Legal framework for foreign direct investment in Guatemala

Florencio Gramajo

Associated

Foreign investment can be direct or indirect.

There are three basic mechanisms in which international businesses can be developed: export and import processes; international technology transfer and foreign investment. Foreign investment can be direct or indirect. In theory, foreign direct investment has been defined as the one made by the resident of capital exporting country, in an entity based in the state receiving the investment, which in turn, allows the investor to have a shareholding of more than 10% of the right to vote and to participate effectively in the decision-making of that entity. [1]

In foreign direct investment, the investor has a fixed stay in the receiving State of the investment, carrying out activities of its ordinary course of business through the establishment of its own company abroad. This can be done through the establishment of a branch, a subsidiary or a Joint Venture or by acquiring on-going operations or companies.

In Guatemala, the Commercial Code allows that companies legally incorporated abroad wishing to establish or operate in any form in the country, may do so through the establishment of a branch. Once authorized, the branch will be subject to the laws of Guatemala and must have at least one representative permanently in the country. As for the subsidiary, Guatemalan law regulate several types of commercial companies that a foreign investor could use as a vehicle for its investment in Guatemala, the most common being the the stock corporation (in Spanish, sociedad anónima) and the Limited Liability Company (in Spanish, Sociedad de Responsabilidad Limitada). It is also common for foreign investors to opt for the creation of a Joint Venture with local partners. This may be caused either by a requirement in that there is cooperation between the foreign investor and a local company, or by an economic decision in which the foreign investor intends to have the experience of the local investor or that the transaction exceeds the required economic capabilities.

Finally, with regards to acquisition of ongoing businesses, these involve the purchase of an operating entity in Guatemala. This purchase of existing assets rather than the creation of

new entities is the main form of foreign direct investment in Latin America. [2] Within this contractual way of implementing foreign direct investment, there are 4 ways to do so: (i) acquisition of an enterprise, as such: the commercial enterprise, regulated in Article 656 of the Commercial Code, is purchased exclusively; (ii) acquisition of assets, private assets are purchased, such as trademarks, formulas, patents for inventions, real estate, among others; (iii) acquisition of assets and liabilities, private assets are purchased, but also combined with liabilities, which the buyer undertakes to assume, such as labor liabilities, bank loans, among others; and, (iv) acquisition of shares or partnerships in companies, which is the most commonly used form of acquisition. It should be noted that when buying the shares or partnerships indirectly, liabilities and assets with the target entity are also being acquired.

Guatemalan law has several mechanisms for promoting and protecting foreign direct investment that seek to provide a safe and predictable environment for foreign investment. To date, 19 Bilateral Investment Treaties are in force with different countries around the world. Similarly, Guatemala is part of several treaties containing provisions relating to foreign investment, such as the Free Trade Agreement between the United States, Central America and the Dominican Republic.

In addition, Guatemala has several laws relating to aspects on the promotion and protection of domestic and foreign investment, among which the following can be mentioned: the Law on the Promotion and Development of Exporting and Maquila; the Nationality Act for foreign investors; the Renewable Energy Project Development Incentives Act; and the Public Private Partnerships Act.

Regarding national regulation strictly related to the promotion and protection of foreign investment, Guatemala has had the Foreign Investment Law, in force since 11 March 1998. This law has its constitutional basis in article 119 of the Political Constitution of the Republic, which recognizes as a fundamental obligation of the State to protect the formation of capital, savings and investment and to create the appropriate conditions to promote the investment of national and foreign capital. These regulatory bodies reflect certain basic principles of International Foreign Investment Law: the foreign investor enjoys the same rights and means of exercising them as the laws grant Guatemalan investors, implying that national treatment or "full equality" of the foreign investor is recognized with Guatemalan in the development of its economic activities.

Source: [1] SALACUSE, Jeswald W.., The Law of Investment Treaties, Editorial Oxford, Reino Unido, 2015, segunda edición, p. 39. [2] Economic Commission for Latin America and the Caribbean (ECLAC), Foreign Direct Investment in Latin America and the Caribbean,United Nations Publication, Santiago, Chile, 2017.