VII. Investment Climate General government attitude Under the FRG/US Foreign Trade and Payments Act of 1961, and the 1956 Treaty of Friendship, Commerce and Navigation, international capital movements (both inward and outward) are in principle free. This legislation provides, however, authority to restrict or prohibit foreign direct investment for reasons of foreign policy, foreign exchange, or national security. No regulations have been promulgated under this authority and it has never been used. There is no broad authority to screen and block Foreign Direct Invetsment (FDI) nor does Germany distinguish between hostile and friendly takeover. However, hostile takeovers, whether domestic or foreign, are rare, difficult and time- consuming, given German corporate practice and structure. Generally, foreign and domestic investors enjoy equal treatment, and official policy and actual practice are consistent. The United States remains the single largest source of foreign investment in Germany, providing some 33 percent of FDI in 1993. The next largest investor was Switzerland with 16 percent. In recent years, the rate of non-U.S. investment in Germany has grown much more quickly than that of U.S. investment. The reason for the relatively low increase in U.S., as contrasted with non- U.S., investment is not entirely clear, but probably has to do with the implementation of the EU's common internal market. U.S. companies have been among the most important investors in the new German states. Economic or industrial strategies with discriminatory effects on foreigners There are no indications that the FRG has or is planning to discriminate against American-owned companies operating in the FRG. Germany offers a variety of investment incentive programs that are equally accessible to domestic and foreign companies. Recent changes in law or practice The U.S. Embassy is not aware of any major changes in law or practice regarding foreign investment. 100 percent foreign ownership 100 percent foreign ownership is permitted in almost all sectors open to private investment. The major exception is the guarantee (known as the "Stromvertrag") that seventy percent of the ownership of power generation operations in the former East Germany must be controlled by the three major western German power companies. The remaining 30 percent can be contracted out by the eastern German municipalities, including to foreign investors. In addition, firms in certain sectors, such as the media, can only be owned up to 49 percent by any one individual or company. This law is designed to avoid biased opinion in the media and applies to German as well as foreign firms. Rules and regulations covering investment No restrictions exist on acquisition, takeovers or reinvestment by foreigners that are at variance with regulations for nationals. There are also no regulations on the repatriation of dividends, nor is foreign exchange controlled. Foreign and domestic investors generally enjoy equal treatment. This is facilitated by the fact that, under German law, foreign-owned companies registered in the FRG as a GmbH (limited liability company) or an AG (joint stock company) have domestic status. The provisions of the Foreign Economic Law provide that restrictions can be imposed on private direct investment flows in either direction for reasons of policy. Pertinent decisions would be taken by the federal government through legal ordinances after consultation with the Bundesbank and the governments of the federal states. According to the Economics Ministry, to date, no such restrictions have been imposed. The requirement to report direct investment does not apply to domestic investment. The taxation of American firms within the FRG is governed by the 1989 "Convention for the Avoidance of Double Taxation with Respect to Taxes on Income." It is effective for tax years beginning after 1989 (effective January 1, 1991, for the area that was the German Democratic Republic). With respect to taxes on income, both countries agreed to grant credit toward their respective federal income taxes for taxes paid on profits by enterprises located on each other's territory. In this manner, a maximum withholding rate of 15 percent on dividends was achieved. Reciprocal exemption of earned income is also provided for if an individual resident of one of the countries is temporarily present in the other for a period not exceeding 183 days in the taxable year and the compensation is derived from services performed as an employee or person or corporation of his country of residence, provided the employer does not have a permanent establishment in the other country. Reciprocal exemption is provided on the following: -- interest -- royalties for the use of copyrights, patents, trademarks, etc. -- profits from the operation of ships or aircraft -- remittances received by a student, who is present in a Contracting State for a period not exceeding four years, shall not be taxed in that State on any income from dependent personal services that is not in excess of USD 5,000 (five thousand United States dollars) or its equivalent in Deutsche Mark per taxable year, for defraying the expenses of study and maintenance -- remuneration received by teachers, for a period not exceeding two years -- compensation received by an employee from an enterprise of one of the two countries who stays in the other country for not more than one year in order to acquire experience from someone other than his employer, provided his total annual compensation for services, wherever performed, does not exceed usd 10,000, and is paid by such enterprises; and -- long-term capital gains from alienation of assets situated in the other country, except real property. Income from real property is taxable only by the country in which the property is situated. Through the European Union (EU), the FRG extends preferential tariff treatment to the countries of the European Free Trade Association (EFTA), certain countries with special ties to the EU as covered by the Lome Convention, numerous developing countries under the Generalized System of Preferences and several other countries including Cyprus, Egypt, Turkey, Lebanon, Algeria, Morocco, Tunisia, Malta, and Israel. The EU has also agreed to (eventual) free trade in most industrial products with Poland, Hungary and the Czech Republic, Slovakia, Bulgaria, and Rumania through "Europe Agreements." Free trade agreements have been initialed with Latvia, Lithuania, and Estonia which may be converted to Europe agreements during the German EU presidency this year. With the exception of strategic goods, including dual-use goods, and agricultural items covered by EU regulations, exporters in the FRG are basically unhindered by licensing requirements or any other control measures. Germany is seeking to eliminate all import licenses and, with a few minor exceptions, has accomplished this. Investment incentives The Federal Government of Germany has created a comprehensive package of incentives to accelerate the pace of investment in the former German Democratic Republic. The incentives available for a particular investment may include one or more of the following programs depending upon size and location and type of investment: -- Tax-based investment allowances and special depreciation allowances -- Investment grants under regional-development schemes -- Direct loan programs including equity capital assistance and liaison start-up program -- Environmental investment programs -- Research investment grants -- Federal Guarantee programs for investment credits These programs are continually revised to respond to the current conditions in the new states. The most current information on investment incentives available for a particular project may be obtained from the Federal Ministry of Economics, Task Force "New Laender", Villemomblerstrasse 76, D-53107 Bonn. Transfer policies There are no restrictions on transferring funds associated with an investment. There are no restrictions on currency convertibility at the market rate and no queuing for foreign exchange. There are also no restrictions on inflows and outflows of funds for remittances of profits or other purposes. Expropriation and compensation Private property is expropriated for public purposes only, in a non-discriminatory manner, and in accordance with established principles of international law. There is due process and transparency of purpose, and investors and lenders to expropriated entities receive prompt, adequate and effective compensation. Investment disputes Germany is a member of the International Center for the Settlement of Investment Disputes (ICSID). Performance requirements/incentives Performance requirements have been employed in some cases by the Treuhandanstalt (Treuhand), the German government agency responsible for the privatization of all state-owned firms in the former G.D.R. Embassy is aware of no other performance requirements imposed on direct foreign investment. Right to private ownership and establishment Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity. Private entities also have the right to freely establish, acquire and dispose of interests in business enterprises. Protection of intellectual property rights The Federal Republic has acceded to WIPO (World Intellectual Property Organization), the Strasbourg Patent Agreement, the International Patent Cooperation Treaty and the European Patent Agreement, all of which guarantee protection of patents and intellectual property. Patents are available for all areas of technology and are protected for 20 years from filing. There is no registration of copyrights in the FRG as there is in the U.S. Authors simply attach a small (c) to their work and are thus copyrighted by the publishing company. Persons contesting the authorship of the work must, by producing a contract with the publishing company, prove themselves that they originated the work. Copyrights include the exclusive right to: -- copy or reproduce work -- translate, revise, or otherwise adapt work -- distribute copies of the work; and -- publicly communicate (e.g., perform, display, broadcast or transmit) the work. Copyright protection for computer programs and databases are specifically provided for in the June 9, 1993 "Second Law for the Change of the Copyright Law" para 69a-g, para 137d. It was based on EU directive 91/250/EUSG. Procedures for the protection of trademarks are generally the same as in the U.S. Trade secrets are protected by a "know-how" license, in which a company signs a contract, vowing to uphold secrecy. Protection for layout design of semiconductor chips is provided through topology registration. This entails copywriting a blueprint of the chip. Regulatory system: laws and procedures Germany's reliance on exports has produced transparent and free trade oriented policies (for specific rules relating to investment, see "Rules and Regulations Covering Investment"). However, foreign investors have begun criticizing what they feel are hurdles in the German system, namely rigidity in working hours, high labor costs, environmental regulations, bureaucratic red tape, high tax rates, active unions and co-determination. Yet most think that the positive aspects of Germany as an investment location outweigh the negative aspects. Efficient capital markets and portfolio investment Germany has a modern financial market sector. Credit is available at market-determined rates to both domestic and foreign investors and a variety of credit instruments are available. Legal, regulatory, and accounting systems are transparent and consistent with international norms. Germany has a universal banking system that is effectively regulated by federal authorities. The government also plans to set up a federal securities supervisory authority to oversee securities markets, which are currently largely self-regulated. Bilateral investment treaties The following is a list of the 68 countries with which Germany has a ratified treaty, and the 9 countries with which Germany has signed, but not yet ratified, a treaty. -- Ratified treaties Country signed ratified Argentina 04/09/91 11/08/93 Bangladesh 05/06/81 09/14/78 Benin 06/29/87 07/18/85 Bolivia 03/23/87 03/10/88 Bulgaria 04/12/86 03/10/88 Burundi 09/10/84 12/09/87 Cameroon 06/29/62 11/21/63 Cape Verde 01/18/90 12/15/93 Central African Republic 08/23/65 01/21/68 Chad 04/11/67 11/23/68 China 10/07/83 03/18/85 Congo 09/13/65 10/14/67 Czech Republic 10/02/90 08/02/92 Dominican Republic 10/01/84 05/11/86 Ecuador 06/28/65 11/30/66 Egypt 07/05/74 07/22/78 Gabon 05/16/69 03/29/71 Greece 03/21/61 07/15/63 Guinea 04/19/62 03/13/65 Guyana 12/06/89 03/08/94 Hungary 04/30/86 11/07/87 Haiti 08/14/73 12/01/75 India 10/15/64 10/15/64 Indonesia 11/08/68 04/19/71 Iran 11/11/65 04/06/68 Ivory Coast 10/27/66 06/10/68 Jordan 07/15/74 10/10/77 Korea (Republic of) 02/04/64 01/15/67 Lesotho 11/11/82 08/07/85 Liberia 12/12/61 10/22/67 Madagascar 09/21/62 03/21/66 Malaysia 12/22/60 07/06/63 Mali 07/28/77 05/16/80 Malta 09/17/74 12/14/75 Mauritania 12/08/82 04/26/86 Mauritius 05/25/71 08/27/73 Morocco 08/31/61 01/21/68 Nepal 10/29/86 07/07/88 Niger 10/29/64 01/10/66 Oman 06/21/79 02/04/86 Pakistan 11/25/59 04/28/62 Panama 11/02/83 03/10/89 Papua New Guinea 11/12/80 11/03/83 Poland 11/10/89 02/24/91 Portugal 09/16/80 04/23/82 Romania 10/12/79 01/10/81 Russia 06/13/89 08/05/91 Rwanda 05/18/67 02/28/69 Senegal 01/24/64 01/16/66 Sierra Leone 04/08/65 12/10/66 Singapore 10/03/73 10/01/75 Somalia 11/27/81 02/15/85 Sri Lanka 11/08/63 12/07/66 St. Lucia 03/16/85 07/22/87 St. Vincent and the Grenadines 03/25/86 01/08/89 Sudan 02/07/63 11/24/67 Syria 08/02/77 04/20/80 Tanzania 01/30/65 07/28/68 Thailand 12/13/61 04/10/65 Togo 05/16/61 12/21/64 Tunesia 12/20/63 02/06/66 Turkey 06/20/62 12/16/65 Uganda 11/29/66 08/19/68 Uruguay 05/04/87 06/29/90 Yemen 06/21/74 12/19/78 Yugoslavia 07/10/89 10/25/90 Zaire 03/18/69 07/22/71 Zambia 12/10/66 08/25/72 -- Signed treaties Temporarily Country signed applicable Israel 06/24/76 Yes Swaziland 04/05/90 No People's Republic of Mongolia 06/26/91 No Chile 10/19/91 No Albania 10/31/91 Yes Lithuania 02/28/92 Yes Kazakhstan 09/22/92 Yes Jamaica 09/24/92 No Estonia 11/12/92 No OPIC OPIC insurance and finance programs are available in Germany only in the territory of former East Germany. Labor The German labor force is well-educated, well-trained, well- disciplined and well-paid. While employers complain that wages and fringe benefits are high, thus impairing international competitiveness, western Germany has the lowest unemployment and strongest economy of any of the larger EU countries. Although unemployment is still rising, albeit more slowly, some categories of skilled workers are in short supply in certain regions of Germany. Generally, however, the highly-acclaimed dual system of combined on-the-job and academic training for apprentices produces the skills needed by employers. Legislation designed to protect workers limits the ability of employers to lay off redundant workers and therefore discourages flexible hiring practices. Unionized (almost 40% of the labor force) German labor is organized in a few large unions. Traditionally union leaders have been able to come to agreement with management with relatively little work stoppage. Co-determination laws give labor significant voting representation in the supervisory boards of larger companies. Management is legally limited in its recourse to lockouts. Severance compensation is generous and management latitude to alter its workforce is restricted. Overall compensation in Germany is among the highest in the world. There is also an ongoing contractually-agreed reduction in weekly working time, which in the metal and electrical industries will decline to 35 hours in 1995. Given the above, most new factories in Germany will emphasize state of the art, capital-intensive technologies. In general, Germany adheres to all International Labor Organization (ILO) conventions to which it is a party. However, it does become involved in occasional disputes with the ILO over which categories of government workers may be prohibited from striking. The labor force is over 39 million, including about 2 million foreign ("guest") workers. The latter are most commonly found in large manufacturing and construction companies and generally receive the same pay and benefits as German citizens in comparable positions. The unemployment rate (salaried employees and wage earners) in the western states was 8.1 percent in May 1994. In contrast, unemployment in the five new states that formally made up the GDR was 15.4 percent. However, if those engaged in "make-work" public employment and retraining schemes were included, the figure would be at least a third. the further addition of those on "pre-early retirement," subsidized short work, and other government financed programs brings the number now employed down to barely half of those who worked in the pre- 1990 GDR. Foreign trade zones/free ports There exist free trade import zones in FRG harbors, the major ones being in Hamburg, Bremen, and Bremerhaven. There are also free trade import zones attached to all German airports with international air traffic. They operate under the provisions of the German Customs Law of June 14, 1961, revised. Foreign-owned firms are entitled to equal treatment with German companies. Capital outflow policy The German Government pursues a policy of supporting industry's efforts to open new markets in Less Developed Countries (LDCs), take advantage of lower production and transportation costs, avoid import restrictions in LDC buyer countries and assure the FRG basic commodity supply. The flow of investment to LDCs is, however, hampered by the lack of infrastructure, qualified labor and potential sales markets in those countries. The FRG has tried to reduce the political risks involved with investments in LDCs by concluding bilateral investment treaties to assure the right of transfer of profits and repatriation of capital or compensation in the event of expropriation. The effects on outflow were rather modest. Industry continued to concentrate on investment in more profitable and less risky countries, i.e., those where investing firms are more or less certain that their money will bring returns. For that reason, the German government, facing a tight fiscal situation, rescinded the Developing Country Tax Law that had provided certain tax privileges in return for investments in LDCs. The government argued that the law encouraged investment that largely would be made by industry whether or not such subsidies were provided.