HomeReportsBureau of Economic and Business Affairs2023 Investment Climate Statements…Palau

# 					2023 Investment Climate Statements: Palau			

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													EXECUTIVE SUMMARY											

                -  EXECUTIVE SUMMARY 
                -  1. Openness To, and Restrictions Upon, Foreign Investment                    -  Policies Towards Foreign Direct Investment 
                  -  Limits on Foreign Control and Right to Private Ownership and Establishment 
                  -  Screening of FDI 
                  -  New Local Tax Reform 
                -  2. Bilateral Investment and Taxation Treaties                    -  Bilateral Investment Treaty 
                -  3. Legal Regime                    -  Transparency of the Regulatory System 
                  -  International Regulatory Considerations 
                  -  Legal System and Judicial Independence 
                  -  Laws and Regulations on Foreign Direct Investment 
                  -  Competition and Anti-Trust Laws 
                  -  Expropriation and Compensation 
                  -  Dispute Settlement                      -  ICSID Convention and New York Convention 
                    -  Investor-State Dispute Settlement 
                    -  International Commercial Arbitration and Foreign Courts 
                  -  Bankruptcy Regulations 
                -  4. Industrial Policies                    -  Investment Incentives 
                  -  Foreign Trade Zones/Free Ports/Trade Facilitation 
                  -  Performance and Data Localization Requirements 
                -  5. Protection of Property Rights                    -  Real Property 
                  -  Intellectual Property Rights 
                -  6. Financial Sector                    -  Capital Markets and Portfolio Investment 
                  -  Money and Banking System 
                  -  Foreign Exchange and Remittances                      -  Foreign Exchange 
                    -  Remittance Policies 
                  -  Sovereign Wealth Funds 
                -  7. State-Owned Enterprises                    -  Privatization Program 
                -  8. Responsible Business Conduct                    -  Additional Resources 
                  -  Climate Issues 
                -  9. Corruption                    -  UN Anticorruption Convention, OECD Convention on Combatting Bribery 
                  -  Resources to Report Corruption 
                -  10. Political and Security Environment 
                -  11. Labor Policies and Practices 
                -  12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs 
                -  13. Foreign Direct Investment and Foreign Portfolio Investment Statistics 
                -  14. Contact for More Information 

## EXECUTIVE SUMMARY

The Republic of Palau is a small island nation of about 350 islands in the western Pacific Ocean, with an estimated population of about 18,000 people. The government is the country’s largest employer, with approximately 30 percent of the workforce, and the tourism sector was Palau’s biggest economic driver, contributing an estimated 40 percent to GDP. GDP in 2021 was $257 million, approximately $14,243 per capita. Palau’s official currency is the U.S. dollar, and the country has three U.S.-headquartered banks. Apart from tourism, commercial industries include wholesale/retail trade, business services, local commercial fisheries, and construction. Fish, coconuts, breadfruit, bananas, and taro cultivation constitute the subsistence sector, though the country’s agricultural base is small. Palau has a limited export base and production capacity, thus highly vulnerable to external shock. The limited exports hit bottom with the implementation of the Palau Marine Sanctuary, as foreign companies were prohibited from fishing in the Palau Exclusive Economic Zone. Alternative revenue from mid-year 2022 to the present came from U.S. military exercises which supported the economy through the purchase of fuel, hotel rooms, car and boats rentals, and some diving activities. Assistance from the U.S. Workforce Innovation and Opportunity Act (IOA) went to eligible individuals in the tourism industry. The Palau Coronavirus Relief One-Stop Shop (Act funded by an Asian Development Bank (ADB) loan of $41 million in 2020 provided aid to laid-off foreign workers from companies in the tourism industry that had to close or minimize operations from 2022-2023. The country continues to rely heavily on imports and continues to run trade deficits. It is affected by weakening global demand and supply. The country’s exports to the United States were $500,000 in 2021.

The government is reshaping its priorities, plans, and policies for investment in infrastructure affecting the economy, education, health, environment, and human resources. Limited resources require public/public; public/private; and private/private collaboration and partnership to improve standards of living the business environment.

Palau’s economy remains dependent on donor funding. Since independence, Palau has operated under a Compact of Free Association (COFA) with the United States. The COFA is currently under negotiation and will provide about $120 million in grants. Palau receives additional aid from Australia, Japan, Taiwan, and other countries with which it has diplomatic relations. It also receives funding from international organizations such as the World Bank, ADB, and UDP toward energy security, urban planning and management, water and sanitation, public financial management, and private sector development. Additionally, Australia awarded $22 million to a U.S. based company to build a solar photovoltaic facility and battery energy storage which provides supplementary efforts for renewal energy and opening job opportunities for residents.

According to the ADB’s Outlook, it forecasted for 2023 GDP growth rate is anticipated to be 3.8%, compared to 2022 at 1.0%, and 2021 at -17.1%. Tax revenue remained low at 16.8% of GDP in FY 2022.

The Foreign Investment Act guides the foreign investment process in Palau, and Foreign Investment Regulations restrict some sectors to Palauan citizens, including wholesale or retail sale of goods, all land and water transportation, travel and tour agencies, and commercial fishing. Other sectors are semi-restricted, requiring a Palauan partner. While the government welcomes foreign investors, Palau’s investment climate poses challenges. Some U.S. investors have made allegations of corrupt practices when seeking government permits, doing business with local partners, and in public procurement processes. Establishing secure land title may be complicated due to the complexity of Palau’s traditional land ownership system and occasional over-lapping claims. Foreigners cannot own land in Palau, but they can lease land and own buildings on leased land. But leased lands cannot be released or transferred from the lessee to a potential new lessee. Leased land must be returned to the State Government unless it was with a private landowner.

Palau is not a member of the World Intellectual Property Organization, the WTO, or any other organization or convention protecting intellectual property rights. Palau has no bilateral investment protection agreements and is not a member of any free trade association. Human resource constraints are a challenge for foreign investors and, third country nationals from Bangladesh and the Philippines comprise a large proportion of the labor force.

An overview of the World Bank indicated that by the end of 2021 Foreign Direct Investment (FDI) flows accounted for $14.9 million, compared to $22 million in 2020. The stock of FDI grew to $488 million in 2020. Traditionally, FDI is mostly directed towards the tourism and real estate sectors. Main investment partners include China, Taiwan, and Singapore.

							1. Openness To, and Restrictions Upon, Foreign Investment					

### Policies Towards Foreign Direct Investment

The government actively seeks foreign direct investment, and the country’s Foreign Investment Board (FIB) is responsible for approving and regulating foreign investment. There are no specific financial incentives extended to foreign investors.

### Limits on Foreign Control and Right to Private Ownership and Establishment

The Foreign Investment Regulations detail the significant number of restricted and semi-restricted sectors. Semi-restricted businesses can include foreign ownership, as long as a Palauan citizen also has an ownership interest. These semi-restricted businesses are as follows:

- handicraft and gift shops;
- bakeries;
- bar services;
- operations [selling] products being produced by wholly Palauan-owned manufacturing enterprise;
- equipment rentals for both land and water within the Republic, including equipment for the purpose of tourism; and
- any such other businesses as the Foreign Investment Board may determine.

Sectors not listed as either closed or semi-restricted are presumed to be open for foreign investment. The Foreign Investment Board may, however, amend the semi-restricted sector list for “any such other businesses as the Board may determine.”**

### Screening of FDI

The FIB must approve all foreign direct investment. In addition to the sector in which the investment will flow, the Board requires a statement of the level of investment (in U.S. dollar amounts), the length of time the investment will be in Palau, the nationality of the investors, and the percent ownership of each investor. The Board may request additional documentation from investors if it has questions about the details of the investment.

### New Local Tax Reform

Implementation of Palau Goods and Services Tax (PGST) took effect on January 01, 2023. This replaced the Gross Revenue Tax (GRT). The PGST adds a 10% surcharge to all goods and services purchased in Palau.

The Government of Palau has not conducted an investment policy review through any organization or institution in the past five years.

							2. Bilateral Investment and Taxation Treaties					

### Bilateral Investment Treaty

Palau has no bilateral investment protection agreements and is not a member of any free trade associations.

Bilateral Taxation Treaty

Palau does not have a bilateral taxation treaty with the United States. The European Union in 2020 added Palau to its list of non-cooperative tax jurisdictions, the “blacklist.”

							3. Legal Regime					

### Transparency of the Regulatory System

Regulatory and accounting systems are largely consistent with international norms. Bureaucratic procedures (e.g., permitting processes, approvals, etc.) may lack transparency and be influenced by cronyism, partly due to the country’s small size and extensive family networks. Proposed laws and regulations are available in draft form for public comment pursuant to the Administration Procedures Act, Title 6 of the Palau National Code. Generally, tax, labor, environment, health and safety, and other laws and policies do not impede investment. There are no informal regulatory processes managed by nongovernmental organizations or private sector associations. The Government of Palau, through the Financial Investment Act and the Environmental Protection Act, requires companies’ ESG disclosure to facilitate transparency and inform the application process in distinguishing between low- and high-end investment.

### International Regulatory Considerations

The Pacific Island Forum, of which Palau is a member, has a model regulatory and policy framework focused on competition, fair trading, and consumer protections. Palau is not a WTO member.

### Legal System and Judicial Independence

The legal system in Palau is composed of a mix of civil, common, and customary law. Palau also has a specialized Land Court for disputes arising from conflicting claims of land ownership, which is a complex issue in the country. The legal system is patterned on common law proceedings as they exist in the United States. The judiciary comprises a four-member Supreme Court, a Court of Common Pleas, and a Land Court. The Supreme Court has a trial division and an appellate division. Court rulings, legal codes, and public law can be found on their website: http://www.palausupremecourt.net/.

### Laws and Regulations on Foreign Direct Investment

All non-citizens wishing to invest in the Republic of Palau must obtain a Foreign Investment Business License (FIBL). The FIBL is obtained from the Registrar of Foreign Investment in the office of the Attorney General. In coordination with the Investment Promotion Unit at the Ministry of Natural Resources and Commerce, the Ministry of Finance reviews the application and ensures that the business does not fall under the categories of the National Reserved List listed above. The application process usually takes 7-10 working days.

### Competition and Anti-Trust Laws

Palau does not currently have any anti-trust legislation, although the Foreign Investment Board considers competition-related concerns in its review process.

### Expropriation and Compensation

Although the Palauan constitution provides for the right of the government to condemn land for national interest (“eminent domain”), there are no reported property-expropriation cases. Most of the land is privately owned by Palauan citizens through complex family lineages.

### Dispute Settlement

#### ICSID Convention and New York Convention

Palau is not a member of the International Center for Settlement of Investment Disputes (ICSID).

#### Investor-State Dispute Settlement

There are no ongoing investment disputes involving the Government of the Republic of Palau and foreign investors. There is a very limited record of foreign investment disputes in Palau due to the small size of foreign investment in the country. The most common type of business disputes is with landowners over land use, and land rights issues, and as there is currently no official dispute resolution procedure, these are frequently resolved informally or only after protracted court disputes.

#### International Commercial Arbitration and Foreign Courts

The Republic of Palau does not have any alternative dispute resolution (ADR) mechanisms or domestic arbitration bodies available as a means for setting disputes between two private parties.

### Bankruptcy Regulations

There is no legal provision for bankruptcy in the Republic of Palau. It ranks 166 out of 190 for resolving insolvency in World Bank’s 2020 Doing Business Report.

							4. Industrial Policies					

### Investment Incentives

The Government of Palau does not offer incentives to domestic or foreign investors.

### Foreign Trade Zones/Free Ports/Trade Facilitation

The Free Trade Zone Act of 2003 established the Ngardmau Free Trade Zone Authority. Another “Tax Free Zone” was established in the state of Melekeok, covering a one-mile radius around the Federal capitol building.

### Performance and Data Localization Requirements

Palau does not currently have laws or regulations on domestic storage or localization requirements.

The Palau government requires all investors employing non-resident workers to agree to:

Cover the cost of repatriating non-resident workers to the place hired.

Train one or more citizen workers to perform the work for which the non-resident worker is employed.

This requirement is set and evaluated on a case-by-case basis and is usually included as part of a whole package that also includes investment incentives such as favorable taxation statuses. U.S. Citizens do not require a visa to enter Palau and may be employed in Palau without obtaining a work permit or a visa. They must register as a non-resident worker with the Bureau of Immigration annually.

							5. Protection of Property Rights					

Other than the foreign-ownership restrictions for certain business sectors, there are no restrictions on private entities to engage in all forms of remunerative activity.

### Real Property

Establishing secure land title may be complicated due to the complexity of the traditional land ownership system and occasional over-lapping claims. Banks offer mortgages, and the recording system is reliable. The Land Court has primary responsibility to adjudicate disputes over land ownership. Non-Palauans may not purchase land, although they are able to lease for up to 99 years. Non-citizen investors must negotiate lease agreements directly with private owners or the state government.

### Intellectual Property Rights

Palau is not a member of the World Intellectual Property Organization (WIPO), the WTO, or any other organization or convention protecting intellectual property right. In general, Palau does not strictly enforce intellectual property rights.

**Resources for Rights Holders**

Embassy ContactMission Deputy Andrew J. Mclean+680-587-2920

*Country Resources*

For a list or lawyers in Palau, please see: https://pw.usembassy.gov/u-s-citizen-services/attorneys/.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

							6. Financial Sector					

### Capital Markets and Portfolio Investment

There are no stock exchanges or financial regulatory institutions in the country.

### Money and Banking System

Palau uses the U.S. dollar and has no central bank. The country has three U.S.-headquartered banks: Bank of Hawaii, Bank Pacific, and Bank of Guam. All three are publicly owned U.S. companies with headquarters in Honolulu and Guam. There are several smaller private banks and a national bank, the National Development Bank of Palau.

The Palau Financial Institutions Commission is the regulatory body responsible for establishing and maintaining the financial supervisory system in Palau.

### Foreign Exchange and Remittances

#### Foreign Exchange

The government does not impose any restrictions on converting or transferring funds associated with an investment. There have been no reported difficulties in obtaining foreign exchange as most funds are in U.S. dollars. Other than best practices to review suspicious money transfers (e.g., money laundering), there are no restrictions on converting or transferring funds associated with an investment.

Since 2011, Palau has had five successful money laundering cases, though the risk of money laundering within the country persists, particularly given large real estate transactions, the reliance on cash transactions, and relative low capacity for government regulatory oversight.

#### Remittance Policies

While the government encourages reinvestment of profits locally, there are no laws restricting repatriation of profits, dividends, or other investment capital acquired in Palau.

### Sovereign Wealth Funds

Palau has no sovereign wealth fund (SWF) or asset management bureau (AMB), but the Compact of Free Association established a Trust Fund for Palau that is independently overseen by the COFA Trust Fund Board composed five members who are appointed by the President of Palau and confirmed by the Senate.

							7. State-Owned Enterprises					

In Palau, most of the major industries are controlled by state-owned- or quasi-state enterprises. These include the utilities sector, telecommunications, and the national bank. The SOE sector continues to underperform and to impose significant risks and burden on the fiscal system and economy.

### Privatization Program

Palau has no on-going privatization program.

							8. Responsible Business Conduct					

Many businesses provide corporate donations to environmental and social Non-Governmental Organizations (NGOs), and /or engage in environmental corporate social responsibility programs to preserve Palau’s environment and wildlife. Most CSR activities are conducted via donation, partly attributable to the available tax deduction of up to 10 percent of a company’s Gross Revenue for donations to non-profit organizations.

Palau has some basic worker protection laws, including a minimum wage and protections for foreign workers.

### Additional Resources

Department of State

- Country Reports on Human Rights Practices ( https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/ )
- Trafficking in Persons Report ( https://www.state.gov/trafficking-in-persons-report/ )
- Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities ( https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/ )
- U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises ( https://www.state.gov/u-s-national-contact-point-for-the-oecd-guidelines-for-multinational-enterprises/ )
- Xinjiang Supply Chain Business Advisory ( https://www.state.gov/xinjiang-supply-chain-business-advisory/ )

Department of the Treasury

- Office of Foreign Asset Controls (OFAC) Recent Actions ( https://home.treasury.gov/policy-issues/financial-sanctions/recent-actions ).

Department of Labor

- Findings on the Worst forms of Child Labor Report ( https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings )
- List of Goods Produced by Child Labor or Forced Labor ( https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods )
- Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World ( https://www.dol.gov/general/apps/ilab )
- Comply Chain ( https://www.dol.gov/ilab/complychain/ ).

### Climate Issues

As an island state, Palau is highly vulnerable to climate change, and as a result has developed a national Climate Change Policy. Policy objectives include mitigating global climate change by working towards low carbon emission development, maximizing energy efficiency, protecting carbon sinks, and minimizing greenhouse gas emissions. Palau also plans to become the world’s first carbon neutral tourism destination. This project, launched in August 2020, aims to reduce Palau’s carbon footprint both domestically and by foreign tourism, while increasing the production of locally sourced food.

Palau has been a vocal proponent of climate mitigation measures and has several government policies in addition to the Climate Change Policy, which seek to achieve outcomes that preserve biodiversity and other ecological benefits. Although government does not specify any specific expectations on the private sector to contribute to achieving targets and goals, there is spirit of collaboration that exists between the private sector and the government that enables efficiency and progress in environmental protection.

							9. Corruption					

Corruption remains a challenge to doing business in Palau, despite a robust legal mechanism to detect and prosecute corruption. The Code of Ethics regulates transactions by national and state public employees, officials, and elected officials, as well as persons making campaign contributions. The law prohibits personal gain through governmental transactions, prohibits conflict of interest, restricts incompatible outside employment, prohibits solicitation of gifts, and severely restricts the size of campaign contributions, limiting such contributions to Palauan citizens.

The Special Prosecutor Act established the Office of the Special Prosecutor (OSP), who has the power to investigate and prosecute the national and state governments, and its officials, for violations of the Constitution and laws of the Republic or for failure to implement such laws. OSP works closely with the Palau Ethics Commission (established by law) who review financial disclosures for national and state elected officials and other public officials required to file annually. OSP and Ethics Commission also coordinate with the Office of the Public Auditor (established by law) who audit national, state governments, and semi-government agencies. Local media often reports on alleged corruption cases and serves as an informal watchdog. Palau does not appear in Transparency International’s Index of Corruption. There are no formal anti-corruption NGOs or international watchdogs based in Palau.

### UN Anticorruption Convention, OECD Convention on Combatting Bribery

Palau acceded to the United Nations Convention against Corruption (UNCAC) in March 2009. It has been a member of the Asian Pacific Group on Money Laundering (APGML) since 2002.

Palau is not a member of the OECD Convention on Combating Bribery.

### Resources to Report Corruption

Allegations of corruption can be reported to the Special Prosecutor through the Attorney General’s Office:

Ernestine RengiilAttorney General+680-488-2481

UN Convention Against Corruption (UNCOC)

UNCOC has been working with Palau on wide range of corruption effect on societies, from reporting, investigations, filing charges, to***UN Anticorruption Convention, OECD Convention on Combatting Bribery***

Palau acceded to the United Nations Convention against Corruption (UNCAC) in March 2009. It has been a member of the Asian Pacific Group on Money Laundering (APGML) since 2002.

Palau is not a member of the OECD Convention on Combating Bribery.

							10. Political and Security Environment					

Palau is stable, and not prone to political violence. The World Bank placed Palau in the 84th percentile in its 2015 rating of country political stability.

							11. Labor Policies and Practices					

With an estimated total of 18,000 Palauan nationals in country (including non-working individuals, such as children and elderly) and 4,300 estimated foreign workers, foreign labor comprises a large proportion of Palau’s labor force. Palau has a fairly low unemployment rate across all age categories.

Under the Compact of Free Association, Palauan citizens are entitled to live, attend school, and work in the United States visa-free as “nonimmigrant residents.” Accordingly, many skilled and professional workers migrate to the U.S. for its higher wages and standards of living.

Professional, medical, management, and other special labor skills are in high demand in Palau. Given the scarcity of resident qualified workers, Palau allows investors to employ non-resident workers provided they agree to cover the cost of repatriation, that they hire and train at least one citizen to perform the same work.

In October 2013, Palau established the minimum wage for workers. Foreign workers are generally hired on a contract basis with opportunities for annual renewals.

As of 2020, there are no new labor related laws or regulations enacted during the last year as well as no pending draft bills.

							12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs					

Palau is a member of the Multilateral Investment Guarantee Agency of the World Bank Group.

							13. Foreign Direct Investment and Foreign Portfolio Investment Statistics					

**Table 3: Sources and Destination of FDI**Data not available.

							14. Contact for More Information					

Andrew J. McLeanDeputy Chief of MissionU.S. Embassy KororRepublic of PalauTel: +680-587-2920 x 2002McLeanAJ@state.gov

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### On This Page

                    -  EXECUTIVE SUMMARY 
                    -  1. Openness To, and Restrictions Upon, Foreign Investment                        -  Policies Towards Foreign Direct Investment 
                      -  Limits on Foreign Control and Right to Private Ownership and Establishment 
                      -  Screening of FDI 
                      -  New Local Tax Reform 
                    -  2. Bilateral Investment and Taxation Treaties                        -  Bilateral Investment Treaty 
                    -  3. Legal Regime                        -  Transparency of the Regulatory System 
                      -  International Regulatory Considerations 
                      -  Legal System and Judicial Independence 
                      -  Laws and Regulations on Foreign Direct Investment 
                      -  Competition and Anti-Trust Laws 
                      -  Expropriation and Compensation 
                      -  Dispute Settlement                          -  ICSID Convention and New York Convention 
                        -  Investor-State Dispute Settlement 
                        -  International Commercial Arbitration and Foreign Courts 
                      -  Bankruptcy Regulations 
                    -  4. Industrial Policies                        -  Investment Incentives 
                      -  Foreign Trade Zones/Free Ports/Trade Facilitation 
                      -  Performance and Data Localization Requirements 
                    -  5. Protection of Property Rights                        -  Real Property 
                      -  Intellectual Property Rights 
                    -  6. Financial Sector                        -  Capital Markets and Portfolio Investment 
                      -  Money and Banking System 
                      -  Foreign Exchange and Remittances                          -  Foreign Exchange 
                        -  Remittance Policies 
                      -  Sovereign Wealth Funds 
                    -  7. State-Owned Enterprises                        -  Privatization Program 
                    -  8. Responsible Business Conduct                        -  Additional Resources 
                      -  Climate Issues 
                    -  9. Corruption                        -  UN Anticorruption Convention, OECD Convention on Combatting Bribery 
                      -  Resources to Report Corruption 
                    -  10. Political and Security Environment 
                    -  11. Labor Policies and Practices 
                    -  12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs 
                    -  13. Foreign Direct Investment and Foreign Portfolio Investment Statistics 
                    -  14. Contact for More Information 

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