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Cablegate: Portugal's 2008 Investment Climate Statement

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DE RUEHLI #0157/01 0180858
ZNR UUUUU ZZH
R 180858Z JAN 08
FM AMEMBASSY LISBON
TO RUEHC/SECSTATE WASHDC 6583
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 06 LISBON 000157

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA
STATE PASS TO USTR
STATE FOR EUR/WE KEVIN OPSTRUP

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV USTR OPIC PO
SUBJECT: PORTUGAL'S 2008 INVESTMENT CLIMATE STATEMENT

REF: STATE 158802

1. The following is Portugal's submission for the 2008
Investment Climate Statement:

A. Openness to Foreign Investment
---------------------------------
Portugal offers a favorable investment climate for foreign
capital, both in the near and long term. Its economy has
become increasingly diversified and service-based since the
country joined the European Community in 1986. On January 1,
2002, Portugal adopted the euro as its official currency,
further integrating itself with the European Union's
financial and economic policies. Prime Minister Jose
Socrates, who took office in 2005, has made opening
Portugal's economy to foreign investment a key priority.

Government Promotion Agencies: The agency leading Portugal's
economic development policy is AICEP (the Portuguese Agency
for Foreign Investment and Commerce). AICEP is a public
company that was created in 2007 following the merger of API
(the Portuguese Investment Agency) and ICEP (the Portuguese
Foreign Business Institute). AICEP is responsible for the
promotion of global Portuguese trademarks, exports of goods
and services, and attracting foreign direct investment (FDI).
It serves as the point of contact for investors with projects
over 25 million euros or companies with a consolidated
turnover of more than 75 million euros. For foreign
investments not meeting these requirements, AICEP will make a
preliminary analysis and direct the investor to assistance
agencies such as INOVCAPITAL, which offers technology
transfer and incubator programs for small- and medium-sized
enterprises (SMEs), or the Institute for the Support of SMEs
(IAPMEI) which provides technical and financial support.
AICEP also publishes a monthly newsletter entitled "Portugal
Global" which provides information on the state of play of
FDI in Portugal. This newsletter is available in Portuguese
and in English, on the website:
http://www.portugalglobal.pt/ CmsAPI/AICEP/newsletter EN.pdf

Government Policies - General: According to the Bank of
Portugal, foreign direct investment is defined as an act or
contract that obtains or increases enduring economic links
with an existing Portuguese institution or one to be formed.
Foreign direct investment is thus all investment made by a
non-resident of, at least, 10% of a resident company's
equity, provided that the direct investor also plays a role
in the company's decision making.

Foreigners are permitted to establish themselves in all
economic sectors open to private enterprise. Currently,
however, Portuguese government approval is required for
non-EU investment in the following sectors: defense, water
management, public service telecommunications operators,
railways, and maritime transportation. Also, Portugal
restricts non-EU investment in regular air transport to 49
percent.

Finance/Insurance: Investors wishing to establish new credit
institutions or finance companies, acquire a controlling
interest in such financial firms, and/or establish a
subsidiary must have authorization from the Bank of Portugal
(for EU firms) or the Ministry of Finance (for non-EU firms).
In both cases, the authorities carefully consider the
proposed transaction, but in the case of non-EU firms, the
Ministry of Finance especially considers the impact on the
efficiency of the financial system and the
internationalization of the economy. Non-EU insurance
companies seeking to establish an agency in Portugal must
post a special deposit and financial guarantee and must have
been authorized for such activity by the Ministry of Finance
for at least five years.

Foreign Workers: Non-Portuguese 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. According to Decree-law
34/2003, a foreign worker can be granted a permit for work
that is essential to the national economy, or if the worker
possesses highly qualified competencies or his/her work is of
relevant scientific interest to the country.

Structural and Cohesion Funds: For the 2007-2013 programming
period, Portugal has been allocated 21.5 billion euros of
Structural and Cohesion Funds financing under the European
Union's Convergence, Regional Competitiveness and Employment,
and Territorial Cooperation program. Portugal plans to use

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the funds to develop a skilled workforce, to promote
sustainable growth, to guarantee social cohesion, to ensure
territorial development, and to improve governance
efficiency. For more information visit:
http://ec.europa.eu/regional policy/ atlas2007/fiche/pt en.pdf

B. Conversion and Transfer Policies
-----------------------------------
Portugal maintains no current or capital account
restrictions. On January 1, 1999, Portugal and ten other
European countries formed the European Monetary Union. On
January 1, 2002, Portugal adopted the euro as its official
currency, replacing the Portuguese escudo which is no longer
in circulation. Currently, there are fifteen member-states
that use the euro.

C. Expropriation and Compensation
---------------------------------
There have been no cases of expropriation of foreign assets
or companies in Portugal in recent history, nor is there
concern for future expropriation.

D. Dispute Settlement
---------------------
The Portuguese legal system is slow and deliberate, with many
cases taking years to resolve. In an effort to address this
problem, the government introduced reforms in litigation
procedures and public administration in 2007. These reforms
are intended to reduce delays in the justice system and
improve its effectiveness by reorganizing the court system
and redefining the division of the court's jurisdiction. The
reform also establishes new rules for management within the
judicial system.

E. Performance Requirements and Incentives
------------------------------------------
As an incentive for both national and foreign companies,
resident entities or branches of non-resident entities whose
main activity is of a commercial, industrial or agricultural
nature are subject to a corporate income tax (IRC) rate of
25%, and a set municipal surcharge of no greater than 2.5% of
taxable profit. Rates vary from municipality to municipality.
Other tax regimes are in place for the country's two
autonomous island regions: the Azores and Madeira.

The Portuguese Government also offers several incentive
packages tailored to investors' needs and capital based on
industry, proposed size of investment and project
sustainability. Details about the programs are available on
the AICEP website: http://www.investinportugal.pt

For example, under Portugal's investment incentive regime,
AICEP is empowered to negotiate a tailored incentives package
for large investment projects on a case-by-case basis,
including tax cuts and subsidized or interest-free loans, as
well as cash grants. Large-scale investment projects are all
investment projects exceeding 25 million euros, within a
period of three years, or those promoted by a company, or
group of companies with a total turnover greater than 75
million euros. The goal of the program is to leverage
investments for proposed projects that support the
government's economic development goals. AICEP has designed
the program to address Portugal's long-term competitiveness
issues, including human resources, and to promote Portugal's
own brands and patents in the industrial, energy,
construction, transport, tourism, commerce and services
sectors.

For more information:
http://www.planotecnologico.pt/
default.aspx?idLang=2&Site=planotecnologico

F. Right to Private Ownership and Establishment
----------------------------- -----------------
Private Ownership/Enterprise: Private ownership is limited to
49 percent 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 affecting public health, public order or
security, or relating to the arms industry, require approval
of the competent authorities.

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Competitive Equality: Law No.18/2003, of June 6, 2003,
governs protection and promotion of competition in Portugal.
It specifically outlaws collusion between companies to fix
prices, limit supplies, share markets or sources of supply,
discriminate in transactions, or force unrelated obligations
on other parties. Similar prohibitions apply to any company
or group with a dominant market position. The law also
requires prior government notification of mergers or
acquisitions which would serve to give one company more than
30 percent market share in one sector or among entities which
had total sales in excess of 150 million euros in the
preceding financial year. The Competition Authority has 60
days to determine if the merger or acquisition can proceed.
The European Commission may claim authority on cross-border
competition issues or those involving entities large enough
to have a significant EU market share.

Privatization Program: Portugal engaged in a wide-ranging
privatization program that sold 100 enterprises and generated
approximately $14 billion in revenues between 1996-2006.
Privatization involves the sale of government shares in
state-owned companies, typically in a series of share
offerings. These share offerings often include private
transactions, usually to attract a "strategic partner" as an
equity holder, and public offerings.

Major privatizations in recent years included sales of
interest in Portugal Telecom (telecommunications), EDP
(electricity), REN (Electricity Transmission System Operator)
and GALP Energia (petroleum refining and marketing, natural
gas distribution). TAP Airlines is expected to be privatized
in the near future.

G. Protection of Property Rights
--------------------------------
The government adopted the Agreement on Trade Related Aspects
of Intellectual Property Rights (TRIPS) and provisions of
General Agreement on Tariffs and Trade (GATT) in 2003.
Portuguese legislation for the protection of intellectual
property rights has been consistent with WTO rules and EU
directives since 2004.

Portugal is a participant in the E-MAGE project, an Internet
based service, which provides multilingual access to
databases of trademarks and industrial designs. This
international cooperation helps customs authorities prevent
sales of counterfeit goods. Other countries involved include
France, Austria, Hungary and Spain.

Trademark Protection: 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. Portugal's current trademark law entered into force
on June 1, 1995. The law, however, is not considered to be
entirely consistent with TRIPS.

Copyright Protection: Portugal has transposed the EU
information society and protection of databases directives
into national legislation (Decree-Law 50/2004 and 112/2000,
respectively). However, software piracy remains a problem.

Patent Protection: Currently, Portugal's patent protection is
governed by the Code of Industrial Property that went into
effect on June 1, 1995. In 1996, new legislation was passed
to extend the life of then-valid patents to 20 years,
consistent with the provisions of TRIPS. A new industrial
property code, designed to bring Portugal into full
conformity with EU and international norms, came into effect
at the beginning of 2003.

Portugal grants health (FDA-equivalent) approval to market
new drug products without crosschecking for existing products
with unexpired patent protection already in the market. This
forces companies to pursue redress through the court system,
an expensive and time-consuming process. U.S. pharmaceutical
companies have brought a number of cases before Portuguese
tribunals for the violation of patent rights by Portuguese
companies. One U.S.-owned pharmaceutical company has won five
cases and has several more pending.

H. Transparency of Regulatory System
------------------------------------
In the recent past, businesses frequently complained about
red tape with regards to registering companies, filing taxes,
receiving value-added tax refunds and importing materials.

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Decision-making tended to be centralized and obtaining
government approvals/permits can be time-consuming and
costly.

The Ministry of Economy has promoted various initiatives to
improve the situation. In 2007, it worked with the Ministry
of Justice to launch the "Cutting Red Tape" website, a
repository of information for all measures taken since 2005
to reduce bureaucracy in the incorporation, registration,
certification, liquidation, dissolution and merging of
businesses in Portugal. Other initiatives include the
"Empresa na Hora" (On-the-Spot Firm) which allows for the
incorporation of companies in less than one hour at Corporate
Formalities Centers and Business Registration Offices; and
other services such as online company incorporation, labor
mediation, bilingual commercial registration, and patents and
trademarks. Since 2005, a total of 14,471 companies have been
incorporated under the "Empresa na Hora" program, while over
450 companies have been incorporated using the online
service. More information can be found at the "Cutting Red
Tape" website: http://www.cuttingredtape.mj.pt/
CuttingRedTape/index.htm

I. Efficient Capital Markets and Portfolio Investment
---------------------------- ------------------------
One result of Portugal's participation in the European
Monetary Union is the country's increasing integration into a
European-wide financial market. As a member of the
Euro-zone, Portugal offers low exchange rate risk for foreign
investors, interest rates comparable to other EU countries
and a greater availability of credit. 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 capital markets code (the CVM) came into
effect on March 1, 2000, and has rationalized and streamlined
Portuguese capital markets legislation. The Lisbon stock
market is part of Euronext, which also includes the Paris,
Brussels and Amsterdam markets.

Portugal has about 50 banking institutions. The largest five
bank groups, however, account for eighty percent of the
sector's total assets. The country's largest bank, Caixa
Geral de Depositos (CGD), is controlled by the Portuguese
government. Despite recent economic challenges, the financial
sector continues to perform well.

In addition to banks and stock markets, Portugal has taken
specific steps to ensure that the financial needs of small
and medium sized enterprises (SMEs) are met. Portugal's
Institute for Supporting Small and Medium-Sized Enterprises
and Investment (IAPMEI) has a program of mutual guarantees so
that SMEs do not have to use their assets or those of their
shareholders to collateralize debt. The companies pay an
initial evaluation fee and an annual fee equal to 0.75-3.00
percent of the guarantee. IAPMEI has also supported the
creation of venture capital funds and venture capital
companies, which will channel capital to SMEs.

Steps have been taken to improve the educational and
vocational training programs in Portugal, in hopes of
increasing skill levels and productivity of the workforce,
which generally lag behind the EU-15 average, and expanding
professional opportunities.

J. Political Violence
---------------------
There have been no incidents involving politically motivated
damage to projects and/or installations. Potentially
destructive civil disturbances are not likely.

K. Corruption
-------------
Corruption plays a limited role in Portugal's business
culture. Although U.S. firms occasionally encounter limited
degrees of corruption in the course of doing business in
Portugal, they do not identify corruption as an obstacle to
foreign direct investment. In Transparency International's
2007 Corruption Perceptions Index, Portugal ranked 29 out of
179 countries considered (listed from least to most corrupt).
The U.S. was ranked 20. Portugal has ratified the OECD
Anti-bribery Convention and recently passed legislation to
bring its criminal code in compliance with the Convention.
Tax evasion remains a problem for the government, which has
implemented several initiatives to improve collection rates.
The Socrates administration is undertaking steps to address

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the limited degrees of corruption that businesses, both U.S.
and other, face in Portugal.

L. Bilateral Investment Agreements
----------------------------------
http://www.investinportugal.pt/ MCMSAPI/HomePage

Listing of International Treaties: http://www.gddc.pt/
siii/paises-organizacoes.asp

M. OPIC and Other Investment Insurance Programs
----------------- -----------------------------
Portugal is a country with low political risk, and the
potential for significant OPIC insurance programs in Portugal
is limited. Portugal is a member of the Multinational
Investment Guarantee Authority (MIGA) of the World Bank.

N. Labor
--------
A package of labor reform laws took effect in 2003 permitting
greater geographic and functional mobility for employers. The
labor code limits the role of unions and makes it more
difficult for workers to strike. It also addresses
absenteeism and fraudulent leave. However, low productivity
and difficulty in firing workers continue to hamper
Portugal's ability to attract foreign investment.

Labor strikes and work stoppages in Portugal, as in much of
Europe, are more common than in the United States. Most
strikes, however, are of short duration. In the past two
years, work stoppages have been more common among public
sector workers, including the transportation sector, than in
the private sector.

Portugal is a member of the International Labor Organization
(ILO) and adheres to the ILO Conventions Protecting Labor
Rights. Portugal ratified 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, thereby exceeding the ILO norm.

Unemployment: Portugal's 2007 unemployment rate was 8.0%,
above the EU-27 average of 7.0%. The unemployment rate is
expected to level off in 2008 before improving slightly over
the coming years The outlook for job creation, although low,
is expected to improve as government educational and
vocational training programs designed to strengthen labor
productivity take effect.

O. Foreign-Trade Zones/Free Ports
---------------------------------
Portugal has two foreign trade zones (FTZ)/free ports in the
island autonomous regions of Madeira and the Azores. These
foreign trade zones/free ports were authorized in conformity
with EU rules or incentives granted to member states.
Industrial and commercial activities, international service
activities, trust and trust management companies, and
offshore financial branches are all eligible. Companies
established in the foreign trade zones enjoy
import/export-related benefits, financial incentives, tax
incentives for investors and tax incentives for companies.

The Madeira FTZ has approximately 6500 registered companies.
Under the terms of Portugal's agreements with the EU,
companies in the Madeira FTZ can take full advantage of the
tax incentives provided until December 2011, when those
incentives will begin to be phased out.
http://www.madeira-management.com/
aboutmadeira/introduction.html

P. Foreign Direct Investment flows into Portugal
--------------------------------------------- ---
http://www.apinvest.pt/MCMSAPI/
HomePage/PortugalToday/PortugalAdvantages/

Q. Portuguese Trade with the U.S.
---------------------------------
http://www.census.gov/foreign-trade/balance/c 4710.html

R. Major Foreign Direct Investors
---------------------------------
Selected Major Foreign Investors in Portugal:
http://www.apinvest.pt/MCMSAPI/
HomePage/PortugalToday/FDI TrackRecord/

S. Web Resources
----------------

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Bank of Portugal:
http://www.bancoportugal.pt

Portuguese Agency for Foreign Investment and Commerce:
http://www.icep.pt/CmsAPI/AICEP/index.html

"Cutting Red Tape":
http://www.cuttingredtape.mj.pt/ CuttingRedTape/index.htm

Empresa na Hora (On-the-Spot Firm):
http://www.empresanahora.pt/ ENH/sections/EN homepage

PRIME (Incentive Program for Economic Modernization):
http://www.prime.min-economia.pt

EUROSTAT (Statistical Office of the European Communities):
http://ec.europa.eu/eurostat

U.S. Census Bureau:
http://www.census.gov

Technological Plan:
http://www.planotecnologico.pt/
default.aspx?idLang=2&Site=planotecnologico

The "Cutting Red Tape" Investment Incentive Program:
www.cuttingredtape.mj.pt

Portuguese Government:
http://www.portugal.gov.pt

American Chamber of Commerce in Lisbon:
http://www-cca.cliente.imediata.pt/ html/main.htm

IAPMEI (Institute for S.M.E. Support and Investment):
http://www.iapmei.pt

INPI (Portuguese Patent and Trademark Office):
http://www.inpi.pt

Trade and Competition Directorate-General:
http://www.dgcc.pt

US Commercial Service in Portugal:
http://www.buyusa.gov/portugal/en
Stephenson

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