2012 Investment Climate Statement - Timor-Leste

Timor-Leste

2012 Investment Climate Statement

BUREAU OF ECONOMIC AND BUSINESS AFFAIRS

June 2012

Openness to and Restrictions Upon Foreign Investment

Independent since 2002, Timor-Leste is establishing legislative, executive, and judicial institutions, developing laws and regulations, and equipping government personnel with knowledge and skills. Private and public institutions are in the early stages of building institutional capacity while addressing the challenges of improving the nation's basic infrastructure and bolstering the human capital endowment. Although instability and periods of violent upheaval marked the early years of Timor-Leste's history, the country has taken advantage of an unprecedented period of domestic tranquility since 2008 to focus on its national priorities, which in 2011 were: infrastructure, rural development, accelerated human resources development, access to justice, social service delivery, good governance, and public security and stability. The United Nations Integrated Mission in Timor-Leste (UNMIT) peacekeeping operation and the International Stabilization Force (ISF) anticipate departing from Timor-Leste at the end of 2012.

Government of Timor-Leste policy welcomes foreign direct investment. It has contracted with foreign firms to explore for and develop offshore oil and gas deposits; royalties and taxes are deposited in a sovereign Petroleum Fund, which held over US$9.2 billion by late 2011. Outside the oil and gas sector, government spending, small-scale retail activity, and subsistence agriculture are primary sources of employment and contributors to Gross Domestic Product. With one of the world's most rapidly growing populations, Timorese authorities are interested in expanding private sector economic activity to provide employment for new labor market entrants.

Commerce is picking up in Timor-Leste as consumers' and business people's confidence in future political stability rises and growing government budgets fund a larger public service and more public works. In addition to oil and gas prospects, investment opportunities exist, particularly in the services, tourism, and agriculture sectors. Obstacles to investment include bureaucratic inefficiency; paucity of local financing options; absence of rules governing real property ownership and other essential legislation; uncertain implementation of government procurement procedures; significant skill shortages; perceptions of malfeasance; conflicts of interest; and corruption.

The legal system rests on a mix of Indonesian laws and regulations that have not yet been replaced. Some acts were passed by the United Nations Transitional Administration over a decade ago, and some are post-independence Timorese legislation. The country has two official languages, Tetun and Portuguese, and two working languages, Indonesian and English; all new legislation is enacted in Portuguese and based on the civil law tradition.

In September 2011, Parliament approved a new Private Investment Law to replace the Foreign Investment Law of 2005. The new law specifies the conditions and incentives for both domestic and foreign investment, and guarantees full equality for international investors. Other major laws affecting incoming foreign investment include the Companies Code of 2004, the Commercial Registration Code, and the Taxation Act of 2008. A government agency, TradeInvest Timor-Leste, reviews foreign investment applications and is tasked with helping applicants navigate licensing and registration procedures. All investors, both foreign and domestic, are required to obtain an Investor’s Certificate, which costs $500 for domestic investors and $2,000 for foreign investors. The International Finance Corporation is working with the Government of Timor-Leste to simplify business registration.

Foreign investors may invest in all sectors that are not specifically reserved to the State (such as postal services, public communications, protected natural areas, and weapons production and distribution) or otherwise restricted by law (such as criminal and immoral activities). Only Timorese nationals, either individuals or corporate entities, have the right to private land ownership; foreigners may conclude long-term (up to 50-year) leases. The lack of a land law complicates all ownership issues, and investors must often sort through competing claims from the Portuguese colonial administration, the Indonesian occupation era, and the post-independence period. As of early 2012, Parliament was considering a land law that would provide a mechanism to resolve these disputes and allow the grant of full legal titles. Foreign investments in natural oil and gas, minerals, wholesaling, and retailing fall outside the scope of the Private Investment Law and are handled through different mechanisms. In the case of foreign investments that are of particular value to the national development strategy, the option of a special investment agreement is available; such an agreement must be authorized by the Council of Ministers and provides the possibility of tax reductions or exemptions, customs incentives, leases of state property, and up to a 100-percent cost sharing in the training of employees.

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Note, several data have changed since this publication.