VII. INVESTMENT CLIMATE Openness to Foreign Investment: As Denmark is heavily dependent on foreign trade and international cooperation, it follows liberal trade and investment policies and encourages increased foreign investment. For several years the Danish Government has run a campaign to attract U.S. and Japanese hi-tech investors, describing Denmark as a gateway to the large EU Single Market, to Scandinavia, and to the new democracies in Eastern Europe. Although concrete results of the campaign, i.e., new investments, are limited, the campaign has improved the perception of Denmark as an investment destination worth considering. Denmark treats foreign investors on a non-discriminatory, national treatment basis, including allowing them to benefit from national investment incentive programs. As a general rule foreign direct investment in Denmark may take place without restrictions and screening. Ownership restrictions apply to only a few sectors, including those for national security reasons (see below). The investment climate is good also as a result of low wage inflation (between 2 and 3 percent annually), high and steadily improving worker productivity in industry (averaging 3 percent annually), and one of the lowest overall inflation rates (about 2 percent) in Europe. Denmark has a highly skilled and efficient labor force, and the corporation tax at 34 percent is among the lowest in the EU. Work permits are easy to obtain for foreign managerial staff, but permits for white or blue collar workers from countries outside the EU and the Nordic countries, who compete with Danish workers, are difficult to obtain. High-paid foreigners stationed temporarily in Denmark are subject to lenient income taxation (25 percent plus a 5 percent labor market contribution (LMC) tax on gross income compared to the standard progressive income tax system with a 5 percent tax on gross income plus marginal tax rates ranging between 48 and 66 percent on taxable income). The establishment in early 1994 of 10 preferential "business zones" in high-unemployment areas has been a limited success. Investment taking place before the end of 1994 in those "zones" may, through 1999, take advantage of reduced administrative requirements, eased taxation, and more lenient employment terms to be agreed upon between labor and management. Investment in regional development areas may take advantage of certain grants and access to preferential financing. Conversion and Transfer Policies: Denmark has no restrictions on capital transfers. Denmark adheres to OECD and EU rules on the liberalization of capital movements, and has no foreign exchange restrictions, only reporting requirements. Profits can be freely repatriated, but are subject to Danish taxation. The Denmark/United States double taxation agreement is now being revised. Expropriation and Compensation: Public expropriation of private property is almost entirely limited to public construction purposes, such as bridge and highway projects, and then only with full compensation. There have been no cases of Danish or foreign companies being expropriated for other purposes since World War II. On the contrary, the Government favors privatization of Government entities, of which the most important so far are Tele Danmark A/S (49 percent sold to investors), Copenhagen Airport (25 percent sold), and a state life insurance company (100 percent sold). Dispute Settlement: The Embassy has no knowledge or record of any major disputes involving foreign, including U.S., direct investors in Denmark. The Danish legal system belongs to the "Nordic family" which is based on continuity through centuries in contrast with the Anglo-Saxon Common Law. In fact some Danish legislation from the 17th century, which has its roots dating back to the 13th century, still is in force. The Danish legal system includes written laws covering practically all commercial issues. Denmark has a written and consistently applied Bankruptcy law (Consolidated Act No. 588 of September 1, 1986, as amended). Monetary adjustments under the bankruptcy law are made in freely convertible Danish Kroner. Creditors' claims against a bankruptcy are met in the following order: 1) Costs and debt accrued during the treatment of the bankruptcy; 2) Other costs, including the court tax, relating to attempts to find a solution other than bankruptcy; 3) mostly wage claims and holiday pay; 4) mostly excise taxes owed to the Government; 5) all other claims. Interests in real property, both private and business, are for the most part secured through the well established Danish mortgage bond credit system, the security of which compares to that of Government bonds. All mortgage credits in real property are recorded in the public register of mortgages. Except for interests in cars and commercial ships which are also publicly recorded, other chattel interests generally are unrecorded. Denmark is a party to the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of other States, and to the 1958 Convention of the Recognition and Enforcement of Foreign Arbitral Awards. Subsequent Danish legislation makes international arbitration of investment disputes binding in Denmark. In addition, Denmark is a party to the 1961 European Convention in International Commercial Arbitration and to the 1962 agreement relating to the application of this convention. Political Violance: Political violence is virtually unknown in Denmark. Performance Requirements/Incentives: Performance requirements are applied only in connection with investment in hydrocarbon exploration, where concession terms normally require a fixed work program, including seismic surveys and in some cases exploratory drillings, consistent with applicable EU directives. Performance incentives are mostly designed to protect the environment, mainly through reduced energy and water use. Denmark was the first, and so far the only, of the EU countries, in January 1993 to introduce a carbon dioxide (CO2) tax on business and industry. The present CO2 tax is equal to 50 kroner per calculated ton of CO2 emitted. Companies with a production dependent on large use of energy, e.g., steel plants and glass and brick producers, may be able to avoid virtually the entire tax. Supplementing the CO2 tax are a number of subsidy measures to, inter alia, promote renewable energy and natural gas use. As part of the 1994 tax reform, a number of new environmental taxes were introduced. These fall mostly on households and offset revenues lost through income tax reductions. A parliamentary majority advocates increased use of environmental taxes, including a sharply increased CO2 tax, offset by reduction of other costs to business in an effort to not jeopardize Danish competitiveness. Right to Private Ownership and Establishment: As a general rule, any foreign or domestic private entity may freely establish, own, and dispose of a business enterprise in Denmark. The capital requirement for establishing a corporation (aktieselskab) is DKK 500,000 and for establishing a private company (anpartsselskab) DKK 200,000. Registration fees are nominal. Capital can take the form of goods, equipment and/or cash on hand. There is a general requirement that managers and at least half of the Board of Directors must be Danish or EU residents. Denmark, like most other countries, has restrictions on establishment in legal services and other areas which require a Danish (or EU or Nordic) professional certification to practice in Denmark. The Danish telecommunications network remains a government monopoly and access to broadcasting is restricted. However, sales of telecommunications equipment and value-added services on leased lines (VANS) have been fully liberalized. Ownership restrictions are applied in few sectors, including: -Hydrocarbon exploration (20 percent Government participation, but in the fourth licensing round to be opened July 1994, no longer on a "carried interest" basis). -Arms production (maximum 40 percent of equity and 20 percent of voting rights may be held by foreigners). -Aircraft (foreign citizens or airlines may not directly own or exercise control over aircraft registered in Denmark). -Ships registered in the Danish International Ships Register (a Danish legal entity or physical person must own a significant share and exercise a significant control (20-25 percent) over such ship). For EU physical persons and legal entities, some of the above restrictions do not apply. Protection of Property Rights: As Denmark is a party to, and enforces, a large number of international conventions and treaties concerning protection of intellectual property rights, Denmark appears to offer adequate protection of those rights. -Patents: Denmark is a member of the World Intellectual Property Organization (WIPO). It adheres to the Paris Convention for the protection of Industrial Property, the Patent Cooperation Treaty (PCT), the Strasbourg convention, and the Budapest convention. Denmark has ratified the European Patent Convention and the EU Patent Convention. -Copyrights: Denmark is a party to the 1886 Berne Convention and its subsequent revisions, the 1952 Universal Copyright Convention and its 1971 revision, the 1961 International Convention for the Protection of Performers, etc., and the 1971 Convention for the Producers of Phonograms, etc. There is little piracy in Denmark of records or videocassettes, but software piracy is estimated to cost the industry about DKK 700 million annually. Piracy is on the decline due to sharply reduced prices, improved protection of programs and efforts to combat such piracy by the international software company-owned Business Software Alliance. Piracy of other items, including books, is very limited. There are no indications that pirated products are imported to or exported from Denmark. One present copyright problem involves the imposition on January 1, 1993 of a Danish levy on blank audio and video tapes for home use. A large share of revenues from the levy will be passed on to authors/performers in Denmark and from countries having a comparable levy (material reciprocity). Inasmuch as the United States has no blank tape levy, this issue should not be seen as affecting Denmark's climate for investors. -Trademarks: Denmark is a party to the 1957 Nice Arrangement and to this arrangement's 1967 revision. A new Danish trademark act entered into force January 1, 1992 which also implements the EU trademark directive harmonizing EU member countries' trademark legislation. Denmark strongly supports efforts to establish an EU-wide trademark system. -Trade Secrets: It is the Embassy's impression that trade secrets are adequately protected in Denmark. We note that, for example, Danish legislation requires registration of the composition of certain chemical compounds and products in order to obtain approval for sale. The Government treats this as confidential information which is not made publicly available. -Semiconductor Chip Layout Design: Denmark has legislation implementing EU regulations for the protection of the topography of semiconductor products which also extends protection to legal U.S. persons. Regulatory System: Laws and Procedures: As an industrialized country based on a free market economy, Danish economic policy and laws foster competition. The Social-Democratic led Government has introduced limited reform of the Danish income tax system aimed at increasing the incentive to work and to reduce the underground economy. It has also introduced labor market reforms to reduce unemployment and make the labor market and unemployment benefit system more flexible and mobile. The labor market reform, inter alia, provides for government-funded leave programs, including for the unemployed, which have been a rousing success in obtaining participation but have not yet led to any significant reduction in unemployment or created any new jobs. In order to adapt to the EU Single Market, Denmark has significantly harmonized excise taxes (except for the 25 percent value-added-tax) with those of Germany in order to reduce border trade. As noted above, Denmark has fully liberalized foreign exchange flows, including for direct and portfolio investment purposes. Credit is allocated on market terms and is freely available (depending of course on collateral offered). A large variety of credit instruments are available, including, but not limited to: commercial bank overdraft facilities for operational purposes, investment loans, export credits and financial loans in foreign currencies. Danish legal, regulatory, and accounting systems for the business sector are transparent and largely consistent with EU directives and regulations. Danish company law and regulations, except in relation to the sectors mentioned above, do not authorize companies to specifically limit or prohibit foreign investment. Also the Embassy has no record of any efforts, by private sector or the Government, to restrict foreign participation in standards-setting consortia or organizations, nor of practices used by private firms to restrict foreign investment. Bilateral Investment Agreements: Denmark's bilateral investment agreements are generally with countries where Danish investments involve participation of the government-funded Industrialization Fund For Developing Countries and the Investment Fund for Central and Eastern Europe (see below). Investment agreements have been entered with the following countries (year of publication): Indonesia (1970), Romania (1981 and updated in 1994), People's Republic of China (1985), Sri Lanka (1985), South Korea (1988), Hungary (1989), Poland (1991), Estonia (1993), Czech and Slovak Federal Republic (1993), Turkey (1993), Malaysia (1993), Lithuania (1994). . Opic and Other Investment Programs: OPIC programs are not applicable to Denmark. Denmark is member of the Multilateral Investment Guarantee Agency (MIGA). Labor: The Danish labor force includes about 2.85 million persons. The total number of employed (measured on a full-time basis) in 1993 was about 2.3 million, of which the private sector accounted for about 70 percent. Official unemployment in 1993 came close to 350,000, or 12.2 percent of the labor force. However, due to high structural unemployment, estimated at 10 percent of the labor force, labor bottlenecks are beginning to show in specialized domestic sectors such as construction and nursing. Labor bottlenecks in manufacturing industry and private services are not expected in the near future. The participation rate for women is among the highest in the world (about 80 percent for women aged between 16 and 60 years). The labor force is highly organized with more than 2 million trade union members accounting for more than 80 percent of all wage and salary earners. Labor disputes and strikes are virtually non-existent due to excellent labor/management relations. Labor market conditions and wages are in general covered by national contracts, which are traditionally negotiated every two years. New contract negotiations are starting in the summer of 1994 to be concluded in early Spring 1995. The contractual work week for most wage earners is 37 hours. Employees are entitled to five weeks of paid annual leave. Denmark has well-functioning unemployment insurance and sick-pay schemes. Danish wages are high by international standards, but employer contributions to social welfare are very low. Thus, total employer costs per hour worked are lower in Denmark than in Germany, Switzerland, Japan, Belgium and Norway. In 1993, the average hourly wage, including overtime and holiday pay, was about 122 kroner, ranging between 107 kroner for an unskilled female worker and 132 kroner for a skilled male worker. Danish wages are expected to increase about 2.8 percent in 1994 and about 3.5 percent in 1995. Denmark adheres to ILO conventions protecting worker rights. In a modern industrialized society like Denmark with an expensive, highly skilled labor force, labor cost factors have impacted significantly on the country's technological direction. For example, the Danish shipbuilding industry, despite a steady reduction of its labor force, has increased production by introducing state-of-the art computerized production equipment. Foreign Trade Zones/Free Ports: The only free port in Denmark is the Copenhagen Free Port. The concession for running the free port is granted to the Copenhagen Free Port and Stevedoring Company, which is fully owned by the Copenhagen Port Authority. The facilities in the free port are basically used for imports, exports, and transit trade but there are also a few manufacturing firms. However, new manufacturing operations can only be established with the permission of the customs authorities, which is granted only if special reasons exist for having the facility in the free port area. Certain minor procedures, such as preparing and finishing imported automobiles for sale, are not considered production, and are allowed in the free port. The Copenhagen Free Port welcomes foreign companies establishing warehouse and storage facilities, whether for servicing Denmark only or, for example, Scandinavia, part or all of the EU, or East European and Baltic countries. Capital Outflow Policy: Denmark has no restrictions on exports of capital and outward direct investment. Investment in developing countries and in east and central European countries is promoted through the government-funded Industrialization Fund for the Developing Countries (IFU) and the Investment Fund for East and Central Europe (IO). The IFU/IO offers assistance in identifying projects and establishing joint ventures which is also available to foreign-owned companies based in Denmark. In the project identification phase the funds provide loans at preferential rates to finance feasibility studies which may be converted to a non-repayable grant if the project is established. In the active investment phase, the funds participate with share capital (up to 30 percent and with participation on the Board of Directors) and loans. The funds' total engagement in a project usually will not exceed 25 percent of the total investment. Once a project is financially consolidated and running smoothly, the funds withdraw from it. Major Foreign Investors: The major foreign investors in Denmark are other Nordic countries and other EU countries. Denmark does not publish Foreign Direct Investment stock figures but annual inflow data are published by the Danish Central Bank (see Appendix). For the four years ending in 1993, foreign direct investment averaged US$1.58 billion annually (calculated at the average 1993 exchange rate of 6.48). Nordic countries provided 46% of this and the EU 44%. The United States provided 4% of the total. The breakdown of the Nordic area was Sweden 26%, Norway 19%, and Finland 1%. The EU breakdown was the UK and Germany 12% each, the Netherlands 10%, France 5%, and others 5%. The Embassy estimates that roughly 250 U.S. subsidiaries in Denmark represent about 10 percent of total value of FDI in Denmark. In the ten-year period 1983-1993, U.S. investors acquired 62 Danish companies with close to 5,000 employees. This compares with total foreign acquisitions in that period of 579 companies with 66,000 employees. According to the U.S. Department of Commerce's Survey of Current Business (July, 1994), the U.S. FDI position in Denmark in 1992 was as follows (in million of dollars, historical costs basis): All Industries 1,707 -Manufacturing total 315 -Food and Kindred Products 137 -Chemicals and Allied Prod. (D) -Metals 50 -Machinery, excl. Electric (D) -Electric/Electronic 21 -Transportation negl. -Other Manufacturing 85 -Wholesale Trade 503 -Banking (D) -Finance, except banking, insurance and real estate 351 -Services 116 -Other Industries 13 (D) = Suppressed to avoid disclosure of individual companies.