VII. INVESTMENT CLIMATE OPENNESS TO FOREIGN INVESTMENT The Portuguese Government considers foreign investment an essential part of its overall strategy to modernize the economy. As a result, Portugal actively seeks foreign investment and provides subsidies to many investments. Foreign investment is permitted in all sectors open to private investment. However, there are limitations on foreign investment in certain strategic sectors. Since joining the EU in 1986, Portugal has experienced large increases in both direct and portfolio foreign investment. Direct foreign investment inflows increased from 166 million dollars in 1986 to 3.3 billion dollars in 1992. Direct foreign investment accounted for 4 percent of GDP and 16.1 percent of Gross Capital Formation. In contrast, direct foreign investment accounts for 1 percent of GDP and 4.8 percent of Gross Capital Formation in the EU as a whole. Decree Law No. 197 of December 1986 provides the framework of the current investment regime. Foreign investors must submit a prior declaration to the Portuguese Foreign Trade Institute (ICEP). ICEP has two months after receipt of a properly documented project to render a decision. For investments that require foreign exchange movements, ICEP may consult the Bank of Portugal. If ICEP does not reply within the stipulated two month period, the project is automatically approved. In practice, almost all foreign investment proposals are approved within one month. Foreign investors have access to all incentives and grants available to national investors. The investment incentive program is primarily cash-based, although tax holidays can be negotiated. In practice, for large investment projects (defined as exceeding 10 billion escudos or approximately 60 million dollars), incentives are negotiated on a case-by-case basis with ICEP, various economic ministries, and the Bank of Portugal. U.S. companies have access to these funds and have not reported any discriminatory treatment. CONVERSION AND TRANSFER POLICIES The Government does not interfere with the transfer abroad of profits and dividends after verification by the Bank of Portugal that applicable taxes have been paid. In some cases, a contract involving payments arising from the import or export of technology, royalties, trademarks, patents, or technical assistance must be registered with the Bank of Portugal. EXPROPRIATION AND COMPENSATION There has been little or no experience in Portugal of expropriation of foreign assets or companies. Some former Portuguese owners of companies nationalized at the time of the 1974 Revolution consider Government attempts to compensate them as inadequate and believe they should have preference in the re-privatization of these firms. There are no tendencies of the host government to discriminate against U.S. investments, companies or representatives. DISPUTE SETTLEMENT The US Embassy in Lisbon is not aware of any major investment disputes involving foreign investors which have occurred over the past few years. As of May 1994, only one unresolved dispute involving an American company was known to the Embassy. The case involves a company which was prevented from developing land for a hotel because the land was subsequently declared part of a natural reserve. Since 1985, the company has been seeking compensation through the Portuguese legal system. Portugal is a member of the International Center for the Settlement of Investment Disputes. POLITICAL VIOLENCE There have been no recent incidents of politically motivated damage to projects or installations. The political environment is stable and it is highly improbable that civil disturbances that would jeopardize the political order will occur. There are no nascent insurrections or belligerent neighbors. PERFORMANCE REQUIREMENTS/INCENTIVES Foreign investors seeking standard incentive benefits are guaranteed treatment equal to that of Portuguese firms and are not normally subject to performance requirements. Performance and local content requirements may arise on an ad hoc basis in the case of negotiated incentives. The Ministry of Labor must approve the employment of non-EU foreign nationals and at least 90 percent of the employees of resident companies must be Portuguese. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT Foreign investors may invest in all sectors open to private investment. In a few sectors foreign investment is limited: mining, maritime transport, air transport, fishing, and international road transport. Competitive inequities between private and public entities have been reduced in recent years. In the financial sector, public banks now compete on equal footing with private banks. There still seem to be competitive advantages for state entities operating in airline transport and telecommunications. Portugal is engaged in a wide-ranging privatization program in sectors such as banking, insurance, cement, petroleum, transport, steel and chemicals. Foreign participation in the initial sale of these firms is often limited. However, once the initial privatization has taken place, these companies will be publicly traded and available to international buyers. PROTECTION OF PROPERTY RIGHTS Portugal is a member of the International Union for the Protection of Industrial Property (WIPO) and a party to the Madrid Agreement on international registration of trademarks and prevention of the use of false origins. The Munich Convention on European Patents went into effect on January 1, 1992. The length of patent protection is 20 years, non-renewable. Trademarks must be registered and are valid for 10 years and can be renewed indefinitely. Industrial designs and models can be protected for five years and renewed indefinitely. Informatics legislation entered into force in 1991. This legislation has improved the enforcement of copyright law and has increased the sale of computer software. The Portuguese Association of Software Producers (ASSOFT) has conducted an aggressive public awareness campaign which has included raids and seizures of illegal software at large companies. Enforcement problems remain, however, and are exacerbated by lengthy delays in concluding court cases. REGULATORY SYSTEM: LAWS AND PROCEDURES As Portugal transposes EU single market directives into national law, barriers to trade, capital and labor movements are progressively diminishing. A major tax reform in 1989 brought the Portuguese tax system closer to those found in other EU countries. These steps at creating a single market have fostered increased competition in Portugal. While bureaucratic procedures for establishing and maintaining a foreign investment have improved since the introduction of the 1986 foreign investment regime, businessmen still consider red-tape excessive. Some businessmen believe entry cost would be reduced with the introduction of a one-stop registration entity. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT Foreign firms have access to the domestic credit market. They may also be quoted on the Lisbon and Porto stock exchanges if operated as Portuguese firms. For example, Citibank and Chemical are both quoted on the local exchange. Portfolio investment from abroad was encouraged by the lifting of remaining capital controls at the end of 1992. Foreign investors may have purchased 1.8 billion dollars worth of escudo-denominated domestic securities in 1993. It is estimated that the stock of portfolio investment held by non-residents at the end of 1993 was 860 billion escudos (5.3 billion dollars) or 15 percent of total outstanding government bonds. This portfolio investment has been increasingly concentrated in Government securities. Local observers feel foreign investor interest in the local stock markets would be enhanced by a more effective regulatory system. In June 1993, the five largest banks had assets of 8.7 billion dollars. The big five have a 66 percent market share, up from 55 percent in 1990. Capital solvency ratios have increased the soundness of the banking system in recent years. Non-performing loans are estimated at 8 percent of total assets. BILATERAL INVESTMENT AGREEMENTS Portugal has a bilateral investment agreement with Morocco. A previous agreement with the Federal Republic of Germany was dropped when Portugal joined the EU. Portugal has bilateral tax treaties with Germany, Austria, Belgium, Brazil, Spain, Finland, France, Italy, Norway, United Kingdom, Switzerland. In January 1993, Denmark abrogated its agreement with Portugal. Recently, Portugal has negotiated but not ratified a tax agreement with Korea. The United States does not have a bilateral tax treaty with Portugal though negotiations to that end are approaching a satisfactory conclusion for both sides. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS There are no restrictions on OPIC programs in Portugal. OPIC actively promotes investment in Portugal by companies from the United States. Additionally, in 1991 OPIC and the Portuguese state bank Banco de Fomento e Exterior signed a cooperation protocol to jointly encourage American and Portuguese private investments in Portuguese speaking African countries. Portugal is a member of the Multilateral Investment Guarantee Agency (MIGA). LABOR Rapid economic growth in recent years has put pressure on labor markets, especially for skilled technicians and managers. Labor shortages have driven up wage and benefit bills, particularly in non-traditional industries such as the financial sector. In recent years labor/management relations in the private sector have been generally good. U.S. companies report high worker productivity. The labor law is quite rigid, making the dismissal of workers not covered by limited term contracts difficult. Strikes in the private sector are rare, except in the mining sector. Public sector labor disruption is common, especially in the transport sector. Portugal is a member of the International Labor Organization (ILO). The Government generally adheres to the ILO Conventions Protecting Labor Rights. The major shortcoming in this regard are violations of minimum age requirements. Labor factors have not limited the choice of technology. CAPITAL OUTFLOW POLICY Capital outflow policy has been liberalized in recent years and is harmonious with EU policies. The Government encourages investment in the former Portuguese colonies in Africa by providing investment insurance, loan guarantees and credit. MAJOR FOREIGN INVESTORS Foreign investment inflows of 3.3 billion dollars represented 4.0 percent of GDP in 1992. The stock of foreign investment is estimated at 10.6 billion dollars at the end of 1992 or 12 percent of GDP.