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LAND AREA: 487 SQ. KM. BACKGROUND The Republic of Palau is an archipelago of more than 300 islands, only nine of which are inhabited. The islands of Palau form a total land mass of 487 square kilometers - the largest island, Babeldaob, 334 square kilometers. The Republic of Palau is associated with the USA in a compact of free association, officially attaining its independent in October 1994. The democratically elected National Government is modeled upon that of the United States and has three separate branches of government: the executive, the legislative and the judicial. In addition, a 'Council of Chiefs', composed of a traditional chief from each of the States, advises the President on matters concerning traditional laws, customs and their relationship to this constitution and laws of Palau. INVESTMENT CLIMATE Government Policy The National Government aims to maxim se opportunities for the people of Palau by implementing policies designed to stimulate a free and vibrant market economy to supersede the subsidized economy that developed during Palau's years as a trust territory. Thus, the Government encourages and recognizes the value of foreign investment, provided such investments are compatible with the cultural and environmental heritage of the islands. Investment Incentives The primary incentive for investment in the Republic of Palau is its status as one of the lowest taxed business environments in the Asia Pacific region. There is no corporate tax, nor is there any taxation of income for business owners. The country is a beneficiary of the Compact of Free Association which allows business access to US markets. Also any foreign investor who constructs a facility in the Republic may be entitled to a refund of taxes paid equal to the costs of off-site roads, water, power or sewer infrastructure improvements accomplished to service such facility. The amount refunded in any single tax year shall not exceed 50 percent of the amount paid in that tax year by the foreign investor. Special Requirements Any foreign investor wishing to do business in the Republic of Palau will need to obtain the necessary business licenses from the Bureau of Revenue, Customs and Taxation. Also a business may have to obtain any applicable state business licenses from the state government where the business will be located. In addition, entry and work permits must be obtained from the Division of Immigration and the Division of Labour for any foreign workers. In certain circumstances, specific permits from the Environmental Quality Protection Board or the Maritime Authority may need to be obtained. A proposed business activity either must involve a foreign investment of more than US$500,000 or the workforce of the business must be at least 20 percent Palauan. Foreign investors also are required under the Foreign Investment Act to pay an annual fee of US$500 for every foreign worker employed by the company. Restrictions and Limitations on Foreign Investment Reserved Activities Reserved investment areas are those in which new investments will be reserved for local citizens or for enterprises partially or wholly owned by local citizens. These areas include:
Exclusive investment areas are those in which new investments are reserved for local citizens or for enterprises wholly-owned by local citizens. These areas include:
Access to Land Foreign investors cannot buy land in the Republic of Palau. Only citizens of Palau and corporations wholly owned by citizens of Palau may acquire title to land or waters in Palau. However, foreigners may lease land from the Palauan owners for up to 50 years. Due to the complex history of Palau, including the long periods of foreign control and management of the islands, the actual ownership and title to much of the land in Palau is only now in the process of being conclusively established. Accordingly, the foreign investor should be careful to ensure that the Palauan lessor with whom they are dealing legally has acquired the right to alienate a specific parcel of land before entering into a lease on behalf of a foreign business enterprise. Access to Labor To ensure that interested Palauans will have an opportunity to apply for jobs as they become available in the private sector, the Division of Labour requires that all prospective employers first advertise a position locally before bringing in a foreign worker. If after 30 days no Palauan is available to hire, a foreign investor is free to recruit foreign employees. In general, both local and foreign investors in recent years have supplemented the local work force by recruiting from abroad due to an acute shortage of skilled labor. REGULATORY FRAMEWORK Review and Approval Mechanisms for Foreign Investment Proposals All proposals from foreign investors seeking to engage in business in the Republic of Palau are required by the Foreign Investment Act to apply for and obtain a license known as a Foreign Investment Approval Certificate (FIAC). Applications to the Government are submitted through the Foreign Investment Board for decisions. The Board has the following functions:
An FIAC application must be submitted with an additional 20 copies plus a non-refundable application fee of $500. This application shall be evaluated by the Board according to the following criteria:
The Foreign Investment Board is required by law to issue a decision on applications within 90 days of the submission of a complete application. However, moves are presently being made to expedite the review process and to issue decisions more quickly. Following an application approval, the Board will set the duration, scope and any conditions to be included in the FIAC. Monitoring and Regulatory Environment Applying to the Activities of Foreign Investors Foreign investors are required to submit periodic reports to the Board. This information enables the Board to monitor investors compliance with the law and with the terms and conditions of the FIAC. An FIAC may be modified, suspended, or revoked by the Board under the Foreign Investment Act. Such circumstances that could warrant this action include, but not limited to:
Competition Policy Presently there are no legislation in respect to monopolies and anti-trust, and acquisitions and mergers. OPERATIONAL PROCEDURES Company/Business Structures In Republic of Palau, business is generally conducted through the following types of commercial entities:
Labor and Labor Regulation The indigenous population of the Republic of Palau is approximately 15,000, of whom about 5,000 are active members of the work force. There is no statutory minimum wage for the private sector. For the government sector a minimum wage of US$2.74 per hour is enforced. Banking There are eight commercial banks currently operating in the Republic of Palau. These include:
There are two banks with pending applications presently with the Foreign Investment Board. Taxation Under a Unified Tax Act the Government levies three general types of taxes. As mentioned earlier there is no corporated tax levied in Palau. Gross Revenue Tax (GRT) The principal form of taxation in the Republic of Palau is the GRT which applies to all businesses operating in the islands. This tax is levied at four percent of gross revenue; however, no tax is payable where gross revenue is US$2,000 or less. Gross revenue does not include income in the form of wages and salaries. A recent amendment to the Unified Tax Act clarifies a 100 percent deduction is permitted for the income in the form of wages and salaries paid to Palauan employees whereas a 50 percent deduction is permitted for income for foreign wages. Wage and Salary Tax The second form of taxation is the wage and salary tax. The current tax rates are six percent on the first US$8,000 and 12 percent on amounts over US$8,000. No tax is payable where the annual wage and salary is $2,000 or less. Import Duties Generally products that are imported into the Republic of Palau for resale, including on-site resale at hotels and restaurants, attract an import tax. The tax rates vary depending on the product: most import items are levied at a three percent ad valorem rate. All consignees of imported products, regardless of whether the product may be taxable, are required to make an entry transaction for them within 48 hours (exclusive of weekends or holidays) after arrival of the importing vessel or plane. Also procedures differ for assessing taxes and customs clearance for products received via surface, air freight or air mail and the necessary forms are available at the Tax Office. Other Taxes Some taxes may be imposed by the Government for specific business activities. These include for example, social security taxes, export taxes, foreign vessel taxes and hotel room taxes. PROMOTION OF INVESTMENT OPPORTUNITIFL5 The Republic of Palau actively promotes investment opportunities through the Foreign Investment Board. The official publication produced by this Board is 'Palau - The Foreign Investor's Guide: Foreign Investment Board'. Contacts for Further Information Foreign Investment Board Secretary Secretary
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