VII. Investment Climate Openness to Foreign Investment The government of Paraguay welcomes foreign investment. Government economic policy is geared to creating favorable investment conditions based on economic stability, a competitive open market, financing facilities, floating exchange rate, free convertibility, tax reductions, and repatriation of capital and profits. There are no restrictions on foreign investment, except for activities reserved for state monopolies (cement, electricity, water, and telephone), which remain closed to both national and foreign private investment. Paraguay offers an open climate for foreign investors, who enjoy the same legal rights as do national investors. After the change of government in February 1989, the Rodriguez administration established a number of fiscal incentives to promote investment, both domestic and foreign. The government also signed a new agreement with the overseas private investment corporation on September 24, 1992. The legal framework governing investment incentives is contained in Law 60/90. The fiscal incentive package includes total exemption from certain taxes on the establishment of operations and reduction of customs duties on imports of capital goods. There is a 95 percent corporate income tax exemption for five years. The law is based on the principle of national treatment and makes no distinction between domestic and foreign investors. The Ministry of Industry and Commerce is responsible for the administration of the investment incentive law; The ministry of Finance oversees all tax matters. With the implementation of the new tax system (Law 125/91), corporate incomes are subject to a 30 percent tax rate. As a further incentive to investment, the government has reduced the income tax rate on reinvestment profits to 10 percent. Privatization: Congress approved, December 31, 1991, a privatization law. The law authorizes the executive to sell to the private sector, entirely or partially, five companies owned by the government. The privatization law allows the participation of foreign individuals or corporations in the scheduled privatization of the five state companies. Nevertheless, article 7(c) of the privatization law stipulates that national capital resources shall enjoy preference over any proposal presented by foreign capital in the evaluation and weighing of offers. Such preference, in the matter of prices, shall grant preference to national capital even when such offers are lower than foreign offers by 15 percent. As of April 1994, no progress had been made toward implementing the privatization of state owned enterprises. Conversion and Transfer Policies There are no restrictions on converting or transferring funds associated with a foreign investment into a freely usable currency and at a legal market clearing. Law 60/90 permits the repatriation of capital and profits, and provides guarantees against inconvertibility. There are no restrictions on remittance of capital and profits. In the case of repatriating profits, funds are subject to an income tax withholding of five percent on the gross amount remitted. There are no limits on currency transactions. Currently, Paraguay does not have controls on foreign currency exchange transactions. Foreign currency prices are set by supply and demand in the market, and such currency may be freely acquired at banks and exchange houses. At present, the U.S. dollar value of local currency is 1,920 Guaranies per dollar. Expropriation and Compensation Paraguay has no record of investment disputes, such as nationalization, requiring recourse to the courts. However, there are cases in which portions of large national and foreign owned land holdings are being considered for expropriation under the agrarian reform law. The June 1992 national constitution allows expropriation for reasons of public use or social interest. However, the constitution also establishes that prior to expropriation, just compensation be given to the owner. Dispute Settlement In December 1991, the Congress approved an investment guarantee law (Law no. 117/91) establishing equal guarantees for national and foreign capital. The new law allows international arbitration for the resolution of disputes between foreign investors and the Paraguayan government. This investment guarantee law also regulates joint-ventures. Paraguay became a member of the International Center for the Settlement of Investment Disputes as of October 22, 1982 (Law 944). Political Violence There have not been any incidents reported over the past few years involving politically motivated damage to private or public projects and/or installations. Since the overthrow of the Stroessner regime in February 1989, the democratic political system has allowed farmers and workers to increasingly use their freedom of expression and assembly to organize protests and strikes, but no private or public interests have suffered significant damage. Performance Requirements/Incentives No performance requirements have been imposed as a condition for establishing, maintaining, or expanding an investment, or for access to tax and investment incentives. Right to Private Ownership and Establishment The recently promulgated national constitution guarantees the right of private ownership for individuals and corporations, both foreign and domestic, to own business enterprises and engage in all forms of remunerative activity. Private entities have the rights to freely establish, acquire and dispose of interests in business enterprises. Protection of Property Rights Paraguay has a comprehensive legal framework of laws, some of them dated, for the protection of intellectual property rights (IPR), including trademarks, patents and copyrights. The U.S. government has ongoing discussions with the Paraguayan government on issues that must be addressed in order to establish an adequate intellectual property regime. Lack of effective enforcement of existing IPR laws has encouraged the development of a sizable business of counterfeiting, particularly sound recordings and video movies. --Patents: The outdated Patent Law of 1925 established an office of patents and inventions and the requirements and procedures for obtaining patents. The law does not meet modern standards. The law grants patents for 15 years which may be renewed. --Trademarks: The procedure for registering a trademark resembles the U.S. system. The illegal appropriation of well-known trademarks presents a serious problem. Anyone may register a trademark and the process is relatively simple and inexpensive. The law grants trademark rights which may be renewed before its expiration. Ownership of a trademark may be transferred by contract or inheritance. --Copyrights: In 1991, Paraguay became a signatory to the Bern convention for the protection of literary and artistic works. Although the government has taken measures to fight piracy, widespread production and trade in pirated recordings, computer software and video cassettes remains a problem. Regulatory System: Laws and Procedures The Paraguayan Civil Code and Law 1,034/83 regulates business and industrial activities in the country. The main government agencies involved in regulating business operations are the Ministry of Industry and Commerce in charge of trade and industrial policy; The Ministry of Finance; the Central Bank in charge of regulating banking and financing activities; and the public trade registry. Registration at the public trade registry is mandatory for individuals and legal entities that wish to perform any type of business, industrial or financial activity in Paraguay. Paraguay has a free enterprise economic system. Government policy is to promote free competition. Nevertheless, there are still activities that are state monopolies. The state monopolies are the telecommunications company, the water and sewage company, the oil importing company, the cement company, and the electricity company. The government has made progress in liberalizing prices for certain basic products, such as sugar and bread. Nevertheless, the government maintains price controls on a few goods and services, such as gasoline and medicines, which the government considers necessary for the welfare of the population. The government also sets the price of public transportation and the minimum monthly wage. The Paraguayan constitution does not allow business combinations tending to establish monopolies, nor does it allow the artificial increase or decrease of prices or the creation of obstacles that may, in any way, preclude free competition at any time or under any form. Bilateral Investment Agreements The following countries have bilateral investment agreements or treaties with Paraguay. Country Type of Agreement or Treaty ------- --------------------------- Argentina Convention covering investment and Industrial harmonization, oct. 22, 1968. Brazil Treaty of friendship and cooperation. Authorizes the creation of binational enterprises. Chile Convention covering investment and industrial harmonization. Sep. 19, 1974. Uruguay Convention covering commercial Interchange and industrial harmonization and investments. France Convention covering the development and Protection of investments. Nov. 30, 1979. South Africa Convention on economic cooperation and investment, Aug. 9, 1974. Taiwan Convention covering investments. Sep. 25, 1975. United Kingdom Accord on the promotion and protection of investments, June 4, 1981. Law no. 92/91, which approves and ratifier the accord on the promotion and protection of investment signed June 4, 1981. Dec. 20, 1991. United States Agreement relating to investment guaranties (OPEC), signed Oct. 28, 1955. Paraguay, as a member of Mercosur, jointly with Argentina, Brazil, and Uruguay signed the "Rose Garden Agreement", a framework agreement to Encourage trade and investment. June 20, 1991. Agreement relating to investment guaranties (OPEC), signed Sep. 24, 1992. OPEC Investment Insurance Program The United States and Paraguay signed, September 24, 1992, an investment guaranty agreement which replaced the agreement signed in 1955. In addition, the government issued a decree on the same day, delegating to the Ministry of Industry and Commerce the authority to approve cases under the 1955 agreement. This allowed OPEC to begin full operations on September 24, 1992, in Paraguay. Capital Markets and Portfolio Investment Paraguay's government policies are geared to facilitate the free flow of financial resources in the country. Credits are allocated on market terms. There are no discriminatory credit policies. Foreign investors are allowed to raise financial resources in the local market without restrictions. Law 94/1991 and law 210/1993 have modified and replaced the Law no. 772/1979 establishing the stock exchange. The stock exchange market began operations in October 1993. Law 210 also provides incentives to companies operating in the stock exchange market, such as tax exemption to interest earned on stocks or bonds and exemption from tax on acts and documents on the transactions in the exchange market. A national stock exchange commission has been created for the regulation and control of the companies participating in the stock exchange market. This commission has established a mandatory accounting system and audit regulations. The country adopted the accounting standard issued by the International Accounting Standard Committee (IASC). The International Auditing Guidelines (IAGT), issued by the International Federation of Accountants (IFA), was adopted in national and regional accounting conferences in Paraguay. Although these standards must be applied by the members of the Paraguayan Institute of Accountants, there is no record of sanction for noncompliance. The banking system is composed of 31 banks and 52 finance companies. Four banks are state owned, 13 banks are foreign banks, and 14 bank's are owned by private nationals. Private bank accounts hold close to 85 percent of all banking assets, for a total amount of 1,584 million USD. The estimated total assets of the country's five largest banks are: Citibank, 139 million USD; Banco Asuncion, 130 million USD; Bancopar, 130 million USD; Banco Union, 122 million USD; and Interbanco, 108 million USD. During April 1994, the central bank increased minimum capital requirements for all banks from 1.6 million USD to 3.7 million USD. Labor The Paraguayan labor force was roughly estimated at 1,597,143 in 1992 and increases by approximately 50,000 new entrants annually. The government estimates unemployment in the metropolitan area at 6.0 percent in 1992. However, private observers put the unemployment rate at 14 percent. With a population growth rate near 3 percent annually, one of the most serious challenges facing the government is the creation of enough jobs to meet the increasing labor demand. The restrictive monetary policy implemented during the 1990's has succeeded in the fight against inflation but, at the same time, has reduced economic activity and worsened the unemployment situation. Historically, excess Paraguayan labor has emigrated to Argentina and Brazil in search of employment. Since 1991 to the present, the Argentina economic recovery has attracted thousands of Paraguayans to Buenos Aires in search of employment, bringing temporary relief to Paraguay's unemployment problem. The National Service for Professional Promotion (SNPP) is the government agency in charge of promoting and developing the technical training of the labor force. In addition, there are universities, technical schools and other non-government entities that regularly produce professionals and trained technicians in several areas and branches of technology. A GSP program was reinstated in February 1991. Paraguay's status as a beneficiary under the U.S. Generalized System of Preferences was suspended in 1987 for violation of labor rights under the Stroessner regime. The restoration of trade benefits was in recognition of improvements in worker rights under the Rodriguez government and the promise that the government would pass a new labor code with internationally accepted protection for labor. In 1993, the AFL-CIO filed a petition requesting suspension of GSP benefits for worker rights violations and for failure to approve a new labor code. On October 28, 1993 the Paraguayan parliament approved a new labor code that meets ILO standards. Foreign Trade Zones/Free Ports Paraguay does not have any areas designated as duty free import zones. Capital Outflow Policy There is no official policy on Paraguayan investment abroad. Paraguayan legislation does not prohibit investment in foreign countries. Paraguayans are free to invest as they wish. There is no data available covering the amount of Paraguayan holdings or investments abroad. Trade sources report that Paraguayans have sizable investments in real estate in Argentina, Brazil, and Uruguay, with a total estimated value over USD one billion. According to the Paraguayan Chamber of Banks, Paraguayan citizens maintain about USD 3,600 million in savings accounts and money-fund accounts abroad. In addition, saving accounts in U.S. currency in the local commercial bank system surpassed 600 million at the end of 1993. Major Foreign Investors The major foreign investors in Paraguay, by country of origin, during the past three years were: Brazil, Argentina, France, United Kingdom, Italy, Germany, and the United States. Paraguayan laws on foreign investment are among the most liberal in Latin America. However, despite the incentives offered to investors, private investment was sluggish and insufficient to maintain a sustainable pace of growth. According to government estimates, Paraguay needs one billion dollars annually in new investments to absorb the approximately 50,000 new entrants that increase the labor force every year.