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Country Commercial Guides for FY 2000: PortugalReport prepared by U.S. Embassy Lisbon, released July 1999 Note* |
VII. INVESTMENT CLIMATE
OPENNESS TO FOREIGN INVESTMENT
The Portuguese Government welcomes foreign direct investment as an integral part of its strategy to modernize the economy. It promotes investments through a government agency, ICEP (Investimentos, Comercio e Turismo). Portugal maintains a simple, post facto registration regime for foreign investment. For investments on the Portuguese mainland, foreign investors need only register with ICEP within thirty days from the day they make their investment. For investments in Madeira or the Azores, investors need to register with the Regional Secretariat of Planning and Finance.
Under Portuguese law, foreign direct investment is defined as an act or contract which obtains or increases enduring economic links with an existing Portuguese institution or one to be formed. In addition to the usual definitions of investment, these acts can include long-term loans (5 years or more); subscription for acquisition of 10 percent of a Portuguese company; acquisition of shareholdings in a Portuguese company in which non-residents hold at least 20 percent of the share capital; or other types of transactions, such as supplemental capital contributions or technical agreements in which the licensor holds the capital of the Portuguese licensee.
According to ICEP, foreigners are allowed to establish themselves in all economic sectors open to private enterprise. However, investments which may affect public health or security or which relate to the arms industry require the prior approval of government authorities. Also, Portugal restricts non-EU investment in regular air transport to 49%. It restricts non-EU investment in television operations to 15% (by a single non-EU investor). It subjects complementary telecommunications services to licensing and restricts non-EU investors' participation in the capital of complementary telecommunications operators to 25%. Portugal also restricts foreign investors' participation in the capital of public service telecommunications operators to 25%. The government has proposed legislation to modify some of these restrictions.
Finance/Insurance: The creation of new credit institutions or finance companies, acquisition of a controlling interest in such financial firms, and establishment of subsidiaries require authorization by the Bank of Portugal (for EU firms) or the Ministry of Finance (for non-EU firms). In both cases, the authorities take prudential considerations into account, but in the case of non-EU firms, the Ministry of Finance also considers the impact on the efficiency of the financial system and the internationalization of the economy. Foreign insurers from non-EU countries seeking to establish an agency in Portugal must post a special deposit and financial guarantee and must have been authorized for such activity for at least five years.
Foreign Workers: Foreigners who want to work in Portugal are required to obtain a work permit and a residence permit. Companies employing more than five workers must limit foreign workers to 10% of the workforce. Companies can request exceptions to this limit if the foreign workers have special technical expertise. Workers from other EU countries are not included in this limitation. EU workers must obtain a residence card for EU nationals but are not required to have work permits. Non-EU workers are required to have both a residence visa and a work permit.
CONVERSION AND TRANSFER POLICIES
Portugal maintains no current or capital account restrictions. On January 1, 1999, Portugal joined with 10 other European countries to form the European Monetary Union which has adopted a new single currency, the Euro. During a transition period, the Portuguese Escudo will continue to be used alongside the Euro, but the exchange rate has been fixed at 200.482 escudos equals 1.0 Euro.
EXPROPRIATION AND COMPENSATION
There have been no cases of expropriation of foreign assets or companies in Portugal in recent memory, nor is there concern for future expropriation. At least one U.S. firm, however, claims that the retroactive application of environment/zoning standards denied it the right to build a hotel on property purchased for that reason.
DISPUTE SETTLEMENT
Major industrial disputes involving foreign firms and investors are rare. Portuguese courts have been the main formal means of resolving such disputes and enforcing property and contractual rights. Many foreign (including U.S.) firms and investors consider Portuguese courts slow and ineffective. These firms routinely seek assistance from private lawyers, lobbyists and/or their Embassies in Lisbon to resolve disputes through direct appeal to the appropriate government authorities.
International Arbitration: Portugal accepts binding arbitration of investment disputes between foreign investors and the state. It is a member of the International Center for the Settlement of Investment Disputes (ICSID), also known as the Washington Convention and/or the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.
PERFORMANCE REQUIREMENTS/INCENTIVES
Portugal offers a number of incentives to foreign investors. From 1994 to 1999, the country benefited from the "Segundo Quadro Comunitario de Apoio - or QCA II" which provided significant tax and financial incentives funded by the European Union. These incentives focused on foreign investment projects greater than 5.0 billion Portuguese escudos (about 27 million US dollars at current exchange rates) which contributed to innovation and modernization of Portuguese industry. These incentives included interest free loans, cash grants, tax incentives and exemptions from social security contributions.
Based on the results of the agreement reached on the EU's "Agenda 2000" in Berlin, EU funding will continue to be available for these programs for the period 2000-2006. While the details of QCA III are still being worked out, it is anticipated that the incentives will be very similar to those of QCA II. Based on the currently proposed structure of QCA III , the following estimated amounts are projected to be available for the period 2000-2006. (Note: Figures are million US dollars, assuming an average exchange rate of 185 escudos/dollar; figures may not add due to rounding.)
Structure of QCA III
Objective 1: To promote the level of qualification of Portuguese workers, promote employment and social cohesion.
Education 1,745 million US Training, employment and social development 2,486 Science, Technology and Innovation 524 Information Society 324 Health 838 Culture 286 Sports 162 Total 6,367 Objective 2: To alter the Productive profile towards Activities of the Future
Agriculture, Rural Development and Fisheries 2,432 Environment 3,486 Total 5,918 Objective 3: To enhance Territorial value and Portugal's Geo-Economic position.
Accessibility, Transportation and Communication 2,881 Environment 535 Total 3,416 Objective 4: To promote sustainable development of the regions and national cohesion
Total 4,811
Taxes: Portugal has one of the lowest corporate tax rates in the EU. The normal rate is now 34% (versus 36% before), with an additional municipal tax in certain areas of up to 3.4%. U.S. companies benefit from the U.S. - Portugal tax treaty, which protects U.S. investors from double taxation and extends exceptional tax reductions on profits and capital gains to investors. It reduces the withholding tax rate for the Portuguese-source income of non-residents to 15% for dividends and 10% for royalties and interest.
Special Regime: Portugal maintains a special contractual investment regime for major projects (over PTE 5,000 million/USD 30 million) that involve investment in an internationally mobile production unit. Under the special regime, foreign investors negotiate financial and tax incentives directly with the Portuguese authorities -- usually ICEP and the Ministry of the Economy. EU authorities must also approve all projects involving EU funding. Foreign investors seeking incentives under the special regime must sign contracts committing them to specific performance targets -- for employment, exports, local content, technology transfer and/or training. Investors are required to share proprietary information relating to these performance targets in order to renew or expand the incentives. The government plans to maintain these incentive programs as long as EU funding for them is available and other countries use them.
RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
Private Ownership/Enterprise: Private ownership is limited to 49% in the following sectors: basic sanitation (except waste treatment); international air transport; railways; ports; arms and weapons manufacture; and airports. The government requires private firms to obtain concessions, contracts, and licenses to operate in a number of sectors (public service television, waste distribution, waste treatment), but grants these on a non-discriminatory basis. Foreign firms have the right to establish themselves in all economic sectors open to private enterprise. Foreign investments that affect public health, order or security, or which relate to the arms industry, require prior approval of the competent authorities.
Competitive Equality: Competitive inequalities between public and private firms have been reduced in recent years. In the financial sector, private banks that have grown through mergers and acquisitions now compete on equal footing with the remaining public bank. State-owned entities still maintain competitive advantages in airline transport and telecommunications.
Privatization Program: Portugal is completing the last phases of a wide-ranging privatization program that has generated $21.5 billion in proceeds between 1989 and 1998. The government used more than half of the proceeds to reduce public debt. In 1988, public companies accounted for 19.7% of Portuguese GDP and 5.5% of total employment. Through its privatization program, those figures had been reduced 8% of GDP and 2.6% of employment by the end of 1997. It reduced total employment in the state-owned sector to 2.8% of total employment from 6.4%. Additional privatizations are planned for TAP-Air Portugal, an energy "holding" company which will combine Gas de Portugal with the state-owned refiner, Petrogal, the Portuguese Airport authority, and the agricultural giant EPAC.
PROTECTION OF PROPERTY RIGHTS
Patents: 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. Current Portuguese law extends the terms of patents applied for or already in force on January 1, 1996, to the WTO TRIPS-consistent 20-year-from-date-of-filing term.
With regard to intellectual property protection, existing Portuguese legislation fails to comply with a number of specific provisions of the WTO TRIPS Agreement. The Portuguese government is aware of these deficiencies and has been engaged in a lengthy review and revision process, but no revisions have been approved to date.
TRANSPARENCY OF THE REGULATORY SYSTEM
Competition Law: Portugal's revised competition law (Decree-Law 371/93 of October 29, 1993) brought Portuguese legislation into line with European Union standards and the needs of an open economy and integrated markets. The law has helped to improve competitive conditions for consumers in some areas.
Nevertheless, one of the most common complaints by American companies wishing to invest in Portugal is the abundance of bureaucratic red tape. Decision-making tends to be overly centralized and obtaining government approvals or permits can be time-consuming and costly, particularly for small- and medium-sized foreign investors and entrepreneurs. Some U.S. firms report substantial delays and red tape in accomplishing such basic tasks as registering companies, filing taxes, receiving value-added tax refunds, and importing vehicles. Portugal still charges a stamp tax on many transactions. Portugal is currently attempting to implement a "one-stop shopping" system to minimize red tape for Portuguese citizens. No such mechanisms are yet in place for foreign investors.
EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT
With European monetary integration, Portugal is increasingly being integrated into a European wide financial market. As a member of the Euro-zone, Portugal now offers a much lower exchange rate risk for foreign investors than in previous years. Another benefit has been a dramatic decrease in interest rates and a greater availability of credit, particularly to Portuguese consumers and homeowners. In addition to bank lending, the private sector has access to a variety of credit instruments, including bonds. Legal, regulatory, and accounting systems are consistent with international norms.
The Portuguese Securities Market Act of 1991 provided for liberalization of capital markets in Portugal. It privatized Portugal's stock exchanges, increased requirements for greater transparency and established an autonomous Securities Market Commission (CMVM) to oversee the market. Total capitalization (stocks and bonds) of the Lisbon stock market (Bolsa de Valores Lisboa or BVL) has grown rapidly from 1.7 billion escudos in 1987 (29% of GDP) to more than 19 billion escudos in 1998 (99% of GDP). The BVL General Index rose 26% in 1998 and has grown at an annually compounded rate of approximately 11% since 1989. Despite its rapid growth, the BVL is still one of the smaller markets in Europe and is largely dominated by the shares of recently privatized state-owned firms. The Oporto Stock Exchange deals in derivatives, essentially futures and options contracts on financial instruments.
Some firms use defensive measures, such as statutes that limit voting power of certain categories of shareholders, to attempt to maintain control. Some firms attempt to prevent mergers and acquisitions that might affect their interests by invoking the tacit support of commercial regulatory authorities. Most statutory measures are designed to protect against any potential loss of control (i.e., any hostile takeover), domestic or foreign. Defensive measures involving regulatory authorities usually involve a foreign investor. Nevertheless, an adequate tender offer for 100% of the shares can overcome most defenses. Portuguese law requires that a hostile bidder make an offer for all the shares of a target firm if the bidder seeks ownership of more than 50% of the shares. The bidder may make an offer for minority blocks of shares if he seeks less than 50% of the shares.
The assets of Portugal's banking sector are currently concentrated in five large banking groups. However, most observers believe that the number of banks in the country will be reduced through consolidation over the next several years. Attempts by foreign banks (particularly Spanish banking groups) to buy controlling interests in Portuguese banks have triggered concerns among government officials that Portugal's banking sector may be dominated by foreign bank groups in the near future. Efforts by the Portuguese governments to block such transactions, however, have been criticized by the European Commission.
POLITICAL VIOLENCE
There have been no incidents involving politically motivated damage to projects and/or installations. Potentially destructive civil disturbances are not likely.
CORRUPTION
Corruption is a relatively limited but enduring aspect of the business culture in Portugal. The "1998 Corruption Perceptions Index" published by Transparency International, ranked Portugal 22nd out of a total of 85 countries considered. Within the EU, Portugal ranked 11th out of 15 countries on the list. It is general practice for firms operating in Portugal to hire advisers and consultants to pursue projects. In Portugal's business culture, well-developed contacts are extremely important because the Portuguese feel this lends confidence and trust to business transactions. Connected advisers are commonly employed to provide this extra measure of support. These intermediaries are often very well paid for their services. Although U.S. firms acknowledge occasional encounters with corruption in the course of doing business in Portugal, they do not identify corruption as an obstacle to foreign direct investment.
Portugal's basic law to combat corruption is Law 36/94 of September 29, 1994. This law clarifies the kinds of business and financial corruption that will be subject to criminal penalties. The penalties for acts of corruption committed in the exercise of public functions are specified in the Penal Code (Article 420). The penalties for conviction on corruption charges are one to six years in prison and/or heavy fines, depending on the nature of the crime. Primary responsibility for preventing and prosecuting corruption lies with the Public Prosecutor's Office and the Judicial Police. Within the Judicial Police, the Central Directorate for Combating Corruption, Fraud, and Financial and Economic Crimes has primary action responsibility. Portugal signed but has not ratified the OECD Convention on Combating Bribery.
LABOR
Portugal's unemployment rates have traditionally been below European averages, a condition that some observers attribute to a willingness on the part of labor unions to be flexible in negotiating wage agreements during economic downturns. That trend has continued with a Portuguese unemployment rate in the fourth quarter of 1998 of only 4.8%, considerably below the Euro-11 average of 10.6% for the same period. According to a 1996 study cited by ICEP, Portuguese workers had, on average, longer hours than those of any other European countries. Portugal has also historically had the lowest labor costs in Europe. However, according to a 1998 study by the German Institute of Economic Studies, DIW, while Portuguese labor costs are only 37.3% of those in Western Germany, Portuguese productivity is only 34.7% of West German levels.
Despite Portugal's favorable comparison to most other EU countries, one of the more common complaints of U.S. investors is that the Portuguese labor market is overly rigid. Portuguese labor law explicitly defines the conditions under which an employer can hire and fire workers. The dismissal of an employee, for example, is allowed only when his behavior makes it impossible to allow him to continue in the job. Furthermore, there are a number of restrictions on part time or temporary employment contracts.
Labor strikes are much more common in Portugal than in the United States, but are generally of a short duration. Over the last year, there have been a number of high-profile strikes in the public sector, including transportation and health. Portugal is a member of the International Labor Organization and adheres to the ILO Conventions Protecting Labor Rights. Portugal ratified and is the most recent signatory to ILO Convention 138, which establishes a minimum employment age of 15 for all economic sectors. As of January 1, 1997, the minimum working age in Portugal is 16, except for light work, thereby exceeding the ILO norm.
FOREIGN TRADE ZONES/FREE PORTS
Portugal has two foreign trade zones/free ports in the autonomous regions of the islands of Madeira and the Azores. These foreign trade zones/free ports were authorized in conformity with EU rules or incentives granted to member states. The authorized activities are industrial and commercial activities, international service activities, trust and trust management companies and offshore financial branches. Companies established in the Free Trade Zones enjoy several benefits including import/export-related benefits, financial incentives, tax incentives for investors and tax incentives for companies.
The Madeira free trade zone has had some success and is well known. The free trade zone of the Azores islands has not achieved the same degree of international acceptance as Madeira.
BILATERAL INVESTMENT AGREEMENTS
As of February, 1998, Portugal had bilateral investment treaties with 25 countries.
Country Signature Publication Germany 09/16/80 07/08/81 Morocco 10/18/88 03/01/90 Cape Verde 10/26/90 04/26/91 China 02/03/92 07/23/92 Guinea-Bissau 06/14/91 10/08/92 Hungary 02/28/92 10/30/92 Poland 03/11/93 10/09/93 Romania 11/17/93 07/26/94 Czech Rep. 11/12/93 07/21/94 Brazil 02/09/94 08/10/94 Tunisia 05/11/92 11/17/94 Venezuela 06/17/94 04/15/95 Peru 11/22/94 07/15/95 Russian Fed. 07/22/94 07/21/95 Argentina 10/06/94 08/08/95 Mozambique 09/01/95 05/28/96 South Korea 05/03/95 05/28/96 Pakistan --n/a-- 10/11/96 Letonia 05/27/95 05/20/97 Rep. of Croatia 05/10/95 06/20/97 Sao Tome and Principe 05/12/95 07/18/97 Slovakia 07/10/95 09/08/97 Chile 04/28/95 12/24/97 Uruguay 07/25/97 12/30/97 Slovenia 05/14/97 01/24/98 OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
The potential for significant OPIC insurance programs in Portugal is limited. Nevertheless, some U.S. firms insure with OPIC in Portugal as a matter of international corporate risk management policy. Portugal is a member of the Multinational Investment Guarantee Authority (MIGA).
FOREIGN DIRECT INVESTMENT
Foreign direct investment inflows into Portugal fell in 1998 to $870 million, or 0.8% of GDP. Portuguese direct investment abroad, however, has soared over the last five years, reaching $2442 million in 1998. Much of 1998's figures are attributable to investments in Brazil by formerly state-owned firms, including Portugal Telecom and EDP. However, beyond continuing strong interest in Brazil and EU countries, Portuguese firms appear to be focusing on other countries of Latin America, in Morocco and Portuguese-speaking countries in Africa, and Eastern Europe.
MAJOR FOREIGN INVESTORS
Selected Major Foreign Direct Investors in Portugal
Company Industry Foreign Control Autoeuropa (Ford/Volkswagen) Motor Vehicles and Parts U.S./Germany BP Portuguesa, SA Fuel Distribution UK Shell Portuguesa, SA Fuel Distribution Netherlands/U.K. Renault Portuguesa, SA Motor Vehicles and Parts France Opel, SA Motor Vehicles and Parts USA Asea Brown Boveri, SA Construction Sweden G.M.A.C. Vehicle Rental USA Siemens Electrical Component Mfg. Germany Fiat Auto Portuguesa, SA Motor Vehicles and Parts Italy Ford Electronics Electrical Components USA Carrefour, SA Food Distribution France Citroen-Automoveis, SA Motor Vehicles and Parts France Mitsubishi, SA Motor Vehicles and Parts Japan Delphi Packard Motor Vehicles and Parts USA Tisep, LDA Electronics USA/Japan Repsol, SA Fuel Distribution Spain Peugeot Portugal, SA Motor Vehicles and Parts France Sony Portugal, LDA Electronics (trade) Japan IBM, SA Electronics USA Lever, LDA Soaps and Cosmetics Netherlands Esso Portuguesa, SA Fuel Distribution USA Citroen Lusitana, SA Motor Vehicles and Parts France Philip Morris (Portugal), LDA Trade USA Rover, LDA Motor Vehicles and Parts UK Mobil Oil Portuguesa, LDA Fuel & Lubricants USA Ericsson Telecommunications Sweden Hewlett-Packard, SA Computers and Electronics USA Dow Portugal, SA Chemicals USA Iglo, LDA Food Netherlands
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.
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