Investment

Nature of Investment

Investment in this context is generally said to involve the taking of a share of at least 10 percent in the controlling shares of a foreign enterprise. Some states do not allow foreign investments at all.  It is generally a characteristic of socialist or developing states.

In such cases, participation in investment within the state may require a joint venture with a state authority or state-approved entity. Some states place restrictions on investment in particularly sensitive sectors.  Other states seek to stimulate investment by providing incentives for particular types of investment.

Treaties on Investment

In some cases, laws in relation to investment are the subject of treaties between states.  There are approximately 2,000 international bilateral investment treaties.

In some cases, treaties provide for dispute settlement mechanisms.  Many treaties designate the World Bank International Centre for Settlement of Investment Disputes as the arbitral body. Many treaties designate the World Bank International Centre for Settlement of Investment Disputes as the arbitral body.

Some states have entered bilateral arrangements with their former colonies to allow investment on a most favoured basis.

Industrial Policy

State’s investment policies or laws may promote local industry and development.  They may encourage local participation with foreign-based investors in industry.

They may seek to exclude competition from certain areas for the purpose of protecting domestic industries. Laws may encourage investment by incentives, in particular types of industries.  It may require percentage participation by local sources.

Regulation may take place at the level of transnational bodies such as the European Union or other regional alliances.

Approval of Investment

Many states require investors to register and obtain approval for proposed ventures.  The extent to which a state agency involves itself in the process, varies considerably.  In some cases, there may be a detailed examination from multiple perspectives. In other cases, the state agency may be coordinating and attempting to assist investment only.

States may limit their review to certain sectors.  There may be limited or no review in sectors intended for incentivisation.  The criteria for scrutiny may depend on the particular percentage investment or the quantum of investment.  There may be more elaborate procedures for larger investments.

Agencies may require details of the investment plan. This may require particulars of the industry, proposed budgets, production schemes, services schemes, transferred equipment, imports and exports, the extent of local imports, employment,, marketing, location and pricing.

Investment laws may determine foreign investment with reference to criteria such as

• job creation,
• the balance of payments,
• contribution to the development of less favoured zones.
• ratio of foreign and national contribution of capital.
• import substitution.
• use of national inputs.
• effect on price and quality.

There may be a formal investment agreement at the conclusion of the process.

Local Entity

Local laws may determine the format or structure that an investment must take.  Local participation may be required.  There is generally a requirement for disclosure by a local subsidiary or branch under doing business or corporation laws.

States may allow foreign subsidiaries and branches to set up, but they may be ineligible for particular benefits unless certain criteria, such as local participation, is provided.

Most states require the disclosure of information to corporate, regulatory and tax authorities.  Some countries positively encourage investment on the basis of the absence of disclosure requirements.  These are typically tax havens.

There may be restrictions on the degree of foreign ownership.  In some states, this is limited to less than half.

Limits of Foreign Investment

Many states reserve particular activities exclusively to the state or to nationals of the state.  They may allow limited participation in some sectors.

Many states do not allow for participation by non-nationals or provide a public monopoly in relation to public utilities, strategic industries, developing industries and industries which may compete with small domestic industries.

There may be restrictions on investment in  TV and media, finance, newspapers and resource industries such as mining, forestry, gas and oil.

Incentives

Non-nationals may be incentivised to invest in certain areas.  States are especially likely to encourage activity which is novel and hi-tech.

Some states establish special zones in which investments may be freely undertaken.  Incentives may be provided for location in those zones.

Ireland formerly provided incentives for the Shannon area and the IFSC.  Conversely, there may be restrictions on participating in industries in certain parts of the country.

Many states encourage free zones into and out of which goods may be imported and exported free of tax.  Other incentives may be provided in that area. There may be regulation of activities which may be undertaken in free zones.  There are almost 200 United States free trade zones.

Export processing zones such as those dealing in raw materials, are imported and processed for immediate export.  For customs purposes, they may be neither subject to import nor export duty.

Guarantees

States may provide guarantees in order to incentivise investment.  The guarantees may guarantee against restrictions on repatriation of profits and other income, non-discriminatory treatment, changes in tax, convertibility of the currency and compensation in the event of acquisition or appropriation. Guarantees may be applied to all investors or on a case-by-case basis.

Constitutions generally guarantee compensation for compulsory acquisition expropriation or nationalization.  There may be political considerations in relation to the degree of confidence which might be had in them.  The guarantee might be in the foreign currency of the investor.

Repatriation guarantees guarantee the right of the investors to remit profits and, ultimately, capital to their home state.  There may be qualifications in the case of foreign exchange difficulties.  There may be temporary capital controls in these cases.

Some states guarantee that non-nationals will be treated no less favourably than nationals.  This may extend to taxation, ownership, investment and other laws relevant to the industry.  It may mean, however, that where nationals are subject to expropriation, non-nationals will equally be so subject.

The state of the investment may provide guarantees with respect to foreign exchange and the exchangeability of currency. Ultimately, however, states retain inherent sovereign powers to nationalize investments and property within their jurisdiction.

Establishment

Upon approval, there may be a limited time in which to establish the investment.  Once it is in operation, the new foreign business may be subject to periodic review.

Requirements may apply in respect of income tax and withholding tax.  The ultimate sale liquidation and withdrawal may require governmental consent.

This may require the submission of reports, accounts, et cetera.  There may be an obligation to comply with local regulations or the terms of an investment agreement. There may be a single agency which supervises foreign investments.  It may require reports and conduct investigations.

Most company laws require disclosure of information once subsidiaries and branches are established within their territory.  In the case of subsidiaries, common law states require filing a memorandum and article.  In civil law states, the organisational documents are notarised and entered into a commercial register which is open for inspection.  It may also require to be notified and published in an official gazette.

Filings

States generally require filing a disclosure of key changes in the subsidiary.  This would typically include

• changes in the objects memorandum or articles and association.
• Changes in the share classes and rights.
• Appointment of directors.
• Liquidation and solvency procedures.

Reports generally have to be filed, including balance sheets, profit and loss, director’s reports and auditor’s reports.  Local accounting standards may be required.

Accounting

Accounting standards vary considerably.  The International Accounting Standards Board has attempted to harmonize accounting standards.  It publishes international financial reporting standards, which are designed to provide transparent and comparable information in statements.  All 104 countries are members.

The International Federation of Accountants has 118 members and has established auditing guidelines.  It is independent and sets standards on audit assurance education ethics.

Corporate

Many states have entities which enforce their corporate law.  The equivalent of the Office of the Director of Corporate Enforcement in Ireland is found in many other states.

Stock exchange rules, company laws and securities laws may grant minority shareholders rights to purchase out at a fair price if they’re being disadvantaged.  They may be granted rights to a minimum dividend.  They may be able to demand compensation in the form of dividends or to be purchased out if certain adverse actions happen.

Parent companies may be held responsible for the debts of their subsidiaries in some jurisdictions.  In some states, each group member is liable for the others’ debts in the event of the insolvency of any member.

A government authority may be in a position on application to appoint an administrator to protect the minority’s interest and the interest of local creditors. In some states, the shareholder may be required to pursue their claims in the domestic courts.