CONTENTS
I. Legal Bases for Foreign Investment
II. Concept and Subject of Foreign Investment
III. Scope of Foreign Investment Activities
COUNTRIES
Canada (Revised Version up to January 1999)
The first meeting of the Working Group on Investment was held in San José, Costa Rica, on September 4th and 5th, 1995. At that meeting, the participating countries asked the Inter-American Development Bank to conduct a comparative study of the foreign investment legislation in effect in each of the countries of the Hemisphere.
In responding to this request, the Bank prepared a questionnaire on the topics agreed to in the meeting. The questionnaire was sent to the countries of the Hemisphere for their consideration and approval. After receiving the countries’ replies, the Bank prepared the first report.
In November, 1995 the Group requested that the IDB expand the questionnaire in some areas and a second version was sent to the countries. The first draft of the results of this expanded survey was submitted to the Group for consideration at the end of 1995. The countries were then given until February 1996 to make comments. Following this, in March 1996, the IDB presented a finalized version of this comparative study which included these observations.
Throughout 1996 countries submitted additional comments on the report. The document, incorporating observations and comments, was approved at the third meeting of vice-minister responsible for hemispheric trade, held in Rio de Janeiro, on April 14-17, 1997. The following document incorporates updates observations sent by some countries up until June 30, 1997. As instructed by the Group the country matrices contain only information which has been provided by the countries. All other sources were not considered and all explicit references to specific countries were eliminated.
In accordance with the Group’s request, this document is presented in Spanish and English, with French and Portuguese versions in preparation.
The Inter-American Development Bank is very pleased to have been able to assist the Working Group on Investment.
Washington, D.C. August 1997
At the request of the Working Group on Investment (Free Trade Area of the Americas), the Inter-American Development Bank (IDB) has prepared this comparative study of the legal foreign investment regimes of the countries in the Hemisphere. It is based entirely on information provided by member countries of the FTAA and, in keeping with the instructions of the Working Group, does not include any information from unofficial sources.
Therefore, the IDB designed a questionnaire which included the following subject matters:
Level of openness to foreign investment
National treatment
Definition and scope of the concept of foreign investment
Exceptions – 1 (excluded sectors)
Performance requirements
Nationalization, expropriation and compensation
Transfers
Privatization
Treatment of high-level personnel
Dispute settlement and/or arbitration
International agreements signed by each country
Hierarchical status or regulatory rank
Tax regime applicable to investments
Basic investment statistics
In terms of methodology, a number of questions were submitted to each of the countries for its consideration.
Twenty-seven countries provided information: Argentina, Barbados, Belize, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, St. Kitts and Nevis, Suriname, Trinidad and Tobago, the United States, Uruguay, and Venezuela.
This study is divided into two parts:
First, a methodological note which briefly analyzes the data is divided into six sections:
Legal bases for foreign investment
Concept and subject of foreign investment
Scope of foreign investment activities
Rights and protection of foreign investment
Dispute settlement
Competent authorities
Second, 27 chapters, one per country, that contain detailed information supplied by the countries and follow the methodology used in the General Report.
It should be noted that the comparative study that follows was somewhat complicated by the existence of two legal systems in the Hemisphere: common law and civil law. As a result, some concepts or notions in countries of one system may not have an exact equivalent in the countries of the other system.
As indicated above, the information provided by the countries was classified in six sections, as detailed below.
Almost all of the countries indicated that their constitutions contain regulations guaranteeing private property, free enterprise, and equal treatment of both nationals and foreigners. Some of the countries cited explicit references to foreign investment in their constitutions, indicating that equal treatment of national and foreign investors is expressly guaranteed, as is the possibility of recourse to national or international arbitration in case of disputes.
1.2 Legal Rank
Almost all of the countries have a special foreign investment statute or law, which in almost all cases, was drafted or has been modified since 1990. Nevertheless, particularly because of the nature of their legal systems, some countries do not have tax laws on foreign investment. Some countries referred to the regulations contained in the Cartagena Agreement, such as Decisions 291 and 292, as their legal bases for foreign investment. Finally, it should remembered that, in addition to domestic regulations, investment protection treaties or other international investment instruments constitute a source of legal rights.
1.3 Administrative Rank
Almost all of the countries have organs, usually state agencies, empowered to regulate this area. In rare instances, countries do not have special agencies responsible for foreign investment and leave this area to be handled by the public administration.
Several categories can be identified from the responses: 1) countries which define foreign investment in their legislation; 2) countries that reported which their legislation contained such a definition, but did not indicate its content; 3) countries which indicated that their legislation did not contain such a definition or did not respond to the question; and 4) countries which referred to the definition of foreign investment contained in international treaties such as the Cartagena Agreement or the North American Free Trade Agreement (NAFTA), without prejudice to their domestic regulations.
The countries may be grouped into four general categories according to their concept of foreign investment. One group emphasized the idea of transfers from abroad in its definition. A second group based its determination on the nature of the investor. The third category defined foreign investment based on the external source, be it from a natural person or juridical entity, thus uniting the concepts of the previous two categories. Finally, some countries, by virtue of having no specific definition in their legislation, employ the concept contained in the Investment Protection Treaties or other international instruments that they have signed.
2.2 Registries and Authorization
With respect to the existence of a registry, authorization process, or other mechanisms for identifying foreign investment, most countries have them. Some countries referred to the existence of an investment contract to which a foreign investor could resort. It was reported that in most cases registries are merely for information purposes and not for authorization.
2.3 Natural and Juridical Persons
Concerning the status of the foreign investor, all countries recognize both natural and juridical persons as foreign investors.
2.4 Nationality
With respect to nationality, one group of countries does not apply its foreign investment regime to nationals. The other group of countries permits nationals to use the foreign investment regime. In this latter category, some countries outlined conditions under which nationals may take advantage of that regime, usually requiring foreign domicile and/or residency, or, in certain cases, also requiring investment from abroad.
2.5 Recipient Company
In all of the countries, the company that receives foreign capital may take advantage of the regulations which govern foreign investment. The majority of the countries mentioned the principle of equality or non-discrimination in their responses. Nevertheless, according to certain responses, companies with mixed capital (national and foreign) may take only partial advantage of that regime to the extent of the amount or percentage of the foreign investment. In this connection, it is worth noting the theory of control applied by some countries to determine whether a recipient company is given the status of foreign investor.
2.6 Temporary Extension
No country indicated that the status of a foreign investor was limited by the mere passage of time. Nevertheless, as indicated by some countries, that does not necessarily extend to incentives that may be granted in certain cases.
2.7 Executive Staff and the Company's Workers
Regarding limitations related to the executive staff and the company's workers, ten countries stated that they had no nationality restrictions in either category. The remaining countries generally do not place nationality restrictions on the executive staff, although some countries limit the composition of this staff in certain economic activities in the country. In relation to the workers, many countries require a certain percentage, ranging from 66% to 90%, of the total workforce to be nationals. Some countries add another condition, namely, that a percentage of the total payroll be paid to local workers. According to some of the responses, in certain cases the administrative authorities are empowered to reduce the aforementioned percentages. Finally, no countries prohibit remittances abroad by foreign executives or workers.
III. SCOPE OF FOREIGN INVESTMENT ACTIVITIES
3.1 The Principles Regulating Economic Activity
The purpose of this section is to determine the scope of activities open to foreign investment, including any conditions and limitations. The first part examines the principles regulating economic activity; more specifically, the form in which economic freedom and the principle of non-discrimination are guaranteed, as well as the extent to which state and private enterprises can compete. The intent is to present a perspective of the legal bases of the respective economic models.
a) Economic Freedom
In general, the responses indicate that economic freedom is either guaranteed in the constitution or is institutionalized. Some countries go into detail on the subject and refer to the regulations which permit economic freedom.
b) The Non-discrimination Principle
With respect to the regulation of the non-discrimination principle and its limitations, almost all the countries indicated that it held constitutional rank, although it was not possible to assert what is expressly contemplated in some countries’ legislation.
c) Competition between Public and Private Enterprises
With respect to competition between public and private enterprises, the information provided merely tends to indicate that they compete on equal terms without giving detailed information. Nevertheless, in certain cases, it was noted that, as a result of the privatization process, the role of state enterprises had been gradually losing importance, while in others, the private sector was restricted in certain activities, and the state enjoyed a privileged, monopolistic position.
3.2 The Scope of Foreign Investment Activities
With respect to the scope of foreign investment, the general rule in all the countries is that it can be applied to all types of activities. Some countries resort to the traditional nomenclature of the Investment Protection Treaties to state that the foreign investor can participate in activities related to personal property and real estate, the right to property, secured loans and mortgages, stocks, bonds or any form of participation in companies, cash, securities, intellectual property, concessions, and so forth, indicating that the list was not exhaustive.
3.3 Reserved Sectors
With respect to reserved sectors, information was requested in two areas.
a) Sectors Reserved to the State
First, in the sectors of economic activity reserved exclusively for the state.
b) Sectors from Which Foreign Investment Was Excluded
Second, with respect to the sectors or economic activities from which only foreign investment was excluded, restricted or limited.
From the information supplied by the countries on the above two subjects, it may be deduced that the sectors reserved to the State and/or limited to foreign investment are: nuclear energy generation; acquisition of property located on the country's borders; military equipment; toxic industries; the banking and financial sector; hydrocarbons; mining; air, sea and overland transport; electric power; agriculture; forestry; health services; insurance; telecommunications; communications media; security services; services such as brokerage, customs agencies and others associated with industrial property; activities involving publishing and the communications media; fishing; uranium; activities related to the ownership of merchant and fishing vessels; cabotage; mail and telecommunications; and public works concessions. An in-depth analysis of the reserved sectors requires that a distinction be made between the cases in which both local and foreign investment are excluded from the private sector and those from which only foreign investment is excluded. It must also be borne in mind that although in the majority of cases mentioned there is a restriction on the percentage of foreign capital that may be invested in the company. In other cases, the restriction relates to the composition of the board of directors.
c) The Principle of Reciprocity
The last two questions in this section refer to the principle of reciprocity and foreign investment performance requirements. The countries that maintain the principle of reciprocity can be divided into several categories: one, which takes into account the activity or sector to which the principle is applied: financial sector; fishing; maritime transport; contracts with the State; television; banks and financial institutions; air transport; undersea cable; oil and gaslines; air services; and small-scale industry and trade. A second category of countries associates the principle of reciprocity with international treaties entered into by the country, generally treaties for the mutual protection of investment.
d) Performance Requirements
It is also possible to distinguish various types of responses with respect to performance requirements imposed on foreign investment. One category did not recognize the existence of these requirements. A second category indicated that the general rule was that there were no performance requirements save in the following expressly stated exceptions: in contracts for concessions in privatized public services; automotive sector; contracts related to geothermal activities; activities which enjoy fiscal benefits; in relation to rules of origin; health-related and environmental protection activities; where incentives are granted; export-related activities and others which confer special benefits; in relation to privatization processes.
e) Privatization
With respect to the possibility of participating on equal terms, most countries replied in the affirmative, with some variations, as for example, some countries indicated that their government may impose limits on foreign capital in relation to certain State activities or the nationality of directors, or they recalled existing restrictions in sectors from which foreign capital was excluded. It is also worth noting the provisions mentioned in some reports under which workers in the company benefit in case of privatization, although technically that does not imply differentiation between local and foreign investors.
This section has been divided into four parts: the first attempts to identify the treatment of foreign investment, whether in reference to national treatment or most-favored-nation. The second focuses on the regulations to protect property. The third is related to the mechanisms for investment and transfers abroad. Lastly, it was deemed important to analyze the tax regime and special exemptions applicable to foreign capital.
a) National Treatment and Most-favored-nation Clause
The majority of the responses expressly affirmed that foreign investment enjoyed national treatment in their countries. Some others did not respond categorically, but the basic principle of national treatment could be deduced from the general context and the regulations on equality of nationals and foreigners. Almost all the reports recognized the most-favored-nation principle and generally made reference to the Investment Protection Treaties. They indicated that the general principle is the better of national and most-favored-nation treatment, except where there is a law to the contrary. This formula is provided in most of the protection agreements signed among countries of the Hemisphere.
4.2 Protection of Property
In order to determine how property is protected, questions have been developed in four areas.
a) Grounds for Expropriation
The first question examined the constitutional grounds for expropriation or the limitation of property rights. The responses were diverse and the following grounds may be mentioned: public utility; social purpose of the property; public necessity; social interest; promotion of agrarian reform; poor exploitation of resources; national interest public interest; collective use; social benefits; and national security.
b) Regulations on Compensation
The regulations on compensation or indemnity are also dissimilar and not all the responses refer to them in detail. The responses addressing proceedings to set compensation can be divided into two groups: one, which resorts to judicial proceedings in the absence of agreement and the other, in which there are different administrative mechanisms for appraisal. With respect to forms of payment, of the countries that responded, two forms may be identified: prior payment and cash payment. In other countries, this is also the general rule although there are exceptions in case of war or internal unrest. Depending on the country, the amount of the compensation should correspond to the market value, the total or actual value, or that of the loss incurred, although there are different interpretations of the concept of loss, as some countries limit compensation to the resulting loss, and others also take into account lost profits. Still others stated that the indemnization should correspond to the fair price of the expropriated property, whereas others informed that the legislator could, for reasons of equity, decide to offer no compensation.
c) Possession of the Expropriated Property
The majority of the countries that replied indicated that the authorities could not take possession of the expropriated property prior to payment of compensation. In a second group of countries it was also prohibited in principle, although the authorities may take possession of the expropriated property prior to payment of compensation in certain extraordinary circumstances: in the case of sudden or urgent need, imminent danger, war or domestic unrest, public disaster, to provide water or electricity, and for national security purposes. All the countries indicated that in such cases compensation should be made without delay as soon as the reason for the delay in payment has ended.
d) Intellectual and Industrial Property
In relation to the last question on property, all the countries affirmed that both tangible and intangible goods are protected in their legislation. In general, the countries listed the relevant laws and treaties without giving a detailed analysis, which, we understand will be the subject of another report.
4.3 Transfers and Remittances
The third part of this section deals with the modality for transfers and remittances abroad and types of exchange markets.
a) Modalities for Transfers
All the countries indicated that transfers of constituent foreign investment capital could take different forms. Some of the responses were more explicit and enumerated these forms. In general, the modalities are: freely convertible foreign currency, tangible property, technology, loans associated with foreign investment, intangible goods, capitalization of credits or profits. One group of countries indicated that the transfer of property was unrestricted, without specifying the existence of regulations to that effect. Another group mentioned, without any analysis, that there were requirements imposed on transfers into the country. The largest group referred to the entry of tangible property being subject to customs regulations or access to foreign loans. Other countries stated that they had special regulations governing technology transfers but did not give details.
b) Restrictions on Remittances
Most of the countries stated that there were no restrictions on remittances. In exceptional cases, there were restrictions on capital repatriation for a certain period.
c) Exchange Rate
Most of the countries stated that they had only one currency exchange market to which a foreign investor had free access. A second group of countries recognized the existence of more than one market and indicated to which market the foreign investor had access. Among these markets are: free exchange market, fluctuating exchange market, formal market, parallel market, official market, bank market, state market, private market, and customs exchange market.
4.4 Tax Regime
The fourth part of this section relates to the tax regime and incentives to foreign investment. It is divided into three areas: the first deals with the taxes imposed on the foreign investor, the second describes the special incentives foreign investment enjoys in certain countries, and the third enumerates the Double Taxation Treaties entered into by countries within the Hemisphere.
a) General Tax Regulations
All the countries reiterated that the general principle in the area of taxation is equality between national and foreign investors. In some cases, details were provided, such as the tax schedule. Some countries are considering an additional tax on profit remittances. The lowest tax rate applicable to profits is 25%.
b) Special Tax Regulations for Foreign Investment
Almost no country had special tax regulations for foreign investment, although there were exceptions in the following areas: free trade zones, external-debt conversion programs, fixed tax rate, and special programs linked to foreign trade.
c) Double Taxation Treaties
The following countries stated that they have entered into Double Taxation Treaties with other countries in the Hemisphere:
Argentina: Bolivia, Brazil, Canada, Chile, Colombia, Cuba, Ecuador, the United States (*).
Bolivia: Argentina
Brazil: Argentina, Canada, Ecuador.
Canada: Argentina, Barbados (*), Brazil, the Dominican Republic, Guyana, Jamaica, Mexico, Trinidad and Tobago, and the United States.
Chile: Argentina.
Colombia: With respect to transport and/or air navigation, and/or shipping: Argentina, Brazil, Chile (*), the United States, Venezuela and with countries of the Andean Community.
The Dominican Republic: Canada.
Ecuador: Andean Community countries, Argentina, Mexico, the United States (*).
Guyana: Canada.
Jamaica: CARICOM, Canada, the United States.
Mexico: Canada, Ecuador, the United States.
Paraguay: Uruguay, Chile(*).
Trinidad and Tobago: Canada, the United States, Venezuela (*).
The United States: Barbados (*), Canada, Jamaica, Mexico, Trinidad and Tobago.
(*) It may be observed that, in certain cases, the data does not correlate between the countries.
d) Other Incentives to Foreign Investment
Regarding the existence of special incentives for foreign investment, in addition to the aforementioned, most countries stated that they existed, although the incentives offered are equally available to foreign and domestic investors. Several reports mentioned the principle of equity and listed the incentives which foreign and local investors enjoy. Other reports also provided such a list and, although they did not make express reference to this, it can be understood from their responses that the incentives are available to both foreign and local investors. There are very few cases in which an incentive is offered exclusively to foreign investors: some countries announced the formation of companies to insure investments, to be formed with private capital, others referred to tax exemptions. Also with respect to investment insurance, some countries mentioned their membership in MIGA or OPIC. It is useful to keep in mind the possible existence of incentive plans at the state level, usually aimed at creating new jobs.
All the countries, in conformity with the principle of equality under the law, provide the foreign investor with legal guarantees and access to the judicial system similar to that afforded nationals. Nevertheless, almost no country considers additional recourse other than that common to all nationals. Notwithstanding the aforementioned, and as a complementary measure to the provisions of local legislation, it should be borne in mind that the Investment Protection Treaties, for those countries which have signed them, establish the international arbitration jurisdiction for foreign investors. In this regard, it is interesting to note the evolution of these treaties in relation to the exhaustion of internal recourse as a prerequisite for resorting to international arbitration. This requirement was being eliminated in some international agreements, such as MERCOSUR, or in investment protection agreements recently entered into by some countries.
5.2 International Arbitration
Regarding the availability of international arbitration, all the countries indicated that they were members of or in the process of becoming members of ICSID.
Other international arbitration mentioned in the replies are: UNCITRAL; the Inter-American Convention on Commercial Arbitration; the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards and NAFTA. It must be borne in mind that in the cases in which investments are made through OPIC or MIGA, the investor has recourse to the dispute settlement mechanisms provided by those entities.
5.3 Investment Protection Treaties
The countries were asked to report on the status of the Investment Protection Treaties under negotiation, signed, approved, ratified, or in force. Although most countries acknowledged having entered into such conventions with countries in other continents, it has been decided to prepare a summary related only to the negotiations and the status of those between countries within the Americas. It must be kept in mind that the dynamic of the process of negotiation of these agreements requires constant updating of information.
Conventions in force:
Argentina: with Bolivia, Canada, Chile, the United States and Venezuela
Belize: with Canada (*), Colombia (*), the United States (*), Venezuela, and CARICOM countries
Bolivia: with Argentina, Mexico (Chapter XV of the Free Trade Agreement) and Peru
Canada: with Argentina, with NAFTA countries
Chile: with Argentina and Venezuela
Costa Rica: with Mexico (*)
Ecuador: with Argentina (*), Chile (*), El Salvador, Paraguay and the United States (*)
El Salvador: with Ecuador
Mexico: with NAFTA countries
Panama: with the United States
Peru: with Argentina (*), Bolivia and Paraguay
Trinidad and Tobago: with Canada (*) and the United States (*)
Uruguay: with the United States (*) and MERCOSUR countries
The United States: with Argentina, Grenada and Panama, with NAFTA countries
Venezuela: with Argentina, Chile and Ecuador (*)
Conventions that have been approved although they have not yet entered into force:
Argentina: with Ecuador and Jamaica
Bolivia: with the United States
Canada: with Trinidad and Tobago, and Uruguay
Chile: with Ecuador.
Colombia: with Cuba and Peru
Paraguay: with Argentina, Brazil, Chile, Ecuador, Peru and Uruguay
Peru: with Colombia.
Uruguay: with Canada.
Venezuela: with Barbados and Brazil
Conventions that have merely been signed:
Bolivia: with Chile and Ecuador
Brazil: with Argentina (*), Chile, Paraguay, Uruguay (*) and Venezuela
Chile: with Brazil, Bolivia, Paraguay and Uruguay (*)
Colombia: with Argentina (*), Canada (*), and the United States (*)
Costa Rica: with Chile
Ecuador: with Bolivia (*) and Venezuela (*)
El Salvador: with the United States
Honduras: with the United States
Nicaragua: with the United States
Trinidad and Tobago: with the United States
Uruguay: with Ecuador and Paraguay
The United States: with Ecuador (*), Haiti, Honduras, Jamaica, Nicaragua and Trinidad and Tobago
(*) As may be observed, the information provided on the status of the conventions does not always correspond.
5.4 Juridical Hierarchy of Foreign Investment Regulations
This section seeks clarification on the hierarchy or regulatory rank, especially to determine the significance of international agreements on foreign investment within each country's legal system. Countries were also asked if those agreements had a "direct impact," that is, whether they could be invoked by the parties directly before the courts and applied by the courts to the case in question.
5.5 Enforceability and Direct Effect of the Regulations
Most countries replied that, in compliance with their respective constitutional provisions, international treaties take legal precedence over national laws (with the exception of the constitution) and that they have direct effect.