowing the lessee to
terminate the lease agreement at any time by giving a 30-day prior notice to the lessor; and providing
that the rental fee cannot be increased by the lessor without prior approval of the Ministry of
Housing.
Leases in the second category, however, are generally governed by the principle of contractual
freedom, with only a few mandatory provisions being required by the laws on leasing.
b. lease agreements
Lease agreements should contain, among others, the following provisions:
• the right of the lessee in residential leases to waive the minimum lease term and terminate the
agreement at any time with a written notice sent at least 30 days in advance; and
• the right to sublease, although consent of the lessor may be required to sublease if so agreed.
The obligation to deposit with the Ministry of Housing a sum equal to the agreed rental fee (if
monthly, then to a month’s rental fee, if yearly, then to a year’s fee, and so forth). It is the lessor’s
obligation to deliver this deposit to the Ministry of Housing, but the deposit is paid by the lessee.
The right of the lessee in residential leases to exercise his or her profession within the leased
property, unless this interrupts the peaceful enjoyment of the property or violates the law.
All lease agreements must be registered with the Ministry of Housing using standard forms provided
by this agency. In addition, lease agreements with terms of six years or more must be executed in the
form of a public deed before a notary public, provided that they affect third parties. Leases, both
residential and commercial, can be recorded at the Public Registry of Panama to put third parties on
notice of the existence of the lease.
The maximum term for a lease agreement is 20 years. In lease agreements partially excluded from the
Lease Law whose term has expired and where the lessee still continues to occupy the property with
the consent of the lessor, there is a holdover or implied continuation of the lease after the contractual
term expires. In this case, the lease becomes an indefinite term agreement that either party may
terminate at any time.
220 Doing Business in Latin America OCTOBER 2018
v. Construction
Any investor planning to build in Panama will be required to have the necessary construction
plans approved by the Directorate of Municipal Constructions and Works (Dirección de Obras
y Construcciones Municipales). The plans must be signed by professionals duly licensed by the
Technical Board of Engineers and Architects (Junta Técnica de Ingenieros y Arquitectos). Once
construction is complete and prior to the occupation of the building, an application for an occupancy
permit must be submitted to the Directorate of Municipal Constructions and Works of the relevant
municipality. To apply for an occupancy permit, the following permits must have already been
obtained in respect of the construction: permit issued by the Security Office of the Fire Department,
the aforementioned construction permit, an electricity permit and a permit for the installation of air
conditioners (if applicable).
vi. Expropriation events
Any person, whether an individual or legal entity, foreign or national, can hold title to real property
in Panama, subject to the limitation that foreigners cannot acquire land within 10 kilometres of
national land borders. Nonetheless, Panama’s Political Constitution contemplates another limitation
regarding the holding of title in real estate: expropriation. Panama’s Political Constitution states that,
by means of public utility or urgent social interest as defined in specific laws, expropriation may be
effective through a special judicial procedure and upon payment of adequate compensation to the
effective owner. The expropriation proceedings apply equally and on a non-discriminatory basis, to
local or foreign owners.
D. Development of ample/integrated capital markets and joint activities between Latin American countries
i. Merger of stock exchanges: attempts versus realities
The Republic of Panama currently has only one stock exchange, called the Bolsa de Valores de
Panama. Legislation and regulation on stock exchanges and securities do not specifically contemplate
the merger of stock exchanges, but such mergers or integrations are not in themselves prohibited.
ii. MILA market: current results and expectations
The MILA market is an integrated stock exchange market. At the present moment it is composed
of Chile, Colombia and Peru. Currently, Panama does not form part of this stock exchange market
integration, but the regulatory regime would not impede that Panama joins the MILA market.
iii. Pacific Alliances: governmental action and proposed treatment and agreements
The Pacific Alliance is a highly praised trade bloc that promotes economic liberty. The Pacific
Alliance is presently composed of Chile, Colombia, Mexico and Peru. The Republic of Panama is
currently paving its way into the Pacific Alliance, as it has now signed an FTA with each of the Pacific
Alliance Member Countries. Panama completed this prerequisite in April 2014, signing an FTA with
Doing Business in Latin America OCTOBER 2018 221
Mexico, the only country in the Pacific Alliance that did not have an FTA with Panama. The efforts of
Panama to join the Pacific Alliance are evidence of its intention to become a full member. As of 2018,
Panama is still in the process of becoming a full member.
iv. IPOs of multilatina companies in Latin American capital markets
Panama does not have any multilatina companies that have performed an IPO in the Latin American
capital markets. COPA Airlines, the Panamanian national carrier that operates in various Latin
American countries, is a New York Stock Exchange (NYSE) traded company and also has its shares
listed on the Panama Stock Exchange.
E. Offshore vehicle providers in Latin American countries
i. General concept: legal framework and scope of general activities
a. introduction
Panama has traditionally served as a jurisdiction to establish offshore vehicles for asset protection and
efficient tax planning strategies. Offshore vehicles are originated by foreign capital and generally do
not carry out operations in Panamanian territory, benefiting from Panama’s territorial tax regime.
Jurisdictions that offer offshore services are often mistaken as tax free jurisdictions, yet Panama’s
corporate income tax is 25 per cent. Operations conducted outside Panama are not deemed as
‘Panama source income’. Panama’s geographical position and international background have
been a key factor for its development as an offshore jurisdiction since 1927, when Panama passed
its corporate law based on Delaware corporate law. As of 2018, Panama offers a variety of offshore
vehicles, such as Panamanian corporations (sociedad anónima), private interest foundations, and LLCs
and trusts, which are regularly used by international clients for asset protection or estate planning.
ii. Panamanian corporations
The Law on Panamanian Corporations was enacted in 1927 and it does not distinguish between
‘onshore’ and ‘offshore’ companies. It is characterised by its simplicity, flexibility and effectiveness;
Panamanian corporations are frequently used inside and outside Panama. Two or more persons,
from any nationality, with or without domicile in the Republic of Panama, may create a Panamanian
corporation, for the accomplishment of any lawful objective, having to comply solely with the
conditions required by the law. It is important to mention that the constitution of a corporation is a
commercial act, and the persons who constitute it (the subscribers of the Articles of Incorporation)
need to have full legal capacity and shall be able to dispose liberally of their assets.
As mentioned previously, the Panamanian taxation system is territorial. As such, income earned from
commercial transactions conducted outside Panama is not subject to taxation in Panama. Income
earned from distributing earnings or dividends or shares, when such dividends or earnings were
produced from income generated or earned by the company solely outside Panama, is not subject
to taxation either. In addition, interest paid by banks located in Panama to any depositor (including
a Panamanian corporation) for deposits located in Panama, and Panamanian corporations that
222 Doing Business in Latin America OCTOBER 2018
operate abroad can distribute all or part of their assets among their shareholders without them or
the corporation having to pay tax in Panama. In terms of offshore activities that could be carried out
by corporations, the regulatory environment is simple; except for specific regulated activities within
Panama, as stated before, such as banking, insurance or the rendering of public utility services, which
are regulated by specific governmental agencies. In Panama, no government entity or agency has
to authorise, approve or supervise the formation of a corporation; the amendment of its articles of
incorporation or the beginning of its operations; the issuing or transfer of shares; or the modification
of the authorised capital of the corporation, distribution of dividends, dissolution, winding up or sale
of the assets of the corporation.
There is no obligation to file any type of statement or financial report before the fiscal authorities
of Panama by corporations that do not carry out business within Panama. Transactions conducted
abroad or the income earned from them are not subject to reporting.
Another benefit is that the law on Panamanian corporations does not require minimum corporate
capital for their further operation or carrying out of their objectives. Neither is it required that
corporate capital be totally paid up when shares are registered in a shareholder’s name, thus, giving
shareholders freedom and flexibility to manage their corporate affairs.
Shareholders are not liable for the obligations of the corporation. They only respond to the creditors of
the company for the amounts owed to the corporation for the issuing of shares in the case in which they
have not been fully paid. In addition, the corporation is not responsible for the personal liabilities of
the shareholders. Additionally, the corporation may belong to only one person. There is no prohibition
against the company having only one shareholder.
The management and completion of shareholders’ and board of directors’ meetings is fairly easy
as the meetings can take place anywhere in the world. It is not necessary that the meetings be held
in Panama. The law also allows that the resolutions of shareholders and directors be adopted by
consent through electronic means, either by telephone or fax, provided that all the shareholders and
directors that participated in the meeting are in contact among themselves and express by majority
their consent or approval of the corresponding resolution.
The shareholders, gathered in a shareholders’ meeting, are the supreme authority of the corporation.
They do not need to be Panamanians or domiciled in Panama and may transfer and sell shares in
unregulated corporations, without being subject to regulation or approval by, or registration with, any
government entity or authority. However, limitations and restrictions can be established in the articles
of incorporation as a condition for the transfer of shares by a shareholder.
Panamanian corporations can undertake and enter into any type of financial transaction without
being subject to government approval or authorisation. Such operations do not need to be reported.
However, in the case in which the corporation had deposits with banks located in Panama, any
movement of funds for amounts up to US$10,000 has to be reported as a means to prevent and
control money laundering.
Any subsequent amendment to the corporation’s articles of incorporation must be registered with the
Public Registry of Panama. Likewise, the appointment and replacement of directors, officers and a
resident agent must be recorded with the Public Registry of Panama. This gives security and certainty
Doing Business in Latin America OCTOBER 2018 223
about the legal existence of the corporation and the persons in charge of its legal representation.
This is not a mechanism of governmental control or regulation over the corporation. The company’s
registration in the Public Registry of Panama is a form of notice to third parties.
The incorporation of a Panamanian corporation is a swift and simple procedure, as the law requires
a set of established requisites, the payment of registry rights and there also exists an annual franchise
tax, payable before 1 January or 1 July; depending on the semester in which the corporation has
been organised. Furthermore, every corporation should have a Record of Minutes, where all the
minutes and resolutions adopted by the shareholders and the board of directors must be kept. The
corporation must also have a share registry where title or ownership of shares and the transfer thereof
must be recorded.
Panamanian corporations may own foreign bank accounts, perform commercial operations abroad, buy
assets and set up trusts overseas. Panamanian corporations are regularly used as holding companies of
regional groups. The dynamic and flexible characteristics of this vehicle allow individuals to tailor the
corporation to fit their particular needs.
iii. LLCs
This offshore vehicle is not to be confused with a Panamanian corporation. The latest legislation on
this matter entered into force in 2009, and the concept has existed in Panama since 1966. LLCs are
known as sociedades de responsabilidad limitada (S de RL).
LLCs may be dedicated to any lawful purpose at any part of the world. In order to constitute an LLC,
there must be at least two partners (with no maximum number of partners), who execute a partners’
agreement and file it at the Public Registry of Panama. The authorised capital is also required to
be a part of the partnership agreement, and is composed of participation fees or quotas that must
be nominative. The participation fees or quotas cannot be transferred without the consent of other
partners, and the responsibility of partners is limited to the amount of capital that each contributes to
the LLC.
Given the territorial regime of Panamanian tax law, income received by the LLC from operations
executed, consumed or which produce their effects outside Panama and earnings that, in turn, it pays
its partners shall be exempt from income tax in Panama. LLCs are frequently used by US clients as
‘check-the-box’ entities.
iv. Private interest foundations
In 1995, Panama enacted a statute that set forth the legal framework for the constitution of private
interest foundations. This vehicle has an independent legal personality separate from that of its
founder, beneficiaries or administrator. Private interest foundations are created when one or more
persons (known as the ‘founders’) subscribe a legal document (known as the ‘foundation charter’)
that must be registered at the Public Registry of Panama. The founders grant certain assets in favour
of the foundation, which shall be managed by the members of the Foundation Council following the
conditions established in the foundation charter and by-laws, for the benefit of one or more persons
(known as the ‘beneficiaries’).
224 Doing Business in Latin America OCTOBER 2018
Private foundations are constituted to carry out individual and private objectives of personal nature,
being used for religious, educational, heirship, philanthropic or charitable purposes, as well as for the
protection of personal assets and enjoyment and disposition of goods in favour of third parties. They
are composed by a founder, foundational council, protector and the beneficiaries.
As mentioned above, the founder is the person that constitutes the foundation and thus the person
that appoints the Foundational Council, which is an administrative entity entitled to carry out the
objectives and purposes of the foundation. In turn, private interest foundations may have a protector
selected by the founder, to supervise the Foundation Council, in order to verify the fulfilment of its
functions and the adequate performance of the purposes of the foundation. There can be multiple
protectors, and they can be composed of individuals or legal entities. There are no requirements as to
the number of protectors.
The beneficiaries of the foundation are those individuals or legal entities appointed by the founder
in the by-laws of the foundation charter to benefit from the foundation and, particularly, enjoy the
proceeds of the assets thereof. The law neither sets out any restrictions, limitations or requirements
for the appointment of beneficiaries, nor regarding their capacity. Therefore, the founder has the
right to appoint whoever he/she desires as beneficiary of the foundation, either individuals or legal
entities including him/herself. The beneficiaries, once appointed, can be replaced by the founder
at any time with or without cause. The founder can even appoint him/herself as a beneficiary of the
foundation. The identity of the beneficiaries does not need to be registered with any public registry.
The beneficiaries are not part of the foundation, nor do they have the right of disposition on the
assets thereof, even if said beneficiaries are relatives or presumed heirs of the founder by disposition
of the legislation of their nationality or residence. The beneficiaries have the right to the assets of the
foundation or its proceeds according to what has been stated by the founder either in the foundation
deed or by-laws.
The by-laws of the foundation develop and regulate the provisions of the foundation charter. They
constitute a document that the founder subscribes to concurrently with the foundation charter, to
enter into force and have effect as of the creation of the foundation so that it may be executed and
complied with by the Foundation Council. As previously indicated, the by-laws of the foundation
charter constitute a private document, which does not require disclosure, nor has to be recorded in
the Public Registry of Panama to have efficacy and validity.
The by-laws constitute the document that, due to its private character, guarantees the founder
confidentiality regarding the identity of the beneficiaries, or their successors or replacements; the
identification of the assets owned by the foundation; and the form of management of said assets for
the benefit of the beneficiaries of the foundation.
A private interest foundation offers a set of concrete benefits for asset management and protection,
family asset planning and others. Private foundations cannot carry out commercial activities as their
regular purpose or objective because, by nature, they do not have a for-profit purpose. They, however,
can own property, including shares or quotas, and perform such other activities to carry out their
purposes or to diversify their assets. Consequently, a founder can transfer to his/her foundation
assets of any nature, such as real estate, stocks or securities, money, chattel goods and contract rights,
Doing Business in Latin America OCTOBER 2018 225
among others, and thus a foundation is able, for example, to exercise shareholders’ rights, invest its
assets, enter into contracts of any nature and own bank accounts, among others.
Private interest foundations pay an annual fee to the state. There are neither initial capital requirements
nor obligations to hold Foundation Council meetings (which can be held abroad). Thus, this offshore
vehicle is used: (1) as a replacement to the use of wills and prenuptial agreements; (2) as an instrument
for the administration and maintenance of funds; (3) as a means of protection for loved ones and/or
granting periodical allocations, goods or other benefits in their favour; (4) as an instrument to assure
the good continuation of a business; (5) as an instrument for the creation and/or administration of
charitable activities; (6) as a receiving entity for commissions and/or interest payments; (7) a ‘holding
company’; and (8) as the owner of real estate, valuable goods, inventions, etc.
Under the law, the foundation charter must comply with certain minimum requirements, such as
the name of the foundation, name of the founder, names and addresses of the members of the
Foundation Council, name and address of the resident agent and domicile of the foundation. Private
interest foundations are subject to an annual licence fee.
Panamanian private interest foundations can constitute a convenient and useful offshore vehicle,
and for asset management and protection; estate planning to set up the execution of philanthropic
activities of interest for the founder; by reason of the absence of controls and restrictions for the
creation of foundations in Panama; and the simplicity of organising a foundation and conducting
its operations, as well as the reasonable protection that is afforded to the identity of the founder and
beneficiaries of the foundation.
v. Trusts
A Panamanian trust is not a separate legal entity, but rather a legal arrangement whereby a person
known as the settler transfers assets to a person known as the trustee to manage and/or dispose of
them as set out in the trust deed in favour of such persons designated as beneficiaries. Under the
applicable law, the settler itself may be a beneficiary of the trust.
The parties of a trust agreement enjoy contractual liberty to establish the terms and conditions of the
trust agreement. The intention to create a trust must be express and in writing; verbal, presumed or
implied trusts are not valid. A trust is established by means of a document known as the trust deed,
which is typically a private document, with some limited exceptions. For perfection of the trust deed,
signatures therein must be authenticated by a notary public, and the deed must contain, among other
things, the following:
• clear and complete designation of the settler, trustee and beneficiary; in the event that the
beneficiary is to be established in the future or is a class of beneficiaries, the trust deed must
contain enough information to be able to identify the beneficiary;
• the designation of a substitute trustee and beneficiary, if any;
• the description of the property or estate or portion thereof that constitutes the trust;
• the express declaration of the intent to establish a trust;
226 Doing Business in Latin America OCTOBER 2018
• the powers and duties of the trustee;
• the prohibitions and limitation placed on the trustee in the exercise of the trust;
• the rules for accumulation, distribution or disposition of assets, income or products of the trust;
• the place and date on which the trust is established;
• the designation of a resident agent in Panama, who must be a lawyer or law firm and who must
countersign the trust deed;
• the address of the trust in Panama; and
• an express statement that the trust was constituted according to the laws of Panama.
The absence of one or more of these clauses does not render the trust as a whole null unless the
defect in question makes the fulfilment of the trust impossible.
In general, trusts constituted under Panamanian law are subject to the laws of Panama. However,
the trust deed may stipulate that the trust is to be governed by the laws of another jurisdiction.
Furthermore, the trust and its assets may continue into another jurisdiction or change the laws
governing the trust if so stipulated in the trust deed.
Alternatively, a trust constituted under the laws of a foreign jurisdiction may continue into Panama
provided that the trust deed allows for its continuation and either the settler and trustee, or the
trustee alone makes a declaration to that effect.
A trust may hold assets of any nature, present or future, situated in Panama or elsewhere, which may
be transferred to the trust at any time by the settler or any other person. If the trust assets consist
of land or other real property located in Panama, then the trust deed must be granted in a public
instrument and registered in the Public Registry of Panama.
The trust assets are for all purposes deemed to be separate from those of the trustee or settler,
and are therefore protected against claims of preventive attachments (secuestros) or attachments
in aid of execution (embargos) by creditors of the settler or trustee, except for obligations
incurred in the execution of the trust, or by reason of a fraudulent transfer of assets to the trust
in prejudice to creditors.
Unlike private interest foundations, trusts are not required to pay an annual franchise tax. However,
as in the case of private interest foundations, trusts are also subject to tax territoriality; therefore, if
the assets or income produced do not derive from a Panamanian source, neither the income nor the
distributions from said income to the beneficiary will be subject to tax.
The trustee may be a natural or legal person, with no restriction as to its nationality or domicile. The
powers and duties of the trustee must be included in the trust deed. No person can act as a trustee
unless it has first obtained a trustee licence granted by the Superintendence of Banks.
The trust deed may establish limitations on the liability of the trustee, except for losses or damages
caused by gross negligence or wilful misconduct. Unless otherwise provided for, the trustee will be
responsible for any loss or damages that can be attributed to a failure to act with an appropriate
standard of care. It should be noted that, although the trust law does not contemplate the figure of a
Doing Business in Latin America OCTOBER 2018 227
protector, it does not prevent the settler from appointing a supervisory body to oversee the actions of
the trustee.
The settler may appoint one or more substitute trustees in the trust deed. In the case of revocable
trusts, the trustee may be replaced and new trustees may be appointed at any time. If the trustee is
declared dead or unfit, or is removed or resigns and no substitute has been appointed, a judge will
designate a successor at the request of the trustee, settler, beneficiaries or Attorney General, and will
transfer the assets of the trust to the substitute trustee.
228 Doing Business in Latin America OCTOBER 2018
Doing Business in Latin America OCTOBER 2018 229
Paraguay
230 Doing Business in Latin America OCTOBER 2018
XII. Paraguay
A. Foreign investment
i. Introduction
Paraguay has shown strong and stable macroeconomic policies that have strengthened economic
performance in the last ten years. As a result, Paraguay’s economy has grown at an average of 4.28
per cent per year between 2013 and 2017 and is expected to grow 4.5 per cent in 2018. Inflation
rates over the past six years have not exceeded five per cent per year. Paraguay is one of the few Latin
American countries that maintain a stable risk rating by three main rating agencies (ie, Moody’s,
Standard and Poor’s, and Fitch).
Paraguayan law guarantees equal treatment for foreign and domestic investment, except for the
ownership of land near borders by foreigners. Companies operating in Paraguay may be fully owned
by foreign companies or individuals. In general, there are no restrictions on the transfer of funds
outside of Paraguay. However, in the case of repatriating dividends to a foreign shareholder, a
withholding tax of 15 per cent applies unless the company is benefited with certain special regimes
discussed in this document.
Certain sectors reserved for the Paraguayan Government are not opened to private investment
(either domestic or foreign). Accordingly, pursuant to the Paraguayan Constitution, Paraguay
owns all deposits of hydrocarbons and solid, liquid or gaseous minerals, except for rocky, earthy or
calcareous substances, and may grant concessions for their exploitation.
Paraguay has an open economy and is a founding partner of MERCOSUR. MERCOSUR was
established in 1991 by the governments of Argentina, Brazil, Uruguay and Paraguay pursuant to
the Treaty of Asunción. MERCOSUR’s objective is to create a common market and ensure the free
movement of goods, services, capital and labour among member countries.
MERCOSUR is the most important of Paraguay’s preferential trade agreements. The most important
destination of Paraguayan exports is also MERCOSUR, other major destinations include the EU,
other countries of LAIA and Russia. Paraguay’s main import trade partners are the MERCOSUR
members, followed by other Asian countries.
Paraguay has entered into approximately 28 BITs with other countries. Paraguayan BITs cover Italy,
Austria, Belgium/Luxemburg, Bolivia, Chile, Costa Rica, Cuba, the Czech Republic, El Salvador,
France, Germany, Hungary, Italy, Korea, the Netherlands, Peru, Portugal, Romania, South Africa,
Spain, Switzerland, Taiwan, the UK and Venezuela.
ii. Paraguay investment promotion laws
Paraguay has enacted several laws and programmes to promote domestic and foreign investment by
means of tax exemptions and other incentives. The most important investment promotion laws are:
(1) Law No 60/90; (2) Law No 1064/97 (the ‘Maquila Law’); and (3) Law No 5542/15.
Doing Business in Latin America OCTOBER 2018 231
The granting of the benefits under such laws is subject to the approval of an investment project
prepared in the terms required by the applicable regulation. Investment projects under the Maquila
Law and Law No 60/90 have had strong governmental support since their enactment.
a. law no 60/90
Law No 60/90 was enacted to promote medium and long-term capital investments to (1) increase
domestic productivity of goods and services; (2) create new sources of employment; (3) incentivise
export and import substitution; and (4) incorporate new technologies for economic efficiency.
1. Benefits
Benefits provided by the law include tax exemptions applicable to: (1) the import of raw material
and fixed assets; (2) local purchase of fixed assets; and (3) provided the investment equals or exceeds
US$5m, the remittances of dividends and payments of interest, commissions and principal abroad.
The benefits under Law No 60/90 may be granted for periods of five to ten years.
2. Requirements
Prospective investors must incorporate a Paraguayan company or must register a branch of a foreign
company in Paraguay prior to applying. Paraguayan law does not impose restrictions in terms of the
types of products and services that the maquila industry may comprise.
In order to obtain the benefits of Law No 60/90, the investing party must submit a project description
and investment proposal to the Investment Council, an advisory body to the Ministry of Industry and
Commerce (Ministerio de Industria y Comercio (MIC)) and the Ministry of Finance (Ministerio de
Hacienda (MH)). Guidelines for the preparation and submission of such documents are provided by
the MIC.
3. Application process
The Investment Council evaluates the project and proposal and, if appropriate, grants its approval.
Upon being notified of the Investment Council’s approval, the MIC and the MH issue a bi-ministerial
resolution, which represents the final approval and grants the investment project the benefits of the
Investment Incentives Law. The evaluation and approval process normally takes approximately three
to four months. The benefits are granted after the approval of the investment project.
b. the maquila law
The Maquila Law promotes the establishment of local industries to carry out activities, such as the
transformation, production, reparation and assembly of imported goods, incorporating the local
workforce or other domestic resources to re-export the goods upon transformation.
232 Doing Business in Latin America OCTOBER 2018
1. Benefits
Assets imported in connection with the Maquila Law are imported under a special customs regime
of ‘temporary admission’. This regime allows the import of fixed capital, raw material and input into
Paraguay while it suspends the obligation to pay customs tariffs and import taxes, provided that the
goods imported are subsequently exported.
All domestic taxes are exempt (including VAT and corporate income tax) and the operations of
the Maquila Law are subject to a single tax at a rate of one per cent levied on the higher of the
following: (1) the added value to the assembled, processed or manufactured good in Paraguay (eg,
compensation paid to employees and service providers in Paraguay and goods acquired in Paraguay);
or (2) the invoice value, whenever the maquiladora issues an invoice to the parent.
2. Requirements
Prospective investors must incorporate a Paraguayan company or must register a branch of a foreign
company in Paraguay prior to applying. Paraguayan law does not impose restrictions in terms of the
types of products and services that the maquila industry may comprise.
3. Application process
The granting of benefits under the Maquila Law is subject to the approval of a maquila programme
by the Council of Export Maquiladora Industries (Consejo Nacional de la Industria Maquiladora
de Exportación (CNIME)) and a joint Resolution of the MH and MIC. The maquila programme
generally describes the operations to be performed by the maquiladora.
Approval takes approximately from three to four months from the filing of all the required
documentation. The benefits are granted after the approval of the programme and the signing of a
contract with the Paraguayan Government.
c. law no 5542/15 on investment
This law is aimed at promoting capital investment and other productive activities when they
contribute to the generation of employment or economic and social development through the
incorporation of added value to local or imported raw materials.
1. Benefits
• Corporate income tax in connection with activities of the company is ‘stabilised’ at the rate
in force at the time of the execution of the relevant contract, for a term of: (1) ten years
for investment of up to US$50m; (2) 15 years for investment above US$50m and less than
US$100m; or (3) 20 years for investment equal or over US$100m;
• remittance of capital gains, obtained by the sale of shares or rights representing the
investment of capital, is exempt from taxes, up to the investment amount; and
Doing Business in Latin America OCTOBER 2018 233
• investments that are deemed to be of ‘high social impact’ enjoy the following benefits:
(1) exemption from five per cent income tax on the distribution of dividends; and
(2) reduction of 15 per cent income tax rate on the remittance of dividends abroad; a
reduction of one per cent for ever y 100 direct jobs generated by the investment and up
to a maximum of 7.5 per cent (eg, if 300 direct jobs are generated, the tax rate will be
reduced by three per cent).
2. Requirements
Companies that meet the regulatory requirements, either by incorporating a new company or
adapting an already existing company to such requirements, are eligible under this law. Existing and
new investment projects are eligible to apply for the benefits granted under this law provided they
comply with the investing requirements provided by the law.
3. Application process
The granting of the benefits is subject to the approval of the investment project by the MIC and the
MH. Applicable benefits may be combined with those granted for the investment in goods established
in Law No 60/90.
The benefits are granted after the approval of the investment project and the signing of a contract
with the government.
iii. Foreign investment in public infrastructure
a. introduction
Government efforts aimed at attracting private investment to develop infrastructure in Paraguay
resulted in the enactment of new legislation governing PPPs and turnkey projects, beginning a new
phase in the country’s economic development. These new regulations together with the general
procurement modalities applicable to public biddings, regulate the procurement process for public
infrastructure in Paraguay.
b. general procurement modalities
Law No 2,051 and Decree No 21,909/03 regulate the standard public procurement processes in
Paraguay. Law No 2,051 regulates the planning, programming, budgeting, contracting, execution,
delivery and control of public procurement and leasing in connection with all types of goods, services
and infrastructure.
Under this scheme: (1) the Paraguayan Government directly finances the project and must
make payments that are not directly linked to the performance of the awarded contractor; (2)
the Paraguayan Government assumes risks related to the proper operation of the services or the
maintenance of the construction (notwithstanding the Paraguayan Government’s right to apply
administrative sanctions to the private contractor or to execute the contractual guarantees); and
234 Doing Business in Latin America OCTOBER 2018
(3) the contract must be awarded to the lowest economic bid, provided that it meets the technical
conditions set by the contracting agency.
The contracting governmental agency sets a referential offer price. Offers must be below 30 per cent
or above 20 per cent of the referential price to be considered, except for exceptional circumstances
that are analysed on a case-by-case basis.
The Paraguayan Government has a website (www.contrataciones.gov.py) where all public
procurement processes are published.
c. ppp projects
Law No 5,102/13 and Decree No 1,350/14 on PPP regulate PPP projects for the design, construction
and operations of public infrastructure projects and services with a value of at least US$4.6m. The
private party may also maintain or operate services associated with infrastructure.
Projects may be presented by the Paraguayan Government but also by private parties. If the project
was presented at an initiative of the Paraguayan Government, the selection of private participants is
made by public tender procedures or other competitive procedures.
The financing of projects may be made by the private party alone or jointly with the governmental
agency. Payments are generally linked to performance.
Projects that can be carried out by means of PPP include:
• water ways, dredging, signalling and maintaining the navigability of the Paraguay river or
other rivers;
• international airports;
• construction, rehabilitation and maintenance of national routes and highways;
• construction, extension and operation of the railway line service;
• construction and maintenance of national and international bridges;
• drinking water supply, sanitation services and treatment of effluents;
• generation, transmission, distribution and commercialisation of electric power;
• road infrastructure in urban areas;
• social infrastructure, including hospitals, health centres and educational centres;
• jails or criminal conviction institutions;
• improvement, equipment and urban development with the participation of the contracting
governmental agency;20
• aqueducts, polyducts, pipelines and gas pipelines;
20 According to the PPP Law, the contracting entity may be a governmental agency, as well as state-owned companies that have the competence to enter into PPP contracts.
Doing Business in Latin America OCTOBER 2018 235
• production of goods and provision of services that are carried out by state-owned companies;
• production and commercialisation of cement;
• production, refinement and commercialisation of hydrocarbons, fuels and lubricants; and
• telecommunications services.
To carry out a PPP project, bidders must provide two guarantees: (1) a maintenance guarantee
(during the bidding process); and (2) a guarantee of performance in connection with the
implementation of the infrastructure project.
d. turnkey projects
Law No 5,074/13, recently modified by Law No 5,396/15 and Decree No 1,434/14, regulate a
particular modality of public procurement for public infrastructure projects in which the bidder may
design, construct, equip and finance a project.
Bidders compete for technical quality, price and financing conditions. The offer must comply with a
25 per cent Paraguayan participation requirement, which may consist of services or workforce.
The Paraguayan Government issues: (1) construction certificates; and (2) upon completion of certain
milestones, payment certificates (‘CRPagos’). CRPagos are issued with the sovereign guarantee of the
Paraguayan state and constitute the public-external debt of Paraguay. The certificates are irrevocable,
unconditional and assignable. Therefore, the right to receive payments under CRPagos and the
right to receive compensation, in the case of early termination of the contract, may be assigned to
third parties as collateral for financing purposes (eg, securitisation structures). The assignment of
collection rights may be complete or partial, and can be done at any time after the execution of
the contract with the government agency, provided the assignment is previously authorised by the
contracting agency.
The parties may freely choose the applicable law and respective jurisdiction of the assignment
agreement. However, any matter related to the project contract or CRPago is governed by Paraguayan
law and subject to the dispute resolution mechanism established in the contract.
Law No 5,074/13 provides general aspects of contracting. The main provisions governing each
project are determined in the tender documents on a case-by-case basis.
iv. Foreign investment in mining and oil activities
a. mining
All mineral resources in their natural state are considered the property of the Paraguayan state,
which may grant permits (available for prospecting or exploring) and concessions (available for
prospecting, exploring and extracting for commercial purposes) to private parties for a limited time.
Mining activities and concessions are generally regulated by Law No 3,180/07 (the ‘Mining Law’).
Permits and concessions for mining activities do not transfer ownership over any mines or the land
236 Doing Business in Latin America OCTOBER 2018
they are located on; they are limited to the transfer of rights to prospect, explore and extract mineral
resources, as applicable, for a limited time.
1. Permits
Permits are issued by the Ministry of Public Works and Communications (Ministerio de Obras
Públicas y Comunicaciones (MOPC)) through a ministerial resolution, and grant the holder
exclusive rights to explore a specific area for a period of two years, which may be extended a single
time for an additional one year. Each permit may cover a single area of up to 50,000 hectares. Any
minerals obtained as a result of the permitted prospecting or exploring are considered investigative
extractions, and are subject to review and analysis by the MOPC. In order to extract minerals for
commercial purposes, a permittee must apply for and obtain a concession, as described below.
2. Concessions
Unlike permits, concessions require a concession contract between the applicant and the Paraguayan
Government, authorised by a decree, and a law authorising the concession as described in the
concession contract, enacted by Congress.
An applicant may request a concession covering prospection, exploration and commercial extraction
(in which case the concessionaire is able to proceed from phase to phase provided requirements
to proceed are met), or exploration and commercial extraction only (once prospection under a
permit has been completed and requirements to proceed to exploration and extraction have been
met and MOPC approval has been obtained), or commercial extraction only (once prospection and
exploration under a permit have been completed and requirements to proceed to extraction have
been met and MOPC approval has been obtained).
b. oil and gas
Deposits of solid, liquid and gaseous hydrocarbons in a natural state also belong to the Paraguayan
state. Currently, the activities of prospecting, exploration and commercial exploitation of
hydrocarbons in Paraguay are regulated by Hydrocarbons Law No 779/95. The performance of such
activities by private parties is subject to permits or concessions granted for a limited time.
1. Permits
The party interested in performing prospect and superficial reconnaissance must obtain a permit
from the MOPC in the form of a ministerial resolution. Prospecting rights permits are granted for a
term of one year, renewable for an additional one-year term. The permit can cover up to 2,400,000
hectares. The beneficiary of the permit has priority to apply for exploration and exploitation rights
within the prospecting area.
2. Concessions
The party interested in performing exploration or exploitation activities must file for a concession.
Once the request for concession is approved by the MOPC, the party filing for exploration or
Doing Business in Latin America OCTOBER 2018 237
exploitation must execute a concession agreement with the Paraguayan Government that must be
enacted by Congress by means of a Concession Law that approves the concession agreement.
Exploration concessions are granted for a term of four years, renewable for a two-year term, and
include the exclusive right to explore an area of up to 800,000 hectares divided into lots of 40,000
hectares.
Following the exploration, the concessionaire can initiate the exploitation phase. Exploitation is
granted for 20 years, renewable for a ten-year term. Exploitation lots shall be of an extension of not
less than 20 hectares, nor more than 5,000 hectares.
3. Environmental laws and licences
Projects that involve a modification of the environment (ie, that affect life in general, biodiversity,
quality or use of natural or environmental resources, or require a significant amount of the
modification), are required to undertake an evaluation of environmental impact, and obtain an
environmental licence (EL) issued by the Environmental Secretariat (Secretaría del Ambiente de
Paraguay (‘SEAM’)) to operate. ELs do not expire but the undertakings are required to carry out
periodic audits or to submit a sworn statement at least every five years, in accordance with the terms
of the relevant EL to comply with environmental regulations.
The SEAM is the governmental entity responsible for: (1) coordinating, monitoring and
implementing support for the country’s ecological system and environment in general; (2)
supervising and enforcing environmental policies; and (3) monitoring undertakings that may have a
negative impact on the environment. Infrastructure projects are usually required to obtain ELs.
B. Rendering of public services
i. Introduction
The rendering of public services is generally carried out by a state-owned company under a natural
monopoly. Most state-owned companies operate independently from the Paraguay Government, but
coordinate their operations with the central government throughout the Ministry of Public Works
and Communications.
ii. Water
Although Law No 1,614/00, which establishes the general framework for the provision of the
public service of water supply and sewer, determines that the service may be provided directly by
the Paraguayan Government or third parties (should they be authorised by concessions or licence),
the Paraguayan Government is currently the sole supplier of water and sanitary sewer in Paraguay.
Concessionaires and licensees are subject to oversight by the Regulatory Agency for Sanitation (Ente
Regulador de Servicios Sanitarios (‘ERSSAN’)), which determines the range of applicable prices for
water supply services.
238 Doing Business in Latin America OCTOBER 2018
Licences can only be granted to private parties in communities with no more than 2,000 inhabitants
within a limited area. They can be granted for a period of ten years, which can be extended for
periods of equal duration. Licences can be granted by means of administrative authorisations issued
by the executive power (ie, central government) or by departmental or municipal governments.
Empresa de Servicios Sanitarios del Paraguay SA (ESSAP) is a state-owned company responsible
for serving communities with populations of more than 10,000 inhabitants. In jurisdictions with
fewer than 10,000 inhabitants and rural communities, the service is provided by private associations
and the National Environmental Sanitation Service (Servicio Nacional de Saneamiento Ambiental
(‘SENASA’)), a public agency that is part of the Ministry of Public Health and Social Welfare,
provides technical assistance and financing.
iii. Telecommunications
The transmission of electromagnetic communication signals is considered to be state-owned and in
the public domain. Nevertheless, Law No 642/95, which regulates telecommunications, guarantees
free access and supply of telecommunications services.
Basic telecommunications services, such as conventional telephone lines are rendered by state-owned
companies through a monopoly by the Paraguayan Communications Company SA (Compañía
Paraguaya de Comunicaciones (‘COPACO’)). Broadcasting services and other services may be
provided by private parties under a licence or authorisation issued by the National Commission
of Telecommunications (Comision Nacional de Telecomunicaciones (‘CONATEL’)), which is the
governmental agency that regulates telecommunications.
Licences and authorisations are subject to the payment of an annual fee, which must be paid within
a period of 60 days of being granted or renewed. Also, the commercial operation of the services is
subject to the payment of an annual rate of up to one per cent of the gross income of the provider.
Licences for broadcasting services are granted for a period of ten years, which can be extended for
periods of equal duration. Authorisations for other services are granted for five years, which can also
be extended.
Fees for the provision of broadcasting services and other services are freely established and subject to
market fluctuations. However, they are subject to the control of CONATEL.
iv. Power
Generation and transport of electrical energy are regulated and subject to government oversight. For
electricity generation, Paraguay relies in two hydroelectric plants, that is, Itaipú (operated with Brazil)
and Yacyretá (operated with Argentina), which provide over 99 per cent of the country’s electricity
and generate a large electricity surplus for export. The treaties concerning those projects were
ratified by Law No 389/1973 (Itaipú) and Law No 433/1973 (Yacyretá).
Private participation in the generation and transport of energy is expressly permitted by Law No
3,009/06 (the ‘P&TE Law’). The law seeks to promote private investment in the generation and
transport of electrical power in a free market.
Doing Business in Latin America OCTOBER 2018 239
Administración Nacional de Electricidad (ANDE) is a publicly owned electricity company, responsible
for: (1) the generation, transmission and distribution of electricity; and (2) verifying and developing
national policies on electricity in Paraguay.
Relationships between energy producers and ANDE for the independent generation of energy are
determined on a case-by-case basis in a licence agreement or JV agreement. Requests for a licence for
the independent generation or transport of energy must be filed by the interested party to the Minister
of Public Works and Communications. JV contracts are awarded by international public bidding.
Although the P&TE Law has been in force since 2006, as of today, ANDE has not signed contracts
with private parties for the independent generation of energy.
C. Real estate: limitations
i. Introduction
The Paraguayan Constitution guarantees the right to private property, whose content and limits are
established by law, attending to its economic and social function. Projects carried out in urban or
rural properties are required to comply with environmental regulations, and are subject to the same
environmental assessments and licensing process described above.
ii. Urban properties
a. applicable taX
The tax base for urban properties is the value of the property that is calculated pursuant to the
commercial value of the land and the type of street (ie, earth, stone pavement or asphalt), among
others. Urban properties are valued per square metre. Real estate tax over urban property is levied at
a rate of one per cent over the value of the property
b. regulatory plans
The main restrictions with regard to urban properties are those emerging from urban planning and
zoning regulations, which are regulated by the municipalities.
Each municipality regulates land use planning and infrastructure coordination. These regulations
cover matters related to residential areas, commercial and service areas, industrial areas, transition
areas, specific use areas, mixed points, housing points, use of specific and special areas, as well as
everything related to permitted uses, height of buildings, parking for vehicles, adequate road design
and, in general, everything related to the use of land located in urban areas.
The regulatory plan includes a zoning map of the city.
240 Doing Business in Latin America OCTOBER 2018
c. construction permits
Every construction or modification of structures in urban properties must be previously authorised by
the municipal government by means of a licence. The municipal authorities verify compliance with
applicable land use regulation and other technical features.
iii. Rural properties
a. applicable taX
The tax base for urban properties is the value of the property that is calculated pursuant to the
commercial value of the land, location, and so on. Rural properties are valued per hectare.
Rural real estate tax is levied at a rate of is one per cent over the value of the property. Rural
properties of less than 5 hectares are subject to a tax rate of 0.50 per cent if the proprietor evidences
that it is the only property destined for agricultural activities.
b. indigenous communal ownership of land
Indigenous people are granted social ownership of land for the preservation and the development of
their lifestyle. The Paraguayan Government has the constitutional obligation to provide land for free
and guarantees that this property is non-seisable, indivisible, non-transferable, imprescriptible, not
susceptible to guarantee contractual obligations and not to be leased; and exempt from taxes.
c. border territories
In general, there are no restrictions on the acquisition of property by foreigners, which are given
the same treatment as nationals. However, Law No 2,532/521 stipulates that legal entities comprised
mostly by foreigners from any of Paraguay’s bordering countries cannot be owners, co-owners or
beneficial owners of rural property located in the border security zone, which consists in an area of 50
kilometres adjacent to the international border.
iv. Expropriation events
The Paraguayan Constitution provides that expropriation can only take place due to: (1) public
interest, for example, for the establishment of a public service, construction of roads or public
infrastructure in general; (2) social interest; and (3) unproductive latifundia (ie, large-scale land
ownership) destined for agrarian reform.
Expropriation must be previously authorised by Congress, providing the legal grounds that motivated
such expropriation.
The Paraguayan Government also guarantees the payment of fair compensation in cases of
expropriation.
21 Law No 2532/05 that establishes the Paraguayan borders’ margin of security.
Doing Business in Latin America OCTOBER 2018 241
Peru
242 Doing Business in Latin America OCTOBER 2018
XIII. Peru
A. Foreign investment in Latin American countries
i. General rules and restrictions
a. general investment guarantees
The Peruvian constitutional and legal framework opens the economy to private investment, which
is practised in the context of a social market economy. It also promotes competition and ensures
foreign investment in any type of company and industry.
Prices are governed by the market and free competition, except for public services, which are
administratively regulated. The Peruvian Constitution also recognises freedom of trade and industry,
and of exports and imports.
In the early 1990s, investment guarantees were introduced, such as the right to freedom of ownership
and disposition of foreign currency, and repatriation of capital and dividends, to all natural and legal
persons, both national and foreign.
It is also guaranteed that there shall be no discrimination or differential treatment in FX, prices,
customs tariffs or duties among investors based on sector or type of activity, or geographic location,
nor between natural or legal persons, domestic or foreign.
ii. Foreign investment promotion
a. general
There are very few restrictions to foreign investment in Peru. Article 71 of the Peruvian Constitution
provides that foreigners – individuals or entities – are prohibited from owning, directly or indirectly,
real estate and mineral extraction rights, among others, within 50 kilometres of the Peruvian borders.
Nonetheless, this rule may be subject to exception in cases of national interest or public necessity.
The general regulatory framework for foreign investment is provided by Legislative Decree Nos 662
and 757 and their specific regulations. Article 63 of the Peruvian Constitution of 1993 provides that
foreign investors shall have the same rights as domestic investors.
Investors are guaranteed the right to freely transfer abroad the whole of their capital, dividends, profits,
royalties and consideration in freely converted currency and without any authorisation whatsoever.
Where appropriate, to convert national currency into foreign currency, they shall be entitled to the
most favourable exchange rate.
Notwithstanding the restriction set forth in the aforementioned Article 71 of the Peruvian
Constitution, the General Law of Hydrocarbons regards the exploration and exploitation of
hydrocarbons to be of public necessity and national interest; therefore, these activities are exempt
Doing Business in Latin America OCTOBER 2018 243
from the aforementioned restriction, and foreigners may perform these activities within the full
national territory.
b. taXation of fdi
Foreign investments carried out through an incorporated company in Peru are subject to the same
tax rates and deductions as those of Peruvian-owned companies. In the application of the non-
discrimination rule and ‘National Treatment’ principle, there shall be no differentiation based on the
nationality of the investment.
The Superintendence of Customs and Tax Administration (Superintendencia Nacional de Aduanas y
de Administración Tributaria (‘SUNAT’)) is the governmental authority in charge of collecting taxes
and customs duties.
1. Income tax
Income tax is an annual tax that levies income obtained by taxpayers domiciled in Peru, regardless of
the place in which the income was generated. Additionally, this tax levies the Peruvian source income
obtained by non-domiciled taxpayers.
Pursuant to Peruvian legislation, Peruvian source income is classified into the following categories:
1. first category: income produced from the lease, sublease and assignment of goods;
2. second category: profit sharing and capital gains income not included in any other category;
3. third category: income related to business activities;
4. fourth category: independent services income; and
5. fifth category: labour income and others as established by law.
The following are the main aspects of income tax applicable to resident and non-resident taxpayers:
i. Resident
Individuals
In general, income obtained by individuals domiciled in Peru (other than income derived from their
business activities) is taxed through the following methods of assessing their income tax:
• Capital gains income: comprises first and second category net income, excluding dividends and
any other distribution of profits. Capital gain income is taxed at a rate of five per cent of the gross
income (6.25 per cent of the net income). In the case of profit distributions, the applicable rate
has been modified recently to a five per cent withholding tax rate on dividend distributions.
244 Doing Business in Latin America OCTOBER 2018
Fiscal years Rate (%)
2015–2016 6.8
2017–2018 8.0
2019 onwards 9.3
• Labour income: comprises fourth and fifth category net income. Resident individuals will be levied
on the result of adding their net labour income to their foreign source income. The former, on the
other hand, will be the result of deducting seven tax units (unidades impositivas tributarias (UIT))
from the taxpayer’s annual fourth and fifth net incomes. A cumulative progressive tax scale shall be
applied to the resulting amount. Resident individuals are entitled to certain itemised deductions
(eg, rental payments, mortgage payments and medical expenses), provided certain requirements
are met and subject to a certain limit.
Legal entities
Corporate income tax is determined by applying a rate of 28 per cent on the total amount of income
for the fiscal year, minus expenses incurred in generating said income. Profit sharing carried out
by companies is taxed with an additional five per cent. Current regulation establishes a progressive
decrease of the corporate income tax rate, as explained below:
Fiscal years Rate (%)
2015–2016 28
2017–2018 27
2019 onwards 26
Profit sharing carried out by companies is taxed at an additional rate. This rate will not be applicable
when the beneficiary of the dividend is another resident legal entity.
The fiscal year begins on 1 January and ends mandatorily on 31 December. Annual tax is assessed at
the end of each fiscal year. Advance pre-payments are deducted from the tax amount.
Net income obtained by taxpayers can be offset against losses under two different systems: (1)
offsetting the losses (until exhausting the amount) against income obtained in the following four
fiscal years; or (2) offsetting the losses against 50 per cent of the net income obtained in each fiscal
year, without any time limits or statute of limitations.
Statute of limitation
The possibility that the Peruvian Tax Authority (SUNAT) will start any action to determine the
tax liability of a taxpayer and/or to demand payment and apply sanctions expires after four years
for taxpayers who have presented the applicable tax return, and six years for those who have not
submitted a tax return. Notwithstanding the aforementioned, the term will be ten years when the
withholding or collection agent has failed to pay the withheld or collected tax.
ii. Non-resident
Income tax for non-resident taxpayers is only levied on Peruvian source income. The following are
considered Peruvian source income:
Doing Business in Latin America OCTOBER 2018 245
• produced by capital, when considered to be located or economically used in Peru;
• dividends generated by companies domiciled in Peru;
• income resulting from business activities carried out in Peru;
• income resulting from individual work carried out in Peru;
• income obtained from the sale, redemption of shares and other securities representing equity
of companies incorporated or established in Peru;
• income obtained from digital services when the latter is economically used or consumed in Peru;
and
• income obtained from technical assistance that is economically used in Peru.
The income tax on the aforementioned Peruvian source income shall be assessed by applying the
following tax rates:
Individuals
• dividends and other profit sharing: 6.8 per cent, 8.0 per cent or 9.3 per cent according to the
fiscal year of distribution;
• income obtained from the sale of real estate: five per cent;
• interest when paid or credited by a person domiciled in Peru that generates third-category
income: 4.99 per cent. This rate shall apply provided: (1) the parties are not related; and (2)
the interests are not related to operations carried out from or through countries or territories
with low or no taxation, in which case the rate will be 30 per cent;
• capital gains from the sale of securities carried out outside of the country: 30 per cent;
• other income derived from capital: five per cent;
• income from third category generating activities: 30 per cent;
• labour income: 30 per cent;
• live entertainment performed by non-domiciled artists and performers: 15 per cent;
• income from royalties: 30 per cent; and
• other income not previously indicated: 30 per cent.
Legal entities
• interest arising from cross-border loans, provided that they meet certain statutory requirements:
4.99 per cent;
• income derived from the lease of ships and aircraft: ten per cent;
• income from royalties: 30 per cent;
246 Doing Business in Latin America OCTOBER 2018
• dividends and other forms of profit sharing received from resident legal entities: 6.8 per cent (tax
years 2015–2016), 8.0 per cent (tax years 2017–2018) and 9.3 per cent (tax years 2019 onwards);
• technical assistance: 15 per cent;
• live entertainment performed by non-domiciled artists and performers: 15 per cent;
• income generated from the sale of securities inside the country (ie, within the Peruvian Stock
Exchange): five per cent;
• interest from bonds and other debt instruments and deposits as set forth by Peruvian Banking
Law: 4.99 per cent; and
• other source of income: 30 per cent.
2. Transfer pricing
The value assigned to goods, services and other benefits for income tax purposes must be at
fair market value. If the value assigned in a transaction differs from fair market value, either by
overvaluation or undervaluation, SUNAT may adjust the aforementioned value for the different
parties of the transaction.
In case of transactions between related parties or with parties located in tax haven jurisdictions, the
transfer pricing standards (ie, arm’s length principle) must be applied in order to avoid the income
tax to be paid in the Peru being less than the income tax that would have been otherwise levied if fair
market value principles were applied.
3. VAT
VAT is a tax levied on value added in each transaction at various stages of the business cycle. The
applicable rate is: 18 per cent (including the two per cent municipal promotion tax). The VAT is
levied on the following operations in Peru:
• sale of personal property;
• the provision of services;
• the use of services within Peruvian territory when provided from abroad;
• performance of construction contracts;
• the first sale of real estate built directly by constructors;
• the import of goods; and
• the taxpayer: the legal entity performing the taxable activity, that is, who sells the goods or
provides the services, etc.
VAT paid when purchasing goods and services may be used as a tax credit. In the case of taxpayers
exporting goods or services, a tax credit not applied against the VAT of taxable operations may be
applied against other taxes.
Doing Business in Latin America OCTOBER 2018 247
4. Tax on net assets
The temporary tax on net assets is a tax that is levied on the value of a company’s net assets as of 31
December of the prior year.
Net asset’s value Rate (%)
Up to PEN1m 0
More than PEN1m 0.4
The obligation becomes due on 1 January of every year and is paid in April of each year, according to
a payment calendar established by the Peruvian Tax Authority.
All third-category income generators (including branch offices, agencies and other permanent
establishments of non-domiciled companies) will be levied with the temporary net assets tax,
provided they started operations before 1 January of the current tax year (thus, eg, a company
starting operations on 2 January 2015 would be subject to this tax as of 1 January 2016 and would be
levied pursuant to the value of its net assets on 21 December 2015).
5. Financial transactions tax
The financial transaction tax levies the entry or exit (credit or debit) of money in accounts held in
entities that are part of the Peruvian financial system, and money transfer operations, irrespective of
the means used (subject, however, to certain exceptions).
The tax obligation becomes due when crediting or debiting the bank accounts. Companies within the
Peruvian financial system will act as withholding agents, and will be responsible for the payment of
said tax to the Peruvian Tax Authority.
The applicable rate is currently 0.005 per cent on the value of the affected transaction. The financial
transaction tax is deductible purposes.
6. Excise tax
Excise tax is levied on: (1) the sales of goods within the country; and (2) the import of certain goods,
such as fuel, soda, mineral water, sugar-sweetened and alcoholic beverages, cigarettes, luxury goods,
new vehicles (other than electric, gas or hybrid) and gambling.
The tax is either a fixed amount or an amount determined by applying a percentage rate.
7. Tax incentives
Among others, Peruvian laws and regulations provide the following tax incentives:
8. Special regimes
Taxpayers may obtain a refund of VAT levied on imports and/or local purchases of new capital goods,
new intermediate goods, services and construction contracts, carried out during their pre-production stage.
In order to benefit from this regime, it is necessary to execute an investment agreement with the
Peruvian Government. Individuals or legal entities may make use of this special regime regulation
248 Doing Business in Latin America OCTOBER 2018
if they invest in any sector of the economy that generates third-category income and meets certain
statutory requirements.
In addition, there are special regulations for early recovery for certain economic sectors, such as
hydrocarbons, mining, public infrastructure and utilities, among others.
c. legal stability agreements
A legal stability agreement (LSA) is a contract with force of law that may be entered into with the
Peruvian Government both by investors and recipient companies, regardless of the economic activity
performed by the latter. By means of LSAs, the Peruvian Government grants stability to an investor
(both foreign and/or local) and to the Peruvian company receiving such investment (‘Peruvian Co’),
over certain regulations (legal framework) in force at the time of executing the LSA, for the entire
term of the corresponding agreement. As a general rule, LSAs have a validity term of ten years or the
length of a particular concession.
ProInversion is the national authority in charge of representing the Peruvian Government in the
execution of LSAs, as well as supervising their compliance by beneficiaries. Agreements with local
investors and Peruvian Co are executed, in addition to ProInversion, by the corresponding ministry
of the economic activity to which the investment is destined.
In order to execute an LSA, investors shall commit to carr y out investments in Peruvian Co of
at least US$10m if Peruvian Co operates in the mining and hydrocarbon industries, or US$5m
for any other industr y.
On the other hand, Peruvian Co may equally enter into an LSA for which it shall receive investments
from at least one investor that complies with the legal requirements.
1. Legal aspects stabilised by LSAs
i. For investors
1. Income tax regime: this implies that the dividends and any other form of profit distribution
will be subject to income tax at the rate in force at the time of entering into the relevant
agreement; the stability regime referred to herein protects the investor from any amendment
to the income tax regime, and such modifications shall not affect the investor, both in the case
of a rise or reduction of the income tax rate;
2. free availability of foreign currency;
3. right to freely remit abroad capital, profits, dividends and royalties, with no limitation or
restriction whatsoever;
4. right to use the most favourable exchange rate available in the market; and
5. right to non-discrimination.
It is important to note that national investors are granted only the benefits detailed in 1, 2 and 5 above.
Doing Business in Latin America OCTOBER 2018 249
ii. For Peruvian Co
1. Income tax regime: this implies that: (i) any amendment to the stabilised regime regarding
rates, deductions or calculation of Peruvian Co’s taxable income will not apply thereto; and
(ii) Peruvian Co. will be subject to income tax at the rate in force at the time of entering into
the LSA. In order to benefit from tax stability, the investment shall represent more than 50 per
cent of Peruvian Co’s share capital plus reserves on the day prior to the execution of the LSA.
Additionally, the investment shall be destined to the enhancement of Peruvian Co’s productive
capability or to its technological development.
2. Employment regime: this implies that Peruvian Co may employ its workers under any of the
forms permitted by current regulations governing private labour.
3. Promotion of exports: for example, the systems covered by the current customs regulations
(eg, temporary admission for active improvement, drawback and replacement of goods under
franchises) and the special regime favouring exporters covered by the Value Added Tax Act.
LSAs entered into by an investor provide stability only to the investment committed under the LSA,
while, on the contrary, Peruvian Co acquires stability over its entire equity. This means that it is
perfectly feasible for an investor to be the titleholder of both stabilised and ‘non-stabilised’ shares of
Peruvian Co.
d. international agreements
1. Double taxation
The following double tax treaties executed by the Peruvian Government are currently in force: Brazil,
Canada, Chile, South Korea, Mexico, Portugal, Switzerland, and with the member countries of the
Andean Community (ie, Bolivia, Colombia and Ecuador).
2. Multilateral agreements on trade and integration
Peru is a founding member of the WTO. Consequently, WTO rules on anti-dumping, subsidies and
countervailing measures, as well as liberalisation of markets and technical barriers to trade, among
others, are applicable in the country.
Similarly, Peru is currently a member of the Andean Community, which is formed by Peru, Bolivia,
Ecuador and Colombia. It is noteworthy that Venezuela was a member of the Andean Community;
however, it denounced the agreement in April 2006. The following are associate states to the Andean
Community: Chile, Brazil, Argentina, Uruguay and Paraguay.
Following the Relief Programme agreed by the Andean Community, the trade of goods between Bolivia,
Colombia, Ecuador and Peru enjoy total tariff relief, constituting a free trade area. Peru joined the
programme according to a relief schedule established by Decision 414 of the Andean Community.
On the other hand, Peru is an associate state to the agreement between countries in South America
called MERCOSUR. That agreement has been entered into by Argentina, Brazil, Paraguay, Uruguay,
Venezuela (currently suspended) and Bolivia.
250 Doing Business in Latin America OCTOBER 2018
Peru has signed agreements with other countries in Latin America under the rules of the Latin American
Integration Association (Asociación Latinoamericana de Integración (ALADI)) and has entered into
trade agreements with MERCOSUR together with other members of the Andean Community.
In addition, Peru is a member of the Pacific Alliance with the leading Latin American economies
(Mexico, Chile and Colombia), and has recently entered into the Comprehensive and Progressive
Agreement for Trans-Pacific Partnership (‘CPTPP’) along with important economies of the Pacific.
3. Global Forum on Transparency and Exchange of Information for Tax Purposes
Peru is a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes,
which is a forum created by the OECD to implement the automatic exchange of financial information
of taxpayers worldwide between member countries, for the purposes of fighting tax evasion.
In addition, Peru has executed investment protection agreements that are currently in force, either in
the form of bilateral investment agreements or through an investment protection chapter contained
in an FTA.22
The main areas covered by trade agreements are customs affairs and trade facilitation; technical
barriers to trade; sanitary and phytosanitary measures; trade protection; services, establishments
and capital movement; public procurement; intellectual property; competition; dispute resolution,
horizontal and institutional affairs; trade and sustainable development; and technical assistance and
skill building; among other matters.
iii. General legal framework
a. vehicles to invest
Foreign individuals or entities may conduct business in Peru either directly or through a Peruvian
corporation or branch. Peruvian law recognises investors’ freedom to incorporate at their option, in
order to conduct economic activities.
Certain activities related to banking and mining may be required by law to be performed through a
particular form of company. Some sectors may also require local incorporation or branch.
The three legal types most commonly used by investors are corporations, LLCs and branches. The
General Corporations Law governs three special types of corporation: (1) the ordinary corporation
(sociedades anónimas (SA)); closely held corporation (sociedad anónima cerrada (SAC)), and public
corporation (sociedad anónima abierta (SAA)), which differ from each other regarding the number of
shareholders allowed, as well as listing of their stock.
b. hiring foreign workers
When hiring foreign personnel, it is necessary to execute a written employment contract according to
certain formalities and limitations (ie, its term shall not exceed three years, which could be extended
for similar periods).
22 For the full list of Free Trade Agreements entered into by Peru, please refer to www.acuerdoscomerciales.gob.pe
Doing Business in Latin America OCTOBER 2018 251
Foreign employees should not exceed 20 per cent of the total workforce, and their combined salaries
should not exceed 30 per cent of the total company payroll.
The applicable law provides for exceptions to these restrictions, such as high-level executives of a
new company, high-level executives going through corporate restructuring, qualified professionals
or technicians, or personnel from companies that have entered into agreements with entities in the
public sector. These restrictions do not apply either in case of: (1) citizens whose spouse, ancestors,
descendants and siblings are Peruvian; and (2) citizens whose countries of origin have entered into
an international dual nationality or a labour reciprocity treaty (eg, Spanish citizens, and citizens from
countries of the Andean Community and MERCOSUR).
Foreign employees may only begin their services once the contract has been approved by the Ministry
of Labour, and when the adequate migratory status (resident visa) has been obtained. Foreign
employees may not be included in the payroll until they fulfil both requirements.
Should preliminary arrangements need to be made in Peru before beginning to work (eg, signing
contracts or participating in a meeting to negotiate employment conditions), it is advisable to enter
Peru with a business visa. As a general rule, the business visa must be requested at the Peruvian
Consulate of the foreigner’s home country; however, as an exception, there are some nationalities for
which foreigners are allowed to request a business visa at the migratory control post when entering
Peru. The countries that have this benefit are the Pacific Alliance members (Chile, Colombia and
Mexico), Brazil, China, India, Indonesia, Panama and most European countries.
c. customs
In Peru, WTO rules on import valuation are applied.
The Customs Law sets out a number of procedures and customs operations that are applicable to
goods that enter or leave the country. The main customs regimes are:
• Import for Consumption Regime: This is the most common type of customs regime and
involves the definitive entry of foreign goods into Peruvian customs territory for the purpose
of being consumed in the country. The entry of goods into Peru is made after paying customs
duties and applicable taxes, if any, and complying with any formalities and other customs
obligations, if applicable. Foreign goods shall be considered nationalised when clearance is
granted by the customs authority.
• Definitive Export Regime: This is a customs regime enabling the exit of national or nationalised
goods from Peruvian customs territory due to definitive consumption or to be used abroad.
This regime is not subject to any taxes.
• Temporary Import Regime: This is a customs regime enabling the entry of goods for internal
use in the country and subsequent re-export (applicable to equipment and machinery included
in a closed list of goods approved for this purpose). The payment of customs duties and taxes is
suspended by submitting a guarantee covering the amount of such duties and taxes.
The law also sets forth customs procedures for export promotion, such as:
252 Doing Business in Latin America OCTOBER 2018
• Drawback Regime: This allows for the full or partial recovery of customs duties levied on
imported inputs that have been incorporated into exported goods or that were consumed
during their production. Through this regime, the beneficiary may get a refund repayment
of four per cent of the free on board (FOB) value of exported goods, provided that some
requirements are met. For example, the value of the imported inputs may not surpass 50 per
cent of the exported good’s FOB value. The recovery rate will change to three per cent in 2019.
• Temporary Import for Outward Processing Regime: This suspends payment of customs duties
and other applicable taxes on imported inputs if they are transformed or manufactured and
materially incorporated into export goods that will be exported within 24 months after their
entry. In addition, goods used directly in the production process, such as catalysts, accelerators
or retarders, which are consumed during the process, may be subject to this customs regime.
• Reposition of Merchandise in Franchise Tariff Regime: That allows the importation –
without payment of customs duties and applicable taxes on imports – of goods equivalent to
nationalised goods, which have been transformed, processed or physically incorporated into
definitively exported products.
Customs clearance is governed by the General Customs Law and its regulations. In addition, SUNAT
is responsible for controlling the entry or exit and transport of goods inside the Peruvian border.
d. mining investment
In Peru, mineral resources are owned by the state; hence, their exploration and exploitation is
allowed only if the relevant governmental consents are granted. A concession is required to carry out
mining-related activities, except for sampling, prospecting, storage and trading. Nonetheless, while a
mining concession is key for conducting mining, the granting of other permits or consents – such as
an environmental certificate, water use right, right over the land and certificate of the non-existence
of archaeological heritage, among others – is also required.
Although a mining concession is a property-like right, it is different and independent from
the surface land on which it is located. Therefore, carrying out mining (whether exploration,
exploitation or any other ancillary activity) needs the mining titleholder to obtain a title over the
surface land through an agreement with the private landowner or the relevant administrative
procedure in case of state-owned land. If reaching an agreement with the private owner is
not possible, the imposition of a mining legal easement may be requested from the Peruvian
Government, but this is rarely granted.
Mining concessions are granted indefinitely and, generally speaking, are irrevocable, provided
their titleholders pay the annual validity fee and reach minimum production levels (or other wise
pay the applicable penalties) within the terms set forth by law.23 Non-compliance with paying the
validity fees or the production penalties for two consecutive years entails the cancellation of the
mining concession.
23 Holders of mining concessions shall achieve a minimum production of at least one tax unit per hectare per year within a ten-year term following the year in which the concession was granted. Otherwise, a penalty equivalent to ten per cent of one tax unit per hectare per year shall be paid. Furthermore, mining titleholders will have a 30-year term to achieve the minimum production levels set by law; otherwise, the concession will be cancelled. In principle, the 30-year term is counted from the granting of the mining concession. Nonetheless, for those concessions granted before 31 December 2008, the term is counted from January 2009.
Doing Business in Latin America OCTOBER 2018 253
Mining concessions may be subject to transfer, assignment, mortgage and, in general, any legal
transaction or contract. In order for these agreements to be enforceable, a public deed shall be
granted and subsequently recorded with the Public Registry of Peru. Otherwise, they will be binding
only between the parties to them.
There are no restrictions or special requirements on foreign companies or individuals regarding
owning mining concessions, unless these are located within 50 kilometres of the Peruvian border, in
which case, special authorisation needs to be granted through a Supreme Decree.
There are other types of concessions regulated by the Peruvian Mining Law and required to develop
certain specific mining-related activities, as detailed below:
Processing Concession, which grants the right to process, purify, smelt or refine minerals through a
processing plant;
General Service Concession, which allows carrying out ancillary services (eg, ventilation, sewerage,
hoisting or underground access) for two or more mining concessions of different holders; and
Mining Transport Concession, which authorises the mass transport of minerals by non-conventional
systems (eg, conveyor belts, pipelines or track cables).
e. oil and gas investment
The Peruvian oil and gas industry is governed by Law No 26,221 (the ‘Organic Law’). The Organic Law
and its regulations constitute the primary local general regulation in hydrocarbon matters establishing
the legal structure that currently governs both upstream and downstream hydrocarbons activities.
1. Upstream activities
Pursuant to the Organic Law, in situ oil and gas resources are owned by the Peruvian state, and
hence, the performance of any exploration and exploitation activities in respect thereof shall only be
performed based on legal rights granted by the corresponding authority.
Title to such rights may be obtained through any of the following two alternatives: (1) a licence
agreement, pursuant to which the oil and gas extracted is owned by the licensee and may be freely
sold either in the domestic or international market, while the Peruvian Government receives a royalty
as compensation for such rights; and (2) a service agreement, by which the Peruvian Government
hires a private entity to undertake exploration and exploitation activities, maintaining ownership title
over all extracted hydrocarbons. In the second scenario, the private operator is compensated for its
services either by receiving a portion of the extracted resource or an agreed fee per barrel extracted.
Contracts entered into under the above regimes provide for certain benefits, including tax stability,
early recovery of VAT and the guarantee of availability of foreign currency, during the life thereof.
The contracts have the nature of contract law, which means that they cannot be modified unilaterally
by the Peruvian Government.
The execution of hydrocarbon contracts may be achieved through: (1) a direct negotiation process; or
(2) a public bid. Nonetheless, both procedures will require the contractor to obtain prior qualification
from the corresponding authority (Perupetro) on a contract-by-contract basis. Duly qualified local
254 Doing Business in Latin America OCTOBER 2018
and foreign oil and gas entities are equally eligible to enter into contracts for the exploration and
exploitation of hydrocarbons, provided that, in the case, of foreign entities, they establish a branch or a
subsidiary domiciled in the capital city of Lima and appoint a Peruvian representative.
The execution of the aforementioned contracts, as well as any amendment thereto or any assignment
thereof, requires the prior approval of the Peruvian Government through the enactment of a supreme
decree ratified by the Ministries of Energy and Mines, and Economy and Finance, respectively.
2. Downstream activities
National or foreign entities are allowed to own and operate oil refineries, fuel oil and gas stations,
gas processing plants, storage terminals and pipeline infrastructure subject only to complying with
applicable local regulations.
In order to undertake the following hydrocarbon activities, refining, storage and fuel stations, entities are
required to: (1) obtain an authorisation (favourable technical report issued by Organismo Supervisor
de la Inversión en Energía y Minería (‘Osinergmin’)) prior to the start of construction works; (2)
register before Osinergmin prior to the start of its commercial operations; and (3) register before the
Peruvian Government’s controlled goods registry managed by SUNAT. The transport and distribution of
hydrocarbons through oil or gas pipelines can only be carried out by entities holding a relevant concession
granted by the Ministry of Energy and Mines (Ministerio de Energía y Minas (‘MINEM’)).
The Executive Branch and Congress are currently working on an amendment to the Organic Law
in order to extend the terms of the exploration and production contracts beyond the current terms
of 30 years for crude oil and 40 years for natural gas, and provide the flexibility to agree on lower
royalties, among other aspects aimed at attracting risk investment to the country.
B. Rendering of public services
i. General framework
As per Article 58 of the Constitution, the Peruvian Government may act in certain areas of social
interest, such as employment promotion, health, education, security, and the rendering of public
services and public infrastructure development.
However, by constitutional mandate, governmental agencies may only engage in economic activities
in a subsidiary manner, and only if expressly authorised by law for reasons of public interest or
national convenience.
In that sense, given that the Peruvian Government can only intervene in specific scenarios, Peru’s
legal framework established the principal guidelines for the exercise of private initiative in all
economic activities through Legislative Decree No 757 in order to promote private investment and
regulate the main actors of Peru’s economic system. Since this legislative decree was enacted, all
prices and tariffs have been set as a result of free market competition, except in the case of public
services, where prices are administratively set as expressly provided by law.
Doing Business in Latin America OCTOBER 2018 255
Once the general rules for private initiative in public services were outlined, each regulated sector
(energy, telecommunications, water supply, sanitary, etc) had its own general law approved for the
provision of each type of public service. As a result, laws, such as the Electrical Concessions Law,
General Telecommunications Law and General Sanitary Law, were created.
Additionally, Legislative Decree No 757 provided the first legal dispositions for the creation of
regulatory agencies that regulate and supervise private investment in the provision of public services.
Subsequently, Law No 27,332 formally created Peru’s first four regulatory entities for the provision
of public services and infrastructure development: the Energy Regulator (‘Osinergmin’), the
Telecommunications Regulator (Organismo Supervisor de Inversión Privada en Telecomunicaciones
(‘Osiptel’)), the Public Transport Infrastructure Regulator (Organismo Supervisor de la Inversión
en Infraestructura de Transporte de Uso Público (‘OSITRAN’)) and the Sanitation Regulator
(Superintendencia Nacional de Servicios de Saneamiento (‘SUNASS’)). All these, among other new
regulatory agencies, currently have administrative powers for regulating, supervising and sanctioning
public services concessionaires in their respective area.
ii. Amending and systematising the applicable rules for the promotion of private investment
Given that the framework regarding these matters was distributed in several sets of regulations,
the Peruvian Government decided to create a more unified and complete system for the aspects
concerning private investment in both public services and public infrastructure. Thus, the Peruvian
Government issued Legislative Decree No 1,224 in 2015, which on was systematised through Supreme
Decree No 254-2017-EF, its regulation approved by Supreme Decree No 410-2015-EF and, finally,
Legislative Decree No 1,251, which amended certain articles in Legislative Decree No 1,224.24 Its
purpose was to establish guidelines to promote the participation of private investors through the
execution of projects via PPP or state assets (proyectos en activos). It should be noted that the latter
is a legal mechanism that allows public entities to promote private investment over their own
assets through purchase agreements and surface right agreements, among others. In addition, it is
important to state that these types of agreements cannot compromise public resources nor transfer
risk towards the public entity, except when expressly stated by a legal provision.
That said, Legislative Decree No 757 also sets forth the main guidelines by which private initiatives
can participate in the rendering of public services and the development of public infrastructure.
One of these is the concession mechanism provided in each sector’s general regulations (Electrical
Concessions Law and the General Telecommunications Law). As mentioned, concession contracts
are one of the main mechanisms by which the state grants the private sector the right of exploitation
for a limited term. In that sense, even though Legislative Decree No 1,224 and its regulation do not
emphasise their role as much as previous regulations, they are widely known and adopted by our
system. This can be greatly appreciated in some of the most important infrastructure projects for the
rendering of public services in Peru.
24 Formerly, the concessions regime was ruled through Supreme Decree Nos 059-96-PCM and 060-96-PCM, and later by Legislative Decree No 1,012 and its regulation, which were overturned as a result of the dispositions in Legislative Decree No 1,224. However, it should be noted that Arts 19 and 22 of Supreme Decree No 059-96-PCM are still in force. These articles regulate the term of legal stability agreements in concessions and the value of transferring goods to the Peruvian Government during or at the end of the concession term, or even for its renewal.
256 Doing Business in Latin America OCTOBER 2018
The bidding mechanisms provided in Legislative Decree No 1,224 and its regulation, approved by
Supreme Decree No 410-2015-EF for private investment in public services and infrastructure, are
currently called and conducted by Proinversion. Infrastructure and public services concessions under
this regulatory framework are usually formalised in concession contracts that have a maximum term
of 60 years with a few exceptions, for example, in the port sector.25 These contracts establish the
corresponding recovery investment mechanism for the development of infrastructure, as well as all
other significant conditions, such as maintaining the economic and financial balance of the project,
the nature of the project and risk allocation, among others.
The investment regime in Peru was established in a very attractive manner, for both national
and foreign investors. This can be seen in a series of benefits and incentives that the Peruvian
Constitution and rules state for those interested in entering into these types of partnerships. Some
of the items that foreign investors shall bear in mind are the following: (1) there is equal treatment
towards both Peruvian and foreign investors (very few exceptions); (2) free access to the financial
sectors; (3) maintaining and protecting private property; and (4) unrestricted access to most
economic sectors, among others.
Before providing more detail on Peru’s legal framework, it is important to acknowledge the role
that Proinversion plays within the scope of the aforementioned rules. First, it is the Peruvian Private
Investment Promotion Agency, a public entity attached to the Ministry of Economy and Finance,
whose purpose is to ensure that the policies regarding the promotion of private investment are
adequately executed. Moreover, it provides orientation and information services to investors (either
local or foreign) in accordance with the political and economic plans of the Peruvian Government, in
order to obtain the most efficient and favourable results for both parties.
In comparison to the previous frameworks which ruled private investment participation, this new
framework established several principles, processes and regulations for the development of PPPs
(asociaciones público-privadas) and unsolicited proposals (iniciativas privadas) for the execution of all
types of investment projects at all three government levels (national, regional and local). PPP and
unsolicited proposals are mainly contractual arrangements between a governmental authority and a
private entity for providing a public asset or service, in which the private party will bear significant risk
as it generally will be responsible for the design, finance, construction, operation and maintenance of
the PPP or unsolicited proposal project.
PPPs for infrastructure projects may be executed through any type of contract permitted by law (ie,
association in participation, management contract, JV and specialisation agreement, among others);
however, the most common contractual figure has been the concession. This may be granted by the
Peruvian Government for investing not only over any type of infrastructure project and/or public
service related to infrastructure, but most recently over any social interest project; related to health
and environmental matters; and related to the treatment and processing of waste; as well as applied to
research and technological innovation projects, among others.
In terms of financing, a PPP can either be self-financed (executed entirely with private funds) or
co-financed by the state. In the latter case, in order to ensure the availability of the resources of the
25 According to Law No 27,943, the management of port infrastructure can only be awarded to the private sector for a maximum of 30 years.
Doing Business in Latin America OCTOBER 2018 257
state to undertake the required co-financing, a report is elaborated by the corresponding entity.
This involves carrying out a technical, economic and financial evaluation to determine the viability
of the projects in order to decide whether the proposals are suitable for the current condition and
needs of the government. Additionally, it should be noted that, in the scenario of a co-financed PPP
originated from a state initiative and with national significance (for the national government), the
total investment cost or total project cost in the case in which there is no investment component shall
exceed 10,000 tax units.26 For projects directed to regional or local governments, the costs previously
mentioned shall then exceed 7,000 tax units.27
Under this legal framework, many important infrastructure concessions have been granted
in mostly the transport, communications and energy sectors. Some of the most remarkable
concessions are the construction and operation of transmission lines of the national grid; the
construction, improvement and operation of airports (among others, Lima International Airport
‘Jorge Chavez’); the concession for the construction and operation of the Transoceanic Highway;
and the concessions of the Callao Seaport.
Regarding administrative competence, the procuring authorities for PPP are: (1) Proinversion
for projects within the national competence that involve investments over 15,000 tax units or
cover multiple sectors; (2) the special investment committee (comité de promoción de la inversión
privada) of each ministr y for national projects that are not in the charge of Proinversion; and (3)
in the case of regional or local projects, through the investment committee (comité de promoción
de la inversión privada) directly and whose supreme body is the regional or municipal council,
correspondingly. In addition, there are other authorities with a relevant participation in the
process of procurement of a PPP such as: (1) the Comptrollers’ General Office (Contraloría
General de la República); (2) the regulator y agencies of each sector involved in the project; and
(3) the Ministr y of Economy and Finance.
The Peruvian regulator y framework also includes the possibility of investors taking the initiative
and proposing the development of a specific infrastructure project to different governmental
authorities through unsolicited proposals. These proposals have the nature of a discretionar y
request, which implies that the rights of the private investor are exhausted upon the submission
of the proposal. However, if the state considers that the proposal is of interest, it may award the
unsolicited proposal concession directly to the proponent or, in the case in which other investors
show interest in the development of the unsolicited proposal, to the winner of a public bid process
called by a competent authority.
In terms of financing, an unsolicited proposal may also be self-financed or co-financed. The
submission of co-financed initiatives varies depending on whether they are directed to the national
government (first 30 working days of the term established by Supreme Decree) or to the regional
and/or local government (first 45 calendar days of each year). These proposals must also have a
contractual term of ten years minimum and a total cost of investment over 15,000 tax units. In the
26 Each tax unit as of 2018 is PEN4,150 which is equivalent to US$1,273 (according to the applicable current exchange rate (3.27)). In this sense, 10,000 tax units is equivalent to US$12,691,131.
27 The value of 7,000 tax units is equivalent to US$8,883,792.05.
258 Doing Business in Latin America OCTOBER 2018
case in which there is no investment component, these proposals shall have as a total cost of the
project an amount over 15,000 tax units.28
An unsolicited proposal for regional or local-scope projects are submitted to the private investment
offices of each regional or local government, except, as mentioned, for co-financed unsolicited
proposals that must be submitted in all cases before Proinversion. An unsolicited proposal may also
be submitted under several contractual forms (operation, management, joint venture, etc), but
generally, the most common contractual form is the concession, as we have previously mentioned.
Important concessions have also materialised as a consequence of unsolicited proposals. The most
significant examples are the concession for the execution of the Taboada wastewater treatment
plant by Proinversion, the concession agreement for the design, finance, construction, operation
and maintenance of the Olmos project (Proyecto de Irrigación Olmos), the concession granted to
Rutas de Lima (previously known as Línea Azul) and, especially, the concession granted to for the
construction and operation of an expressway for the city of Lima under the name ‘Vía Parque Rímac’
(previously known as Línea Amarilla), which was granted by the Municipality of Lima.
Finally, once the investor has been awarded the project and is enabled to develop it under a PPP (or
unsolicited proposal), it will need to comply with the regulatory requirements for completion of the
concession contract, as well as for the construction and operation of the particular project, which will
be submitted to each sector’s specific regulations (energy law, transport law, etc).
1. privatisation general rules
Along with Legislative Decree No 757, in 1991, Legislative Decree No 674 established a legal
framework to promote private investment in public state companies. In line with the constitutional
definition by which the state may only perform business activity in a subsidiary manner, several
privatisation projects were implemented during the early 1990s in which many public companies were
transferred to the private sector.
However, since the enactment Supreme Decree Nos 059-96-PCM and 060-96-PCM and Legislative
Decree No 1,012 (applicable legal framework before Legislative Decree No 1,224 entered into force
in 2015), privatisation projects have been conducted through private investment concessions, PPP
and the concession mechanisms provided in each economic sector’s specific regulations that were
detailed above.
C. Real estate
i. Land use and real estate
Peruvian law offers rules that guarantee the acquisition, transfer and protection of real estate. The
specific measures adopted by the Peruvian Government have a threefold thrust. First, the protection
of the right to acquire property is at the constitutional level, ensuring the free exercise of this right
and enshrining it as inviolable (Article 70 of the Peruvian Constitution). Second, the Peruvian
28 The value 15,000 tax units is equivalent to US$19,036,697.25.
Doing Business in Latin America OCTOBER 2018 259
Constitution also establishes that foreigners (whether natural individuals or legal entities) have the
same status as Peruvians with respect to the acquisition of property, with a specific exception set
forth for national security reasons regarding land located within 50 kilometres from the border line
(Article 71 of the Peruvian Constitution). Third, several legal mechanisms have been developed to
ensure the safety of transactions related to the acquisition, transfer, and use of property. The limit to
the right of foreigners to own land in frontier areas is not an absolute prohibition as it may be waived
due to public necessity and subject to a supreme decree (Article 71 of the Peruvian Constitution).
a. private and public real estate
The transfer of private property is governed by ordinary rules regulated by the Civil Code. According
to these rules, transactions between individuals enjoy wide contractual possibilities, even allowing
the creation of new types of contracts, called ‘atypical contracts’ that are not stipulated in the
current legislation. Within the regulated legal concepts are the real rights of property: surface rights,
easements, ownership and usufruct, among others. Formal ownership is also acquired through actual
possession (the possession must be continuous, peaceful and public as the owner) of an asset for ten
years, which is known as acquisitive prescription – adverse possession.
Peruvian regulations also allow the parties to enter into preliminary agreements intended for the
possible acquisition of real estate. This is the case of a commitment to execute an agreement, by
means of which the parties agree to enter into a future contract; the party that refuses to execute the
preliminary agreement may even have to pay a penalty. There is also the option agreement, by means
of which one of the parties agrees to perform the sale within a stipulated term, with the other party
having the power to decide whether or not to execute the agreement.
With the exception of donations and mortgages, which are invested with certain formalities,
agreements related to real estate may generally be executed by simple mutual consent. The practice
and need to protect property rights encourages abiding by the formalities that evidence the
execution of an agreement, not only with written evidence of the agreement and its formalisation in a
public deed, but also through its registration in the Public Registry of Peru.
In relation to private real estate, there is a special type of property that may only be transferred by
observing special formalities. These are properties owned by native and peasant communities, in
which case the sale of property must be approved at corresponding community meetings. According
to the resolution adopted at these meetings, a person who has been expressly chosen to act on behalf
of the community must execute the agreement.
Public property could be private property of the Peruvian Government or belong to the public
domain. In both cases, there is a ver y specialised regulation in place that stipulates a number of
formalities that must be met for the use of such property by any individual. A private entity may
purchase state-owned property, execute agreements on exchange, easement, surface rights or
usufruct, or lease the property for a specific purpose of public relevance. In these cases, it will be
necessar y to follow administrative procedures relevant to the entity owning the public property;
comply with the requirements legally set forth for each type of operation; and, depending on
the case, take part in auctions or public bids, competing with other bidders for the acquisition
of the intended right. State-owned properties are not acquired by prescription (Supreme Decree
260 Doing Business in Latin America OCTOBER 2018
No 007-2008-VIVIENDA, Reglamento de la Ley No 29151, Ley General del Sistema Nacional de
Bienes Estatales).
Public property, provided it is under the regime of private domain, can be bought only under the
modality of a public auction and exceptionally by a direct sale. The call for a public auction must
be made through the website of the National Superintendence of State Property (Superintendencia
Nacional de Bienes Estatales (‘SBN’)), notwithstanding the other publications that regulate the
corresponding directive (which approve the public auction). The application for direct sale with
the price at commercial value will be published in the Official Gazette, El Peruano, and another
newspaper of greater circulation in the region where the property is located, as well as on the website
of the SBN.
b. urban and rural land
This distinction between urban and rural land applies to both state-owned property and private
real estate.
Urban land is located within cities, including land on which commercial, industrial, residential,
public service activities and other activities typical of development in an urban area take place.
When urban land is intended to be acquired for a specific purpose, it is very important to first obtain
the necessary certification from the corresponding local authority, either a ‘land development
and building parameters’ certificate or a ‘zoning and roads’ certificate. These certificates, which
have three years of validity, detail (among other information) the use and building parameters
that must be observed. Notably, while the certificates are valid, the person who has requested them
may put into effect the information contained in them, despite the fact that within the three-year
period normative changes may arise, modifying the uses and parameters of the land (Supreme
Decree No 006-2017-VIVIENDA, Texto Único Ordenado de la Ley No 29090, Ley de Regulación de
Habilitaciones Urbanas y de Edificaciones).
Rural land is that located outside the urban area intended for agricultural use, livestock and rural
activities in general. In most cases, it is possible to modify the designation of land from rural to urban
following a fairly complex procedure before the competent local authority.
c. registry system
The National Superintendence of the Public Registry (Superintendencia Nacional de los Registros
Públicos (‘SUNARP’)) is the entity that governs the real estate registration system. It is through
SUNARP that any person may obtain a property registry certificate (certificado registral inmobiliario
(CRI)). This document enables the purchaser to verify the existence and attributes/description of
the property (land and construction) and identity of the owner, and to check whether the title is free
from attachments, mortgages or any encumbrances of a judicial or extrajudicial nature.
The effectiveness of the real estate registry is guaranteed by legal order. All the information published
and contained in the records is presumed to be known by all, without admitting evidence to the
contrary. Persons that appear as owners in this system are duly empowered to sell the properties of
which they are titleholders. The third party that in good faith acquires a right of person who in the
Doing Business in Latin America OCTOBER 2018 261
registry appears empowered to sell the property, maintains its acquisition once its right is registered,
even if the seller’s title is cancelled, rescinded or terminated by causes that do not appear in the
registry entries and the archived titles that support it. The good faith of the third party is presumed
until it is proven that it knew the inaccuracy of the record.
d. eXpropriation
Property rights are well protected and awarded with guarantees for their defence, but are not
absolute. The Peruvian Constitution sets forth that a person may be only be deprived of his/her
property (expropriated) in the case of national security or public necessity declared as such by a
law enacted by Congress and prior payment in cash of an indemnity for the value of the property
and the profit loss. The owner of the land subject to expropriation may discuss the amount of the
indemnity before the judiciary or in an arbitral proceeding. The expropriation is always in favour of
the Republic of Peru. The experience in recent years reveals that the Republic of Peru has resorted
to this on very few occasions, and it essentially does it for territorial security and in order to perform
public infrastructure works. This is the last resort when a property is required.
ii. Applicable taxes
At the level of the local authority where the property is located, the following taxes apply (depending
on the specifics of each case and of the transferor, other central government taxes may apply
whenever real estate property is transferred to third parties, eg, income tax and VAT).
a. real estate property taX
Property tax applies on the value of the urban and rural property based on self-appraisal (autoavalúo).
Its collection, administration and oversight correspond to the district municipality of the location of
the property.
The rates of property tax are as follows:
1. 0–15 tax units:29 0.2 per cent;
2. 15–60 tax units: 0.6 per cent; and
3. more than 60 tax units: one per cent.
Payers of the property tax are the owners of real estate properties from 1 January of a given tax year.
b. real estate transfer taX
The Municipal Taxation Law, approved by Supreme Decree No 156-2004-EF, states that alcabala tax
applies on the transfer of real estate property (urban or rural), whether it leads to a payment of a
consideration or not, whatever form or manner, including transfers with reservation of ownership.
29 For 2018, the tax unit is equivalent to PEN4,150 (approximately US$1,288).
262 Doing Business in Latin America OCTOBER 2018
The taxpayer is the property acquirer. The taxable base is the consideration agreed upon by the
parties, provided it is not lower than the property value set forth in the local authorities’ records (ie,
autoavalúo). The self-appraisal is obtained by applying tariffs and construction unit prices formulated
and approved by the Ministry of Housing and Urban Development (Ministerio de Vivienda y
Urbanismo) every year.
The first ten tax units (approximately US$12,880) of the taxable base are exempt from this tax. The
tax rate is three per cent and must be borne exclusively by the purchaser.
The alcabala tax must be paid until the last working day of the following month of the transaction.
c. municipal fees
Municipal fees are taxes to be paid for the provision or maintaining of the public services of public
cleaning, parks and public gardens, and patrolling guards.
The amount to be paid for municipal fees is determined by the corresponding district municipality
and must be paid quarterly.
D. Development of ample/integrated capital markets and joint activities between Latin American countries
i. Peru stock exchanges: current developments on regional integration
The Lima Stock Exchange (BVL) is currently the only stock exchange in Peru. It has mechanisms
in place for listing shares, as well as other securities of local and foreign issuers. In addition, it has a
simplified listing mechanism applicable to securities of local and foreign issuers that are already listed
in other specific foreign markets (dual listing). The BVL has also implemented a special segment for
the listing of junior mining companies.
According to the Peruvian Securities Market Law (SML), stock exchanges may be incorporated as
corporations (sociedades anónimas). Hence, besides being regulated by the SML, they are regulated by
the Peruvian General Corporate Law. A merger between stock exchanges is legally possible. It should
be noted, however, that, as mentioned, the BVL is the only existing stock exchange.
Recently, the SML was amended in order to allow for an exemption to the general prohibition to hold
more than ten per cent equity participation in local stock exchanges, and in local clearing, settlement
and depository institutions, in the case of transactions involving corporate integration within stock
exchanges and clearing, and settlement institutions approved by the Peruvian Superintendency of the
Securities Market (Superintendencia de Mercado de Valores (SMV)).
a. mila market: current results and eXpectations
The MILA market is the result of the agreement initially executed between the Santiago Stock
Exchange (Republic of Chile), Colombia Stock Exchange and BVL, including their corresponding
securities clearing, settlement and depository institutions, in order to integrate the aforementioned
Doing Business in Latin America OCTOBER 2018 263
stock exchanges’ markets. It formally commenced operations in May 2011. In December 2014, the
Mexican Stock Exchange, as well as its clearing, settlement and depository institution, joined MILA.
MILA allows local brokerage agents to engage in trading with instruments that are listed in the
associated foreign stock exchanges from their negotiation platforms (the BVL has implemented an
electronic trading mechanism called Millennium, provided by the London Stock Exchange, which
has replaced Elex, the previous system), through the trading platforms of brokerage agents that
operate in the target exchanges, which grants the former remote access to centralised negotiation
mechanisms.
The integration of the Santiago Stock Exchange, Colombia Stock Exchange, Mexican Stock Exchange
and BVL through MILA is based on the independence of such stock exchanges as independent
companies. In this way, the stock exchanges are administered independently, operating their own
platforms and independent negotiation electronic systems, with their own negotiation rules and
market administration.
The operations are executed in the original currency of the instrument (eg, if the instruments
are Peruvian, then the currency has to be nuevos soles). The liquidation of such transactions has
to be done in the currency of the country in which the instrument is listed and under which the
negotiation was performed.
According to published information on MILA’s website, the total volume traded in MILA for 2016 was
US$178.898m. The Mexican Stock Exchange represented 77.55 per cent, followed by the Santiago
Stock Exchange with 13.97 per cent, the Colombia Stock Exchange with 6.99 per cent and the BVL
with 1.49 per cent.
b. pacific alliance: recent developments and governmental action
The Pacific Alliance was implemented by Colombia, Chile, Mexico and Peru on 28 April 2011,
through a document called the Declaration of Lima, with the purpose of creating a space for
economic, political and commercial integration, offering economic agents a predictable legal
framework for the development of the commerce of assets, services and investment.
The Pacific Alliance arose as a result of an initiative of the Peruvian President at the time (2010),
following an invitation made to Colombia, Chile, Ecuador and Panama in order to establish a
‘profound integration area’ that secures the freedom to circulate assets, services, capital and persons,
with the purpose of making such a space an integration model for the region, consolidating a
common economic platform, with projection to the world, specially Asia. Eventually, Mexico joined
this group, while Ecuador did not participate and Panama stayed as an observer country.
The Declaration of Lima established the commitment of the participating countries to achieve the
main objective of the Pacific Alliance: the freedom to circulate assets, services, capital and persons. In
that way, several technical groups were created for each of the aforementioned areas and a high-level
group was integrated by the Vice Ministers of Foreign Affairs and Foreign Trade in order to supervise
the other technical groups.
264 Doing Business in Latin America OCTOBER 2018
Since the execution of the Declaration of Lima, there have been: (1) 12 presidential in-person
meetings, the last held on 30 June 2017 in Cali, Colombia; (ii) 16 ministerial meetings, the last held
on 29 June 2017 in Cali, Colombia; (iii) 42 high-level group meetings, the last held on 6 October
2017 in Santiago, Chile; and (iv) 29 technical group meetings, the last held between 20–21 March
2018 in Lima, Peru.
At the Cali Summit, Chile handed over the pro tempore presidency of the Pacific Alliance to
Colombia. Likewise, the presidents of the Pacific Alliance member countries signed the Declaration
of Cali, in which they highlighted their commitment to the Pacific Alliance, as a process that
promotes deep regional integration; the first year of entr y into force of their free trade zone
through the implementation of the Additional Protocol to the Framework Agreement, as well
as the progress in regional integration; the announcement of the beginning of the negotiations
aimed at granting Australia, Canada, New Zealand and Singapore the status of Associated States
to the Pacific Alliance; their commitment to free trade, regional integration and strengthening
of the multilateral trading system, as means to promote competitiveness and the development of
their economies; their conviction to continue promoting a green growth strategy as a way to face
the challenges of climate change; their willingness to intensify efforts to incorporate the gender
perspective transversally into the programmes and activities of the Pacific Alliance; their firm
intention to strengthen integration in Latin America; their satisfaction regarding the strengthening
of the cooperation space in areas of common interest and rapprochement that has been achieved
with the Asia Pacific; as well as other developments.
Before the Cali Summit, at a meeting of the Council of Ministers of the Pacific Alliance, held earlier
that year in Mexico City, three new countries were admitted as Observer States of the Pacific Alliance:
Croatia, Slovenia and Lithuania.
Doing Business in Latin America OCTOBER 2018 265
Uruguay
266 Doing Business in Latin America OCTOBER 2018
XIV. Uruguay
A. Foreign investments
i. Authorisations versus limitations or prohibitions
a. general absence of restrictions
Most investors consider Uruguay a safe place because the country has done much to create a
climate of trade openness, passing legislation to promote foreign investment, thereby establishing
attractive benefits for investors. The main areas of investment have been the manufacturing industry,
construction, wholesale and retail trade, agriculture and service.
Uruguay is a model of political and social stability, recognised for its solid macroeconomics. This is
evidenced by a compound annual growth rate of 4.2 per cent in real terms of its GDP in a period
going from 2005 to 2017, as well as by the investment grade it was awarded by all big three credit
rating agencies: Standard & Poor’s, Fitch Ratings and Moody’s Investors Service.
Uruguay has no limitations on the holding or trading of foreign currency or precious metals.
Moreover, transactions may be entered into in any currency, and no permits or authorisations
are required to bring money into the country or to send funds abroad. Any individual or duly
incorporated legal entity may own real estate (with certain exceptions in the case of rural real estate),
regardless of nationality, residence or place of incorporation. Practically no areas of the economy are
reserved to Uruguayan citizens.
1. Equitable and fair treatment, parity with national investments
Uruguay grants fair and equitable treatment to national and foreign investors under its laws and
through the bilateral investment agreements it has entered into. Foreign investors may carry out any
type of activity in parity with national investors, receiving equal treatment with respect to taxation.
Under the Colonia Investment Protocol (‘Protocolo de Colonia para la Promoción y Protección
Recíproca de Inversiones en el Mercosur’), MERCOSUR members are compelled to respect other
members’ right to promote investment, which translates into an obligation to admit investments of
third states into their territory.
Furthermore, Uruguay has negotiated treaties to avoid double taxation with Argentina, Ecuador,
Finland, Germany, Hungary, India, the Korean Republic, Liechtenstein, Malta, Mexico, Romania,
Portugal, Spain, Switzerland, Singapore and the UK that are currently in force. Moreover, there are
bilateral investment agreements with Armenia, Germany, Saudi Arabia, Australia, Belgium, Canada,
Chile, China, Korea, El Salvador, Spain, the US, Finland, France, the UK, Hungary, India, Israel, Italy,
Malaysia, Mexico, Netherlands, Panama, Paraguay, Poland, Portugal, the Czech Republic, Romania,
Sweden, Switzerland, Venezuela and Vietnam.
Doing Business in Latin America OCTOBER 2018 267
Although there is no specific regulation governing stability agreements executed between investors
and the state, there have been some experiences of agreements executed by the state providing this
type of undertaking. Moreover, the Investment Law (as defined below), reassures investors due to the
wide array of benefits and rights with which it vests them.
2. The Investment Law
Uruguayan legislation has established a legal framework for promoting investment in various fields
and activities, with very successful results. Law No 16,906 (the ‘Investment Law’) declares that the
promotion and protection of investments made in the country by Uruguayan and foreign investors
is of national interest. It also guarantees freedom to transfer invested capital, as well as profits in
any currency and at any time. This law regulates three important aspects: investment principles, tax
matters and the treatment given to companies who act within ‘MERCOSUR’.
According to this law, a national interest status may be granted to any activity, specific project or
company that meets certain objectives, such as the increase and diversification of exports of processed
goods, the establishment of new industries, or the expansion or refurbishment of existing industries,
among others. The Investment Law enables the Executive Branch to provide tax advantages to certain
activities, which are then qualified as ‘promoted activities’.
For the purpose of obtaining said advantages, companies must submit detailed accounting and
financial information to the Investment Implementation Committee (Comisión de Aplicación de
la Ley de Inversiones (‘COMAP’)). Once a recommendation from COMAP has been obtained,
the Executive Branch issues a resolution declaring the project promoted, where the amounts and
deadlines of the granted tax benefits are established.
The main benefits of the law are essentially tax benefits. These consist of the possibility of deducting
between 20 per cent and 100 per cent of the total value of the investment from the applicable income
tax in a term that can go from three to 15 years. Additionally, this law grants other benefits, such
as exonerations of the net worth tax for a particular term and of taxes and duties applied when
importing certain equipment and assets destined to be fixed assets of the project when they do not
compete the national industry.
3. Free trade zones and free port regime
Law No 15,921 created the free trade zone regime, which has given rise to several exclaves in
commercially strategic areas of the country, both public and private. On the other hand, Law No 16,246
created the free port regime. Both have had important consequences for investment in Uruguay.
Operations that occur within the scope of these regimes receive multiple benefits, such as a complete
tax exemption, as well as an exemption from all applicable duties on importing and exporting goods
and services. Companies operating under these regimes receive an exemption from net worth tax and
corporate income tax. Furthermore, goods may transit freely within these areas without the need for
authorisation or formal procedures of any type.
268 Doing Business in Latin America OCTOBER 2018
A wide array of activities may be performed under the free trade zone regime. These range from
the mere deposit of merchandise to the rendering of services, including financial and insurance
services, handling, classification and selection of deposited goods, including the establishment of
manufacturing industries and professional services.
The free port regime represents one of the mainstays for Uruguay as a logistic platform in the
MERCOSUR and as a hub for the distribution of goods in transit. When operating under this
regime, goods circulate freely without the need of permits or formal procedures, except for basic
customs declarations. During their stay at the port customs area, goods are exempt from all import
requirements and import-related taxes and, depending on the custom treaties in force, may not lose
the origin requirements.
4. Labour benefits
Companies established in Uruguay benefit from the following labour incentives:
• companies may remain open on Sundays and holidays;
• vacation dates are negotiable with employees;
• the social security and health system is supported by employees, employers and the state, and
covers risks arising mainly from old age, disability, disease, industrial accidents, maternity,
paternity, unemployment and death;
• foreign employees can be hired for any activity developed within the national territory, with
some few exceptions, where certain limitations apply (free trade zones, national fishing and the
merchant navy);
• the termination of labour contracts on trial periods (of up to three months) does not generate
a severance payment; and
• as a general rule, employers do not have to allege a just cause to dismiss employees; ordinary
severance compensation is equivalent to one monthly salary (plus benefits) for every full year of
service or fraction thereof, up to a maximum of six monthly salaries.
5. Immigration benefits
Companies established in Uruguay can benefit from the following immigration incentives:
• There are three types of residencies granted by the Uruguayan Migration Office: (1) a six-month
provisional identity card for people who will carry out an activity for a short time; (2) two-year
temporary legal residency (granted within four months, approximately); and (3) ordinary
permanent legal residency (granted within two years, approximately).
• Moreover, there is a special permanent legal residency for people born in countries that are
members of MERCOSUR or associated to it; which has a simple application process before the
Ministry of Foreign Affairs, who shall decide within 30 working days from the date on which the
documents were filed.
Doing Business in Latin America OCTOBER 2018 269
6. Operation permits
In relation to the relevant permits that are necessary to operate in Uruguay, they shall depend on
the type of industry concerned and its controlling authority. However, general permits that apply to
industries or financial entities exist, which are as follows:
i. Environmental authorisation
Pursuant to Law No 16,466 and Decree No 349/005, several environmental permits are required
prior to starting certain activities, construction and works expressly listed in such regulations. These
include, for example, electricity generating plants of over 10 MW; nuclear power plants; construction
of public terminals for loading and unloading of goods and passengers; implementation of complex
urban developments of over 10 hectares, among many others.
Those interested in carrying out any of the activities, construction and works are subject to the
request of a Prior Environmental Authorisation (Autorización Ambiental Previa (AAP)) and shall
communicate the project to the Ministry of Housing and Environment (Ministerio de Vivienda,
Ordenamiento, Territorial y Medio Ambiente (MVOTMA)) by submitting certain information
depending on the category of the authorisation.
Decree No 349/005 also establishes that parties interested in performing certain activities,
construction or works included in Section 20 of Decree No 349/005 shall communicate the
location and a description of the area of execution and influence to the environmental authority
called Dirección Nacional de Medio Ambiente (‘DINAMA’), and, as the case may be, include an
assessment of the location or section of the site where the project is to be performed, including an
analysis of any alternatives.
Some projects that require an AAP must also obtain an Operating Environmental Authorisation
(Autorización Ambiental de Operación (AAO)) in order to start operating. The AAO shall be
requested by the interested party and, once there has been full verification of the conditions
established in the AAP, the project is filed before the MVOTMA and the Environmental Impact
Assessment criteria are met, the MVOTMA grants the AAO.
Those activities that were built, authorised or put into operation without being required to obtain the
AAP (because the activity was prior to the entry into force of the decree or, when the activity started,
it did not meet the requirement established in the decree for obtaining the AAP), require a Special
Environmental Authorisation (Autorización Ambiental Especial (AAE)), included in Section 25 of
Decree No 349/005, if they expand the facilities or increase the productive capacity.
Environmental permits can be transferred from one person to another, provided the transferee
assumes the same obligations that the transferor had assumed before:
ii. Uruguayan financial system
The Uruguayan financial system allows entities to operate as full branches of foreign banks or,
alternatively, as local subsidiaries of foreign companies or banks. Entities that carry out ‘financial
270 Doing Business in Latin America OCTOBER 2018
intermediation’, such as banks, financial houses and offshore banks require a licence granted by the
Central Bank of Uruguay and authorisation from the Executive Power.
The Central Bank of Uruguay, in its capacity as supervising entity, overlooks financial entities and
is vested with the authority to impose minimum capital requirements, liquidity ratios, reserves,
maximum exposures, debt ratios, and so on, all in line with the Basel Convention principles.
ii. Treatment of foreign investment in infrastructure initiatives and PPP projects
a. objective of ppp contracts
Law 18,786 regulates the PPP regime. PPP contracts may be entered into for the development of
infrastructure and provision of services. Those projects may concern: (1) roads (including rural roads),
railways, ports and airports; (2) energy projects (without prejudice to the provisions establishing state
monopolies); (3) waste treatment and disposal; and (4) social infrastructure, including prisons, health
centres, education centres, social housing, sports centres and urban development.
The PPP regime coexists with other regimes applicable between private entities and the state. These
other regimes are the default regimes, and PPP contracts may only be concluded when the state
determines that any other contractual alternative does not satisfy the public interest pursued.
b. parties to the ppp contract
The Uruguayan state may contract through any of the three branches of government (executive,
legislative and judicial) public entities such as entes autónomos and servicios descentralizados and state
governments (gobierno departamentales), among others. The public administration may agree directly
with the National Corporation for Development (NCD) for this entity to assume the implementation
of the project, and then transfer it to the private sector later. The involvement of the NCD implies a
shorter procedure because some stages of the contracting process are avoided. To involve the NCP,
prior authorisation of the Executive Branch must be obtained.
c. ppp contracts
A contractor’s compensation may be paid either directly by the state or by the users of the
infrastructure or service, or a combination of both. The state in turn will be paid a canon or fee
either by the contractor, and/or by the users of the service or infrastructure.
The contractor shall provide guarantees for the performance of its obligations.
Even though the state cannot ensure that the project will be profitable, it can guarantee a minimum
income. Moreover, the state may promote the development of PPP contracts by granting subsidies, tax
exemptions, and so on.
In the area of dispute resolution, it is expressly provided that the parties must resort to arbitration.
The arbitrators shall be appointed by agreement between the contracting parties or, failing that, by
the procedure laid down in the General Code of Procedure.
Doing Business in Latin America OCTOBER 2018 271
Sanctions for non-compliance including withholding of payments may be provided for by the state,
which can also request judicial measures to ensure their effectiveness.
d. procurement procedure: private initiative
Before starting the contracting process, the public administration must produce a document
evaluating the feasibility and desirability of the project.
The PPP Law created a procedure called ‘competitive dialogue’, which involves a discussion about all
the aspects of the PPP contract between the state and the applicants that have submitted offers, and
which have met the requirements of technical and economic solvency stated therein.
The PPP Law also provides that the initiative for said undertaking can come from private entities.
e. guarantee in favour of creditors and the concession pledge
Pursuant to the PPP Law, the contractor is authorised to grant pledges on the future cashflows of the
project, trusts and all other real or personal guarantees on goods and rights, present and future in
benefit of its creditors.
There is also the possibility to pledge the rights arising from the PPP contract (termed ‘pledge of
the concession’), but this is restricted to guaranteeing the financing of the project, operation or
maintenance costs, as well as those resulting from a trust created for that purpose.
iii. Treatment of foreign investment in oil and gas, and mining activities
a. mining
All mineral deposits located within the Uruguayan territory belong to the Uruguayan state and
therefore, all rights over such deposits can only be granted by the Executive Branch. The Uruguayan
Mining Code recognises and regulates the granting of easements, prospecting rights, exploration
rights and exploitation permits, and expressly states that all persons or entities, whether national or
foreign, can be holders of mining rights.
Mining rights are usually granted irrespective of the wish of the owner of the property, who will,
nonetheless, have the right to receive compensation for mining activities carried out and damage that
may be caused and, eventually, to receive a production canon if the mine becomes productive.
In 2013, a law was passed regulating large-scale mining (LSM), an activity that has been declared of
public interest.
Projects that qualify as LSM are now regulated by the Mining Code and by this new LSM Law, which
introduces some relevant changes, such as the need to execute an exploitation concession agreement
with the Executive Branch (not required for non-LSM, in which the granting of an exploitation
permit is enough), and the need for corporation holders of such projects to have their capital stock
in registered shares and to identify the ultimate beneficial owner. Special environmental requisites
also apply to these projects.
272 Doing Business in Latin America OCTOBER 2018
b. oil and gas
Under the Uruguayan Mining Code, all: (1) fossil substances, oil and gas; and (2) ‘other minerals or
elements capable of generating energy industrially’ are classified as Class I minerals and all mining
activities regarding this class are reserved to the state-owned oil company (Administración Nacional
de Combustibles, Alcoholes y Portland (ANCAP)) directly or through concessions to third parties.
Uruguay has identified areas for onshore and offshore exploration for oil and gas, and bids have been
awarded by ANCAP for exploration to internationally renowned companies who have subsequently
signed exploration contracts with ANCAP.
iv. Treatment of foreign investment in real estate (rural and urban properties)
a. ownership
Real estate property may be owned by one or more individuals, partnerships or corporations, or some
combination, whether national or foreign. The only restrictions refer to ownership of agricultural
land (ie, destined for agriculture; rural land destined for other purposes, eg, industry, is not subject
to limitations) and are set forth in Law Nos 18,092 and 19,283.
Law No 18,092 (as amended and implemented) declared that it is of national interest that the owners
of agricultural land be individuals (national or foreign) or corporations with registered shares owned
by individuals (national or foreign). However, the Executive Branch may authorise companies that
do not comply with the above requirements to own agricultural land: (1) when the nature of their
undertaking or the number of their shareholders impedes the investment of capital belonging to
individuals; (2) when the shareholders are listed on a stock exchange with a good reputation; (3)
when the activity to be carried out qualifies as a productive project.
Law No 19,283, states that sociedades anonimas and sociedades en comanditas por acciones (ie, Uruguayan
corporations) with bearer shares, in principle, are no longer authorised to own rural real estate if
their controlling shareholders are: (1) national entities owned by foreign states; or (2) sovereign
funds of said states. Exceptionally, the Executive Branch may grant an authorisation to a Uruguayan
corporation, the shareholders of which are foreign states or sovereign funds of said States, if said
Uruguayan corporation: (1) presents a productive project; and (2) has a minor non-controlling
participation of foreign states or sovereign funds.
b. real estate transactions
As will be explained below, the legal regime governing real estate property rights in Uruguay offers
an extremely secure system under which all real estate transactions must be authorised by a notary
public (‘escribano’) and filed at the Real Estate Public Registry to be valid and enforceable against
third parties. The date of registration indicates the preference of each right and, with fully digitalised
registries, title insurance is unheard of in Uruguay.
Financing for the purchase of real estate properties in Uruguay is easily available through banks
and financial institutions. Customarily, the lender will participate in the deal through its own legal
Doing Business in Latin America OCTOBER 2018 273
advisers and a notary public who will be in charge of carrying out the title due diligence and drafting
a mortgage. The owner of a real estate property can grant a mortgage over it by executing a deed
before a notary public. Mortgages are also registered with the Real Estate Public Registry and
therefore, as of the date of registration, become enforceable against all third parties and prevent any
future transactions regarding said property until the cancellation of the mortgage and release of the
property is duly registered.
c. apartment buildings and country clubs
The largest real estate investments in apartments buildings are made in Montevideo and Punta del Este.
In Punta del Este in particular, such investments are linked to the tourism industry because most buyers
are foreigners and the properties are rented in the summer (December, January and February).
In general, each apartment is recognised by law as an independent real estate property upon
the registration of the construction plans and the granting of the pertinent authorisation by the
municipal authorities. During the construction phase, it is possible to execute and register promises
of sale, granting the purchaser rights in rem.
Apartment buildings are governed by the provisions of an agreement executed by the original owner
of the building (reglamento de copropiedad) including rules on the administration of the building,
and the rights and obligations of the owners of the apartments with respect to the maintenance of
the building and their contribution to common expenses, as well as their rights to use the common
areas and amenities of the building. Such agreements always establish a mortgage over each of the
apartments of the building in favour of the owners of all other apartments as security for the payment
of common expenses.
Housing in the form of private country clubs has become increasingly common in Uruguay. Upon
the purchase of a plot, the owner acquires full title to that specific plot, being entitled to build a
house, dispose of said plot and use the common areas of the country club.
Law No 17,292 regulates property rights of plots in country clubs as well as the contribution of each
plot to common expenses, the administration and use of the common areas, the size of the plots and
other matters pertaining to the premises to be built by the owner of each plot. Under this law, the
independent legal existence of each plot is the result of the granting of the municipal approval of the
infrastructure works of the country club, the registration of the country club map and the execution
and registration of the reglamento de copropiedad.
v. Treatment of foreign investment in agribusiness activities
a. agribusiness activities in general
Uruguay has a strong agribusiness tradition. As informed by the Ministry of Agriculture, the total
agriculture area amounts to 16.4 million hectares and the gross agribusiness product for 2016
amounted to US$4,654m. As for rural land transactions, during 2017, 1,139 purchases were executed,
causing 187,022 hectares of land to change hands at an average price of US$3,712 per hectare.
Regarding ownership see paragraph section iv(A) above.
274 Doing Business in Latin America OCTOBER 2018
b. forestry investment
Uruguay may well be considered as an emerging forestry country. A 1987 Forestry Law introduced various
incentives to the industry such as: (1) complete tax exemption for the forested areas planted in land
declared to be of ‘Forestry Priority’, not only for net worth tax but also municipal land taxes; (2) the fact
that the proceeds of the forested areas are not compounded for the payment of income tax and other
taxes related to agricultural activities; (3) investors may receive partial reimbursement of the expenses
incurred; (4) eligibility for special soft credit lines provided by the Uruguayan state bank (Banco de la
República Oriental del Uruguay (BROU)); and (5) tax and customs duty exemptions for the importation
of supplies and capital assets destined for the production and industrialisation of Uruguayan wood.
vi. Treatment of foreign investment in public services
In Uruguay, a public service is governed by Public Law and, in principle, carried out directly by the
state. The only way private parties can carry out these activities is through a concession.
The concession of a public service is an act by which the state temporarily allows a private party to perform
a public service and grants this private party certain legal powers. A concession shall always be done under
governmental control and supervision, and is necessarily granted for a limited period of time.
The concessionaire is granted the right to exploit the public service involved, along with any and all acts
needed to those effects, bearing all costs and risks involved. The retribution received for carrying out
the public service is not borne by the state but by those who make use of and benefit from the service.
No discrimination is made as to who may be eligible for concessions of public services. However,
Uruguayan law does provide that the state is compelled to grant concessions through public bids.
The state, taking all offers into account, will choose the most convenient offer. This decision shall
be made exclusively according to its own judgment, although this judgment must have some sort of
justification. Aspects such as pricing, timing volume or financing options, as well as reputation and
track record carry weight in this decision.
B. Public services
i. Concept under Uruguayan laws
Public services in Uruguay are defined as activities performed to satisfy imperative collective needs
that are provided to individuals under a public law regime (ie, power, water and gas). It is up to the
national legislation to determine which activities are deemed public services.
Public services must be provided:
• on a continuous and uninterrupted basis, given the importance of the needs they satisfy;
• on a regular basis, under reasonable conditions of proper functionality;
• on a non-discriminatory basis; and
• under equal conditions.
Doing Business in Latin America OCTOBER 2018 275
The relationship between the provider of the public service and the user is statutory rather than
contractual because the conditions of the service are defined by statute or regulations and not by an
agreement between parties.
ii. Ways to render public services
a. directly
Directly means by a government entity, using its own employees, resources and technical means. For
such purposes, the Uruguayan Constitution establishes state-owned agencies called autonomous
entities (entes autónomos) and decentralised services (servicios descentralizados), which have functional
and financial autonomy, with their own legal personality distinct from that of the state, over which the
latter exercises powers of control.
Supervision and control of the public service administration is achieved through the following mechanisms:
• application of the Tax and Financial Administration Code (Texto Ordenado de Contabilidad y
Administración Financiera del Estado (TOCAF)) in contracts with private parties;
• the possibility to challenge the administrative acts of the service provider by means of
administrative appeals before that same issuing entity (in the case of decentralised services,
there is a special appeal for reasons of lawfulness that is decided by the Executive Branch);
• possibility of challenging said administrative acts before the Contentious Administrative Court,
which can annul or confirm an administrative act;
• application of rules of ethics to public service employees;
• application of the specialty principle, whereby the entities in question cannot do business
other than that which has been specifically assigned to them by law or dispose of resources for
purposes other than their normal activities;
• entity directors are appointed by the Executive Branch at the Council of Ministers with approval
by the Senate;
• control of compliance with prohibitions and incompatibilities;
• control by the Executive Branch, which can challenge acts issued by the entities and suspend
acts that have been challenged for reasons of advisability or lawfulness, order rectifications,
corrective measures or removals, communicating them to the Senate, and replace and dismiss
their directors, with Senate approval;
• parliamentary control by means of:
– requests for written reports;
– summons to appear for questioning; and
– creation of an investigation commissions to review their activities;
276 Doing Business in Latin America OCTOBER 2018
• control by the Government Accounting Office (Tribunal de Cuentas) concerning:
– an opinion on the budget of the entity;
– preventive assessment of expenses and payments to certify their legality; and
– a report on renderings of account and financial management;
• control by the judiciary for indemnification of damages to the users of public services
• citizens’ control by means of the regular publication of financial statements clearly reflecting
the entities’ financial situation; and
• control by the application of Law No 18,381 granting access to public information (habeas data).
b. indirectly, through public service concessionaires
Public service concessions temporarily delegate the performance of a public service, under the
supervision and control of the state, but at the risk and peril of the concessionaire.
Pursuant to the provisions of a 2004 constitutional amendment, public services of sewerage and
drinking water supply must be provided exclusively and directly by government entities, and hence, in
no case may they be subject to a concession.
When the concessionaire is entrusted with performance of a public service, it is vested with certain
legal powers under public law, such as the power to expropriate or to create administrative easements.
In turn, the concession of public services of monopolised activities requires authorisation by a
national law.
The public entity has broad powers of direction and control with respect to the concessionaire,
overseeing technical, commercial and financial aspects of the operation. These powers are
exercised via diverse instruments, such as authorisations, approvals, inspections, investigations and
the review of books.
Moreover, the public entity can unilaterally amend clauses related to the organisation and
functioning of the service when there is a change in the factual situation existing at the time of
granting the concession. If this situation implies greater costs for the service, then the concessionaire
must be compensated. However, clauses referring to the economic aspects of the operation cannot
be changed except to make than adequate for administrative acts, unforeseen restrictions or
unforeseeable circumstances. If the economic equation is affected by an administrative act, then
the concessionaire must be fully compensated. If, instead, the change derives from facts alien to
the parties, which temporarily and abnormally alter compliance with the concession, then the
concessionaire shall only be entitled to compensation for losses.
Non-compliance by the concessionaire may subject the concessionaire to penalties (fines, suspension
of benefits, lapse, etc). This power to impose penalties is an implied one, that is, it does not require
express texts and is regulated by the rules and principles of public law. In the case in which non-
compliance gravely affects the normal provision of the service, the public entity may retake the
operation and render the services directly.
Doing Business in Latin America OCTOBER 2018 277
The entity granting the concession is empowered to approve rates for public services, while ensuring
the maintenance of the concessionaire’s economic benefit, and must prevent hindrance to the
operation by third parties.
Concessions are extinguished due to expiration of the term, lapse declared by the entity in the event
of serious non-compliance by the concessionaire, judicial termination at the concessionaire’s request
due to serious non-compliance by the granting entity, termination due to force majeure making the
performance of the service impossible, unilateral decision of the granting entity for reasons of public
interest indemnifying the concessionaire in full, and by agreement.
Both the state and the concessionaire must indemnify users for damages caused in the performance
of the public services for which they are responsible.
c. miXed public private companies
The Uruguayan constitution provides for the organisation of mixed public–private companies
(sociedades de economía mixta).
A law, passed by the votes of three-fifths of the members of each of the houses of Parliament,
can authorise private capital to incorporate a new public entity or to contribute to existing ones
(autonomous entities and decentralised services).
The contribution of private capital and the private representation on boards of directors or councils
may in no case exceed those of the state.
The state may also participate in industrial, agricultural or commercial activities of private companies, as
agreed by the involved parties ensuring state participation in management. Such participation must be
authorised by a law passed by the absolute majority of all members of each house of Parliament.
The directors of the company are subject to the same rules as directors of autonomous entities and
decentralised services.
d. non-governmental public entities
These entities are public because they are governed by public law, but they and their assets are not
part of the state.
Their features are as follows:
• they are created by law;
• they are governed by public law;
• they are assigned purposes that are public or of public interest;
• the board of directors has state participation or representation by interested sectors;
• they are subject to more intensive state control than other entities under public law;
• their employees are not government employees;
278 Doing Business in Latin America OCTOBER 2018
• their acts can be challenged, appealing to the entity itself, with the possibility of a subsequent
challenge at an appellate court; and
• they enjoy certain privileges and exemptions by virtue of the general interest services entrusted
to them.
e. ppp system
Uruguayan law also contains a PPP system, which is regulated by Law No 18,786 and Decree No
17/2002. PPP contracts are defined as those agreements in which a public entity retains a private
party, for a certain time period, for the design, construction and the operation of a certain
infrastructure or part of the services related to the infrastructure, in addition to financing.
Through the PPP system, the Uruguayan Government has retained or has launched competitive
procedures to retain private parties to build, operate and finance roads, schools, railways and
even a jail.
C. Real estate
i. General considerations
As explained above, all transactions in real estate involve a notary public. The role of the notary
public is not only limited to drawing up and authorising agreements, it also carries out title due
diligence, analysing the antecedent title deeds for the last 30 years, and further acts on behalf of the
state as a controlling agent, confirming that the seller is up to date with the payment of certain taxes,
pension fund contributions related to construction on the premises, that all necessary permits and
authorisations have been obtained, and so on.
In general terms, a real estate transaction involves the execution of the following documentation:
• preliminary agreement (boleto de reserva);
• promise to purchase agreement (compromiso de compraventa); and
• sale and purchase agreement (compraventa).
The purchase procedure normally starts with the execution of a preliminary agreement, by which
the parties agree to the basic terms and conditions of the transaction (object, price, terms, penalties,
etc) and the term within which the parties should execute the sale and purchase agreement (or the
promise to purchase agreement, depending on how the transaction is structured).
This preliminary agreement is not registered with the Real Estate Public Registry and in case of
breach, the parties are entitled to claim penalties and damages.
When the transaction cannot be structured as a cash payment transaction (due to the need for
payment in instalments or delayed delivery of possession, etc) it is usual to execute a promise to
purchase agreement. This agreement is registered with the Real Estate Public Registry and, in case
of breach by the seller, the applicable law provides the buyer with the possibility to claim specific
Doing Business in Latin America OCTOBER 2018 279
performance. Additionally, any lien (ie, mortgage, attachment, etc) created post registration does
not affect the purchaser. The agreement should provide for the execution of a sale and purchase
agreement once the conditions are met.
The promise to purchase must be executed either as a public deed by a notary public or as a private
document with signatures certified by a notary public.
Finally, the procedure ends with the execution of a public deed by a notary public containing the sale
and purchase agreement. Title over the property is transferred once this deed is executed.
This document is registered with the Real Estate Public Registry and is effective against third parties
upon registration.
With respect to form of payment in real estate transactions, Law No 19,210 and its regulatory decrees
expressly regulate how payments must be implemented. In this sense, as of 1 April 2018, cash may not
be used to make payments in real estate property transactions whose amount is greater than 40,000
indexed units. The law states that such payments must be made electronically, by common cheques
or deferred crossed cheques, or by crossed bill of exchange letters issued by a financial intermediary
institution on the name of the buyer. This limitation shall not apply in expropriation events.
In addition, promise to purchase agreements or sale and purchase agreements should detail the specific
form of payment used for the transaction, including, among other information, the identification
number of the form of payment, amount of the payment, name of the financial intermediary institution
from where the payment is made, and name of the issuer and receiver of the form of payment when
such a payment is made by persons other than those performing the transaction.
The Real Estate Public Registry will not register promise to purchase agreements or sale and
purchase agreements that do not contain the details of the form of payment and the aforementioned
specifications, or if such documents provide a different form of payment than those established by
the law.
ii. Rural properties: limitations for private parties
For limitations on ownership of agricultural land please refer to section iv(A) above.
iii. Urban properties: limitations for private parties
The Uruguayan legal framework does not limit the acquisition of urban property. In this sense, any
person, whether individual or corporate, foreign or national, can hold title to urban real property.
iv. Expropriation events
The Uruguayan Constitution establishes that expropriation of private property can be carried out
when there is a need or usefulness to proceed for such an undertaking. Expropriation is done
through the prior payment of compensation to the owner.
280 Doing Business in Latin America OCTOBER 2018
D. Development of ample/integrated capital markets and joint activities between Latin American countries
i. Merger of stock exchanges: attempts versus realities
Uruguay currently has only two stock exchanges, Bolsa de Valores de Montevideo (BVM) and Bolsa
Electrónica de Valores (‘BEVSA’), which are both under the control of the Central Bank. There
are several general agreements among both, and they are now coordinating the co-registration of
sovereign debt.
The main difference among the stock exchanges is that BEVSA only operates electronically: the
market and bids are entered into a system by operators by matching or auction procedures.
Legislation and regulation on stock exchanges and securities does not specifically contemplate the
merger of stock exchanges. However, the number of stock exchanges is not limited.
ii. MILA market: current results and expectations
The MILA market is an integrated stock exchange market. At the present moment it is composed of
Chile, Colombia, Mexico and Peru.
Currently, Uruguay does not form part of this stock exchange market integration as MILA
focuses on the equity market, a market not developed in Uruguay. Moreover, BVM is member
of the Federación Interamericana de Bolsas (‘FIAP’) and the Americas’ Central Securities
Depositories Association (ACSDA).
iii. Pacific Alliances: governmental action and proposed treatment and agreements
The Pacific Alliance is a highly praised trade bloc that promotes economic liberty, implemented by
Chile, Colombia, Mexico and Peru.
Although Uruguay is currently an observer of the Pacific Alliance, it has revealed its intention to
become a full member. This has not been implemented yet as, additionally, Uruguay is a member of
MERCOSUR, and its bylaws bind the country to negotiate in the bloc and not individually, which is an
issue that has caused several arguments between mostly Uruguay and Argentina.
Notwithstanding the foregoing, Uruguay’s relationship with the member countries of the Pacific
Alliance is optimal, and bilateral treaties are in force with each of them.
iv. IPOs of multilatina companies in Latin American capital markets
Uruguay’s private equity market is quite small; although there are almost 31 national Uruguayan
companies subject to public offer in the BVM or BEVSA, listed companies are generally issuers of
bonds. Notwithstanding the foregoing, there are no multilatinas based in Uruguay that have been
subject to IPOs so far.
Doing Business in Latin America OCTOBER 2018 281
E. Offshore vehicle providers in Latin American countries
i. General concept: legal framework and scope of activities
Uruguay has a great tradition of being an interesting jurisdiction to establish offshore vehicles that
give important benefits to foreign investors, without being considered as a tax haven. During many
years, Uruguay offered a very interesting vehicle, called sociedad anónima financiera de inversión (SAFI),
which enabled companies established abroad and operating outside Uruguay to structure their
businesses through this vehicle, only paying an annual tax of less than one per cent of their net worth.
This was a very commonly used vehicle by many foreign investors, but after the Uruguayan tax reform
in 2007, SAFI were not admitted.
However, similar benefits are granted using domestic corporations as Uruguay’s only tax income of
national origin. All these will be analysed in the following. Additionally Uruguay has a very important
tax free zone system, where companies organised in the special way of a tax free zone corporation
also benefit from important tax benefits.
Finally, Uruguay has many valuable characteristics for investors that still make it a very attractive
jurisdiction. The country has a longstanding tradition of political and economic stability that is always
very much valued by foreign investors. Additionally, no exchange control exists in Uruguay: exchange
market operations are free and entirely determined by supply and demand. Uruguay has a very solid
banking system, where the principle of banking secrecy is still in force.
ii. Applicable legal regimes in Costa Rica, Panama and Uruguay
As mentioned above, although Uruguay changed its Tax System in 2007, where SAFIs were not
admitted any more, the tax system is still attractive as a jurisdiction to create offshore vehicles.
Uruguay’s new tax is based on the territorial source principle. This means that only activities
developed, services provided and goods situated in Uruguay will have Uruguayan taxes levied, so any
income obtained outside Uruguay by a domestic entity is not taxed. To be considered a tax payer in
Uruguay, the investor must have its residence in the country. The only exception to this rule is the
case in which the Uruguayan company established outside Uruguay renders services to a Uruguayan
tax payer. In this case, the income would be taxed. For all these reasons, Uruguayan Corporations
have been used as foreign vehicles, as they enable investors to perform many activities outside
Uruguay without being taxed, such as having bank accounts, investing in real estate or securities,
rendering services or having commercial activities.
a. uruguayan companies
Business companies in Uruguay are governed by Law No 16,060 of 1 November 1989, without
prejudice to other regulatory and ancillary provisions.
In general, business companies developing activities in Uruguay are organised as corporations or
branches of foreign companies established abroad. Other smaller companies are established in the
form of LLCs. Finally, there are sole proprietorships established for different purposes, both for tax
and legal reasons (eg, agricultural and farming undertakings).
282 Doing Business in Latin America OCTOBER 2018
1. Corporations
i. Incorporation
Corporations may be incorporated in a single act by a group of founders or through the public
offering of stock. There are no restrictions on the nationality of the shareholders. Corporations may
be publicly or closely held.
ii. Capital stock
Capital stock may be represented by bearer and registered shares. Shareholders are not liable for the
company’s debts beyond the amount of capital contributed by each shareholder. However, Law No
18,930 determines that all the owners of bearer shares must register at the Central Bank as owners of
those shares. Pursuant to Law No 19,848, owners of registered shares must comply with said registry.
This law also incorporates the duty to register the ultimate beneficial owners (UBO) of companies
and trusts. Regarding this law, a UBO is the person who directly or indirectly possesses at least 15
per cent of the total shares of a company, or has control over the company, whether it directly or
indirectly. Indirect control means a chain of companies, where the final beneficiary is at the end of
the chain.
Corporations are required to have fixed authorised capital. The authorised capital of regular
corporations will always be denominated in Uruguayan pesos and will be at least US$35,000. Twenty-
five per cent of the authorised capital should be paid in cash or other assets. Investment stock
companies and offshore banks may denominate their capital in foreign currency.
iii. Restrictions
There are no restrictions on citizenship nor domicile of shareholders and directors imposed on
Uruguayan corporations.
iv. Shareholder meetings
Shareholder meetings are the major authority of the company.
Meetings should be held at the corporate principal place of business and called in advance through
a resolution of the board of directors. Shareholders representing at least 20 per cent of the paid-in
capital will also be authorised to call a meeting. Meetings may not be held outside Uruguay. Notice of
meetings should be published in the Official Gazette and another newspaper. These formalities may
be disregarded provided all shareholders are present.
Meetings may be regular or special. Regular meetings should be held at least once a year, within 180
days of the end of each fiscal year or within 120 days in the case of a publicly held corporation, to
approve the board of directors’ report, annual financial statements, proposal for the distribution of
dividends, and appointment of directors and statutory auditors.
Special meetings may be held at any time under a special quorum in the first and second call, and are
free to resolve any matters put to the vote.
Doing Business in Latin America OCTOBER 2018 283
The corporation should start winding-up proceedings if the company’s losses from former periods
reduce its capital to less than 25 per cent of its net equity, unless a special meeting of shareholders
resolves a reduction of the capital stock or refund of capital through new contributions.
v. Board of directors
The board of directors manages the company under the control of shareholders.
No restrictions exist on nationality or residence of directors. The board of directors of publicly held
corporations should be comprised of more than one director and should hold a meeting at least once a
month. The board of directors of closely-held corporations may be comprised of one or more directors.
Directors are jointly and severally liable to the company, the company’s shareholders and creditors for
any violation of acts, executive orders or bylaws knowingly incurred. Directors are personally liable to
tax authorities for unpaid taxes under certain circumstances.
The board of directors may resolve any matters included in the corporate purpose subject to the
restrictions imposed by the law and the corporate bylaws. In certain cases, the board of directors
may approve interim dividends when distributable profits are available. The meeting of shareholders
should later ratify these dividends.
2. LLCs
LLCs are generally adopted by small and medium-sized companies, for instance, those established by
relatives or friends. These companies are ruled by articles of organisation and an operating agreement
subscribed by two to 50 members, either individuals or legal entities, including corporations. No
restrictions exist on nationality or residence of members. The articles of organisation and the operating
agreement should be filed with the National Registry of Commerce and published in the Official
Gazette and another newspaper. After publication, the company will be legally established.
LLCs are managed by managers appointed in the articles or at a meeting of members. In this type of
company, members’ liability is limited to the contributed capital. However, members are liable for the
company’s debts to its employees for salaries; this does not include redundancy payments. Moreover,
the managing members are liable for the payment of the company’s income tax, if any, and for the
company’s tax debts in the case in which the managing members have acted negligently.
The minimum authorised capital of LLCs is fixed annually, but is of approximately US$645, as of
2018. The capital of these companies should not exceed an amount equivalent to the minimum
authorised capital required to establish a corporation, and should be represented by units.
LLCs are not authorised to issue negotiable instruments. The assignment of units to third parties
requires the approval of a special majority of the remaining members or a unanimous vote, depending
on the number of members. In certain cases, the assignment of units may be authorised judicially.
The meeting of members of the LLC is the main authority of the company and is held once a year to
approve the financial statements and performance of managers. LLCs with more than 20 members
are managed as corporations, and therefore, should have a manager or a board of directors. If the
284 Doing Business in Latin America OCTOBER 2018
number of members is under 20, then these companies may be managed by one or more members,
or by a manager appointed by members.
3. Tax free zone companies
Uruguay’s tax free zone system is also a commonly used vehicle for offshore investment. Tax free
zones are public or private, efficiently fenced and isolated areas within the national territory,
authorised by the Executive Branch for the development of the activities explained below under tax
exemptions and other benefits specified in the law.
In 2017, Uruguay’s tax free zone system was subject to some substantial changes by the amendments
of Law No 19,566. With this piece of legislation, Uruguay intended to comply with the requirements
of the OECD.
i. Activities included
Any industrial, business or service activity may be developed. The activities listed in the laws by way of
example are:
• marketing of goods (except those set forth in section 47: ‘weapons, gunpowder, ammunitions
and other warfare material, as well as material declared as opposing the Executive’s interests’),
deposit, storage, packaging, selection, classification, fractioning, assembly, disassembly, and
handling or mixing of goods or raw materials of foreign or Uruguayan origin. Pursuant to
section 36, goods of foreign origin entering the Uruguayan territory should be immediately
carried to the respective tax free zones;
• installation and operation of manufacturing plants;
• provision of all types of services not restricted by Uruguayan law, including services provided
both to non-tax free zone Uruguayan territory, other countries, and other tax free zones;
however, pursuant to Law No 19,566 of 2017, for the case of services provided from tax free
zones to the rest of the national territory, the beneficiary of said service must be a subject taxed
by the business activities income tax (Impuesto a las Rentas de las Actividades Económicas
(IRAE)); and
• other activities considered by the Executive Branch as benefiting the national economy or the
economic and social integration of states.
ii. Exemptions and benefits
Practically full tax relief is granted: tax free zone users shall be exempt from all national taxes
currently in force or to be imposed in the future, including those taxes the exemption of which
requires a specific provision in connection with the activities to be developed therein. Pursuant to
Law No 19,566 from 2017, the exemption is only for activities inside the tax free zone, provided
they are developed in compliance with regulation given by the law regarding tax free zones and the
authorisations needed to operate in them.
Doing Business in Latin America OCTOBER 2018 285
Tax free zone users charged with the net worth tax will not include the property allocated to tax free
zone activities for tax assessment purposes.
VAT exemption also covers:
• movement of goods and provision of services within free trade zones, and;
• entry of goods from abroad into tax free zones.
Exemptions do not include social security contributions and pecuniary contributions established
in favour of non-governmental social security entities subject to public law. If the foreign personnel
working in a tax free zone state in writing that they waive the benefits of the social security system
applicable in Uruguay, no obligation exists to make the corresponding contributions.
Pursuant to Law No 19,566, for goods under the protection of the intellectual property regulation,
their profits will be taxed at 30 per cent of the costs needed to produce said goods.
The law also benefits users through the rates charged by the National Port Administration and public
agencies providing inputs or services.
iii. Goods within tax free zones
Goods, services, commodities and raw materials of any origin entering tax free zones, are exempt
from any customs duty applied to imports.
Current export regulations apply to goods entering tax free zones from the national territory. On the
other hand, when goods enter the national territory from tax free zones, import regulations should
be complied with.
Retail is not allowed within tax free zones. However, Law No 19,566 established an exception that
allows the retail sale of products to cover the needs of personnel working inside tax free zones. This
law also allows the marketing of goods and services between users of tax free zones.
iv. Activities
• Industrial, business or service activities developed within tax free zones should be specified in
user agreements;
• users established in tax free zones will not be entitled to develop industrial, business and service
activities in the national territory, nor should they provide services from tax free zones that will
be delivered in the national territory; and
• users authorised to develop tax free zone financial intermediation activities will be authorised
to develop all the activities included in their line of business, provided the recipients of these
activities are third countries or foreign trade zone users.
v. Tax free zone corporations
The only specific requirement for tax free zone corporations is that the purpose of the company must
authorise the company to be a tax free zone user.
286 Doing Business in Latin America OCTOBER 2018
This means companies must be exclusively intended for the purpose of the activities legally allowed to
be developed inside tax free zones. These companies may not develop other commercial or industrial
activities outside the tax free zone, with the exception of:
• the collection of debt, provided it is done by the intermediation of a third party; and
• exhibition of services in places specially stated for that purpose by the authorities. This is
exclusive for users of tax free zones disadvantaged by their location.
In order to develop other activities accessory to the main activity developed within the tax free zone,
companies must first obtain authorisation from authorities. Regarding this matter, the law considers
public relations, billing and collection of debt as accessory activities.
Doing Business in Latin America OCTOBER 2018 287
Venezuela
288 Doing Business in Latin America OCTOBER 2018
XV. Venezuela
A. Foreign investment in Latin American countries
i. Authorisations versus limitations or prohibitions
Foreign investment is regulated by the Constitutional Law of Productive Foreign Investment,
published in the Official Gazette of the Bolivarian Republic of Venezuela No 439,407 of 29 December
2017 (the ‘Foreign Investment Law’). Under said law, foreign investment is defined as productive
investment made through contributions from foreign investors, of tangible and intangible resources,
intended to form part of the net worth of foreign investment recipients in the national territory. The
Foreign Investment Law distinguishes two types of foreign investment:
1. direct foreign investment is a productive investment made through contributions from
foreign investors, of tangible and financial resources, destined to be part of the net worth of
foreign investment recipients in the national territory in order to generate added value to the
productive process in which it is inserted. These contributions must represent participation
greater than or equal to ten per cent of corporate capital; and
2. foreign investment in portfolio is the acquisition of shares or corporate interests in all
types of companies that represents a level of participation in the corporate equity of less
than ten per cent.
Participation in both forms of foreign investment, may be:
• a financial investment in foreign currency and/or any other medium of exchange or
compensation established within the framework of Latin American and Caribbean integration;
• physical or tangible capital goods, such as industrial plants and machinery;
• non-material or intangible goods, such as trademarks, product brands and invention patents;
and
• reinvestment.
According to Article 301 of the Constitution of the Bolivarian Republic of Venezuela (the
‘Constitution’), foreign investment is subject to the same conditions as domestic investment.
Consequently, foreign business corporations, agencies or individuals shall not be granted any
conditions that may be more favourable than those established for Venezuelan nationals.
a. authorisations
Although in Venezuela no prior authorisation is required to make an investment provided said
investment conforms to the laws that are in effect in the relevant sector, the Foreign Investment Law
provides that foreign investment shall be registered with the National Foreign Trade Centre (Centro
Nacional de Comercio Exterior (‘CENCOEX’)), and that said registry must be updated annually.
The rights of foreign investors provided under the Foreign Investment Law, such as the guarantee of
Doing Business in Latin America OCTOBER 2018 289
repatriation of profits, remittance of dividends, reinvestment of dividends and legal certainty, shall
only become effective after CENCOEX registry has been granted.
The formal requirements for foreign investment registration are:
• a minimum amount of €800,000 or the equivalent thereof in other currency, at the official exchange rate; however, CENCOEX may establish a different minimum amount depending
on the sector’s interest for the promotion of small and medium-sized industries, and any other
forms of productive organisation, provided said minimum amount is not less than ten per cent
of the aforementioned minimum amount established under the Foreign Investment Law; and
• such investment shall remain in the national territory for a minimum term of two years,
counted from the date on which the foreign investment registry is granted.
Nonetheless, the national bodies or agencies that have competence for hydrocarbons, banking,
securities and insurance matters are concurrent with CENCOEX with regard to the analysis, study and
issuance of the foreign investment registry. In cases in which the foreign investment shall be destined
to the hydrocarbons, petrochemical, carboniferous and mining sectors, the registry shall be granted
by the Ministry of People’s Power for Oil and Mining (the ‘Ministry of Oil and Mining’).
In view that the Foreign Investment Law has only recently been enacted, the regulations thereof have
not yet been issued and the specific procedure for foreign investment registration has not yet been
established, which leaves this matter in a legal vacuum.
b. limitations and prohibitions
With reference to investment limitations and prohibitions, the Foreign Investment Law provides
that foreign investment may be made in any area, sector or activity allowed by national legislation.
In this regard, the state reserves for itself the development of certain strategic fields according to
the national interest, and the provisions under the Constitution and the national legal framework.
Currently, these restrictions only apply to certain sectors, such as hydrocarbons, open television, radio
and press in Spanish.
ii. Treatment of foreign investment in infrastructure initiatives and PPP projects
According to Article 299 of the Constitution, the state, jointly with private initiative, shall promote
the harmonious development of the national economy. In this regard, the decree on Rank,
Value and Force of Organic Law for the Promotion of Private Investment under the Concessions
Regime of 25 October 1999 (the ‘Organic Law for the Promotion of Private Investment under the
Concessions Regime’), establishes incentives and guarantees, with the aim of promoting private
investment and the development of infrastructure and public ser vices, which are the responsibility
of the national government.
In this sense, the Organic Law for the Promotion of Private Investment under the Concessions
Regime constitutes the basis for the grant of concessions, which refer to agreements entered into
between the competent public authority and a private company, for the construction and exploitation
290 Doing Business in Latin America OCTOBER 2018
of new works, systems or infrastructure facilities; or the maintenance, refurbishment, modernisation,
expansion and exploitation of said pre-established infrastructure, or public services.
Moreover, the Foreign Investment Law establishes the rights and obligations of foreign investors in
those cases where no bilateral agreement has been entered into between Venezuela and the country
of origin of the foreign investor. Consequently, as stated in the Constitution, international investors
have the right to fair and equal treatment under international law and principles, and shall not be
subject to any arbitrary or discriminatory measures. Thus, foreign investors have the same rights and
obligations as domestic investors under similar circumstances, the sole exception being any applicable
provisions under special laws, and the limitations set forth in the Foreign Investment Law.
Finally, it must be noted that Venezuela has entered into bilateral agreements for the promotion
and protection of investments with the following countries: Argentina, Barbados, Belarus, Belgium-
Luxembourg, Brazil, Canada, Chile, Costa Rica, Cuba, the Czech Republic, Denmark, Ecuador,
France, Germany, Iran, Lithuania, the Netherlands, Paraguay, Peru, Portugal, Russia, Spain, Sweden,
Switzerland, the UK and Vietnam.
iii. Treatment of foreign investment in oil and gas and mining activities
Pursuant to the provisions under Articles 150 and 151 of the Constitution, the prior approval of the
National Assembly is necessary to enter into municipal, national or state public interest agreements
with foreign governments, as well as with foreign companies not domiciled in Venezuela. At present,
hydrocarbon and mining laws provide for said requirement to participate in certain activities
relating to such areas, even requiring, in some cases, the approval of the National Assembly for the
incorporation of companies intending to participate in certain activities.
In this regard, in the following, we indicate the possibilities for foreign investment in oil, gas and
mining activities, according to the provisions under each of the applicable laws.
a. the organic hydrocarbons law
The Organic Hydrocarbons Law regulates all matters in connection with the exploration,
exploitation, refining, transport, storage, marketing and preservation of hydrocarbons, and such
refined products and works as may be required for the performance of said activities.
The Organic Hydrocarbons Law regulates five activities.
1. Primary activities
Primary activities are defined under Article 9 as those activities relating to exploration in search
of those hydrocarbon deposits referred to in the Organic Hydrocarbons Law, the extraction of
hydrocarbons in their natural state, their initial collection, transport and storage.
Primary activities, as well as those relating to such works as their management may require, are
reserved to the state upon the terms set forth under said Organic Hydrocarbons Law.
These types of activities may only be carried out by the state, either directly by the National Executive,
through wholly state-owned companies, or through companies in which the state may have control
Doing Business in Latin America OCTOBER 2018 291
over their decisions, by virtue of holding a stake exceeding 50 per cent of the capital stock. These
types of companies are known as operating companies.
The prior approval of the National Assembly shall be required for the incorporation of mixed
companies and the establishment of the terms governing the conduct of primary activities, and the
National Assembly may modify the terms or establish such terms as it may deem pertinent, with any
subsequent modification to also be approved by the National Assembly.
2. Refining and marketing activities
Pursuant to the provisions under Article 10, refining and marketing activities are those relating to the
distillation, purification and transformation of natural hydrocarbons regulated under the law, carried
out for purposes of adding value to said substances and marketing any products obtained. According
to the provisions under Chapter VIII of the aforementioned law, these activities may be carried out by
the state and private individuals, either jointly or separately.
In order to engage in natural hydrocarbon refining activities, a license issued by the Ministry of Oil
and Mining must be obtained. The ministry may grant said license after definition of the appropriate
project and pursuant to the provisions under this law and its regulations.
The assignment, transfer or encumbrance of any licenses shall require the prior approval of the
Ministry of Oil and Mining, without which said licenses shall have no effect. In the case of mandatory
transfers resulting from execution, the state may substitute the executor after payment of the amount
of the execution order.
3. Industrial activities
Industrial activities are those defined under Article 49 as the Industrialisation of refined
hydrocarbons, comprising activities relating to the separation, distillation, purification, conversion,
mixing and transformation of the same, carried out for the purpose of adding value to said
substances through the obtainment of oil specialties or other hydrocarbon by-products.
These activities may be carried out directly by the State, by its wholly state-owned companies, by mixed
companies having private and state capital participation, in any proportion, and by private companies.
In this case, private companies must obtain a permit to be granted by the Ministry of Oil and Mining.
4. Marketing activities
Marketing activities refer to the domestic and offshore commercialisation of natural hydrocarbons
and their by-products.
In this case, any activities in connection with the commercialisation of natural hydrocarbons, as
well as that of such by-products as may be indicated by the National Executive, by decree, may only
be carried out by wholly state-owned companies, created for such purposes. For their part, mixed
companies carrying out primary activities may only sell any natural hydrocarbons produced by them
to said state-owned companies.
292 Doing Business in Latin America OCTOBER 2018
Any by-products’ commercialisation activities that may be excluded from the reserve decrees issued
by the National Executive may be carried out directly by the state, its wholly state-owned companies or
mixed companies without regard for their capital stock interest.
5. Activities of supply, storage, transport, distribution and sale of hydrocarbon by-products for purposes of domestic commerce
These types of activities may be carried out by individuals or corporations, with a prior permit from
the Ministry of Oil and Mining.
b. the organic law for the development of petrochemical activities
The purpose of the Organic Law for the Development of Petrochemical Activities is to regulate
petrochemical activities carried out in the country, including those industrial activities causing
the chemical or physical transformation of raw materials based on gaseous hydrocarbons, liquid
hydrocarbons and mineral substances used as an input for said activities, whether by themselves or
mixed, or in combination with other substances and input. Said law also governs any intermediate
products deriving therefrom in products of a different physical-chemical nature and of higher added
value, as determined by this law and its regulations.
Petrochemical activities are understood as the transformation of initial petrochemical products
originated from hydrocarbons, which is conducted through the separation, purification,
conversion and combination of the products, through chemical or physical methods, as well as the
transformation of the products obtained in subsequent, intermediate or final industrial processes.
Pursuant to Article 5 of the law, basic and intermediate petrochemical activities, as well as such works,
assets and facilities as may be required for the management thereof, are reserved to the state. Said
reserve shall be exercised either directly by the National Executive or through mixed companies
where the National Executive shall have a controlling interest and a stake of not less than 50 per cent
of its capital stock.
The incorporation of mixed companies is subject to the prior authorisation of the National Assembly.
c. the organic law on gaseous hydrocarbons
The Organic Law on Gaseous Hydrocarbons regulates all matters in connection with non-associated
gaseous hydrocarbon deposit exploration and exploitation activities, as well as the collection, storage
and use of both non-associated natural gas, resulting from said exploitation, and gas produced in
association with oil or other fossil fuels; and the procedure, industrialisation, transport, distribution,
and domestic and offshore commerce of said gases. Such activities may be exercised either directly by
the state or through state-owned entities or national or foreign private persons, with or without the
participation of the state, upon the terms set forth under said law.
Also included within the scope of the Organic Law of Gaseous Hydrocarbons are those matters
referring to liquid hydrocarbons and non-hydrocarbonated components contained in gaseous
hydrocarbons, as well as gas resulting from the oil refining process.
Doing Business in Latin America OCTOBER 2018 293
The Organic Law on Gaseous Hydrocarbons makes a distinction between the types of activities in
this matter:
• activities in connection with the exploration and exploitation of non-associated gaseous
hydrocarbons: the law provides that any national or foreign private persons who may wish to
carry out these types of activities, with or without the participation of the state, must obtain the
appropriate licence from the Ministry of Oil and Mining;
• activities other than exploration and exploitation: a permit from the Ministry of Oil and Mining
is required to carry out these activities; and
• gaseous hydrocarbons industrialisation activity: with reference to this area, the law provides
that any national or foreign private persons who may wish to carry out gaseous hydrocarbon
industrialisation activities, with or without the participation of the state, must obtain the
appropriate permit from the Ministry of Oil and Mining, after the definition of the project is
registered with and approved by the ministry.
d. the mining law
The Mining Law regulates those matters in connection with mines and minerals existing in the
national territory, whatever the origin or presentation thereof, including the exploration and
exploitation, as well as the extraction, processing, storage, holding, circulation, transport and
commercialisation, whether domestic or offshore, of the extracted substances, except as provided
under other laws.
The exploration, exploitation and use of mining resources may only be carried out through the
following modalities:
• directly by the National Executive;
• concessions for exploration and subsequent exploitation;
• authorisations for exploitation for the exercise of small-scale mining;
• mining communities; and
• artisanal mining.
Under Article 17, the law provides that any person, whether an individual or corporation, national or
foreign, legally competent and domiciled in the country may obtain mining rights to carry out the
activities provided thereunder, except for certain exceptions.
Any companies or corporations that may be organised for the exploration or exploitation of mines
shall be incorporated in accordance with the provisions under the Commercial Code and shall be
civil in nature.
Pursuant to Article 19, in order to engage in mine exploration or exploitation activities, foreign
companies shall meet the requirements provided under the Commercial Code and other applicable
provisions and shall have a Venezuelan or foreign legal representative, domiciled in the country.
294 Doing Business in Latin America OCTOBER 2018
Pursuant to Article 22, foreign governments may not hold mining rights within the national territory.
In the case of entities depending on any such governments or companies where said foreign
governments may have an interest, which, by virtue of the capital or by-laws, shall confer control
over the company upon them, said entities shall require the approval of the National Assembly to be
granted mining rights.
In any case, pursuant to the provisions under the law being commented on, foreign companies
may only be granted a mining concession for exploration and subsequent exploitation, inasmuch
as activities for the exercise of small-scale mining, mining communities and artisanal mining, are
reserved, in the first case, to Venezuelan individuals or corporations, who, upon gathering in various
areas surrounding the same deposit or several thereof, form the so-called mining communities, and
in the third case, only Venezuelan individuals may engage in artisanal mining.
e. the organic law reserving to the state gold eXploration and eXploitation activities as well as related and ancillary activities
This law reserves to the Venezuelan state all primary, related and ancillary activities in connection
with gold mining, where primary activities are understood (Article 6) to be the exploration and
exploitation of gold mines and deposits; and related and ancillary activities, such as the storage,
holding, extraction, processing, transport, circulation, and domestic and foreign commercialisation
of gold, to the extent that the latter activities shall contribute to the conduct of primary activities.
Article 9 of said law provides that the aforementioned activities may only be carried out by the
Bolivarian Republic of Venezuela or through its public agencies, or wholly state-owned companies, or
affiliates thereof, as well as through mixed companies in which the Bolivarian Republic of Venezuela,
its public agencies, wholly state-owned companies or affiliates thereof shall control 55 per cent of the
capital stock, and strategic alliances entered into between the Bolivarian Republic of Venezuela and
any corporations or other forms of association permitted by law for the conduct of small-scale mining.
For the conduct of activities characterised as primary activities, mixed companies shall be governed
by this law, and in each specific case, by such terms and conditions as may be approved through
an agreement issued by the National Assembly, as well as such provisions as may be dictated by the
National Executive through the Ministry of People’s Power having competence for mining matters.
iv. Treatment of foreign investment in real estate (rural and urban properties)
The real estate sector has been restricted over the past years in Venezuela, therefore, the lease,
construction and sale of housing are regulated by the national government. However, such limitations
are not specially designed for foreign investors, but as a matter of government policy. In this regard,
foreign investors shall be subject to special laws on this matter.
v. Treatment of foreign investment in agribusiness activities
There are no special regulations with reference to foreign investment in agribusiness activities.
Therefore, as was established in the Constitution, foreign investment is subject to the same conditions
as domestic investment in all agribusiness activities.
Doing Business in Latin America OCTOBER 2018 295
vi. Treatment of foreign investment in the rendering of public services
As to the provision of public services, the Public Contracting Law provides that national companies
must have priority over foreign companies in contracting processes. In effect, Article 9 of the Public
Contracting Law states that for the selection of bids whose prices, in respect of one another, shall not
exceed five per cent of the price of the company obtaining the best evaluation, the company to be
preferred shall be the one that shall meet the following conditions as defined under the term sheet:
• for the acquisition of goods, such a bid as may have the highest national added value; and
• for the contracting of works and services, such a bid as shall be submitted by a bidder whose
principal place of business is in Venezuela, incorporates the largest proportion of national parts
and input, and has the highest participation of national human resources.
Once the foregoing criteria have been applied, if two or more bids with similar characteristics were to
result from the evaluation, the bidder to be preferred shall be the bidder with a capital stock that has
the largest national share.
Pursuant to Article 29 of the law, in order to submit bids, companies must be previously registered
with the National Contractors Registry, provided that the estimated amount of the bids shall exceed
4,000 tax units in the case of goods and services, and 5,000 tax units in the case of execution of
works. Said registration shall not be necessary for those interested in participating in internationally
announced open tenders; as well as those providing highly specialised services sporadically used,
small producers of food products or basic products declared to be of first necessity.
B. Rendering of public services
i. General framework
Public services are regulated by the decree on Rank, Value and Force of Public Contract Law,
published in the Official Gazette of the Bolivarian Republic of Venezuela Extraordinary No 6,154 of
13 November 2014 (the ‘Public Contract Law’). The scope of the Public Contract Law is to regulate
the activity of the state for the acquisition of goods, rendering of services and execution of works for
the purpose of preserving public heritage.
In addition to the Public Contract Law, the Constitutional Law against Economic War for Rationality
and Uniformity in the Acquisition of Goods, Services and Public Works establishes basic rules of
conduct that the public administration must follow in the processes of acquisition and contracting of
goods, services and public works.
ii. Governmental monopoly versus private initiative
Except for the areas that are reserved for commercial exploitation by the Venezuelan Government, a
private initiative can participate in public works without major limitations whenever they comply with
the Public Contract Law.
296 Doing Business in Latin America OCTOBER 2018
iii. Privatisation general rules
The Privatization Law, published in the Official Gazette of the Bolivarian Republic of Venezuela
Extraordinary No 5,199 of 30 December 1997 (the ‘Privatization Law’), regulates the privatisation
of goods or services owned by the public sector by restructuring the entities for the purposes of
privatisation, including the modification of regulatory frameworks, transfer of shares owned by the
public sector to the private sector, concession of public services and any other mechanism that allows
the objectives of that policy to be achieved.
vi. Limitations and/or prohibitions to private parties in the rendering of public services
Besides the areas that are reserved for commercial exploitation by the Venezuelan Government,
private parties have limitations that derive from the prerogatives that the state has at the time of
entering into the respective contracts with individuals, such as limitations of contractual liability,
applicable jurisdiction and termination of the contract, among others.
C. Real estate
i. Rural properties
a. limitations for private parties
Venezuelan Law regulates so-called security zones, which are areas of the country, which because of
their strategic importance, features and elements that comprise them are subject to special regulation
in terms of people, goods and activities in order to ensure the protection of these areas from internal
hazards or external threats.
The security zones could be in rural zones, such as border security zones. Foreigners cannot
acquire properties in security zones without the previous authorisation of the government
(Ministr y of Defence). Likewise, foreigners that are already owners of properties in said zones
must inform the authorities.
The Coastal Law also regulates some protected areas, which are subject to concessions and
administrative authorisations.
ii. Urban properties
a. limitations for private parties
There are also some security zones located within the perimeters of cities. These zones are subject to
the same regulations and limitation with respect to the property of foreigners.
Doing Business in Latin America OCTOBER 2018 297
iii. Expropriation events
a. regulations in the constitution
The Venezuelan Constitution regulates all private property rights and their limitations. Only for
reasons of public utility or social interest, by final decision and prompt payment of just compensation,
may the expropriation of any type of goods be declared.
b. regulations in the law
Expropriation for public utility or social utility regulates all relevant procedures regarding
expropriations and how to determine a fair price to pay as compensation. Therefore, expropriation
that does not follow this procedure is illegal and can be appealed by a writ of amparo.
298 Doing Business in Latin America OCTOBER 2018
Doing Business in Latin America OCTOBER 2018 299
300 Doing Business in Latin America OCTOBER 2018
International Bar Association
4th Floor, 10 St Bride Street
London EC4A 4AD, United Kingdom
Tel: +44 (0)20 7842 0090
Fax: +44 (0)20 7842 0091
Email: [email protected]
www.ibanet.org
4/23/2021 Foreign Corrupt Practices Act (FCPA) Definition
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What Is the Foreign Corrupt Practices Act (FCPA)? The Foreign Corrupt Practices Act (FCPA, the Act) is a United States law that prohibits U.S. firms and individuals from paying bribes to foreign officials to further business deals. The FCPA contains two main articles:
Foreign Corrupt Practices Act (FCPA)
By WILL KENTON Reviewed by Updated Mar 26, 2021ROBERT C. KELLY
TABLE OF CONTENTS
EXPAND
4/23/2021 Foreign Corrupt Practices Act (FCPA) Definition
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The anti-bribery provisions The books, records, and internal control provisions, which speaks to accounting practices
4/23/2021 Foreign Corrupt Practices Act (FCPA) Definition
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The FCPA applies to prohibited conduct anywhere in the world and extends to both U.S. publicly traded companies and privately held companies.
4/23/2021 Foreign Corrupt Practices Act (FCPA) Definition
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Understanding the Foreign Corrupt Practices Act The Foreign Corrupt Practices Act targets corruption and bribery internationally. Paying foreign officials for expediting legal processes or obtaining contracts was a common business practice around the world well into the 1970s. In some countries, in fact, corporations routinely wrote-off bribes as normal business expenses when filing their tax returns. Being common, however, does not make this behavior desirable or ethical.
When the act was passed in 1977, it received substantial backing from American businesses because they could not compete fairly in overseas markets where bribery was accepted. The FCPA’s anti-bribery regime—along with the adoption of treaties like the Organisation for Economic Co-operation and Development's (OECD), which required signatory countries to outlaw all financial crime—has helped to level the playing field abroad for U.S. businesses.
KEY TAKEAWAYS
The Foreign Corrupt Practices Act (FCPA) is a U.S. statute that prohibits firms and individuals from paying bribes to foreign officials to further business deals. Both the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) are responsible for enforcing the FCPA. Passage of the FCPA, in 1977, helped to level the playing field for American businesses in overseas markets.
4/23/2021 Foreign Corrupt Practices Act (FCPA) Definition
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Anti-Bribery Provisions The act prohibits bribery of foreign officials and intends to deter corruption and abuses of power worldwide. The FCPA contains policies for governing the actions of publicly traded companies, their directors, officers, shareholders, agents, and employees. This includes working through third parties such as consultants and partners in a joint venture (JV) with the company—meaning that the use of proxies to execute a bribe will not shield the company or individual from culpability.
Books, Records, and Internal Control Provisions This section of the act outlines the accounting transparency guidelines that are meant to operate in tandem with the anti-bribery provisions. The FCPA requires companies whose securities are listed in the U.S. to meet its accounting provisions, which cite ways of recording assets that make it difficult to mask corrupt payments.
Corporations covered by the act also must devise and maintain internal controls to assure regulators that their business transactions are accounted for properly.
Violating the Foreign Corrupt Practices Act The Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) are jointly responsible for enforcing the Foreign Corrupt Practices Act. For its part, the SEC created a special unit within its enforcement division to focus on matters that fall under the auspices of the FCPA.
Violators of the act can face substantial sanctions and penalties, and both criminal and civil actions may be charged. Punishments include fines as much as twice the amount of the benefit expected to be received from the bribery. Corporate entities found guilty of breaching the act may be forced to accept the oversight of an independent auditor to ensure future compliance. Individuals involved in breaking this law can face imprisonment for as many as five years.
4/23/2021 Foreign Corrupt Practices Act (FCPA) Definition
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SEC Sample Rulings in the FCPA The SEC publishes current violations of the act, along with its enforcement actions, on the SEC website in press release format. The agency also redacts a summary list, organized by calendar year, of individuals and firms that violated the tenets of the act.
For example, in 2019, some of the SEC's rulings included actions against:
Ericsson (NASDAQ: ERIC), the Stockholm based multinational telecommunications company, agreed to pay more than $1 billion to the SEC and DOJ to resolve charges that it violated the FCPA by engaging in a large-scale bribery scheme involving the use of sham consultants to secretly funnel money to government officials in multiple countries. Microsoft (NASDAQ: MSFT) agreed to pay more than $24 million to settle SEC charges related to FCPA violations in Hungary, Thailand, Saudi Arabia, and Turkey, and criminal charges related to Hungary. Tim Leissner, a former executive of Goldman Sachs (NYSE: GS), agreed to a settlement with the SEC that includes a permanent bar from the securities industry for violating the FCPA by engaging in a corruption scheme, in which he obtained millions of dollars by paying unlawful bribes to various government officials to secure lucrative contracts for Goldman Sachs. The SEC charged Walmart Inc. (NYSE: WMT) with violating the books, records, and internal accounting controls provisions of the FCPA by failing to operate a sufficient anti- corruption compliance program for more than a decade as the retailer experienced rapid international growth. Walmart agreed to pay more than $144 million to settle the SEC’s charges and approximately $138 million to resolve parallel criminal charges by the DOJ for a combined total of more than $282 million.
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4/23/2021 Foreign Corrupt Practices Act (FCPA) Definition
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Related Terms Racketeering Definition Racketeering typically refers to crimes committed through extortion or coercion. The term is typically associated with organized crime. more
Bribe A bribe is an illegal act in which a gift (for example, money) is given with the goal of influencing an outcome. more
White-Collar Crime Definition A white-collar crime is a non-violent crime committed by an individual, typically for financial gain. more
Fair Housing Act The Fair Housing Act is the federal law that forbids discrimination in housing based on race, sex, religion, nationality, disability, and family status. more
Disparate impact and Antidiscrimination Law Disparate impact means the effect or result of a rule or practice that selectively treats members of a legally protected group adversely. more
Impeachment Impeachment is the process letting Congress bring charges vs. high-ranking civil officers, such as the president, in a bid to remove them from office. more
BUSINESS IN AFRICA
With its diverse and plentiful resources, and a continent- wide desire among governments to create jobs and bolster their national economies, Africa is a place of interest for the international business community.
In an April 2014 report, the World Bank said that sub- Saharan Africa “continues to make impressive strides” in sustaining economic growth, emerging from a five-year period of weakness and stagnation in the global economy. Developed countries around the world have taken notice of Africa’s rise as a business center; in 2012, U.S. President Barack Obama issued the U.S. Strategy Toward Sub-Saharan Africa, in which the American government outlined its effort to spur economic growth through trade and investment in African nations.
BUSINESS IN AFRICA: THE RISKS, REWARDS AND CHALLENGES
Those opportunities are multiplying. According to the American website Export.gov, as of 2012, U.S. trade to and from Africa had tripled over the previous decade, with U.S. exports to sub-Saharan Africa topping $21 billion. The site also notes that Africa is home to six of the top 10 fastest- growing countries in the world, and that the International Monetary Fund projected sub-Saharan Africa to grow between 5 and 6 percent per year through 2014.
Other developed nations are also investing in the expansion of African business. In December 2013, the government of the United Kingdom announced a new partnership in east Africa. The partnership is aimed at utilizing commercial initiatives to help those in Tanzania’s lower class benefit from the region’s economic growth, with an eye toward ending reliance on foreign aid by creating jobs and boosting the country’s business community.
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The effort to invest in Africa is ongoing throughout the developed world. Associations such as the U.K.’s Business Council for Africa and the Canadian Council for Africa exist to connect investors and entrepreneurs in those countries with opportunities.
Africa is becoming an increasingly important player on the world stage. But if an investor or entrepreneur is to invest in an African business, or venture to Africa to set up a new business, what can he or she expect once involved? What are the real risks and potential rewards for doing business in Africa?
UNDERSTANDING AFRICA Those in the Western world often think of Africa as a single entity, as if it were a country on its own, with laws, customs and conditions that are universally applicable across its entirety.
But Africa is anything but homogenous. It is a continent with 54 sovereign states and other territories that have complete or limited international recognition. It is the world’s second-largest continent both in terms of land area and population, with a vast variance in climate, culture, customs and natural resources.
It is a continent with a great deal of political diversity and includes countries that are stable with well-developed economies, and countries that are poor and unstable — some of which are reeling from the effects of war and continuous tribal friction.
With all of that in mind, the success of a business venture in Africa has a great deal to do with its location and with the investors’ appetite for risk.
According to Marius Maritz, chairman of South Africa- based Certified Master Auditors Inc., South Africa is the continent’s most developed country, both from an economic and infrastructural standpoint. Most outside businesses look there first to gain a toehold in Africa. But oil and gas production accounts for a relatively small portion of South Africa’s GDP, compared to countries such as Egypt and Nigeria, and the latter two countries are often more fruitful places to invest in an energy venture.
Political climate is another important factor in choosing a location to do business. African governments range from capitalistic democracies to authoritarian dictatorships. The stability of a country’s government has a major impact on unemployment rates, and to that end, Africa has some of the world’s highest unemployment rates. According to a list based on research conducted between 2007 and 2013, African countries accounted for five of the 10 highest unemployment rates in the world. As of 2011, Zimbabwe had an unemployment rate of 70 percent, the fourth highest in the world. Not coincidentally, Zimbabwe has also
endured a high level of unrest and political upheaval in recent years.
With unrest come crime and corruption, which are endemic to Africa’s poorer countries but which affect even the most developed countries on the continent. Still recovering from generations of apartheid, and the violence used to enforce it, South Africa endures high crime rates. It is something ingrained in the society, said Maritz, and only the passage of time, with future generations brought up in an environment of peace, will quell the country’s crime rates.
With all the potential pitfalls and areas of caution that await a business investor in Africa, why would anyone even look at African nations for expansion? It’s because the potential rewards are tremendous.
A FERTILE LAND Africa is known for its vast supply of natural resources. The continent is rich with oil, gas and other energy sources. It’s well known for its gemstone mines, particularly diamonds. It has some of the most lush, dense tropical rain forests on Earth, which are home to thousands of species of flora and fauna not found anywhere else.
But Africa has another vast resource — its people. Thiru Govender, a South African expat and now a Charlotte, N.C.-based partner with accounting firm Elliott Davis, said governments across the continent are enthusiastically supporting international efforts to promote business, and combined with an unemployment rate that is, collectively, one of the world’s highest, Africa has vast opportunities for workforce development, particularly in the area of unskilled or minimally skilled labor.
Employment opportunities for members of the unskilled and lower-income groups of African society are turning these groups into consumers of previously inaccessible and unaffordable goods. For example, Govender said, cell phones represent one of the exploding markets among lower-income tiers. People who may not have enough to eat on a day-to-day basis still covet cell phones because they’re a modern convenience and something of a status symbol.
Further up the spending ladder, luxury automobiles represent another exploding market. South Africa — the African nation widely regarded as the most “first world” of all nations on the continent — has the highest per-capita population of luxury car owners of any country in the world.
The middle class — in the Western sense of the term — is a very small segment in the African population, which is mostly either very rich or very poor. But the African middle class is growing, and as more people benefit from foreign investment in the form of job creation and access to previously unattainable luxury goods, the middle class
BUSINESS IN AFRICA
has the potential to boom in much the same way it did in the U.S. and Europe during the early and mid-20th century. The potential for consumer spending in Africa is incredible, and companies based in Africa and elsewhere are only starting to nibble at the edges of what it could become.
THE PLAYING FIELD Even in the age of on-demand information, Africa remains mostly a mystery to the Western world. Ask a group of Westerners to describe what they envision when they think of Africa, and you might get a different answer from each person.
Africa can’t be defined by one set of traits, and its people can’t be defined by a common set of characteristics. That’s critical to remember when considering how and where to invest in the African business sphere.
From the Mediterranean coast in the north to the Cape of Good Hope in the south, from the Atlantic shore on the west to the Red Sea, Indian Ocean and Madagascar on the east, the continent varies tremendously. Here are some items to consider.
Climate: Africa is virtually bisected by the equator, which means the continent is almost entirely free of winter weather such as ice and snow storms, with the exception of high mountain elevations. What Africa does contain is the world’s largest desert — the Sahara — which engulfs most of the continent’s northernmost third — along with thick tropical rain forests in the continent’s middle third and savanna grasslands throughout much of the southernmost portions of the continent.
Tropical storms make landfall on the African coastline less frequently than in other parts of the world, but when they do, they can be destructive to local infrastructure. Cyclone Haruna struck the coast of Madagascar in February 2013, killing 26. Cyclone Hellen struck the Mozambique Channel in March 2014 as a Category 4 storm — one of the strongest on record to hit the channel — causing extensive flooding in Mozambique and killing at least eight.
Madagascar and Mozambique are among the nations with coastline that faces the prevailing wind — the African Easterly Jet — and are susceptible to major tropical cyclones. The west coast of Africa, facing the Atlantic Ocean, is less susceptible to tropical storms because the prevailing wind carries weather systems away from the coast. But those same prevailing winds can also create destructive wet-season monsoons capable of damaging infrastructure across wide areas.
The oil-rich Sahara provides its own set of climate- related challenges, with intense sandstorms and some of
the hottest mean temperatures on Earth. When starting or developing a business in an African
nation, or investing in an existing business, it is critical to consider how well the business is designed to cope with the environmental hazards it could encounter. The design of the infrastructure, such as the integrity of paved roads and the ability of a shipping port to withstand wind, rain and flooding, are key factors to consider. Along with that, consider the preparedness of local authorities to respond to a natural disaster. The preparedness of the regional or national government could make a major difference in whether businesses are incapacitated for days, weeks or months, and whether the local business community is able to recover at all.
Customs: Local and regional customs can have a profound impact on how business is conducted. The sum total of what is acceptable and not acceptable, tolerated and not tolerated, during business dealings has been shaped by a variety of factors, including indigenous cultures, the European influence of African colonialism in the 19th and 20th centuries and the resulting racial conflict that affected the continent — South Africa in particular — up until the 1990s.
On an introductory level, a basic rule of African business is that it is done in person. Although technology is becoming ever more prevalent in many corners of the continent, the acceptance of technology as a pathway to driving business is still lagging behind. Many African businesspeople still prefer deals be done in person, and an in-person introduction and a handshake still mean much more than a video conference and a document sent in an email attachment.
It’s popular in Western business to say there is no substitute for being there. In African business — particularly in South African business — it’s a must. Business doesn’t get done unless you’re in the same room. To try to make a deal happen any other way could be viewed as disrespectful.
Unions: Another important factor to consider is the role of unions in African business. Much like in the Western world, unions are a powerful force in shaping the African business landscape. But in Africa, where labor laws are ingrained in the culture, unions hold even more sway in determining how business gets done.
A failure to understand how unions and labor laws are ingrained into the culture of many African nations can have disastrous consequences for business owners and investors. Govender says that in South African plants and factories, manual laborers will, on most occasions, readily
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follow the directions of their union leaders, no questions asked. If the union leaders order a strike, the workers will strike — and strikes can often last for weeks or months.
Unions also hold a great deal of sway over how day- to-day business is conducted. Unionized employees, for example, are often not held to the same accountability standards as in Western countries. Repeatedly calling in sick might serve as grounds for termination in the U.S. and Europe, but that is often not the case in Africa.
Most of the South African labor force is unionized, and the unions’ ability to manipulate how and when business gets done is tolerated without much corporate or political opposition. That fact is the essential difference between how business is conducted in South Africa, and how it might be conducted in the U.S. or U.K., where there are more checks and balances in place between unions and companies.
Politics: With 54 sovereign states, outside business investors can expect to find a wide range of political conditions throughout Africa, exerting many different forces on the business climate.
The continent’s political atmosphere includes developed, stable governments in countries such as South Africa, Nigeria and Kenya, economies still recovering from the ravages of civil war in countries such as Angola and Mozambique, and countries still caught in the transformational turmoil of the Arab Spring, such as Egypt, Libya and Tunisia.
Governmental stability and political strife have a profound impact on a country’s ability to support and sustain a thriving business community, which is why it is important for any business owner or investor to learn about the country — and even more specifically, the region — to be targeted for investment.
Every region will almost certainly have political positives and negatives. The stability and advanced infrastructure of South Africa is somewhat offset by a culture in which crime and violence are still endemic. On the other hand, unstable countries such as Egypt, and recovering, developing countries such as Mozambique and Ethiopia, are quietly developing a manufacturing base due to the migration of manufacturing from Asia and the readily available supply of unskilled labor. This is why it’s critical for any outside businessperson to learn about the region of interest on a granular level and not make sweeping judgments based on news reports.
In most cases — though not always — the most developed countries in Africa provide the greatest benefit for outside investors.
CORRUPTION Many African countries continue to struggle with the ability to enforce laws, which includes the ability to enforce ethical business practices. As a result, corruption is still a widespread concern throughout most of the continent.
According to the 2013 corruption perceptions index compiled by Transparency International, all but a small portion of the continent’s countries rated a score of 40 or below, placing them on the scale’s bottom third as it relates to clean business practices.
A total of 177 countries around the world were ranked according to ethical business practices. Libya ranked 172, South Sudan 173, Sudan 174 and Somalia 175, giving Africa the largest share of the bottom 10. Kenya (136), Nigeria (144) and Tanzania (111) are among the other notable countries that ranked on the bottom half of the list.
The most ethical African countries included Namibia (57), Lesotho (55), Ghana (63), South Africa (72) and Senegal (77). By contrast, notable Western countries included Canada (9), Germany (12), the U.S. (19), France (22) and the U.K. (14).
When doing business in Africa, the burden of preventing corruption falls on the shoulders of the businesses themselves. According to both Maritz and Govender, before a business sets foot in Africa, it must have a well- defined set of corporate governance guidelines that make clear what is considered ethical and what is considered unethical, and then communicate those guidelines to those who will be conducting business on the company’s behalf.
Bribery is one of the most common forms of corruption throughout the continent, and a business that is unwilling to engage in bribery may find it difficult to make deals in some circles where bribery is an accepted part of the cost of doing business. But maintaining ethical practices will benefit a business in the end, as it will often get government officials — who are extremely interested in job creation and improving the image of their countries — on the business’ side.
Ultimately, if a business is creating jobs and solidifying its position in the marketplace through further investments, it will gain the respect and backing of local, regional and national governments, which is the most direct and effective way to overcome the endemic bribery and corruption issues that still plague wide swaths of Africa.
THE COUNTRIES Once a strong overarching view of what one can expect when exploring the African business landscape has been developed, the next step is to gain an in-depth
BUSINESS IN AFRICA
understanding of individual countries, with an eye toward finding the nation with the most ideal combination of all business-affecting factors. These include political climate, government incentives, employable population, natural resources, infrastructure and an overall upward trend in the development of the nation to suit the growth of the business in question.
The 2010 book “Emerging Africa: How 17 Countries Are Leading the Way,” by Steven Radelet, identifies 17 African nations that are steadily emerging from the poverty and instability of post-European colonialism to a new era of societal and economic development.
Not all of the book’s identified nations are equally prepared for an influx of Western investment, however. Mozambique, as referenced earlier, still struggles with political instability despite a 5.3 percent growth in annual per-capita income from 1996 to 2008. Rwanda, with a 3.7 percent growth rate in the same category over the same time span, is still picking up the pieces after being ravaged by civil war and genocide in the 1990s.
But all of the identified nations are trending upward in some key economic indicators.
Apart from South Africa, which is well documented as the most developed of African nations and the often- referenced “Gateway to Africa” for Western business, here are a selection of other nations that possess the potential to offer fertile ground for Western business investment, both now and in the future.
BOTSWANA A landlocked country bordered by Namibia, Zimbabwe and South Africa in the southernmost portion of the continent, Botswana is arguably Africa’s greatest economic success story of the past 40 years.
Since attaining independence from the U.K. in 1966, Botswana averaged a 9 percent economic growth rate until 1999 — the highest in the world over that span. According to “Emerging Africa,” Botswana has averaged 4.1 percent in annual income growth per capita from 1996 to 2008, and experienced a 68 percent cumulative increase in average real income over the same span — figures that are at the top of the list in both categories among the book’s 17 emerging countries.
Botswana’s strong performance has been aided significantly by the diamond-mining industry and ecotourism, a growing industry in the region that now accounts for more than 10 percent of the country’s GDP. Although virtually no nation in Africa is regarded as a “clean” nation by corruption watchdog Transparency International, Botswana ranks among the least corrupt in
Africa. Those facts, combined with a conservative fiscal policy and foreign policy, have helped protect Botswana’s money and resources from unscrupulous business entities, making it one of the safest African nations in which to do business.
Botswana’s chief impediment to business growth is its climate. Much of the country lies within the Kalahari Desert. The Kalahari isn’t a desert in the sense of the Sahara — it isn’t completely arid and baked by triple-digit Fahrenheit temperatures year-round. Large portions are covered by grasslands that can provide good livestock grazing areas during wet seasons — a reason why agriculture is another economic driver in Botswana.
But the lack of year-round precipitation, combined with overgrazing, has made the landscape susceptible to soil erosion and dust storms during periods of drought, much like the American Great Plains during the Dust Bowl of the 1930s.
The lack of year-round rainfall contributes to a general lack of water sources. Deep-well drilling has helped ease the water burden somewhat, but collected rainwater is still a major water source — and even then, rainwater can only sustain about 5 percent of the country’s agriculture.
GHANA A small country of about 92,000 square miles, Ghana occupies a section of south-facing Atlantic coastline between Cote D’Ivoire and Togo. Its status as a stable and relatively prosperous nation has made it attractive to Western investors for decades.
Ghana’s growth has been buoyed by a stable government, particularly over the past 20 years. Its current constitution has been in place only since 1992, but it was the first African nation to declare independence from European colonization, breaking away from the U.K. in 1957.
Ghana’s political stability has much to do with its wealth of natural resources and its ability to manage them to the country’s financial benefit. The thriving agricultural and mineral-mining sectors have turned Ghana into a key exporter. The country is becoming a rising force in oil exportation — an ascent that has only picked up speed since the 2007 discovery of an oil field that contains an estimated 3 billion barrels of crude oil. According to the site ghanaoilwatch.org, the country produced 120,000 barrels a day in 2010, and that number could increase to 2.5 million barrels per day by the end of 2014.
Bauxite, gold and phosphates are the primary minerals mined and exported from Ghana, and cocoa is one of the country’s main agricultural exports.
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Ghana is also one of the most technologically advanced nations in Africa, especially in its telecommunications infrastructure. Approximately 80 percent of the population has either mobile or fixed-line phone service. Ghana was also one of the first Internet-connected countries in Africa and now has more than 160 Internet service providers licensed to do business within the country.
As is the case throughout the continent, Ghana deals with issues connected to corruption and transparency in its business practices. Transparency International’s 2013 Corruption Perceptions Index gave Ghana a score of 46 out of 100, ranking the country 63rd out of 177 countries — better than most of Africa, but still low by developed-world standards.
NAMIBIA Bordering the Atlantic Ocean, Namibia is a country in southwestern Africa bordered on the south by South Africa, the east by Botswana and the north by Angola and Zambia. It was one of the last areas of Africa to fall under European rule, when Germany claimed it as a colony in 1884, and called it German South-West Africa.
South Africa overtook the colony in 1915 after defeating the occupying German forces as part of the South-West Africa Campaign during World War I. Following the war, it was declared a League of Nations mandate territory, under South African rule. It remained under South African administration until 1966, when the United Nations terminated the mandate, beginning a 23-year civil war that ultimately led to the formation of the Republic of Namibia in 1990.
Today, Namibia retains close economic and cultural ties to South Africa, allowing it to develop one of the most advanced and stable economies in Africa. With a strong banking sector, an agricultural sector that accounts for 13 percent of the country’s GNP and a mining sector that accounts for 10 percent of the country’s GNP, Namibia is widely regarded as one of the strongest of the emerging African markets. In 2013, Bloomberg named Namibia the top emerging economy on the continent. “Emerging Africa” notes that Namibia had a 2.4 percent rise in annual income growth per capita from 1996 to 2008.
Namibia’s chief concerns center on unemployment, which ran at a rate of 27.4 percent in 2012, and a high cost of living, due to the fact that many staples, such as cereal and grains, are largely imported. The Namibian government places a priority on employment of Namibian citizens over employment of foreigners, which is something any business in Namibia needs to consider when deciding how to set up operations and build a work force.
MALI Much of the western Africa country of Mali is located in the Sahara, but the majority of the country’s population — which includes the capital and largest city of Bamako — lives in the southern portion of the country, which also contains most of Mali’s arable soil, fed by the Niger and Senegal rivers.
The one-time French colony has a population that relies heavily on subsistence farming. It’s a major reason why, despite recent economic growth, Mali is one of the poorest nations in the world, heavily reliant on foreign aid.
However, Mali is rich in natural resources, particularly metals and minerals, which makes mining an important and growing part of the Malian economy and makes the nation one of particular interest to outside investors.
The Malian mining industry is particularly dependent on gold, which accounted for about 80 percent of the country’s mining activity in the first decade of the 21st century. As of the end of the 1990s, Mali was the third- largest African exporter of gold, after South Africa and Ghana, and overall, gold was the country’s third-largest export after cotton and livestock.
However, the gold-mining industry in Mali has endured criticism. The industry has displaced villages and primarily employs foreigners, meaning the population of Mali sees little direct benefit from the mining activity. The industry is also poorly regulated, particularly in smaller mining operations, in which child labor is frequently used.
As a poor nation, Mali still lacks many oversight and regulatory factors, but the mining industry alone — which also includes limestone, salt and phosphate — possesses the potential to turn Mali into an industrial nerve center in Africa.
TANZANIA A former British colony located in eastern Africa along the Indian Ocean, Tanzania’s economy is heavily dependent on agriculture and mining, as are many nations in Africa. What sets Tanzania apart, however, is that it has one of the fastest-growing industrial sectors in Africa, which now accounts for 22 percent of the country’s GDP.
Tanzania’s geographic position on the Indian Ocean makes it an ideal area for processing raw goods prior to shipping — and Tanzania is capable of a high level of shipping volume. The country’s largest city, Dar es Salaam, has the fourth-largest port on the continent’s Indian Ocean coastline. As such, the backbone of Tanzania’s industrial sector is built on the processing of agricultural products such as beef, tobacco, sugar, salt and metals.
However, the country’s industrial sector is burdened
by ongoing power shortages due to droughts that have compromised the power-generating ability of the country’s hydroelectric dams. The problem is in the early stages of being remedied, as the privatization of the country’s electric supply 2003 has begun the process of diversification of electricity sources.
OTHER NATIONS Other nations identified in “Emerging Africa” include some of Africa’s island nations, such as Cape Verde, Mauritius, Seychelles, and Sao Tome and Principe, all of which experienced annual income growth per capita of between 2.5 and 5 percent from 1996 to 2008.
Beyond the 17 countries identified as emerging economies, a number of other African countries are on the threshold of gaining status as an emerging country, including Liberia, Kenya, Senegal and Sierra Leone, all of which have shown many of the same economic growth characteristics, but over a shorter time span. Liberia, for example has shown a 3.1 percent growth in annual per capita income from 2005 to 2008, after the nation was ravaged by a pair of civil wars between 1996 and 2003.
THINGS TO REMEMBER Business is all about risk, and determining one’s appetite for risk, and doing business in Africa is no exception. The continent provides business owners and investors with a wealth of opportunities on many fronts. Its abundance of resources makes it a fertile land for agriculture and manufacturing. It has a massive potential workforce that, if employed, could spur incredible economic growth.
But Africa is also dealing with many of the same problems that have habitually plagued the developing world. The infrastructure, although built to developed- world standards in some areas such as South Africa, is largely undeveloped and incapable of supporting large-scale business growth without substantial outside investment. The population in most countries still deals with widespread poverty. Corruption and bribery are still accepted parts of how business is conducted throughout the continent, leaving it up to the business to determine and enforce its own moral code — and, in some corners, live with the consequences of lost business should it decide not to engage in corrupt practices.
But if a business, or an individual investor, can position itself to successfully navigate the problems that continue to plague the African continent, the rewards can be great. Those who invest in Africa are investing in one of the world’s most potential-laden economies, and at some point, that potential will become reality.
DOING BUSINESS IN AFRICA: A FIRSTHAND ACCOUNT Bas Vloet is co-founder and CEO of Florius Flowers, a company that grows floral plants in Kenya and Ethiopia and ships them to destinations around the world. Below, Vloet offers an insider’s perspective on what it’s like to do business in Africa.
What are some of the benefits of doing business in Africa? The production costs are low, as far as land, labor and energy. More important, for our industry in particular, the natural climate is very favorable. We can grow flowers year-round without the need for greenhouses. What are some of the problems you have encountered in doing business in Africa, and how have you overcome those problems? The biggest problem is bureaucracy. There are many time- consuming processes that are involved in imports, exports, foreign currency repatriation, tax payments, land acquisition and application of permits. How is the relationship between government and business in Africa, in your experience? It can best be described as a love-hate relationship. The government is trying hard to create favorable conditions for foreign investors. These include duty-free privileges and tax holidays. On the other hand, the government is slow in solving day-to-day problems. What advice would you give to a business owner who is considering entering the African marketplace? Have patience, because everything needs more time than you’re used to.
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SELECTED AFRICAN COUNTRIES AT A GLANCE (GDPs listed by purchasing power parity)
Algeria Capital: Algiers Population: 38.7 million GDP: $302 billion Corporate tax rate: 19 percent
Botswana Capital: Gaborone Population: 2.1 million GDP: $36 billion Corporate tax rate: 15 percent
Egypt Capital: Cairo Population: 86 million GDP: $275 billion Corporate tax rate: 20 percent
Kenya Capital: Nairobi Population: 44 million GDP: 77 billion Corporate tax rate: 30 to 37.5 percent
Nigeria Capital: Abuja Population: 174.5 million GDP: $478 billion Corporate tax rate: 30 percent
Senegal Capital: Dakar Population: 13.5 million GDP: $26 billion Corporate tax rate: 25 percent
South Africa Capital: Pretoria (executive), Cape Town (legislative) Population: 53 million GDP: $623 billion Corporate tax rate: 28 percent
Tanzania Capital: Dodoma Population: 45 million GDP: $74 billion Corporate tax rate: 30 percent
SUGGESTED READING
“Emerging Africa: How 17 Countries are Leading the Way” By Steven Radelet Brookings Institution Press, 2010
“African Economic Development” By Emanuel Nnadozie Emerald Group Publishing, 2003
“A Guide to African Political and Economic Development” Edited by Guy Arnold Routledge, 2001
BUSINESS IN AFRICA
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The 21 scariest data breaches of 2018
Paige Leskin Dec 30, 2018, 10:42 AM
Facebook CEO Mark Zuckerberg. Justin Sullivan/Getty Images
Data breaches in 2018 compromised the personal information of
millions of people around the world.
Some of the biggest victims in 2018 include T-Mobile, Quora, Google,
and Orbitz. Facebook dealt with a slew of major breaches and
incidents that affected more than 100 million users of the popular
social network.
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It seems like every week, a new company has to notify its customers that their
data may have been compromised, and personal information may have been
affected.
Data breaches can happen for a variety of reasons. Some companies are
hacked. Data can be mishandled or sold to third parties. Holes in a website's
security system can leave information unprotected.
One of the latest victims was Marriott hotels, which recently revealed that
hackers had accessed the information of an estimated 500 million customers.
Some of the biggest victims in 2018 include T-Mobile, Quora, Google, and
Orbitz. Facebook dealt with a slew of major breaches and incidents that
affected more than 100 million users of the popular social network.
Here are 21 of the biggest data breaches that companies faced this
year.
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Here are the biggest data breaches that were revealed this year,
ranked by the number of users affected:
21. British Airways — 380,000
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Jack Taylor / Getty
What was affected: Card payments
When it happened: August 21, 2018 — September 5, 2018
How it happened: A "criminal" hack affecting bookings made on the
airline's website and app.
Source: Business Insider
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20. Orbitz — 880,000
Orbitz
What was affected: Payment card information and personal data such as
billing addresses, phone numbers, and emails.
When it happened: January 1, 2016 — December 22, 2017
How it happened: Hackers accessed travel bookings in the website's system.
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Source: Reuters
19. SingHealth — 1.5 million
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A street in Singapore. Jirka Matousek/Flickr
What was affected: Names and addresses in the Singapore government's
health database, and some patients' history of dispensed medicines.
Information on the prime minister of Singapore was specifically targeted.
When it happened: May 1, 2015 — July 4, 2018
How it happened: Hackers orchestrated a "deliberate, targeted, and well-
planned" attack, according to a statement.
Source: BBC
18. T-Mobile — about 2 million
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Adam Berry/Getty Images
What was affected: Encrypted passwords and personal data, including
account numbers, billing information, and email addresses.
When it happened: August 20, 2018
How it happened: An "international group" of hackers accessed T-Mobile
servers through an API.
Source: Motherboard
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17. myPersonality — 4 million
Ime Archibong, a Facebook executive who wrote the blog post announcing the issues with
myPersonality. Getty
What was affected: Personal data via Facebook customers who used the
myPersonality app.
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When it happened: The app was "mostly active before 2012," but was
banned from Facebook this year in April.
How it happened: The app mishandled Facebook user data by sharing
"information with researchers as well as companies with only limited
protections in place."
Source: Business Insider
16. Saks and Lord & Taylor — 5 million
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Northfoto/Shutterstock
What was affected: Payment card numbers
When it happened: Details were never shared.
How it happened: "New York-based security firm Gemini Advisory LLC
says that a hacking group called JokerStash announced last week that it had
put up for sale more than 5 million stolen credit and debit cards, and that the
compromised records came from Saks and Lord & Taylor customers."
Source: Associated Press
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15. SheIn.com — 6.42 million
SheIn.com
What was affected: Email addresses and encrypted passwords for
customers' online store accounts.
When it happened: Sometime in June 2018
How it happened: Hackers carried out "a sophisticated criminal cyberattack
on its computer network."
Source: ZDNet
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14. Cathay Pacific Airways — 9.4 million
Wikipedia
What was affected: 860,000 passport numbers; 245,000 Hong Kong
identity card numbers; 403 expired credit card numbers; and 27 credit card
numbers without the card verification value (CVV).
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When it happened: Activity was discovered in March 2018
How it happened: Passenger data was accessed "without authorization."
Source: Reuters
13. Careem — 14 million
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A Saudi woman shows the Careem app on her mobile phone in Riyadh, Saudi Arabia, January
2, 2017 Faisal Al Nasser/Reuters
What was affected: Names, email addresses, phone numbers, and trip data.
When it happened: January 14, 2018
How it happened: "Access was gained to a computer system that stored
customer and driver account information."
Source: Reuters
12. Timehop — 21 million
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iTunes
What was affected: Names, email addresses, and some phone numbers.
When it happened: December 2017 — July 2018
How it happened: "An access credential to our cloud computing
environment was compromised ... That cloud computing account had not been
protected by multifactor authentication."
Source: Business Insider
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11. Ticketfly — 27 million
Shutterstock
What was affected: Personal information including names, addresses,
email addresses, and phone numbers.
When it happened: Late May 2018
How it happened: A hacker called "IsHaKdZ" compromised the site's
webmaster and "gained access to a database titled 'backstage,' which contains
client information for all the venues, promoters, and festivals that utilize
Ticketfly’s services."
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Source: The Verge
10. Facebook — 29 million
Wachiwit/Shutterstock
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What was affected: Highly sensitive data, including locations, contact
details, relationship status, recent searches, and devices used to log in.
When it happened: July 2017 — September 2018
How it happened: "The hackers were able to exploit vulnerabilities in
Facebook's code to get their hands on 'access tokens' — essentially digital keys
that give them full access to compromised users' accounts — and then scraped
users' data."
Source: Business Insider
9. Chegg — 40 million
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pmccormi / Flickr
What was affected: Personal data including names, email addresses,
shipping addresses, and account usernames and passwords.
When it happened: April 29, 2018 — September 19, 2018
How it happened: According to Chegg's SEC filing: "An unauthorized party
gained access to a Company database that hosts user data for chegg.com and
certain of the Company's family of brands such as EasyBib."
Source: ZDNet
8. Google+ — 52.5 million
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Sean Gallup/Getty Images
What was affected: Private information on Google+ profiles, including
name, employer and job title, email address, birth date, age, and relationship
status.
When it happened: 2015 — March 2018, November 7 — November 13
How it happened: Earlier this year, Google announced it would be shutting
down Google+ after a Wall Street Journal report revealed that a software
glitch caused Google to expose the personal profile data of 500,000 Google+
users. Then again in December, Google revealed it had experienced a second
data breach that affected 52.5 million users. Google has now decided it will
shut down Google+ for good in April 2019.
Source: Wall Street Journal, Google
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7. Cambridge Analytica — 87 million
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Facebook CEO Mark Zuckerberg. Justin Sullivan/Getty Images
What was affected: Facebook profiles and data identifying users'
preferences and interests.
When it happened: 2015
How it happened: An personality prediction app called "thisisyourdigital
life," developed by a University of Cambridge professor, improperly passed on
user information to third parties that included Cambridge Analytica, a data
analytics firm that assisted President Trump's presidential campaign by
creating targeted ads using millions of people's voter data.
Only 270,000 Facebook users actually installed the app, but due to Facebook's
data sharing policies at the time, the app was able to gather data on millions of
their friends.
Source: Business Insider
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6. MyHeritage — 92 million
Getty Images/William Thomas Cain
What was affected: Email addresses and encrypted passwords of users who
have signed up for the service.
When it happened: October 26, 2017
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How it happened: "A trove of email addresses and hashed passwords were
sitting on a private server somewhere outside of the company."
Source: Business Insider
5. Quora — 100 million
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iTunes
What was affected: Account info including names, email addresses,
encrypted passwords, data from user accounts linked to Quora, and users'
public questions and answers.
When it happened: Discovered in November 2018
How it happened: A "malicious third party" accessed one of Quora's
systems.
Source: Reuters
4. MyFitnessPal — 150 million
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Shutterstock
What was affected: Usernames, email addresses, and encrypted passwords.
When it happened: February 2018
How it happened: An "unauthorized party" gained access to data from user
accounts on MyFitnessPal, an Under Armour-owned fitness app.
Source: Business Insider
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3. Exactis — 340 million
Flickr / Leonardo Rizzi
What was affected: Detailed information compiled on millions of people
and businesses including phone numbers, addresses, personal interests and
characteristics, and more.
When it happened: June 2018
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How it happened: A security expert spotted a database "with pretty much
every US citizen in it" left exposed "on a publicly accessible server," although
it's unclear whether any hackers accessed the information.
Source: WIRED
2. Marriott Starwood hotels — 500 million
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Marriott International
What was affected: Guest information including phone numbers, email
addresses, passport numbers, reservation dates, and some payment card
numbers and expiration dates.
When it happened: 2014 — September 2018
How it happened: Hackers accessed the reservation database for Marriott's
Starwood hotels, and copied and stole guest information.
Source: Business Insider
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1. Aadhar — 1.1 billion
Taj Mahal Sunrise in Agra India. Shutterstock
What was affected: Private information on India residents, including
names, their 12-digit ID numbers, and information on connected services like
bank accounts.
When it happened: It's unclear when the database was first breached, but it
was discovered in March 2018.
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How it happened: India's government ID database, which stores citizens'
identity and biometric info, experienced "a data leak on a system run by a
state-owned utility company Indane." Indane hadn't secured their API, which
is used to access the database, which gave anyone access to Aadhar
information.
Source: ZDNet
4/23/2021 The Ten Principles For Doing Business In China
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Forbes Asia
The Ten Principles For Doing Business In
ChinaZoe McKay Contributor
INSEAD KNOWLEDGE
Contributor Group
Everyone is opening shop in China because “it’s the place to be.” Before you sign the lease,
read this…
By Michael A. Witt, Professor of Asian Business & Management at INSEAD
Get your top management team to take a week off to
go to experience China. In China, take them outside
the usual experience of Audi limousines and luxury
hotels and arrange for exposure to experiences
relevant to your business - for example, do store
checks or visit private homes of average citizens. Take
the team to a fourth-tier city and to the countryside
for a more holistic picture.
2. Beware of industrial dynamics
A common cause of losses in China is that foreign
firms are so focused on market growth rates that they
neglect the basics of competitive analysis. In the beer industry, for instance, more than 20
foreign brewers entered in the mid-1990s, each of them planning to capture on average 15
percent of their market segment. In a market lacking clear differentiation, they also found
themselves competing with around 600 local brewers, many of them subsidised by local
governments. Some expected these issues to disappear over time, but almost twenty years
later, the fundamental situation has changed little. Many industries in China resemble the
beer industry, with overcapacity, high levels of fragmentation, subsidised local
competition, and foreigners willing to absorb losses from their “strategic” investments.
Michael A. Witt
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3. Take your time
Many companies want to get on the ground quickly. In one case, the CEO told his head of
strategy to get China operations going within six months. Time pressure of this sort can
create problems later on. It tends to result in sloppy planning and analysis. It shifts the
attention from finding the right partner to finding any partner, regardless of partner fit.
Moreover, it weakens your hand in negotiations. Your Chinese counterpart will know how
to use your time constraints against you, and you will walk away with a worse deal.
4. Chinese society is collectivist
Conventional wisdom and cross-cultural management
studies, such as Geert Hofstede’s seminal work,
emphasise the collectivist nature of Chinese society.
However, visitors to China often remark how
individualist they find behaviour to be. This seeming
contradiction is the result of a conflation of collectivism
with widespread cooperation. Chinese society is collectivist in that individuals identify with
an “in-group” consisting of family, clan, and friends. Within this, cooperation is the norm.
Outside it, zero-sum competition is common.
As a result, self-organised, as opposed to hierarchically imposed, cooperation can be
difficult to achieve—an issue epitomised in Sun Yat-sen’s famous observation that China is
a “tray of loose sand.” In addition, zero-sum competition means that your Chinese
counterpart may not believe in win-win solutions. One can observe this, for instance, in the
tendency to re-open negotiations just as everything seems settled, especially if one seemed
too ready to agree with the negotiated terms; one’s counterpart may interpret this as an
indication that s/he has not bargained hard enough.
5. Mistrust and opportunism are endemic
There are two opposite ways of extending trust. One is to trust until given reason not to;
the other is not to trust until there is enough evidence of trustworthiness. China takes the
latter approach. The zero-sum competition already noted creates an incentive to take
advantage of people outside the in-group. China still lacks reliable and impartial
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mechanisms to check such behavior, such as a well-functioning legal system. This opens
the door for opportunistic behaviour.
As a consequence, the Chinese tend not to trust people outside their in-group. Take your
cue from them. The absence of a reliable system to ensure fair outcomes means that you
can encounter difficulty in enforcing contracts to the letter, and you should take suitable
countermeasures, such as cash on delivery.
6. Trust is interpersonal and takes time to build
A common safeguard against opportunism is to build relationships of trust with persons
who matter for your business. Unlike in the West, the creation of personal friendship is a
prerequisite of doing business. Building friendship takes time, which is another reason to
avoid rushing into things. Besides numerous invitations to sports and other events, one key
element in building trust is long dinners during which everything but business is discussed.
In these, alcohol plays an important role. Learn to drink intelligently. Seasoned negotiators
dispose of the alcohol into their water glasses or into the wet towels most good restaurants
make available.
7. Notions of “out-of-bounds” behaviour do not necessarily match.
Chinese negotiators occasionally push beyond what their Western counterparts consider
appropriate bounds. For example, the representatives of a large Western firm were
negotiating the distribution rights for one of their products. Their Chinese counterparts
closed their initial pitch by threatening to use their political connections to prevent
distribution of their products if they did not receive the rights. In another case, the Chinese
party got their Western guests drunk to prevent them from being effective in negotiations
the following morning (which, on the Chinese side, involved a completely different set of
people).
Be alert and prepare suitable countermeasures. For instance, negotiation teams should
learn how to drink without getting drunk, include women (as they are not expected to get
drunk), and know that the heavy drinking can be delegated to one of the team members.
8. Chinese society is hierarchical
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Company decisions are typically reached in a top-down manner, with only the very top of
the pyramid involved in decision-making. Mistrust puts limits on delegation, and
supervisory control at each level is high. Mid-level managers typically have little power to
make decisions of consequence, and their main role is to pass on orders from the top and
ensure execution.
Be aware in negotiations that the decision is ultimately made at the very top. If your
counterpart is not part of that group, s/he is typically not authorised to make major
decisions but must report back to the top for instructions. Also make sure your
representative matches the status of his or her counterpart. Important dimensions of
status are formal position, age, and education. Once you run your business in China, be
mindful of the limitations to delegation.
9. Government in China is decentralised and in important respects, bottom- up
Conventional wisdom holds that China’s governmental structure is highly centralised, with
all key decisions made in Beijing. In reality, Beijing directs little of what happens
throughout the country, especially in far-flung regions. To be sure, if Beijing truly wants
something to happen, it will. At the same time, Beijing recognises that decentralisation of
power plays an important role in taking economic reforms forward. By running things in a
slightly different way, the thousands of localities throughout China constitute a large
population of local experiments collecting information about what works. From these
experiments, the central government can select suitable future policies.
Expect conditions to vary by location. In addition, to the extent you need to negotiate with
government, it is crucial to involve the local government. Even if you have agreement from
Beijing, if the local government wants to thwart you, it will.
10. Be conscious of the large picture
Most of the growth in China since 1978 has come from private small and medium-sized
enterprises. Today, they make up about 65 percent of Chinese GDP. Moving forward,
policy-makers are keen for China to produce its own large multi-national enterprises, and
government is re-asserting its role as the key orchestrator of these initiatives. A group of
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about 100 state-owned enterprises - those under the tutelage of the State-owned Assets
Supervision and Administration Commission - is being groomed toward that end.
Government ownership - or at least partial control - and support also appear in many of
the new industries being put together under apparently local and private initiative.
You should know whether any of these targeted firms are active in your industry. If so,
fierce competitive battles seem likely for the future, and easy access to state money for
these firms means the playing field will not be level. Government may be on your side as
long as your technology is needed. Keep this in mind when selecting a partner for
cooperation or considering market entry.
uncaptioned
Zoe McKay
Global Strategy
Navigating the Complexities of Doing Business in Russia by Mark McNamee
May 29, 2017
Summary.
Jennifer Maravillas for HBR
Relations between the West and Russia have become increasingly
hostile, yet Russia remains an important part of most Western multinationals’
emerging markets portfolios. These companies are not immune from geopolitical
tensions, which can impact their...
From the conflict in Ukraine, to Russian meddling in U.S. and
European elections, to management of the Syrian War, it’s clear that
relations between the West and Russia have become increasingly
more
hostile. Yet Russia remains an important part of most Western
multinationals’ emerging markets portfolios. These companies are not
immune from geopolitical tensions, which can impact their
businesses in both direct and indirect ways.
While relatively rare, there have been a few cases of the Russian
government directly interfering in Western businesses’ affairs. For
example, in 2014, at the onset of the sharp deterioration in U.S.-
Russian relations over the conflict in Ukraine, the Kremlin sued
McDonald’s for allegedly violating the government’s safety codes, and
even temporarily closed four stores over alleged “health violations.”
Similarly, hours after the U.S. and EU increased sanctions on Russia
that same year, Russian authorities raided the Russian headquarters
of Ikea, which has long struggled with interference from the Russian
government.
Some of my company’s clients (executives at large American and
European multinationals) operating in Russia have also noticed
increasing regulations over the past few years: they have experienced
more unplanned inspections of facilities, abruptly altered labelling
requirements, threats of regulatory changes from the regional and
federal government, and heightened pressure to hire and
manufacture locally. They have also reported receiving threats of fines
and increased delays and payments while in customs at the Russian
border. Interestingly, all these intrusions into business operations
typically do not come from the Kremlin but from local officials who
seem eager to gain the Kremlin’s favor amid instances of elevated
international tensions.
Russia’s recent economic downturn, precipitated by the collapse in
energy prices, has also contributed to more conservative state policies
at the expense of economic reforms – which undermines the business
climate and long-term growth prospects. Government revenues and
private sector opportunities have deteriorated over the past few years
and will be slow to recover.
This environment is altering how multinational firms operate in the
country and market their products. Our clients in the area have
already noticed several changes that make it harder and costlier to do
business there.
Induced by rising economic pressures – and reflective of trends in
other emerging markets – the Russian government has been
pressured to support local businesses, often to the detriment of
foreign investors. For instance, a 2014 law mandates that the
government must show preference for local manufacturers over
foreign firms when granting public tenders, without regard to
differences in quality. In response to the West’s decision to
implement sanctions on Russia, the government decided to impose
tit-for-tat sanctions on various Western agricultural imports and has
adopted a policy of import substitution, which means that it imports
fewer food and dairy products, while subsidizing more domestically
produced ones. This has been beneficial for some Russian industries
but has reduced market access for foreign firms.
At the same time, multinationals are feeling pressured by the state to
demonstrate their commitment to the market by further localizing
their supply chain, labor, brand, and production. This poses
challenges when there are no (or no high quality) local suppliers,
which is often the case in certain sectors, such as healthcare.
Meanwhile, the government’s fiscal policies are reducing domestic
demand. For instance, the country’s excessive reliance on commodity
exports, combined with a lack of growth-supporting policies (e.g. a
fiscal stimulus, support for non-commodity sectors, improved rule of
law), have created problems for raising sufficient government
revenues. As a result, Moscow has introduced various excise taxes
and is contemplating a hike in the VAT rate (from 18% to as much as
24%) and higher income taxes (to either raise the flat rate from 13% to
up to 20%, or to create progressive scale) that will hurt the spending
power of consumers.
In recent years, the government has also been making funding cuts on
healthcare, education, state industries, and pensions. In many cases,
people have to bear more costs directly – for example to pay for more
of their own healthcare – which also limits their spending power.
We also hear from clients that more government projects are being
eliminated, reducing opportunities for companies hoping to sell to the
government. Additionally, because Russian agencies are facing
reduced federal funding, they are becoming incentivized to enact
regulations or ad hoc policies to gain more revenue from foreign
firms, either extracting payment at customs or imposing fines and
taxes on their local operations.
Furthermore, economic decision-making has become increasingly
politicized as the government has prioritized political goals (i.e. the
re-election of Putin in 2018) and foreign policy over domestic
reforms, such as fighting corruption, that could lead to an improved
business environment. This will likely continue to make business
planning even more difficult.
So, what can businesses do?
Most firms we work with feel a sense of powerlessness to handle the
changing conditions in Russia. But based on the experience and
strategies of our clients, there are ways that they can manage the
uncertainty. Despite the tumultuous the political and economic
climate, Russia still remains very attractive compared to other
emerging markets, like Brazil or Nigeria, over the long term, because
of its large population, public and private spending capacity, and
strong resource base.
First, companies should pinpoint exactly what elements of their
operations are most vulnerable to abrupt changes in foreign policy
relations. Then, firms need to think through the types of political and
macroeconomic events (e.g. further sanctions, oil price drop, protests,
etc.) that could influence the economy (e.g. ruble volatility) and policy
(e.g. import bans), and also affect their operations, local partners, and
customers. These can be laid out in scenario plans with specific
mitigation actions assigned to help businesses react quickly if
necessary.
Since 2014, we have guided numerous consumer goods firms through
this process to mitigate the effects of the extreme depreciation of the
ruble on their businesses. The weak ruble has driven up inflation
notably, which in turn has forced the central bank to raise interest
rates, driving up the cost of credit. As a result, our clients’
distributors have had difficulty in obtaining loans and therefore have
had less financial capacity to buy products from our clients to
distribute to stores around the country. To preempt any operational
disruptions, some clients have chosen to provide the financing to
distributors themselves, so they are still able to purchase and then sell
products from our clients. For many firms, this has had a
significant positive impact on their ability to retain market share and
brand awareness while maintaining profitability.
Second, firms should strengthen their government affairs teams to
stay ahead of any regulatory changes. Multinationals can even team
up with competitors (both foreign and domestic) and industry
associations to lobby the government on policy decisions affecting
their sector and customers.
Third, companies should consider localizing more of their operations.
The more local you are, the better your chances at obtaining
government tenders and the more leverage you have to push back
against potentially harmful government regulation. With greater tax
contributions, local labor, and sourcing from local suppliers, firms
can more easily show how government interference negatively
affects Russian businesses and workers.
Despite the turmoil in Russian-Western relations, having a plan to
respond quickly can help multinationals weather, manage, or even
capitalize on political developments.
MM
Mark McNamee is Practice Leader of Europe at
Frontier Strategy Group (FSG), the leading
information and advisory services partner to
senior executives in global markets. Download his
recent Brexit Scenario Planning Executive
Worksheet.
4/23/2021 16 Challenges of Doing Business in Africa... Oh Man! - My African Plan
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16 Challenges Of Doing Business In Africa… Oh Man!
CHUKI OBIYO (HTTPS://WWW.MYAFRICANPLAN.COM/AUTHOR/CHUKI-CHARLES-O/)
“Difficulties mastered are opportunities won.” – Winston Churchill
First, the good news: Economic growth in sub-Saharan Africa is still on track to outpace the global average over the next
three years, according to the World Bank, with an increase in investment likely to boost the continent’s growth to more
than 5%. As a bit of context, Africa maintained an average growth rate of 4% in 2013 compared to 3% for the global
economy which underscores the continent’s resilience to global and regional headwinds.
“You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas
come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn
thing.” – Warren Buffett
The not-so good news is that there are challenges to doing business in Africa. This post explores some of those
challenges.
“I run on the road, long before I dance under the lights.” – Muhammad Ali
1. Starting the Business
Starting a business in Africa is not expensive in nominal terms. The total cost of the startup procedures and the
minimum capital requirements add up to approximately US$2,350 according 2014 figures from the World Bank. This is
less than startup costs in East Asia or Eastern Europe and Central Asia, where starting a business runs around
US$3,700.20. However, if we take into account the average income per capita, then establishing a company in Africa
becomes quite expensive. The total cost rises to 135 percent of annual income—more than double the cost in all other
regions. For example, in South Asia and in Latin America-and-the Caribbean, it costs around US$350 and US$2,200,
respectively, to start a business.
2. Dealing with Construction Permits
S A L E S & M A R K E T I N G ( H T T P S : // W W W. M YA F R I C A N P L A N .C O M /C AT E G O R Y/S A L E S -A N D - M A R K E T I N G / )
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The cost of dealing with construction permits can be unpredictable to say the least. Good construction regulation matters
for public safety. It also matters for the health of the building sector and the economy as a whole. According to a recent
study, the construction industry accounts on average for 6.5% of GDP in OECD economies. The building sector is Europe’s
largest industrial employer, accounting for about 7% of employment. In the European Union, the United States and
Japan combined, more than 40 million people work in construction. It is estimated that for every 10 jobs directly related
to a construction project, another 8 jobs may be created in the local economy. Small domestic firms account for most of
the sector’s output and most of its jobs.
Sound regulation of construction helps protect the public from faulty building practices. Besides enhancing public safety,
well-functioning building permitting and inspection systems can also strengthen property rights and contribute to the
process of capital formation. But if procedures are too complicated or costly, builders tend to proceed without a permit.
By some estimates 60–80% of building projects in developing economies are undertaken without the proper permits and
approvals. And because the construction permitting process generally involves licensing requirements from several
different agencies, those using the process are exposed to different bureaucracies, which creates opportunities for rent
seeking.
Where informal construction is rampant, the public can suffer. Take the case of Nigeria, which lacks an approved
building code that sets the standards for construction. Many of the buildings erected do not comply with proper safety
standards. Without clear rules, enforcing even basic standards is a daunting task. Structural incidents have multiplied.
According to the Nigerian Institute of Building, 84 buildings collapsed in the past 20 years, killing more than 400 people.
Overly complicated construction rules also can increase opportunities for corruption. Analysis of World Bank Enterprise
Survey data shows that the share of firms expecting to give gifts in exchange for construction approvals is correlated
with the level of complexity and cost of Dealing with Construction Permits.
3. Having Reliable Electricity
Getting electricity is a big concern for businesses in Africa. For example, in South Africa it can take up to 226 days
involving a string of lengthy procedures. Eskom, an electricity public utility, can take 60 days to provide an estimate after
the application has been received, and 165 days to complete external connection works.
4. Registering Property
At one time, land seemed an almost inexhaustible asset in Africa, but population growth and market development have
created mounting competition for land resources, especially close to towns and cities, and in the productive, high-value
agricultural areas. Customary land management is also under pressure in many places. With such a high proportion of
land being unregistered, the risks of dispossession for the poor majority from a major land-grab are high. Historical
experience suggests that in the evolution of oral to formal, written rights, certain interests tend to lose out, typically the
poor holders of secondary rights.
5. Accessing Capital and Credit
So is the cost of capital really higher in Africa? A cross-regional analysis of finance cost (such as prime rate – what banks
charge when lending to their best customers) shows clearly that, if they are located in Africa, even the best customers
are charged a much higher interest rate. More specifically, firms in Africa pay around 7 percent more in interest rates
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than firms in East Asia and in South Asia. In Eastern Europe and Central Asia, the difference is 4 percent. In the main
competitors such as India,Thailand,Vietnam, and China, borrowing funds is up to 40–70 percent cheaper than in the
continent of Africa.
A lack of access to credit for farmers and other small businesses is widespread in most developing countries. Yet in
Africa, a majority of the population farms or resides in rural areas. Although they are central to their countries’
economic advancement, small farms and agribusinesses often face a devastating impediment to growth: a lack of access
to financing, literally and figuratively. Banks (mostly located in urban areas) are hesitant to lend to sectors they perceive
as being too risky.
One inspiring response to this challenge has taken shape in the form of USAID’s Development Credit Authority which has
established risk-sharing agreements with local banks in developing countries around the world. The agreements state
that USAID will share risk on loans made by these banks if they increase their lending to sectors that require financing
and are central to local USAID priorities. Put another way, USAID will partially reimburse banks—typically 50 percent—
for defaults on these loans. As a result, banks are able to boost their lending and expand into new sectors that they
traditionally perceived as being too risky.
6. Paying (and not paying) Taxes
On one hand, there is the issue of tax evasion; on the other hand, there’s the issue of over-taxation.
A study conducted in 2008 by Raymond Baker, estimates that developing countries like Ghana loses over $22.4 million in
tax revenue annually to tax evasion. Also, a similar study conducted by Internal Revenue Service of Ghana revealed that
about 1.5 million of 7 million income earners pay their tax which indicates that 79% of total income earners evade tax.
Corporate tax rates vary considerably across regions, but Africa appears to be the least tax-friendly location to
corporations. With a rate of approximately 30 percent, African firms seem to be among the most highly taxed firms in
the world.
Africa is the location with the highest property tax (except for South Asia—with a rate of 21 percent). Firms on the
continent have to pay, on average, 7.5 percent of the value of the property in taxes. This is much higher than the 4.7
percent and 2.7 percent firms pay in East Asia and Latin America and the Caribbean, respectively.
Africa applies one of the highest average rates at 16 percent (second only to Eastern Europe and Central Asia, with 19
percent), while VAT in all other regions amounts to 11–14 percent. A value-added tax (VAT) or also General Sales tax
(GST) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price.
7. Trading Across Borders
From June 2011 to June 2012 the Doing Business report recorded 22 reforms making it easier to trade across borders.
Among the 10 economies making the most progress, 4 are in Sub-Saharan Africa. The most common feature of trade
facilitation reforms in the past 8 years was the introduction or improvement of electronic submission and processing.
Economies in Latin America and the Caribbean have made the biggest reductions in the time to trade across borders
since 2005. Those in the Middle East and North Africa have made the biggest reductions in the documents required to
export and import.
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8. Enforcing Contracts
Trial and judgement can take over 500 days when enforcing contracts in South Africa, and the cost of an attorney and
court fees can make the procedure an expensive ordeal. The challenge here can be summed up in three words: bribery
and corruption.
9. Resolving Insolvency
In too many parts of the continent of Africa, it takes too long (two-plus years on average) to resolve insolvency with a
recovery rate of 35.4%. Insolvency occurs when an individual or a firm is unable to meet its financial obligations.
Accounting insolvency happens when total liabilities exceed total assets (negative net worth). Cash-flow
insolvency involves a lack of liquidity to pay debts as they fall due. Processing insolvency more efficiently is directly
proportional to promoting a better business environment.
10. Embracing the Different Cultures
Some interesting facts:
– Africa is a continent with a very high linguistic diversity, there are an estimated 1500-2000 African languages.
– Africa is the second most populous continent with about 1.1 billion people or 16% of the world’s population. Over 50%
of Africans are under the age of 25.
– The continent’s population will more than double to 2.3 billion people by 2050.
11. Finding Skilled Labor
Most African countries have abundant labor but finding skilled workers can be difficult. Accenture notes that where
highly educated people are available, they tend to lack practical management experience. Although employing
expatriates is an option, this is not always the best solution. Expatriate personnel might find the living conditions in
many African countries difficult. Employing foreign workers also slows down the skills transfer process and creates a
“key person dependency” issue. Language barriers in certain African countries can also be a problem for expatriates.
12. Understanding Local Consumers
Companies and investors must ensure that they understand the values, needs and behavior patterns of local consumers.
Accenture’s research reveals that low-income markets often have unreliable sources of income. Erratic cash flow, for
example, affects packaging strategy. “Some consumers tend to purchase in smaller quantities, while others prefer to
purchase in extra-large sizes when they have the money, thus avoiding costly travel to the retail outlet,” says Accenture.
13. Going to Work
The commute to and from work can literally be an epic adventure in many parts of Africa. Transportation is a perpetual
problem in Africa. Potholed roads and missing rail links get in the way of daily productivity and annual economic
growth. In 2013, intra-regional trade accounted for just 13% of total commerce, compared with 53% in emerging Asia.
Landlocked countries suffer the most. Transportation costs can make up 50-75% of the retail price of goods in Malawi,
Rwanda and Uganda. Shipping a car from China to Tanzania on the Indian Ocean coast costs $4,000, but getting it from
there to nearby Uganda can cost another $5,000.
14. Doing Your Work
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It can be challenging to first find suitable office or retail space in many African countries, especially outside of the main
urban centers. Utility and municipal services can also be unreliable. Small and large businesses are often forced to
supply their own primary or back-up infrastructure such as running water. When the right work space is located, noise
pollution can be a problem, especially inside of the main urban centers. One good development is that more countries
are setting noise standards in accordance with WHO guidelines. For example in Ethiopia, the loudest permitted noise for
residential areas is 55 decibels during the day and 45 decibels at night. For businesses, the limits are 65 decibels and 55
decibel, respectively, while 75 decibels is set for industrial areas, during the day and night. (Decibels is a scientific
measurement of intensity levels of a sound on human hearings).
15. Feeling Safe at Work
Providing a safe environment where firms can conduct their business is a key function of any state. And yet, around the
world, as much as 15 percent of firms report losses due to crime. In spite of this, a much higher share of firms (almost 60
percent) protect themselves from theft by using protection services, which adds to the cost of doing business.
Interestingly, 16 percent of African firms report losses due to crime, on par with Eastern Europe and Central Asia and
well above all other regions, but over half of the African firms employ private security services. Consequently, African
firms spend a nontrivial amount on security services—equal to over half a percentage point of sales, which is
considerably higher than East Asia or South Asia.
16. Doubting Your Business Plan
Of all the challenges discussed, this one in particular is the most difficult. Notably, it has less to do with Africa. The
great news is that working through the other 15 aforementioned challenges will put you in the best position to turn
doubts into deliverables.
Sources:
OECD Journal: Competition Law and Policy 10 (1): 156–57
Deloitte on Africa Banking regulatory environment and supervision in Africa, 2012
Allafrica: Noise Pollution Regulations
PricewaterhouseCoopers. 2005. “Economic Impact of Accelerating Permit Processes on Local Development a
World Bank Group. 2013-2014. Good Practices for Construction Regulation and Enforcement Reform: Guidel
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McKinsey director Gordon Orr goes behind the trends shaping the world’s second-largest economy to explain what companies must do to operate effectively.
China, a $10 trillion economy growing at 7 percent annually, is a never-before-seen force
reshaping our global economy. Over the past 30 years, the Chinese government has at times
opened the door wide for foreign companies to participate in its domestic economic growth. At
other times, it has kept the door firmly closed. While some global leaders, such as automotive
original-equipment manufacturers, have turned China into their single largest source of profits,
others, especially in the service sectors, have been challenged to capture a meaningful share of
revenue or profits.
This article summarizes some of the trends shaping the next phase of China’s economic growth,
which industries might benefit the most, and what could potentially go wrong. It also lays out what
I believe it takes to build a successful, large-scale, and profitable business in China today as a
foreign company.
Trends shaping growth and creating new opportunities in China
As the contribution of net exports and real estate to economic growth diminishes, the focus on
infrastructure and domestic consumption—as traditional and new sources of growth for the
economy, respectively—rises. Whether or not the current growth of the Chinese economy is
sustainable depends on the evolution of several trends.
Government policy continues to be the critical shaping force. As the ministimulus delivered in the
second quarter of 2014 demonstrates, the government still possesses levers to push GDP growth
rates up and down quite rapidly. In other ongoing government initiatives, the “marketization” of
prices for electricity, water, land, and capital is having a major impact on the behavior of business,
leading to a new focus on productivity, even within state-owned enterprises. Progress in bringing
more private capital into state-owned enterprises is slow at the national level, with few scale
A pocket guide to doing business in China Gordon Orr
O C T O B E R 2 0 1 4
2
examples, such as the $30 billion partial privatization of Sinopec’s gas stations under way. At the
city level, much more momentum is building, with local governments selling out of noncore
activities such as hotels and many manufacturing businesses. The anticorruption campaign
continues aggressively throughout state-owned enterprises, and government has itself become a
material brake on growth. Officials and executives are simply unwilling to make decisions that
could possibly be held against them later. President Xi has pursued anticorruption as a theme for
more than a decade; he is not going to back off.
The Chinese middle class—the people who are buying new homes, who today are buying 18 million
cars a year (delivering a third of the global auto industry’s profits), and who are starting to spend
more on services—are critical. Only if they remain confident in their personal economic future
will they continue to increase their spending and become a larger driver of economic growth. By
2022, more than 50 percent of urban households should be in the middle class (in current US
dollars, that means an annual household income of $20,000 to $40,000), an increase of more
than 100 million households over the coming decade.
China is now more than 50 percent urban, but 10 million to 15 million people a year will still be
moving to cities from the countryside. Rural migrants already in the cities need to be better
integrated. City governments need to make their cities more livable, more efficient, and better able
to integrate their migrants. “Smart cities” is a clichéd term, but China’s cities need everything
from more efficient mass transit to better water usage. Investment to deliver this will be massive,
indicating how the construction of China’s infrastructure is not yet complete.
Many businesses are coming under a new level of cost and margin pressure. Margins of
industrial state-owned enterprises have fallen by a third over the past four years. Often the
industries they compete in, from steel production to telecom-network equipment, are simply
growing much more slowly. By the standards of China over the past 30 years, state-owned
enterprises have become mature industries. This leads to three outcomes: initiatives on
productivity, diversification, and globalization. The latter two are more often conducted on the
basis that prior success in one industry in China will automatically lead to success in the next
industry and country.
Multinationals selling to Chinese consumers often continue to perform extremely well, using their
skills in consumer insights, branding, and pricing to differentiate from local companies that,
while large, are still developing world-class functional capabilities. Multinationals selling to
government, at the other end of the spectrum, find market access much more challenging.
China is home to some of the world’s largest, most successful, and innovative Internet-based
companies. The pace at which Chinese consumers are embracing the Internet is at the cusp of
causing major disruptions to many sectors in China. Perhaps because consumers are still new to
our traditional ways of shopping or banking (only having had modern shopping malls for a decade
in many cities), consumers are very willing to switch to buying online. When the experience of
going into a Chinese bank branch is so poor, it’s not surprising that consumers would rather
transact online.
Almost no consumer-facing business in China can succeed without an online and offline strategy
today. Mall owners are struggling to find a new economic model. Retailers are trying to bring
order to their nationwide distribution chains to exert control over the price at which their
products are sold online. Online wealth-management products have been able to gather $100
billion dollars in less than 100 days, forcing traditional banks to increase rates on much of their
deposit base. The impact on employment is just starting to appear, but many millions of sought-
after white-collar jobs will be eliminated in the next few years.
The risks
This growth is not risk free. Perhaps most critically, Chinese consumers remain relatively
unsophisticated. A loss of confidence as a result of a default in a wealth-management product, or a
decline in housing prices in a specific city, could easily become a nationwide contagion creating a
vicious cycle of consumers who withdraw from spending, thereby worsening market conditions.
One has to be over 40 to remember a recession in China.
Other risks to growth include geopolitics, especially China’s relationship with Japan, where the
government’s credibility depends on being seen to do the right thing by the Internet classes. A
final and rising risk is the underemployment of graduates. Of the seven million graduates each
year, maybe only three million find jobs that require a degree. The remainder discovers that their
aspiration of joining the middle class and owning a home and a car is possibly out of reach
permanently. They are a large, dissatisfied, and growing segment of society.
Industries with potential for faster growth in the next decade
Many of the industries with the highest growth potential in China over the next decade are in the
services sector, but not all. For example, energy and agriculture will have segments with very
rapid growth. Below is a very brief snapshot of where we see opportunities.
E-tailing. The online share of retail in China, at 8 percent in 2014, is higher than it is in the United
States and is not close to reaching saturation. Increasingly, this is conducted through mobile
devices. The payments system is in place, logistics are improving, and online providers are
3
4
trusted. Many retailers will adapt, often with far fewer physical locations. Malls will have to
become destinations for services beyond retail.
Logistics. Modernization of supply chains is a key enabler of increasing productivity in many
sectors in China today. Until recently, most goods were carried by individual truck owner–
operators. As express parcels become a $100 billion industry on the back of e-tailing,
e-commerce companies themselves are investing billions in modern warehouses and trucks.
Alibaba alone is committed to spending billions of dollars on its own logistics. Third-party
carriers such as SF Express are rapidly becoming regional leaders on the back of growth in China.
Even in agriculture, massive investment is under way in cold storage and cold carriage to reduce
waste and provide higher-quality food products to China’s middle class.
Education. Nearly two-thirds of registered kindergartens in China are privately owned. Private
universities are expanding. Traditional and online vocational learning schools are publicly listed
multibillion-dollar businesses. Niche businesses, such as preparing children to apply to US, UK,
and Australian high schools and universities, are also flourishing. The amount the Chinese are
willing to spend on tutoring and support for their children is almost unlimited. As the middle
class becomes wealthier, the increased ability to spend will drive market growth.
Healthcare. More than 1,500 new private hospitals opened in China in 2013, a number of which
are 100 percent foreign owned. The shortcomings of the mainstream public healthcare system in
China are not likely to be overcome quickly. Patients are looking for solutions where both cost and
quality are more certain, and private and foreign companies are being encouraged to deliver.
There is a related boom in supplying equipment to these new facilities.
Tourism. Available hotel rooms in China have tripled over the last decade. Four million mainland
Chinese visited South Korea in 2013; four million visited Thailand. China’s middle class expects
to take three to four weeks of vacation each year and no longer accepts visiting the overcrowded,
overexploited traditional domestic destinations. Disneyland’s opening in Shanghai in 2015 could
trigger a new wave of investment to create higher-caliber resorts.
Wealth management. China represents more than 50 percent of Asia ex-Japan growth, with high-
net-worth assets expected to reach $16 trillion by 2016. The more than one million high-net-
worth individuals in China remain generally unsophisticated as investors, seeking advice on how
to broaden their investment portfolio both onshore and offshore.
Entertainment. China is the second-largest movie box office market in the world, despite the fact
that tickets cost upward of $10 and DVDs are still available for $1. In 2013, more than 1,000 new
theaters opened, yet admissions per capita are less than one-fifth of South Korea’s.
5
IT Services. Finding the chief information officer in a Chinese company is often hard, especially
in a state-owned enterprise. Historically regarded as simply a support role for the business,
CIOs were pushed three to four levels down in the organization and attracted little talent (which
instead went to Internet start-ups). A typical Chinese company spends only 2 percent of revenue
on IT versus international benchmarks of around 4 percent. As these companies struggle to
bring technology into the core of their operations, they need massive amounts of help to do so.
The cost of good IT talent is already soaring. Most Chinese companies will be unable to solve
their technology challenges for themselves.
Clean energy. China already produces 60 percent of solar panels and wind turbines.
Increasingly, it is consuming this output domestically. For example, 11 gigawatts was installed
in large-scale solar farms in 2013, and this will grow an additional 30 percent in 2014. China is
also investing heavily to exploit its shale-gas assets and develop cleaner coal technologies.
Agriculture. China does not feed itself today—certainly not with the kind of quality and
value-added products that the middle class seeks—but it will be challenged to do so in the future.
Continual food-safety crises illustrate the challenge. For many successful technology investors,
such as Legend Holdings, agriculture is the new Internet. Chinese companies are investing
in agriculture outside of China at scale, from Chile to the Ukraine, for China. They also invest
in China, especially in value-added products—such as fruit and the production of frozen
ready meals.
Doing business effectively in China
Often in China, the fundamental barrier to success is less about identifying the opportunity and
more about the inability to execute the plan more effectively than others. One’s own
management team, the team’s relationship with corporate headquarters, the role of and
relationship with joint-venture partners—all play a key role. Joint ventures have been part of
doing business in China for more than 30 years. In many sectors, they remain the only way to
participate, often in a mandatory minority position. But there are a number of clear lessons:
Establish the right strategic positioning.
• If regulations require you to have a joint-venture partner and a minority position today,
assume it will be that way forever in the core business activities. From automotive to financial
services, the lesson is that it won’t change. If that model is not attractive today, do not invest
in the hope that it will change.
6
• Follow the evolution of government policy and align your stated intent with such policy as far
as possible. Using the words from government statements in your own statements
communicates your commitment to China.
• Be clear if you are in China for the opportunity in China, or if you are in China for the
opportunity that China creates for you in the rest of the world. This can lead to a very different
presence in China.
Many potential joint-venture partners are highly successful and very large within China, who
sees international partners as little more than a temporary accelerator of growth.
• Increasingly, China’s mind-set is that there are fewer and fewer things to learn from foreign
partners. China doesn’t need the capital, it can hire the skills, and it has the customer
relationships, insights, and, most critically, the government relationships. Even state-owned
enterprises now hold this mind-set.
• Simply stating that “this is how we do it in America/Germany/Japan” will not win friends.
What one can do today is make a long-term commitment to help a Chinese joint-venture
partner expand internationally. This may well be at a cost to the international partner’s
existing business and needs to be seen as part of the total China investment.
• Establish from the outset a clear hierarchy of who interacts with whom at the joint-venture
partner and with relevant government officials. Chinese partners like the certainty this
provides. Ensure that the committed executive shows up for board meetings and the like, and
don’t delegate.
Place a trusted senior colleague in China with a commitment to have him or her be there for
the long term.
He or she is your go-to person when things get volatile in China, someone whose viewpoint the
global management team will trust, and someone the head of your joint-venture partner will
also learn to trust. Usually, this person will be very strong in people development, with skills
almost overlapping with a head of HR. And he or she will need to be 100 percent trusted to
enforce compliance and to role model required behaviors. Typically, make this person chairman
of your Asia or China operations, as senior a title as possible.
Talent acquisition and development, at all levels, remains highly time consuming and often
frustrating for multinationals. Loyalty to an employer is often low on an individual’s priority list.
Turnover will likely be high and should be planned for.
7
• Hiring midcareer executives is increasingly common, and in almost all industries the
available talent pool is deepening. Both Chinese and global search firms have rapidly growing
businesses that serve local and international companies. It is imperative to complete thorough
background checks. Getting people to leave quietly in China often involves being silent on the
cause of separation.
• At the entry level, many graduates are available. However, many lack workplace-relevant
skills, including even those with MBA qualifications, which are more often bought than
earned and often come with a lack of self-awareness that can lead to a mentality of
entitlement. As a result, many corporations hire and then weed out aggressively during the
initial probation period. Once on board, retention of high performers often depends on a
highly variable compensation structure and dismissing underperformers.
• While you will likely have to work with “sons and daughters” of government officials as
business partners, it does not mean that you have to employ them. Outside of some companies
in financial services, few international firms do.
If protecting intellectual property (IP) in China is a concern, consider it very hard if that IP
needs to actually come to China. Some companies in the technology sector have been very
successful, even while not bringing core IP into China. Secondly, consider if the cost of loss of IP
could be contained solely in China. Again, in technology, multinationals have aggressively and
successfully sued Chinese companies outside China that have taken IP from multinationals in
China and used it outside China. China is evolving fast on IP protection, with more and more
Chinese companies suing other Chinese companies. It is becoming increasingly likely that a
Chinese partner will recognize the value of IP and be willing to protect IP developed jointly with
them. A practical means of making it harder for global IP to leak into China is to establish a
stand-alone IT architecture for China that has no access to servers at headquarters.
China is likely to be a more volatile economy. Taking a through-cycle viewpoint rather than a
“quarterly performance versus plan” mind-set is key to motivating your China team and to
convincing them that you are committed to China for the long term. Indeed, downturns in
China have proved to be attractive moments to double down. When partners or governments
are under stress, new partnerships and licenses can become available to foreign partners that
are willing to step up and invest. Even after 30 years, few multinationals adopt this mind-set.
8
Don’t do anything to compromise your global brand and reputation. If you can’t do business
the way you want to, then don’t do it at all. There may be opportunities to make money in the
short and medium term, but shortcuts will eventually be made transparent. The Chinese
government will be well aware of how you are operating, and the anticorruption campaign is not
going to go away. Don’t assume that because your suppliers are international companies that
they are automatically operating to the global standards you expect; verify that they are.
Gordon Orr is a director in McKinsey’s Shanghai office. This is an edited version of an article originally published on LinkedIn, where he posts regularly. For more of Gordon’s articles on
China and doing business in Asia, visit his LinkedIn page.
Copyright © 2014 McKinsey & Company. All rights reserved.
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Please read the latest information for UK businesses (https://www.gov.uk/government/news/doing-business-in-russia-and-ukraine-sanctions- latest) on Russia and Ukraine, including the Crimea.
Political and economic context
Russia’s interventions in Ukraine and illegal annexation of Crimea in 2014, the chemical attack in Salisbury in 2018, and the use of a chemical weapon on Russian territory in 2020, pose a challenging backdrop for British businesses operating in Russia. There are limitations on pursuing some activities in Russia but legitimate business can continue and UK exports remain robust in both goods and services.
The Department for International Trade (DIT) (formerly known as UK Trade & Investment) continues to support British companies in the market with a range of services including targeted events, sector- specific advice, market introductions and trade missions.
Russia is the world’s 11th largest economy by GDP according to the IMF´s estimates for 2020. The economy declined by a relatively modest 3.1% in 2020 thanks in part to lighter-touch COVID-19 restrictions. However, the outlook remains subdued due to sanctions and structural constraints. Macroeconomic policy continues to prioritise stability; government debt remains low, even after the pandemic, and inflation is low and stable. The IMF predicts growth to be 3.0% in 2021 and return to pre- crisis levels by 2022. A $400bn government spending programme, the ‘National Projects’, could push growth higher and presents opportunities for businesses in areas like infrastructure, financial services, healthcare and education.
Although Russia has the smallest population of the BRIC economies, it is the wealthiest in per capita terms by a considerable margin. This means that it has a relatively large middle class, though recent low growth has suppressed their real incomes. Consumers nonetheless seek quality and innovation within a growing retail sector.
Russia’s domestic supply of consumer goods and services is still underdeveloped – so there are opportunities to develop new business e.g. e-commerce. Growth is currently sector-specific e.g. mining, hydrocarbons and agriculture.
Heightened political tensions and the Russian government’s focus on import substitution have made some companies more wary of buying foreign goods and services. However, Russians understand that British exports provide some of the highest quality, most innovative goods and services available. Significant opportunities remain in, for example, consumer goods, luxury, education and machine tools.
Russia’s investment climate is mixed. It reached 28th position in the World Bank’s Doing Business (https://www.doingbusiness.org/en/rankings) rating in 2020; it currently ranks higher than China, India and Brazil. However, there are concerns about the rule of law, transparency and access to credit. These concerns pose challenges for domestic and international investment but major Western companies continue to have a large presence in Russia in a range of sectors including energy, finance, business services, consumer goods, automobile and engineering. Despite the sanctions and the economic downturn, a number of companies are continuing to invest.
In 2011, Russia, Kazakhstan and Belarus entered into a Customs Union. In 2015 the union evolved into the Eurasian Economic Union, which consists of a Customs Union and a Single Economic Space. Armenia and Kyrgyzstan has since joined the Union. The organisation is still developing, but regulation
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of various different sectors and technical regulations are now being set centrally by the Eurasian Economic Commission. The Eurasian Economic Union’s ultimate ambition is for free movement of goods, services, capital and labour
EU sanctions
The UK government and our international partners, including the EU, have introduced sanctions against Russia’s interventions in Ukraine and the illegal annexation of Crimea. These sanctions mean that trade and investment with Russia in specific targeted areas and/or with specific entities/individuals is illegal.
We are working hard to secure full implementation of the Minsk Agreements and work with our international partners to ensure future stability and prosperity in the region. To achieve these objectives we will use the full range of our diplomatic channels and keep our overall engagement with Russia under constant review.
Information about the restrictive measures that have been implemented can be found on the GOV.UK site (https://www.gov.uk/government/news/doing-business-in-russia-and-ukraine-sanctions-latest). If in doubt, businesses should consult the Business Support helplines (https://www.gov.uk/business-support-helpline). UK businesses should be mindful of the potential risks and challenges of working in a sanctions environment. Business should continue to pay close attention to the Russia sections of the DIT (https://www.gov.uk/government/world/organisations/department-for-international-trade-russia) and FCDO (https://www.gov.uk/government/world/russia%20websites).
Companies may also need to be aware of sanctions regimes imposed by other countries, for example, the US (http://www.treasury.gov/resource-center/sanctions/Programs/Pages/ukraine.aspx).
The EU’s restrictive measures are targeted, so legitimate business may continue where sanctions do not apply. Companies should consult the information about sanctions on the GOV.UK site (https://www.gov.uk/government/news/doing-business-in-russia-and-ukraine-sanctions-latest) and if in doubt contact DIT Russia who can share contact details for Moscow based law firms familiar with the sanctions regime.
It is important that companies research sanctions thoroughly and take advantage of the advice offered by DIT. We expect UK companies to stay strictly within the law.
Human rights
Russia is a country of concern for human rights issues. See the FCDO Annual Human Rights Report on Russia (https://www.gov.uk/government/publications/russia-country-of-concern--2) for more details.
Bribery and corruption
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world. In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
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Corruption is endemic in Russia and is a major concern for businesses operating there.The Russian government continues to state its commitment to reducing corruption and other damaging informal practices but they remain a challenge in practice. Russia fell in Transparency International’s Corruption Perceptions Index (http://www.transparency.org/cpi2014/results) in 2018 to 138 out of 180 countries.
Visit the Business Anti-Corruption portal (http://www.business-anti-corruption.com) which provides advice and guidance about corruption in Russia.
Read the information provided on our Bribery and corruption page (https://www.gov.uk/anti-bribery-policy).
Terrorism threat
There is a high threat from terrorism. Although there is no indication that British nationals or interests have been specific targets, attacks could be indiscriminate, including in places frequented by foreigners. You should remain vigilant in all public places, including tourist sites and crowded places, particularly where access is not controlled (eg open-air events and markets) and in major transport hubs.
Previous attacks have targeted transport infrastructure, including airports, buses, trains and metro systems. Further attacks are likely, and could take place anywhere in Russia.
See the FCDO travel advice (https://www.gov.uk/foreign-travel-advice/russia).
Read the information provided on our terrorism threat page (http://www.ukti.gov.uk/export/howwehelp/overseasbusinessrisk/protectivesecurity.html).
6. Protective security advice
There are protective security issues attached to doing business in Russia; business people need to be conscious of the following activities of the local security service (FSB):
IT attack against office computers, laptops, PDAs and other electronic devices physical, audio and video surveillance approaches to staff interception of telephone calls (landline and mobile), texts, emails, fax and post searches of offices, homes, vehicles and (especially) hotel rooms (including safes)
For specific advice email [email protected]
Read the information provided on our protective security advice page (https://www.gov.uk/crime-and-fraud- prevention-for-businesses-in-international-trade).
Intellectual property
IP rights are territorial, that is they only give protection in the countries where they are granted or registered. If you are thinking about trading internationally, then you should consider registering your IP rights in your export markets.
Read the information provided on our Intellectual Property page (https://www.gov.uk/intellectual-property-an- overview).
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Organised crime
Read the information provided on our organised crime page (https://www.gov.uk/crime-and-fraud-prevention- for-businesses-in-international-trade).
Department for International Trade contact
Contact us on [email protected]
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[As of July 22, 2004]
Anti-Bribery and Books & Records Provisions of
The Foreign Corrupt Practices Act
Current through Pub. L. 105-366 (November 10, 1998)
UNITED STATES CODE
TITLE 15. COMMERCE AND TRADE
CHAPTER 2B--SECURITIES EXCHANGES
§ 78m. Periodical and other reports
(a) Reports by issuer of security; contents
Every issuer of a security registered pursuant to section 78l of this title shall file with the Commission, in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate for the proper protection of investors and to insure fair dealing in the security--
(1) such information and documents (and such copies thereof) as the Commission shall require to keep reasonably current the information and documents required to be included in or filed with an application or registration statement filed pursuant to section 78l of this title, except that the Commission may not require the filing of any material contract wholly executed before July 1, 1962.
(2) such annual reports (and such copies thereof), certified if required by the rules and regulations of the Commission by independent public accountants, and such quarterly reports (and such copies thereof), as the Commission may prescribe.
Every issuer of a security registered on a national securities exchange shall also file a duplicate original of such information, documents, and reports with the exchange.
(b) Form of report; books, records, and internal accounting; directives
* * *
(2) Every issuer which has a class of securities registered pursuant to section 78l of this title and every issuer which is required to file reports pursuant to section 78o(d) of this title shall--
(A) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and
(B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that--
(i) transactions are executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(3) (A) With respect to matters concerning the national security of the United States, no duty or liability under paragraph (2) of this subsection shall be imposed upon any person acting in cooperation with the head of any Federal department or agency responsible for such matters if such act in cooperation with such head of a department or agency was done upon the specific, written directive of the head of such department or agency pursuant to Presidential authority to issue such directives. Each directive issued under this paragraph shall set forth the specific facts and circumstances with respect to which the provisions of this paragraph are to be invoked. Each such directive shall, unless renewed in writing, expire one year after the date of issuance.
(B) Each head of a Federal department or agency of the United States who issues such a directive pursuant to this paragraph shall maintain a complete file of all such directives and shall, on October 1 of each year, transmit a summary of matters covered by such directives in force at any time during the previous year to the Permanent Select Committee on Intelligence of the House of Representatives and the Select Committee on Intelligence of the Senate.
(4) No criminal liability shall be imposed for failing to comply with the requirements of paragraph (2) of this subsection except as provided in paragraph (5) of this subsection.
(5) No person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account described in paragraph (2).
(6) Where an issuer which has a class of securities registered pursuant to section 78l of this title or an issuer which is required to file reports pursuant to section 78o(d) of this title holds 50 per centum or less of the voting power with respect to a domestic or foreign firm, the provisions of paragraph (2) require only that the issuer proceed in good faith to use its influence, to the extent reasonable under the issuer's circumstances, to cause such domestic or foreign firm to devise and maintain a system of internal accounting controls consistent with paragraph (2). Such circumstances include the relative degree of the issuer's ownership of the domestic or foreign firm and the laws and practices governing the business operations of the country in which such firm is located. An issuer which demonstrates good faith efforts to use such influence shall be conclusively presumed to have complied with the requirements of paragraph (2).
(7) For the purpose of paragraph (2) of this subsection, the terms "reasonable assurances" and "reasonable detail" mean such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.
* * *
§ 78dd-1 [Section 30A of the Securities & Exchange Act of 1934].
Prohibited foreign trade practices by issuers
(a) Prohibition
It shall be unlawful for any issuer which has a class of securities registered pursuant to section 78l of this title or which is required to file reports under section 78o(d) of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly in
furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to--
(1) any foreign official for purposes of--
(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or
(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,
in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;
(2) any foreign political party or official thereof or any candidate for foreign political office for purposes of--
(A) (i) influencing any act or decision of such party, official, or candidate in its or his official capacity, (ii) inducing such party, official, or candidate to do or omit to do an act in violation of the lawful duty of such party, official, or candidate, or (iii) securing any improper advantage; or
(B) inducing such party, official, or candidate to use its or his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality.
in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person; or
(3) any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official, to any foreign political party or official thereof, or to any candidate for foreign political office, for purposes of--
(A) (i) influencing any act or decision of such foreign official, political party, party official, or candidate in his or its official capacity, (ii) inducing such foreign official, political party, party official, or candidate to do or omit to do any act in violation of the lawful duty of such foreign official, political party, party official, or candidate, or (iii) securing any improper advantage; or
(B) inducing such foreign official, political party, party official, or candidate to use his or its influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,
in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person.
(b) Exception for routine governmental action
Subsections (a) and (g) of this section shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official.
(c) Affirmative defenses
It shall be an affirmative defense to actions under subsection (a) or (g) of this section that--
(1) the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official’s, political party’s, party official’s, or candidate’s country; or
(2) the payment, gift, offer, or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate and was directly related to--
(A) the promotion, demonstration, or explanation of products or services; or
(B) the execution or performance of a contract with a foreign government or agency thereof.
(d) Guidelines by Attorney General
Not later than one year after August 23, 1988, the Attorney General, after consultation with the Commission, the Secretary of Commerce, the United States Trade Representative, the Secretary of State, and the Secretary of the Treasury, and after obtaining the views of all interested persons through public notice and comment procedures, shall determine to what extent compliance with this section would be enhanced and the business community would be assisted by further clarification of the preceding provisions of this section and may, based on such determination and to the extent necessary and appropriate, issue--
(1) guidelines describing specific types of conduct, associated with common types of export sales arrangements and business contracts, which for purposes of the Department of Justice’s present enforcement policy, the Attorney General determines would be in conformance with the preceding provisions of this section; and
(2) general precautionary procedures which issuers may use on a voluntary basis to conform their conduct to the Department of Justice’s present enforcement policy regarding the preceding provisions of this section.
The Attorney General shall issue the guidelines and procedures referred to in the preceding sentence in accordance with the provisions of subchapter II of chapter 5 of Title 5 and those guidelines and procedures shall be subject to the provisions of chapter 7 of that title.
(e) Opinions of Attorney General
(1) The Attorney General, after consultation with appropriate departments and agencies of the United States and after obtaining the views of all interested persons through public notice and comment procedures, shall establish a procedure to provide responses to specific inquiries by issuers concerning conformance of their conduct with the Department of Justice’s present enforcement policy regarding the preceding provisions of this section. The Attorney General shall, within 30 days after receiving such a request, issue an opinion in response to that request. The opinion shall state whether or not certain specified prospective conduct would, for purposes of the Department of Justice’s present enforcement policy, violate the preceding provisions of this section. Additional requests for opinions may be filed with the Attorney General regarding other specified prospective conduct that is beyond the scope of conduct specified in previous requests. In any action brought under the applicable provisions of this section, there shall be a rebuttable presumption that conduct, which is specified in a request by an issuer and for which the Attorney General has issued an opinion that such conduct is in conformity with the Department of Justice’s present enforcement policy, is in compliance with the preceding provisions of this section. Such a presumption may be rebutted by a preponderance of the evidence. In considering the presumption for purposes of this paragraph, a court shall weight all relevant factors, including but not limited to whether the information submitted to the Attorney
General was accurate and complete and whether it was within the scope of the conduct specified in any request received by the Attorney General. The Attorney General shall establish the procedure required by this paragraph in accordance with the provisions of subchapter II of chapter 5 of Title 5 and that procedure shall be subject to the provisions of chapter 7 of that title.
(2) Any document or other material which is provided to, received by, or prepared in the Department of Justice or any other department or agency of the United States in connection with a request by an issuer under the procedure established under paragraph (1), shall be exempt from disclosure under section 552 of Title 5 and shall not, except with the consent of the issuer, be made publicly available, regardless of whether the Attorney General responds to such a request or the issuer withdraws such request before receiving a response.
(3) Any issuer who has made a request to the Attorney General under paragraph (1) may withdraw such request prior to the time the Attorney General issues an opinion in response to such request. Any request so withdrawn shall have no force or effect.
(4) The Attorney General shall, to the maximum extent practicable, provide timely guidance concerning the Department of Justice’s present enforcement policy with respect to the preceding provisions of this section to potential exporters and small businesses that are unable to obtain specialized counsel on issues pertaining to such provisions. Such guidance shall be limited to responses to requests under paragraph (1) concerning conformity of specified prospective conduct with the Department of Justice’s present enforcement policy regarding the preceding provisions of this section and general explanations of compliance responsibilities and of potential liabilities under the preceding provisions of this section.
(f) Definitions
For purposes of this section:
(1) A) The term “foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.
(B) For purposes of subparagraph (A), the term “public international organization” means--
(i) an organization that is designated by Executive Order pursuant to section 1 of the International Organizations Immunities Act (22 U.S.C. § 288); or
(ii) any other international organization that is designated by the President by Executive order for the purposes of this section, effective as of the date of publication of such order in the Federal Register.
(2) (A) A person’s state of mind is “knowing” with respect to conduct, a circumstance, or a result if--
(i) such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or
(ii)
such person has a firm belief that such circumstance exists or that such result is substantially certain to occur.
(B) When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.
(3) (A) The term “routine governmental action” means only an action which is ordinarily and commonly performed by a foreign official in--
(i) obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country;
(ii) processing governmental papers, such as visas and work orders;
(iii) providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country;
(iv) providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or
(v) actions of a similar nature.
(B) The term “routine governmental action” does not include any decision by a foreign official whether, or on what terms, to award new business to or to continue business with a particular party, or any action taken by a foreign official involved in the decision-making process to encourage a decision to award new business to or continue business with a particular party.
(g) Alternative Jurisdiction
(1) It shall also be unlawful for any issuer organized under the laws of the United States, or a State, territory, possession, or commonwealth of the United States or a political subdivision thereof and which has a class of securities registered pursuant to section 12 of this title or which is required to file reports under section 15(d) of this title, or for any United States person that is an officer, director, employee, or agent of such issuer or a stockholder thereof acting on behalf of such issuer, to corruptly do any act outside the United States in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to any of the persons or entities set forth in paragraphs (1), (2), and (3) of this subsection (a) of this section for the purposes set forth therein, irrespective of whether such issuer or such officer, director, employee, agent, or stockholder makes use of the mails or any means or instrumentality of interstate commerce in furtherance of such offer, gift, payment, promise, or authorization.
(2) As used in this subsection, the term “United States person” means a national of the United States (as defined in section 101 of the Immigration and Nationality Act (8 U.S.C. § 1101)) or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship organized under the laws of the United States or any State, territory, possession, or commonwealth of the United States, or any political subdivision thereof.
§ 78dd-2. Prohibited foreign trade practices by domestic concerns
(a) Prohibition
It shall be unlawful for any domestic concern, other than an issuer which is subject to section 78dd-1 of this title, or for any officer, director, employee, or agent of such domestic concern or any stockholder thereof acting on behalf of such domestic concern, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to--
(1) any foreign official for purposes of--
(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or
(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,
in order to assist such domestic concern in obtaining or retaining business for or with, or directing business to, any person;
(2) any foreign political party or official thereof or any candidate for foreign political office for purposes of--
(A) (i) influencing any act or decision of such party, official, or candidate in its or his official capacity, (ii) inducing such party, official, or candidate to do or omit to do an act in violation of the lawful duty of such party, official, or candidate, or (iii) securing any improper advantage; or
(B) inducing such party, official, or candidate to use its or his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,
in order to assist such domestic concern in obtaining or retaining business for or with, or directing business to, any person;
(3) any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official, to any foreign political party or official thereof, or to any candidate for foreign political office, for purposes of--
(A) (i) influencing any act or decision of such foreign official, political party, party official, or candidate in his or its official capacity, (ii) inducing such foreign official, political party, party official, or candidate to do or omit to do any act in violation of the lawful duty of such foreign official, political party, party official, or candidate, or (iii) securing any improper advantage; or
(B) inducing such foreign official, political party, party official, or candidate to use his or its influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,
in order to assist such domestic concern in obtaining or retaining business for or with, or directing business to, any person.
(b) Exception for routine governmental action
Subsections (a) and (i) of this section shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official.
(c) Affirmative defenses
It shall be an affirmative defense to actions under subsection (a) or (i) of this section that--
(1) the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official’s, political party’s, party official’s, or candidate’s country; or
(2) the payment, gift, offer, or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate and was directly related to--
(A) the promotion, demonstration, or explanation of products or services; or
(B) the execution or performance of a contract with a foreign government or agency thereof.
(d) Injunctive relief
(1) When it appears to the Attorney General that any domestic concern to which this section applies, or officer, director, employee, agent, or stockholder thereof, is engaged, or about to engage, in any act or practice constituting a violation of subsection (a) or (i) of this section, the Attorney General may, in his discretion, bring a civil action in an appropriate district court of the United States to enjoin such act or practice, and upon a proper showing, a permanent injunction or a temporary restraining order shall be granted without bond.
(2) For the purpose of any civil investigation which, in the opinion of the Attorney General, is necessary and proper to enforce this section, the Attorney General or his designee are empowered to administer oaths and affirmations, subpoena witnesses, take evidence, and require the production of any books, papers, or other documents which the Attorney General deems relevant or material to such investigation. The attendance of witnesses and the production of documentary evidence may be required from any place in the United States, or any territory, possession, or commonwealth of the United States, at any designated place of hearing.
(3) In case of contumacy by, or refusal to obey a subpoena issued to, any person, the Attorney General may invoke the aid of any court of the United States within the jurisdiction of which such investigation or proceeding is carried on, or where such person resides or carries on business, in requiring the attendance and testimony of witnesses and the production of books, papers, or other documents. Any such court may issue an order requiring such person to appear before the Attorney General or his designee, there to produce records, if so ordered, or to give testimony touching the matter under investigation. Any failure to obey such order of the court may be punished by such court as a contempt thereof.
All process in any such case may be served in the judicial district in which such person resides or may be found. The Attorney General may make such rules relating to civil investigations as may be necessary or appropriate to implement the provisions of this subsection.
(e) Guidelines by Attorney General
Not later than 6 months after August 23, 1988, the Attorney General, after consultation with the Securities and Exchange Commission, the Secretary of Commerce, the United States Trade Representative, the Secretary of State, and the Secretary of the Treasury, and after obtaining the views of all interested persons through public notice and comment procedures, shall determine to what extent compliance with this section would be enhanced and the business community would be assisted by further clarification of the preceding provisions of this section and may, based on such determination and to the extent necessary and appropriate, issue--
(1) guidelines describing specific types of conduct, associated with common types of export sales arrangements and business contracts, which for purposes of the Department of Justice’s present enforcement policy, the Attorney General determines would be in conformance with the preceding provisions of this section; and
(2) general precautionary procedures which domestic concerns may use on a voluntary basis to conform their conduct to the Department of Justice’s present enforcement policy regarding the preceding provisions of this section.
The Attorney General shall issue the guidelines and procedures referred to in the preceding sentence in accordance with the provisions of subchapter II of chapter 5 of Title 5 and those guidelines and procedures shall be subject to the provisions of chapter 7 of that title.
(f) Opinions of Attorney General
(1) The Attorney General, after consultation with appropriate departments and agencies of the United States and after obtaining the views of all interested persons through public notice and comment procedures, shall establish a procedure to provide responses to specific inquiries by domestic concerns concerning conformance of their conduct with the Department of Justice’s present enforcement policy regarding the preceding provisions of this section. The Attorney General shall, within 30 days after receiving such a request, issue an opinion in response to that request. The opinion shall state whether or not certain specified prospective conduct would, for purposes of the Department of Justice’s present enforcement policy, violate the preceding provisions of this section. Additional requests for opinions may be filed with the Attorney General regarding other specified prospective conduct that is beyond the scope of conduct specified in previous requests. In any action brought under the applicable provisions of this section, there shall be a rebuttable presumption that conduct, which is specified in a request by a domestic concern and for which the Attorney General has issued an opinion that such conduct is in conformity with the Department of Justice’s present enforcement policy, is in compliance with the preceding provisions of this section. Such a presumption may be rebutted by a preponderance of the evidence. In considering the presumption for purposes of this paragraph, a court shall weigh all relevant factors, including but not limited to whether the information submitted to the Attorney General was accurate and complete and whether it was within the scope of the conduct specified in any request received by the Attorney General. The Attorney General shall establish the procedure required by this paragraph in accordance with the provisions of subchapter II of chapter 5 of Title 5 and that procedure shall be subject to the provisions of chapter 7 of that title.
(2) Any document or other material which is provided to, received by, or prepared in the Department of Justice or any other department or agency of the United States in connection with a request by a domestic concern under the procedure established under paragraph (1), shall be exempt from disclosure under section 552 of Title 5 and shall not, except with the consent of the domestic concern, by made publicly available, regardless of whether the Attorney General response to such a request or the domestic concern withdraws such request before receiving a response.
(3) Any domestic concern who has made a request to the Attorney General under paragraph (1) may withdraw such request prior to the time the Attorney General issues an opinion in response to such request. Any request so withdrawn shall have no force or effect.
(4) The Attorney General shall, to the maximum extent practicable, provide timely guidance concerning the Department of Justice’s present enforcement policy with respect to the preceding provisions of this section to potential exporters and small businesses that are unable to obtain specialized counsel on issues pertaining to such provisions. Such guidance shall be limited to responses to requests under paragraph (1) concerning conformity of specified prospective conduct with the Department of Justice’s present enforcement policy regarding the preceding provisions of this section and general explanations of compliance responsibilities and of potential liabilities under the preceding provisions of this section.
(g) Penalties
(1) (A) Any domestic concern that is not a natural person and that violates subsection (a) or (i) of
this section shall be fined not more than $2,000,000.
(B) Any domestic concern that is not a natural person and that violates subsection (a) or (i) of this section shall be subject to a civil penalty of not more than $10,000 imposed in an action brought by the Attorney General.
(2) (A) Any natural person that is an officer, director, employee, or agent of a domestic concern, or stockholder acting on behalf of such domestic concern, who willfully violates subsection (a) or (i) of this section shall be fined not more than $100,000 or imprisoned not more than 5 years, or both.
(B) Any natural person that is an officer, director, employee, or agent of a domestic concern, or stockholder acting on behalf of such domestic concern, who violates subsection (a) or (i) of this section shall be subject to a civil penalty of not more than $10,000 imposed in an action brought by the Attorney General.
(3) Whenever a fine is imposed under paragraph (2) upon any officer, director, employee, agent, or stockholder of a domestic concern, such fine may not be paid, directly or indirectly, by such domestic concern.
(h) Definitions
For purposes of this section:
(1) The term "domestic concern" means--
(A) any individual who is a citizen, national, or resident of the United States; and
(B) any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State of the United States or a territory, possession, or commonwealth of the United States.
(2) (A) The term “foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.
(B) For purposes of subparagraph (A), the term "public international organization" means --
(i) an organization that has been designated by Executive order pursuant to Section 1 of the International Organizations Immunities Act (22 U.S.C. § 288); or
(ii)any other international organization that is designated by the President by Executive order for the purposes of this section, effective as of the date of publication of such order in the Federal Register.
(3) (A) A person's state of mind is "knowing" with respect to conduct, a circumstance, or a result if--
(i) such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or
(ii) such person has a firm belief that such circumstance exists or that such result is substantially certain to occur.
(B) When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.
(4) (A) The term "routine governmental action"means only an action which is ordinarily and commonly performed by a foreign official in--
(i) obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country;
(ii) processing governmental papers, such as visas and work orders;
(iii) providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country;
(iv) providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or
(v) actions of a similar nature.
(B) The term "routine governmental action" does not include any decision by a foreign official whether, or on what terms, to award new business to or to continue business with a particular party, or any action taken by a foreign official involved in the decision-making process to encourage a decision to award new business to or continue business with a particular party.
(5) The term "interstate commerce"means trade, commerce, transportation, or communication among the several States, or between any foreign country and any State or between any State and any place or ship outside thereof, and such term includes the intrastate use of--
(A) a telephone or other interstate means of communication, or
(B) any other interstate instrumentality.
(i) Alternative Jurisdiction
(1) It shall also be unlawful for any United States person to corruptly do any act outside the United States in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to any of the persons or entities set forth in paragraphs (1), (2), and (3) of subsection (a), for the purposes set forth therein, irrespective of whether such United States person makes use of the mails or any means or instrumentality of interstate commerce in furtherance of such offer, gift, payment, promise, or authorization.
(2) As used in this subsection, a "United States person"means a national of the United States (as defined in section 101 of the Immigration and Nationality Act (8 U.S.C. § 1101)) or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship organized under the laws of the United States or any State, territory, possession, or commonwealth of the United States, or any political subdivision thereof.
§ 78dd-3. Prohibited foreign trade practices by persons other than issuers or domestic concerns
(a) Prohibition
It shall be unlawful for any person other than an issuer that is subject to section 30A of the Securities Exchange Act of 1934 or a domestic concern, as defined in section 104 of this Act), or for any officer, director, employee, or agent of such person or any stockholder thereof acting on behalf of such person, while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to--
(1) any foreign official for purposes of--
(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or
(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,
in order to assist such person in obtaining or retaining business for or with, or directing business to, any person;
(2) any foreign political party or official thereof or any candidate for foreign political office for purposes of--
(A) (i) influencing any act or decision of such party, official, or candidate in its or his official capacity, (ii) inducing such party, official, or candidate to do or omit to do an act in violation of the lawful duty of such party, official, or candidate, or (iii) securing any improper advantage; or
(B) inducing such party, official, or candidate to use its or his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality.
in order to assist such person in obtaining or retaining business for or with, or directing business to, any person; or
(3) any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official, to any foreign political party or official thereof, or to any candidate for foreign political office, for purposes of--
(A) (i) influencing any act or decision of such foreign official, political party, party official, or candidate in his or its official capacity, (ii) inducing such foreign official, political party, party official, or candidate to do or omit to do any act in violation of the lawful duty of such foreign official, political party, party official, or candidate, or (iii) securing any improper advantage; or
(B) inducing such foreign official, political party, party official, or candidate to use his or its influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,
in order to assist such person in obtaining or retaining business for or with, or directing business to, any person.
(b) Exception for routine governmental action
Subsection (a) of this section shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official.
(c) Affirmative defenses
It shall be an affirmative defense to actions under subsection (a) of this section that--
(1) the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official's, political party's, party official's, or candidate's country; or
(2) the payment, gift, offer, or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate and was directly related to--
(A) the promotion, demonstration, or explanation of products or services; or
(B) the execution or performance of a contract with a foreign government or agency thereof.
(d) Injunctive relief
(1) When it appears to the Attorney General that any person to which this section applies, or officer, director, employee, agent, or stockholder thereof, is engaged, or about to engage, in any act or practice constituting a violation of subsection (a) of this section, the Attorney General may, in his discretion, bring a civil action in an appropriate district court of the United States to enjoin such act or practice, and upon a proper showing, a permanent injunction or a temporary restraining order shall be granted without bond.
(2) For the purpose of any civil investigation which, in the opinion of the Attorney General, is necessary and proper to enforce this section, the Attorney General or his designee are empowered to administer oaths and affirmations, subpoena witnesses, take evidence, and require the production of any books, papers, or other documents which the Attorney General deems relevant or material to such investigation. The attendance of witnesses and the production of documentary evidence may be required from any place in the United States, or any territory, possession, or commonwealth of the United States, at any designated place of hearing.
(3) In case of contumacy by, or refusal to obey a subpoena issued to, any person, the Attorney General may invoke the aid of any court of the United States within the jurisdiction of which such investigation or proceeding is carried on, or where such person resides or carries on business, in requiring the attendance and testimony of witnesses and the production of books, papers, or other documents. Any such court may issue an order requiring such person to appear before the Attorney General or his designee, there to produce records, if so ordered, or to give testimony touching the matter under investigation. Any failure to obey such order of the court may be punished by such court as a contempt thereof.
(4) All process in any such case may be served in the judicial district in which such person resides or may be found. The Attorney General may make such rules relating to civil investigations as may be necessary or appropriate to implement the provisions of this subsection.
(e) Penalties
(1) (A) Any juridical person that violates subsection (a) of this section shall be fined not more than
$2,000,000.
(B) Any juridical person that violates subsection (a) of this section shall be subject to a civil penalty of not more than $10,000 imposed in an action brought by the Attorney General.
(2) (A) Any natural person who willfully violates subsection (a) of this section shall be fined not more than $100,000 or imprisoned not more than 5 years, or both.
(B) Any natural person who violates subsection (a) of this section shall be subject to a civil penalty of not more than $10,000 imposed in an action brought by the Attorney General.
(3) Whenever a fine is imposed under paragraph (2) upon any officer, director, employee, agent, or stockholder of a person, such fine may not be paid, directly or indirectly, by such person.
(f) Definitions
For purposes of this section:
(1) The term “person,” when referring to an offender, means any natural person other than a. national of the United States (as defined in 8 U.S.C. § 1101) or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship organized under the law of a foreign nation or a political subdivision thereof
(2) (A) The term “foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.
For purposes of subparagraph (A), the term "public international organization" means --
(i) an organization that has been designated by Executive Order pursuant to Section 1 of the International Organizations Immunities Act (22 U.S.C. § 288); or
(ii) any other international organization that is designated by the President by Executive order for the purposes of this section, effective as of the date of publication of such order in the Federal Register.
(3) (A) A person’s state of mind is "knowing"with respect to conduct, a circumstance, or a result if --
(i) such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or
(ii) such person has a firm belief that such circumstance exists or that such result is
substantially certain to occur.
(B) When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.
(4) (A) The term "routine governmental action"means only an action which is ordinarily and commonly performed by a foreign official in--
(i) obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country;
(ii) processing governmental papers, such as visas and work orders;
(iii) providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country;
(iv) providing phone service, power and water supply, loading and unloading cargo, or
protecting perishable products or commodities from deterioration; or
(v) actions of a similar nature.
(B) The term “routine governmental action” does not include any decision by a foreign official whether, or on what terms, to award new business to or to continue business with a particular party, or any action taken by a foreign official involved in the decision-making process to encourage a decision to award new business to or continue business with a particular party.
(5) The term “interstate commerce” means trade, commerce, transportation, or communication among the several States, or between any foreign country and any State or between any State and any place or ship outside thereof, and such term includes the intrastate use of —
(A) a telephone or other interstate means of communication, or
(B) any other interstate instrumentality.
§ 78ff. Penalties
(a) Willful violations; false and misleading statements
Any person who willfully violates any provision of this chapter (other than section 78dd-1 of this title), or any rule or regulation thereunder the violation of which is made unlawful or the observance of which is required under the terms of this chapter, or any person who willfully and knowingly makes, or causes to be made, any statement in any application, report, or document required to be filed under this chapter or any rule or regulation thereunder or any undertaking contained in a registration statement as provided in subsection (d) of section 78o of this title, or by any self-regulatory organization in connection with an application for membership or participation therein or to become associated with a member thereof, which statement was false or misleading with respect to any material fact, shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both, except that when such person is a person other than a natural person, a fine not exceeding $25,000,000 may be imposed; but no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.
(b) Failure to file information, documents, or reports
Any issuer which fails to file information, documents, or reports required to be filed under subsection (d) of section 78o of this title or any rule or regulation thereunder shall forfeit to the United States the sum of $100 for each and every day such failure to file shall continue. Such forfeiture, which shall be in lieu of any criminal penalty for such failure to file which might be deemed to arise under subsection (a) of this section, shall be payable into the Treasury of the United States and shall be recoverable in a civil suit in the name of the United States.
(c) Violations by issuers, officers, directors, stockholders, employees, or agents of issuers
(1) (A) Any issuer that violates subsection (a) or (g) of section 30A of this title [15 U.S.C. § 78dd-1] shall be fined not more than $2,000,000.
(B) Any issuer that violates subsection (a) or (g) of section 30A of this title [15 U.S.C. § 78dd-1] shall be subject to a civil penalty of not more than $10,000 imposed in an action brought by the Commission.
(2) (A) Any officer, director, employee, or agent of an issuer, or stockholder acting on behalf of such issuer, who willfully violates subsection (a) or (g) of section 30A of this title [15 U.S.C. § 78dd-1] shall be fined not more than $100,000, or imprisoned not more than 5 years, or both.
(B) Any officer, director, employee, or agent of an issuer, or stockholder acting on behalf of such issuer, who violates subsection (a) or (g) of section 30A of this title [15 U.S.C. § 78dd-1] shall be subject to a civil penalty of not more than $10,000 imposed in an action brought by the Commission.
(3) Whenever a fine is imposed under paragraph (2) upon any officer, director, employee, agent, or stockholder of an issuer, such fine may not be paid, directly or indirectly, by such issuer.
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- Chapter 14: The Green Office: Economics and the Environment from The Business Ethics Workshop was adapted by Saylor Academy and is available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the work's original creator or licensor.
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