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Cablegate: West Bank/Gaza Investment Climate Statement 2008

VZCZCXRO9639
PP RUEHROV
DE RUEHJM #0299/01 0461453
ZNR UUUUU ZZH
P 151453Z FEB 08
FM AMCONSUL JERUSALEM
TO RUEHC/SECSTATE WASHDC PRIORITY 0617
INFO RUEHXK/ARAB ISRAELI COLLECTIVE PRIORITY
RUCPCIM/CIMS NTDB WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHBS/USEU BRUSSELS PRIORITY

UNCLAS SECTION 01 OF 06 JERUSALEM 000299

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA, NEA/IPA FOR
GOLDBERGER/SHAMPAINE/BELGRADE
PLEASE PASS TO USTR, TREASURY FOR NUGENT/HIRSON, COMMERCE
FOR LOUSTANAU

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KPAL KTDB PGOV USTR OPIC
KWBG, IS
SUBJECT: WEST BANK/GAZA INVESTMENT CLIMATE STATEMENT 2008

REF: 2007 SECSTATE 158802

Post submits the following 2008 Investment Climate Statement
for the West Bank and Gaza Strip.

BEGIN TEXT

INVESTMENT CLIMATE STATEMENT - 2008
WEST BANK AND GAZA STRIP
------------------------

INTRODUCTION

Internal Palestinian political issues and the
Israeli-Palestinian conflict continue to impact negatively
the development of the Palestinian economy in the West Bank
and Gaza Strip (WB/G). Following the establishment of a
Palestinian Authority (PA) Government under the leadership of
Prime Minister Salam Fayyad in June 2007, the PA has
demonstrated a renewed determination to improve the
investment climate in the WB/G and to attract foreign
investment. The PA has undertaken a number of significant
reforms and prepared a three year reform and development plan
that was endorsed by the international community in December
2007. The PA's development plan emphasizes the importance of
private sector investment and growth as a vital source of new
jobs and a sustainable economy.

At the time this report was drafted, Hamas, a designated
Foreign Terrorist Organization (FTO), remained in control of
the Gaza Strip, having violently seized power in June 2007.
Where applicable, this report addresses issues related to
investment in the Gaza Strip, although there are currently no
opportunities for meaningful private investment in Gaza due
to Hamas' control.

This report focuses on investment issues related to areas
under the administrative jurisdiction of the Palestinian
Authority, except where explicitly stated. Given the
changing circumstances on the ground, potential investors are
encouraged to contact the U.S. Consulate General in Jerusalem
and the Foreign Commercial Service for the latest information.

OPENNESS TO FOREIGN INVESTMENT

PA laws have established a legal structure that aims to
promote foreign investment. The 1998 Investment Law
guarantees the repatriation of foreign capital and prohibits
expropriation and nationalization of approved foreign
investments. PA law states that no restrictions govern
foreign currency accounts.

FOREIGN TAXES

All new foreign investment in WB/G must be registered with
the PA and approved by the relevant ministry/ministries. The
income tax law is intended to incorporate both West Bank and
Gaza. Ministry of Finance officials stated to USG officials
in January 2008 that the PA's corporate tax rate is 15
percent, while personal income tax is specified according to
the following:
- 5 percent for income between NIS 1 - 10,000;
- 10 percent for income between NIS 10,001 - 25,000; and
- 15 percent for all incomes above NIS 25,001.

A 20 percent tax is withheld at source from dividends
distributed in WB/G to shareholders of a foreign company.
There are no taxes due on dividends distributed to
shareholders of Palestinian companies regardless of where
they live or their nationality, and regardless of whether
they are an individual or a company. An automatic deduction
at the source of 25 percent is withheld from companies,
unless they obtain a "Deduction at the Source Certificate,"
which grants a reduced rate that ranges between zero and five
percent. Applications for these certificates are available
from district tax offices.

Exemptions
The 1998 Investment Law provides a number of incentives,
including exemption from taxes, for PA-approved domestic and
foreign investment. To benefit from these incentives,

JERUSALEM 00000299 002 OF 006


investors must apply to the Palestinian Investment Promotion
Agency (PIPA), a department of the PA Ministry of National
Economy, and present it with a completed investment
application and feasibility study. PIPA is composed of both
public and private sector members.

Pre-approval
Certain investment categories require PA Council of
Ministers' pre-approval. These include investments involving
(1) weapons and ammunition, (2) aviation products and airport
construction, (3) electrical power generation/distribution,
(4) reprocessing of petroleum and its derivatives, (5) waste
and solid waste reprocessing, (6) wired and wireless
telecommunication, and (7) radio and television.

CONVERSION AND TRANSFER POLICIES

The 1998 Investment Law guarantees investors the repatriation
of all financial resources, including capital, profits,
dividends, wages, and salaries. There are no other PA
restrictions governing foreign currency accounts and currency
transfer policies.

EXPROPRIATION AND COMPENSATION

The 1998 Investment Law prohibits expropriation and
nationalization of approved foreign investments, except for
the pursuit of the public good, which shall be in return for
fair compensation based on market prices and for losses
suffered because of such expropriation.

PA sources and independent lawyers say that any Palestinian
citizen can file a petition or a lawsuit against the PA.
There are on-going court cases involving illegal confiscation
of property by PA senior government officials; however, there
has been no ruling on most of these cases. A general lack of
confidence in the judicial system has prompted citizens to
look for alternative means of arbitration to resolve such
disputes.

DISPUTE SETTLEMENT

The 1998 Investment Law provides for dispute resolution
between the investor and official agencies by binding
independent arbitration or in Palestinian courts. It has
been reported that some contracts contain clauses referring
dispute resolutions to the London Court of Arbitration.

PERFORMANCE REQUIREMENT AND INCENTIVES

Certain incentives apply to Palestinian Investment Promotion
Agency-approved investments:

- Investments whose value is between USD 100,000 and USD 1
million will be exempt from income tax for five years and be
subject to income tax on their net profit at 10 percent for
an additional eight years;

- Investments whose value is between USD 1 million and USD 5
million will be exempt from income tax for five years and be
subject to income tax on their net profit at 10 percent for
an additional 12 years;

- Investments whose value is USD 5 million and above will be
exempt from income tax for five years and be subject to
income tax on their net profit at 10 percent for an
additional 16 years;

- Special projects recommended by PIPA and approved by the
Council of Ministers will be exempted from income tax for
five years and be subject to income tax on their net profit
at 10 percent for an additional 20 years; and

- Investments in information technology (IT) training may be
capitalized and depreciated for tax purposes.

The United States continues to support private sector
development in the WB/G. In 2007, the Overseas Private
Investment Corporation (OPIC), working with Palestinian and
U.S. partners, helped establish a program that will generate
at least USD 228 million in lending to Palestinian small and

JERUSALEM 00000299 003 OF 006


medium enterprises over the next 10 years. OPIC is also
seeking to establish a new mortgage finance company which
will offer long-term mortgage loans to potential home-buyers.
By dramatically expanding access to long-term credit, the
mortgage facility will support several new affordable housing
development projects, thus stimulating the construction
sector. OPIC is also investigating the possibility of
providing political risk/trade disruption insurance to
businesses operating in the West Bank. In addition, in
December 2007, the Secretary of State launched the
U.S.-Palestinian Public-Private Partnership to support the
development of economic and educational opportunities for
Palestinian youth and to foster business opportunities in the
West Bank.

RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

The right to private ownership in Gaza is guaranteed by
British Mandate law, as amended by regulations issued by the
PA. Jordanian law in the West Bank, as amended by PA
regulations, similarly guarantees the right to private
ownership. Foreigners must obtain permission from the PA
before purchasing property in areas under PA civil authority
and from the appropriate Israeli authorities before
purchasing property in West Bank areas under Israeli control.
PIPA outlines the following concerning foreign ownership of
property:

The Acquisition Law in the West Bank, which regulates foreign
acquisition and the rental or lease of immovable properties,
classifies foreigners into three categories:

- Foreigners who formerly possessed Palestinian or Jordanian
passports shall have the right to own certain properties
sufficient to erect buildings and/or for their agricultural
projects.

- Foreigners who hold other Arab nationality passports have
the right to own certain property that suffices for their
living and business needs only.

- Other foreigners must receive permission from the PA
Cabinet to own buildings or purchase land.

It is critical that potential purchasers of land or buildings
perform a title search to be assured that no outstanding
violations or unpaid penalties exist on the property. Under
current law, violations and penalties are transferred to the
new owner.

Accurate title search can only be obtained from the PA Land
Authority (al-Taboh). Land registration is done through the
Land Registries in Hebron, Ramallah, Qalquilya, Tulkarem,
Nablus, Bethlehem, Jericho, Jenin, and Gaza City. In order
to purchase land in WB/G, an application that includes
supporting documents, such as deeds to the property and
powers of attorney, should be submitted to the land registry
office having jurisdiction over the land.

PROTECTION OF PROPERTY RIGHTS

The West Bank and Gaza do not have a modern intellectual
property rights (IPR) regime in place. The PA was indirectly
committed to the GATT-TRIPS agreement when it signed the
Interim Agreement on WB/Gaza according to Annex III (Protocol
Concerning Civil Affairs), Appendix 1, Article 23. All IPR
legislation pertaining to WB/G originates from British
Mandate Law regardless of the change in control over the
years. Pre-1967 era Jordanian laws concerning trademarks,
patents, and designs are applicable in the West Bank. In
Gaza, the Palestinian Trademark and Patent Laws of 1938,
adopted during the British Mandate, are applicable.
Registration under the two laws is very similar, and, despite
different authorizing legislation, there are few substantive
differences between IPR laws in the West Bank and Gaza Strip.
According to PA contacts, the PA is working on a modern law
that will encompass areas of Copyright, Patents and Designs,
Trademarks, and Merchandise Branding.

Patent protection in WB/G is provided for a period of 16
years from the date of filing the patent application.

JERUSALEM 00000299 004.2 OF 006


Furthermore, both systems require licensing of anything
already patented if the reasonable requirements have not been
met. Trademark protection is available for registered
trademarks for a period of seven years, which may be extended
for additional periods of 14 years. The proprietor of a
trademark in WB/G owns the sole right to the use of the
trademark in association with the goods with which the
trademark is registered. The trademark is open for
opposition after being published in the Gazette for a period
of three months. The holder of a trademark retains the right
to bring civil action against any perpetrator in addition to
criminal proceedings. There is minimal enforcement of IPR
laws in WB/G.

TRANSPARENCY OF REGULATORY SYSTEM

The PA has worked to erect a sound legislative framework for
business and other economic activity in the areas under its
jurisdiction since its creation in 1994; however, much work
remains to be done. Al Mustakbal, a Palestinian
non-governmental organization (NGO), in its September 2006
report on legislative reform in the business sector, stated
that a number of institutional and procedural dysfunctions
have impeded efforts to establish a transparent regulatory
system, including a lack of clear goals in policy formation;
an unsystematic process for passing laws; dysfunctions within
the Palestinian Legislative Council (PLC), and a lack of
sustained and coordinated donor support.

EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT

Major progress was achieved in 2004 with the passage by the
PLC of the Capital Markets Authority Law, the Securities
Commission Law, and the establishment of the Capital Market
Authority, the regulator of the stock exchange and insurance
industries, among others.

Several foreign banks, mostly Jordanian, have established
WB/G branches, but financial services remain limited. Credit
is limited by concerns over uncertain political and economic
conditions in WB/G and limited availability of real estate
collateral due to non-registration of most West Bank land.
Correspondence and other international banking relationships
are evolving. No Palestinian currency exists, and, as a
result, the PA places no restrictions on foreign currency
accounts, leading some observers to believe that WB/G will
show strong growth in offshore banking services. The
Palestinian Monetary Authority (PMA) is responsible for bank
regulation.

Palestinian Securities Exchange
In early 1997, the Palestinian Securities Exchange (PSE)
started operations on a limited scale in the West Bank city
of Nablus. Twenty-eight share holding companies have been
approved for listing so far with additional companies
authorized for future listing. The current list of companies
spans a wide range of sectors including pharmaceuticals,
utilities, telecommunications, and financial services. There
are currently an estimated forty Palestinian companies
eligible to be listed on the Exchange with a market
capitalization of over 1 billion USD. PSE operations have
been disrupted several times in 2007-2008 as a result of
Israeli military operations in Nablus.

POLITICAL VIOLENCE

In June 2007, Hamas forces violently seized control of Gaza,
removing PA forces from government facilities. Since that
time, crossings between Israel and Gaza have been closed to
most shipments, with only limited humanitarian shipments and
certain commercial shipments allowed to enter Gaza. Exports
from Gaza have been severely restricted. As a result of
these restrictions, economic activity in Gaza has slowed
dramatically. According to 2007 World Bank reports, as many
as 80 percent of private sector businesses have closed as a
result of the current economic situation.

Economic and political instability resulting from the
continued Israeli-Palestinian conflict, inter-factional
fighting within Palestinian areas, and ongoing Israeli
military operations have had a significant impact on the

JERUSALEM 00000299 005 OF 006


operations of the private sector in the WB/G. In recent
years, the GOI has increased the number of obstacles to
movement of goods and people within the West Bank and between
Israel and the WB/G. These measures have restricted economic
activity in WB/G. The World Bank and the UN Trade and
Development Conference estimated that these obstacles had
cost the Palestinian economy USD 8.4 billion from 2000-2006.
The State Department, at the time of this writing, has in
place a travel warning that urges American citizens to defer
travel to the West Bank and to avoid all travel in the Gaza
Strip.

CORRUPTION

The U.S. Consulate General in Jerusalem has received reports
of potential foreign and domestic investors being asked to
provide inducement fees or to include well-connected persons
in their business arrangements to help secure a contract.
There are no reliable means of determining where or to what
extent this kind of activity occurs. When crossing points
between Gaza and Israel were open - prior to June 2007 - many
Palestinian businesses reported corrupt practices by guards
stationed at the crossings. According to those reports,
border guards would allow certain shipments access to the
crossings in exchange for large amounts of cash.

TRADE AGREEMENTS AND TARIFF STRUCTURES

The PLO, on behalf of the PA, has signed international trade
agreements, which on more than one occasion implicitly or
explicitly refer to WTO rules. These include:

1) Interim Association Agreement with the EU (1997)
2) Free Trade Agreement with EFTA states (1998)
3) Duty Free Arrangements with the United States (1996)
4) Free Trade Framework with Canada (1999)
5) Preferential trade agreements with Jordan and Egypt
(1996 and 1998)
6) Unilateral acts by other Arab trade partners extending
preferential treatment to trade with Palestine
7) Greater Arab Free Trade Area, to which PA is a party
(2003)
8) Free Trade Agreement with Turkey (2004)

Since 1996, duty-free treatment has been available to all
goods exported from the WB/G to the U.S. provided they meet
qualifying criteria as spelled out in the U.S.-Israel Free
Trade Area (FTA) Implementation Act of 1985, as amended. The
duty-free benefits accorded under the FTA exceed those
benefits which would be provided under the Generalized System
of Preferences (GSP).

OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

OPIC provides a variety of services to qualified U.S.
investors in emerging economies and developing nations.
During the early stages of investment planning, U.S.
investors may contact OPIC for insurance against political
violence, inconvertibility of currency, and expropriation in
the form of an insurance registration letter. OPIC insurance
is not available after the investment has been irrevocably
committed. As stated above, OPIC has initiated a number of
programs in the WB/G to support private sector development.

The World Bank, via a USD 20 million fund administered by its
Multilateral Investment Guarantee Agency (MIGA), provides
guarantees in the form of insurance against political risk
for private investments in the WB/G. Under the terms of the
Fund, investors who are nationals of or companies
incorporated in a MIGA member country, or who are Palestinian
residents of the WB/G, are eligible to obtain guarantees
provided that investment is brought in from outside the WB/G.
The Fund currently has the capacity to issue guarantees for
up to USD 5 million per project.

LABOR

The working age population (over the age of 15) reached
2,375,000 (54.2 percent of the total population) by 2007.
According to the Palestinian Central Bureau of Statistics
(PCBS), as of September 2007, 92 percent of WB/G workers were

JERUSALEM 00000299 006 OF 006


employed in the WB/G, while eight percent were employed in
Israel and the Israeli settlements in the West Bank). In
2007, nearly 40 percent of those working in Israel, including
the settlements, worked in construction. Women account for
some 15 percent of the formal labor force (16.4 percent in
the West Bank, 10 percent in Gaza) and are concentrated in
the services and agricultural sectors. According to PCBS,
roughly 24 and 36 percent of the West Bank and Gaza Strip's
eligible workers, respectively, are unemployed.

Labor force distribution (percentage) by sector is as
follows:
(Source: PCBS website)

West Bank (2007)
- 15.7 percent - Agriculture, Forestry, Fishing, Hunting
- 14.8 percent - Mining, Quarrying, Manufacturing
- 14.4 percent - Construction
- 20.6 percent - Commerce, Hotels, Restaurants
- 6.0 percent - Transportation, Storage, Communication
- 28.5 percent - Services and other

Gaza (2007)
- 11.7 percent - Agriculture, Forestry, Fishing, Hunting
- 8.3 percent - Mining, Quarrying, Manufacturing
- 9.3 percent - Construction
- 16.2 percent - Commerce, Hotels, Restaurants
- 5.1 percent - Transportation, Storage, Communication
- 49.7 percent - Services and other

FOREIGN TRADE ZONES/FREE PORTS

There are no foreign-trade zones or free ports in WB/G.

FOREIGN DIRECT INVESTMENT STATISTICS

The PA has not yet compiled a complete listing of foreign
direct investment statistics. Limited foreign investment
flows began in 1994-95, with the majority of funds coming
from Palestinian investors. The largest foreign company in
WB/G is the Palestine Development and Investment Company
(PADICO), which has invested over USD 500 million in WB/G.
Key PADICO investors include Diaspora Palestinians from
Jordan, Great Britain, and the Arabian Gulf. PADICO has made
significant investments in telecommunications, housing, the
Gaza Industrial Estate, and the establishment of the
Palestinian Securities Exchange in Nablus. Another large
foreign investment group active in WB/G with authorized
capital of over USD 100 million is the Arab Palestinian
Investment Company (APIC), which is headquartered in the West
Bank city of Ramallah.

END TEXT.
WALLES

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