2008 INVESTMENT CLIMATE STATEMENT FOR AUSTRIA

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08VIENNA61 15 January 2008 No clasificado Embassy Vienna

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DE RUEHVI #0061/01 0151538
ZNR UUUUU ZZH
P 151538Z JAN 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 9322
RUEATRS/DEPT OF TREASURY WASHDC
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UNCLAS VIENNA 000061

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STATE FOR EB/IFD/OIA, EUR/ERA AND EUR/AGS
STATE PLEASE PASS TO USTR
USDOC ALSO FOR 4212/MAC/EUR/OWE/PDACHER

E.O. 12958: N/A
TAGS: EINV, EFIN, ELAB, ETRD, PGOV, KTDB, OPIC, USTR, AU
SUBJECT: 2008 INVESTMENT CLIMATE STATEMENT FOR AUSTRIA

REF: 07 STATE 158802

1. Following is the 2008 Investment Climate Statement for Austria,
keyed to reftel instructions:

2008 INVESTMENT CLIMATE STATEMENT — AUSTRIA


Introduction


With the European Union’s (EU) enlargements in May 2004 and January
2007, Austria solidified its central position in the EU. As an
investment location, Austria, and Vienna in particular, faces
growing competition from its Eastern neighbors, all of which are EU
members. Budapest, Prague and Bratislava are competing directly
with Vienna for foreign investors. Many have pointed out that
direct transportation links among Austria’s Eastern neighbors are in
some places better than those running through Austria. Many view
the current state of inadequate road and rail transport links to
Central, Eastern and Southeastern European neighbors as a missed
opportunity. The Austrian government’s program includes plans to
address these infrastructure gaps. On December 21, 2007, the EU’s
Schengen area expanded to the Czech Republic, Hungary, Slovakia, and
Slovenia, removing border controls between these countries and
Austria. The 2005 corporate tax cut was a major step towards
remaining competitive vis-a-vis Austria’s Eastern EU neighbors. The
tax cut has also enticed firms to open regional headquarters in
Vienna. Some 340 U.S. companies have invested in Austria and most
have expanded their original investment over time.

Austria continues to offer some advantages for foreign investors,
but it also presents some challenges.

Openness to Foreign Investment


Government attitude towards foreign private investment: Observers
do not expect Austria’s basic policies and openness towards foreign
direct investment to change under the grand coalition between the
Social Democratic Party (SPO) and the People’s Party (OVP), which
took office in January 2007 for a four-year term. The coalition
program includes a promise to promote direct investment and to
further strengthen Austria’s attractiveness as a location for
investment and headquarters for international firms. In general,
the coalition program is relatively broad, reflecting the hand of
both the SPO and the OVP. The need for compromise between the big
center-left and center-right parties prevented the development of
visionary reforms. The government will not reverse major structural
and economic reforms implemented in recent years. However, the SPO
insists on a more "social face" for reforms. Observers are
convinced that reforms will continue, although more slowly and with
greater emphasis on social and welfare reforms and less on
deregulation, liberalization and privatizations.

Strong growth is now primarily the result of favorable global
trends. The Austrian government intends to pursue initiatives to
raise economic growth as a means to attain full employment by 2010.
These initiatives include the following: expanding and improving the
road, rail, energy and telecom infrastructures; introducing
Public-Private Partnership (PPP) models; improving education and
training; improving R&D policies and raising R&D expenditures to 3%
of GDP by 2010; continuing efforts to balance the budget over the
economic cycle in line with the requirements of the EU’s Stability
and Growth Pact; implementing administrative reforms and
streamlining the division of responsibilities among the various
levels of government; and lowering income taxes by the end of the
legislative period.

The government can build on the comprehensive structural reforms the
previous government implemented during the 2000-2006 timeframe.
These reforms helped streamline government, create a more
competitive business environment, and strengthen Austria’s
attractiveness as a location for investment. According to many
observers, in comparison to other EU member states, Austria carried
out a major policy shift in 2000-2006 by pursuing a balanced budget,
pension reform, privatizations, reorganizing financial market
supervision and competition policy bodies, and implementing a
corporate tax cut in 2005. The reforms addressed long-standing
imbalances and have improved the Austrian economy’s long-term growth
potential.

Addressing a major concern of many businesses, the government has
extended shop opening hours (shops will remain closed on Sundays)
and started initiatives to raise R&D expenditures. In an effort to
transfer more transportation from roads to railways, the government
raised taxes on diesel and gasoline, as well as truck tolls.
However, the reform agenda has lost momentum following the formation
of the grand coalition government in January 2007. A legislated
increase in social security contributions rules out any cuts in
non-wage costs. In a controversial move, the government reversed
some features of the previous government’s pension reforms by
extending possibilities for early retirement without cuts in pension
payments. The government is still working on introducing a basic
social allowance. Little or no progress has been made on health
system reform, educational reform, and the increasingly prominent
challenge of ensuring adequate and affordable nursing care for
Austria’s ageing population.

In order to balance the budget and implement tax cuts by 2010 as
promised, the government must resist pressure to spend cyclical
generated revenues. To remain competitive in the medium-term, the
government should implement an array of innovative strategic
measures, including added emphasis on the high-tech goods and
services segment to transform Austria from a technology consumer to
a supplier of high-tech products.

Austria has been virtually strike-free since spring 2003.

Liberalization and deregulation in the energy and telecom sectors
have lowered prices for businesses. However, remaining barriers to
entry and competition have resulted in only partial liberalization.
Network tariffs for electricity, for example, have remained too
high, according to a December 2006 study by the Austrian Federal
Competition Authority.

Austria welcomes foreign direct investment that does not have a
negative impact on the environment. Austria particularly welcomes
those investments that create new jobs in high technology fields,
promote capital-intensive industries, and have links to R&D
activities, for which special tax incentives are available. Austria
remains a high-tax country, but due to a 25% corporate tax rate, it
has become increasingly attractive as a headquarters location.
Because of tax base adjustments, experts estimate the effective
corporate tax burden to be no more than 22%. Austria also offers a
highly favorable provision for group taxation, unique in Europe,
which allows business to offset profits and losses of group
operations (requiring direct or indirect participation of more than
50%, but no other financial, economic or organizational integration)
in Austria and abroad. This group taxation system offers
interesting opportunities for U.S. investors, in particular
joint-venture structures, M&A transactions, headquarter companies
and simple holding companies without active business, which can also
benefit from the group taxation. The corporate tax cut and group
taxation aim to keep Austria competitive vis-a-vis its new EU
neighbors.

Under certain conditions, limited amounts of the business profits of
non-corporations will be assessed at half the income tax rate to
which they would regularly be subject. Austria has no wealth or net
worth tax, and no trade tax (Gewerbesteuer), unlike neighboring
Germany. As of July 31, 2008, the existing inheritance tax and most
likely the gift tax will be abolished.

There are no formal sectoral or geographic restrictions on foreign
investment. In some regions, Austria offers special facilities and
services ("cluster packages") to foreign investors. For example,
these can include automotive producers or manufacturers of chips,
silicon, and high-tech products. Austria offers financial and tax
incentives within EU parameters to firms undertaking projects in
economically depressed and underdeveloped areas on Austria’s eastern
and southern borders. For most of these areas, eligibility for
co-financing subsidies under EU regional and cross-border programs
will decline under the EU’s 2007-2013 financial framework from Euro
2 billion to Euro 1.3 billion. The only opposition to investment in
the manufacturing sector may arise from environmental concerns.

Potential U.S. investors need to factor Austria’s strict
environmental laws into their decision-making process. Austria has
imposed marketing bans on some agricultural biotechnology seeds
despite existing EU approvals. The EU Commission is currently in a
position to overturn the bans, but it is unclear whether it will act
accordingly. For new varieties, the EU’s legislation on the
deliberate release of genetically modified organisms (GMOs) and on
traceability and labeling requires Austria to allow GMO seeds in
fields and in stores. However, strict liability regulations for
research, production, and distribution of GMOs still apply. Under
the Kyoto Protocol, Austria has made a commitment to cut its CO2
emissions by 13% between 2008 and 2012 from its 1990 level. Austria
is in the process of implementing the EU’s regulatory framework on
greenhouse gas emissions trading, which entered into force in 2005.

In investor surveys and international rankings, Austria consistently
earns high marks for political stability, personal security, quality
of life, rule of law, skill and motivation of labor, productivity
and quality, health infrastructure, and mobile phone costs.
However, Austria receives low marks for economic growth, tax burden,
rigid labor practices, lack of risk capital financing, low
innovation dynamics, restrictive immigration laws, size of the
public sector, and regulatory red tape. With the 2005 corporate tax
cut, the government addressed one major investment disincentive.
Surveys show that Austria faces stiffer competition from Central and
Eastern European (CEE) markets, as well as from the twelve new EU
members, especially the four that border Austria. This competition
is particularly noticeable in sectors where wage costs are decisive.
The International Institute for Management Development’s (IMD) 2007
World Competitiveness Scoreboard ranks Austria eleventh, up from the
thirteenth position in 2006, while A.T.Kearney’s 2007 Globalization
Index, which measures variables such as economic integration,
technological connectivity or political engagement, ranks Austria
number 14, down from number 9 in 2006 (by comparison, the U.S. was
seventh in 2007, the UK twelfth, and Germany twenty-second). The
Index of Economic Freedom of The Heritage Foundation/Wall Street
Journal ranks Austria number 25 worldwide and number 15 among the 41
European countries.

Acquisitions, mergers, takeovers, cartels: Austria’s 2005
Anti-Trust Act, in effect since January 1, 2006, harmonizes Austrian
anti-trust regulations with EU competition law. The independent
Federal Competition Authority (FCA) and the Federal Cartel
Prosecutor (FCP) are responsible for administering anti-trust laws.
The FCA has not been particularly pro-active, reportedly due to
personnel shortages.

The Austrian Anti-Trust Act prohibits cartels, any competitive
restrictions, and abuse of a dominant market position. Companies
must inform the FCA about mergers and acquisitions (M&A) concerning
domestic enterprises, if combined worldwide sales exceed Euro 300
million ($411 million at the current exchange rate of $1.00 per Euro
0.73), domestic sales exceed Euro 30 million ($41.1 million), or if
two of the firms involved each have worldwide sales exceeding Euro
5.0 million ($6.9 million). Special regulations apply to M&As of
media enterprises. The cartel court is competent to decide on any
M&A notification from the FCA or the FCP. For violations of
anti-trust regulations, the cartel court can impose fines of up to
the equivalent of 10% of a company’s annual worldwide sales. An
independent energy regulatory authority separately examines
antitrust concerns in the energy sector, but also has to submit any
cases to the cartel court.

European Community anti-trust regulations continue to apply and take
precedence over national regulations in cases of trade between
Austria and other EU member states.

Austria’s 1999 Takeover Law applies to both friendly and hostile
takeovers of corporations headquartered in Austria and listed on the
Vienna Stock Exchange. It protects investors against unfair
practices, since any shareholder obtaining a controlling stake in a
corporation (30% or more in direct or indirect control of a
company’s voting shares) must offer to buy out smaller shareholders
at a defined "fair market" price. The law also includes regulations
for shareholders who passively obtain a controlling stake in a
company, i.e., not by buying additional shares, but because another
large shareholder has reduced his/her shareholding. A 2006
amendment to the law implementing the EU’s Takeover Directive
prohibits defensive action to frustrate bids. The law does not
imlement the directive’s breakthrough regulations, bt allows
individual companies to address these i company bylaws. The
Shareholder Exclusion Act f 2006 allows a primary shareholder, with
at least 90% of capital stock, to "squeeze out" minority
shareholders. An independent takeover commission at the Vienna
Stock Exchange oversees compliance with these laws.

Screening mechanisms: Only those foreign investments with financial
assistance from the Austrian government are subject to government
overview. Screening ensures compliance with EU regulations, which
limit such assistance to disadvantaged geographic areas.

Privatizations: The larger party in the coalition government, the
Social Democratic Party, has announced it has no plans for further
privatizations. As a result, there were no privatizations in 2007,
whereas the previous government had privatized many public
enterprises successfully. Foreign and domestic investors received
equal treatment. Despite Austrian government’s historical
preference for maintaining a Austrian core shareholding, foreign
investors have been successful in obtaining shares in strategic
sectors of the Austrian economy, including the following: telecoms;
Austria’s largest bank, Bank Austria; the Austrian Tobacco Company;
Voest-Alpine (VA), a major steel producer; and VA Tech, a
metallurgy, power generation and infrastructure conglomerate. In
early 2007, the U.S. investment fund Cerberus Capital Management
finalized the takeover of about 90% of the shares of BAWAG P.S.K.
Bank, Austria’s fourth largest banking group, from its owner, the
Austrian Trade Union Federation.

Treatment of foreign investors: There is no discrimination against
foreign investors, but they are required to follow a number of
regulations. Although there is no requirement for participation by
Austrian citizens in ownership or management, at least one manager
must meet residence and other legal requirements. Non-residents
must appoint a representative in Austria. Expatriates are allowed
to deduct certain expenses (costs associated with moving,
maintaining a double residence, education of children) from
Austrian-earned income. The Austrian immigration law requires
permanent legal residents to take German language and civics
courses. A 2005 amendment to the Austrian immigration law exempts
applicants for residence permits from the German language course
requirement, if they hold a university degree.

Investment incentives: Since 2007, Austria has less access to funds
from various EU structural and cohesion programs, primarily regional
competitiveness and employment programs. The Austrian federal,
state, and local governments also provide financial incentives
within EU guidelines to promote investments in Austria. Incentives
under these programs are equally available to domestic and foreign
investors, and range from tax incentives to preferential loans,
guarantees and grants. Most of these incentives are available only
if the investment meets specified criteria (e.g., implementation of
new technology, reducing unemployment, etc.). Tax allowances for
advanced employee training and R&D expenditures are also available.
Austria Wirtschaftsservice is the government’s "one-stop shop"
institution providing financial incentives. Further information, in
the German language only, is available from
http://www.awsg.at/portal/).

Conversion and Transfer Policies


Austria has no restrictions on cross-border capital transactions,
including the repatriation of profits and proceeds from the sale of
an investment, for non-residents and residents. The Euro, a freely
convertible currency and the only legal tender in Austria and
fourteen other Euro-zone member countries, shields investors from
exchange rate risks in the entire Euro-zone.

Expropriation and Compensation


Expropriation of private property in Austria is rare and may proceed
only on the basis of special legal authorization. The government
can initiate it only in the absence of any other alternative to
satisfy the public interest; when the action is exclusively in the
public interest; and when the owner receives just compensation. The
expropriation process is fully transparent and non-discriminatory
toward foreign firms.

Dispute Settlement


The Austrian legal system provides an effective means for protecting
property and contractual rights of nationals and foreigners.
Additionally, Austria is a member of the International Center for
the Settlement of Investment Disputes. The 1958 New York Convention
also grants enforcement of foreign arbitration awards in Austria.
There have been no recent reports of bilateral investment disputes.

Performance Requirements/Incentives


Austria is in compliance with the World Trade Organization’s Trade
Related Investment Measures (TRIMS) agreement. There are virtually
no restrictions on foreign investment in Austria and foreign
investors receive national treatment in the main. However, some
requirements exist. For example, at least one manager must meet
residency and other legal qualifications. Non-residents must
appoint a representative in Austria.

The Austrian government may impose performance requirements when
foreign investors seek financial or other assistance from the
government, although there are no performance requirements to gain
access to tax incentives. There is no requirement that nationals
hold shares in foreign investments or that there be a technology
transfer.

The U.S. and Austria are signatories to the 1931 Treaty of
Friendship, Commerce, and Consular Rights. Austrian immigration law
restricts the overall number of visas, but a few non-immigrant
business visa classifications, including intra-company
transfers/rotational workers, and employees on temporary duty, are
eligible for visas with no numerical limitations. Recruitment of
long-term overseas specialists or those with managerial duties is
under quota controls. Austrian law defines employment-based
immigrants as multinational executives/managers or similar
professionals who are self-employed. The 2005 Amendment to the
Austrian Immigration Law has eased the integration policy requiring
immigrants to attain a minimum level of competence in the German
language. Under the amendment, previous education (university
degree) will automatically fulfill the integration requirement.
Austria cut annual immigration quotas for 2006 from 7,500 to 7,000,
largely at the expense of "key workers/managers" category. In 2007,
the overall number of immigration slots decreased further to 6,500.
However, during 2007, the quota for key managers had to be increased
by some 300 slots to meet rising demand because of strong economic
growth. Immigration quotas for 2008 have been raised to 8,050, with
the new quotas again benefiting the visa category for key managers.

Right to Private Ownership and Establishment


Foreign and domestic private enterprises are free to establish,
acquire, and dispose of interests in business enterprises, except
for in some infrastructure and utilities, and in a few state
monopolies, such as gambling. However, through privatizations, the
government may gradually open up some of these industries to private
investment as well. For example, in recent years, the Austrian
government implemented legal changes to allow private radio and
private terrestrial TV; dismantled the postal monopoly for
wire-transmitted voice telephony and infrastructure; and liberalized
the electricity and gas markets. In 2006, in line with EU
regulations, the government privatized 49% of its postal company.
However, by law, federal and state governments maintain at least a
51% share in all electricity providers. In most business
activities, the law permits 100% foreign ownership. Foreign direct
investment is restricted only when competing with monopolies and
utilities. Licensing requirements, such as those in the banking and
insurance sectors, apply equally to domestic and foreign investors.

Protection of Property Rights


The Austrian legal system protects secured interests in property.
The law recognizes mortgages, if recorded in the land register and
if the underlying contracts are valid. For any real estate
agreement to be effective, owners must register with the land
registry, which requires approval of the land transfer commission or
the office of the state governor. The land registry is a reliable
system for recording interests in property, and any interested party
has access to it.

Austria has effective laws to protect intellectual property rights,
including patent and trademark laws; a law protecting industrial
designs and models; and a copyright law. Austria is a party to the
World Intellectual Property Organization (WIPO) and several
international property conventions, including the European Patent
Convention, the Patent Cooperation Treaty, the Universal Copyright
Convention, and the Geneva Treaty on the International Registration
of Audiovisual Works. Since both the United States and Austria are
members of the "Paris Union" International Convention for the
Protection of Industrial Property, American investors are entitled
to the same protection under Austrian patent legislation as are
Austrian nationals. Amendments in 2005 and 2006 to the Austrian
Patent Act strengthened protection of patents from innovative
enterprises, particularly through more efficient and transparent
implementation procedures. One can file objections only after
authorities have granted the patent, and the right to receive
information from authorities has been extended.

Austria’s copyright law is in conformity with EU directives on
intellectual property rights and grants the author the exclusive
rights to publish, distribute, copy, adapt, translate, and broadcast
his/her work. Infringement proceedings, however, can be
time-consuming and complicated. The Austrian Copyright Act also
regulates copyrights of digital media (restrictions to private
copies), works on the Internet, protection of computer programs, and
related damage compensation. In line with EU requirements, Austria
also has a law against trade in counterfeits. The Austria film and
music industry lobby groups complain regularly about high rates of
piracy in their fields. In 2006, Austrian customs authorities
confiscated pirated goods worth Euro 10.4 million ($14.2 million), a
sharp decline compared to 2005.

Transparency of the Regulatory System


Austria’s legal, regulatory, and accounting systems are transparent
and consistent with international norms. The government usually
publishes proposals for new laws and regulations in draft form for
public comment.

The Austrian government has made some progress in streamlining its
complex and cumbersome permit and paperwork requirements for
business licenses and permits. The government maintains that it has
reduced the time necessary to obtain permits to about three months,
except for large projects requiring an environmental impact
assessment. The "one-stop shop" for a business permit, which the
government implemented in 2002, does not include plant and building
permits. These simplified procedures should accelerate permit
procedures, but unpredictable and inflexible bureaucratic rules can
still be a problem. The government has plans to reduce the
administrative cost burden for companies by 25% until 2010 by
streamlining and cutting legal regulations and firms’ data
collection and information obligations.

The government applies tax and labor laws uniformly, as well as
health and safety standards. The government thus does not influence
the allocation of investments amongst sectors. The Austrian
investment climate has become more conducive for business since
Austria became a member of the EU.

Efficient Capital Markets and Portfolio Investment


-----
Austria has modern and sophisticated financial markets. All
financial instruments are available. Foreign investors have access
to the Austrian market without restrictions. Austria has a highly
developed banking system with worldwide correspondent banks, and
representative offices and branches in the United States and other
major financial centers. Large Austrian banks also have a huge
network in many of the fourteen new EU members and other countries
in Central and Eastern Europe (CEE) and in Southeastern Europe
(SEE). Austrian banking groups dominate CEE/SEE banking markets.
Six out of the seven largest Austrian banks hold sizeable
investments in CEE/SEE. Three of them are among the five largest
banking groups in the area. Total assets of Austria’s five largest
banking groups (Bank Austria Creditanstalt (BA-CA), Erste Bank,
Raiffeisen Zentralbank (RZB), Bank fuer Arbeit und Wirtschaft und
Oesterreichische Postsparkasse (BAWAG P.S.K.), and Oesterreichische
Volksbanken) amounted to approximately Euro 570 billion ($781
billion) in 2006, representing 71% of Austria’s total bank assets.

The Vienna Stock Exchange (VSE) is connected to Xetra, Frankfurt’s
electronic trading system, so traders worldwide have on-screen
information and direct access to all stocks listed in Vienna.
Listed companies must publish quarterly reports. As of November 1,
2007, the VSE’s Unregulated Third Market will no longer be covered
by the Stock Exchange Act, but considered a Multilateral Trading
Facility (MTF), operated by the VSE. This change is in line with
the EU’s Markets in Financial Instruments Directive (MiFID), which
differentiates only between regulated markets and MTFs. Companies
and investors have to be aware that the operation of an MTF is not
part of exchange trading and therefore the requirements of the Stock
Exchange Act regarding financial instruments admitted to trading on
a regulated market (especially obligations imposed on issuers) do
not apply to the financial instruments traded on an MTF. However,
the Third Market Rules of the VSE will apply.

In pursuing its idea of establishing a regional "Central European
Stock Exchange" alliance, the VSE, as leader of a consortium of
Austrian and Hungarian investors, acquired a majority share in the
Budapest Stock Exchange and has signed a cooperation agreement with
the Zagreb Stock Exchange, as well as MoUs prompting closer
cooperation with stock exchanges in Banja Luka, Belgrade, Macedonia,
Montenegro, Sarajevo and Ukraine. The VSE also publishes a
Southeast Europe Traded Index (SETX), which contains 20 blue chip
stocks listed on the stock exchanges of Bucharest, Ljubljana, Sofia
and Zagreb, and a number of county-specific CEE/SEE indices,
including for Russia.

Criminal penalties for insider trading, money laundering and
terrorist financing exist. The Austrian Financial Market Authority
(FMA), similar to the U.S. Securities and Exchange Commission, is
responsible for policing irregularities on the stock exchange and
for supervising banks, insurance companies, securities markets, and
pension funds. However, several recent scandals in the financial
sector have raised questions about the effectiveness of regulations
and their execution. Subsequently, the government implemented legal
changes to reform the supervisory system, strengthening the role of
the Austrian National Bank vis-a-vis the FMA in the supervisory
system.

Austria’s venture capital market is still underdeveloped. The
market, which has been flat since it peaked in 2000, started to
recover in 2005 and continued to grow in 2006, but not as fast as
the European venture capital market. The volume of private equity
and venture capital raised in Austria during 1997-2006 was Euro 1.7
billion ($2.3 billion), according to the Austrian Private Equity and
Venture Capital Organization (AVCO). After a doubling in 2005,
compared to 2004, fund raising rose again almost 30% to Euro 279
million ($382 million) in 2006. Figures for 2007 are not yet
available.

The legal, regulatory, and accounting systems are transparent and
consistent with international norms. Austrian regulations governing
accounting provide U.S. investors with improved and internationally
standardized financial information. In line with pertinent EU
regulations, listed companies must prepare their consolidated
financial statements according to the IAS/IFRS (International
Financial Reporting Standards). For firms with annual sales
exceeding Euro 400,000 ($548,000), the new Austrian Enterprise Code,
which replaced the Austrian Business Code on January 1, 2007,
includes detailed accounting regulations. The new Code of Corporate
Governance, in effect since January 1, 2006, requires listed
companies to comply or explain why they are not following it.

Political Violence


There have been no incidents of politically motivated damage to
foreign businesses. Civil disturbances are extremely rare.

Corruption


The Austrian Criminal Code contains penalties for bribery, including
a fine of up to Euro 500 ($685) per day for up to 360 days or up to
three years imprisonment for the payer of a bribe. The recipient of
a bribe faces up to five years imprisonment. Under the Criminal
Code, any person who bribes a civil servant, a foreign official, or
a manager of an Austrian public enterprise is subject to criminal
penalties. Austria has ratified the OECD Anti-Bribery Convention,
which entered into force in July 1999. Corresponding criminal code
legislation, in place since summer 1998, also prohibits tax
deductibility for bribes. To implement the United Nations
Convention against Corruption (UNCAC), which Austria ratified
January 11, 2006, the Austrian government recently tightened the
Criminal Code’s corruption regulations and established a special
central department of public prosecution with Austrian-wide
authority for corruption cases. The OECD’s 2006 report on
corruption recommended that Austria strengthen the tax authorities’
limited capacity to detect illicit payments and to broaden the
income tax guidelines’ restrictive interpretation of the foreign
bribery offense. The Law on Responsibility of Associations, in
force since January 1, 2006, introduced criminal responsibility for
legal entities and partnerships. The law covers all criminal
offences, including corruption, money laundering, and serious tax
offences that are subject to the Tax Offences Act. Fines pursuant
to the new law can rise to as much as 180 daily rates, with one
daily rate equal to one-360th of yearly proceeds, but not less than
Euro 50 ($69) and not more than Euro 10,000 ($13,700). Transparency
International’s 2007 Corruption Perceptions Index ranks Austria
number 15, down from number 11 in 2006, due to a lack of awareness
of corruption (By comparison Germany is 16th, and the U.S. 20th).

Bilateral Investment Agreements


Austria has bilateral investment agreements in force with Albania,
Algeria, Argentina, Armenia, Azerbaijan, Bangladesh, Belarus,
Belize, Bolivia, Bosnia-Herzegovina, Bulgaria, Cape Verde, Chile,
China, Croatia, Cuba, Egypt, Estonia, Ethiopia, Georgia, Hong Kong,
Hungary, India, Iran, Jordan, Kuwait, Latvia, Lebanon, Libya,
Lithuania, Macedonia, Malaysia, Malta, Mexico, Moldova, Mongolia,
Montenegro, Morocco, Oman, Paraguay, Philippines, Poland, Romania,
Saudi Arabia, Serbia, Slovenia, South Korea, South Africa, Tunisia,
Turkey, Ukraine, United Arab Emirates, Uzbekistan, Vietnam, and
Yemen.

Austria has signed agreements with Cambodia, Guatemala, Namibia and
Zimbabwe, but the agreements have not yet entered into effect. An
agreement with North Korea is in initial stages of discussion.
Until new agreements take effect, the existing agreements with the
former Czechoslovakia continue to apply to the Czech Republic and
Slovakia, and that with the former Soviet Union to Russia and
Tajikistan. Austria and Russia are negotiating a new agreement.
Under all these agreements, if parties cannot amicably settle
investment disputes, a claimant submits the dispute to the
International Center for Settlement of Investment Disputes or an
arbitration court according to the UNCITRAL arbitration
regulations.
The U.S. and Austria are parties to a bilateral double taxation
treaty covering income and corporate taxes, which went into effect
on February 1, 1998. Another bilateral double taxation treaty,
covering estates, inheritances, gifts and generation-skipping
transfers, has been in effect since 1982.

OPIC and Other Investment Insurance Programs


OPIC programs are not available for Austria. Austria is a member of
the Multilateral Investment Guarantee Agency (MIGA).

Labor


Austria has a highly educated and productive labor force of
approximately 4.3 million people, of whom 3.7 million are employees
and 600,000 are self-employed or farmers. Austria’s labor market is
more rigid than that of the U.S., but more flexible than markets in
some other EU member states. Starting January 1, 2008, the
government introduced important work hour flexibility, including
allowing firms to increase the maximum regular time hours from 40 to
50. In special cases and including overtime, work hours can be
raised up to 60 hours per week for a maximum of 24 weeks annually.
However, these 24 weeks can only be in 8-week segment, with at least
two weeks break between each 8-week slot.

Depending on labor demand, government policies limit the number of
foreign workers to 8-10% of the salaried workforce. In 2007, the
number of guest workers, predominantly from the former Yugoslavia
and Turkey, averaged 413,000. As part of the 2004 EU enlargement,
Austria adopted a 7-year transition period vis-a-vis eight of the
ten new EU members (except Cyprus and Malta) before fully allowing
free movement of labor. In May 2006, the Austrian government
extended the restrictions for another three years, after which the
EU Commission can approve a further extension for two years. For
new EU members Bulgaria and Romania, which joined the EU on January
1, 2007, Austria adopted the same 7-year transition period.
Exemptions for the recruitment of specialists or managers from all
twelve new EU members apply. Recently, a shortage of qualified
labor in specific industrial sectors sparked a discussion about
shortening the transition period for laborers from the new EU
members.

Compared to other EU countries, Austria had a relatively low
unemployment rate of 4.3% in 2007. The 2008/09 forecasts call for
no change in the 4.3% unemployment rate, assuming real economic
growth of 2.2-2.4% in 2008 and 2.0-2.5% in 2009. Medium-term
forecasts project no significant change in the unemployment rate
through 2011. Analysts expect no potential labor market shortages
in the medium term. While demographic trends indicate little growth
in the labor force over the next few years, factors such as
industrial restructuring, productivity gains, increased
participation of women and older employees in the workforce, gradual
phase-out of early retirement, efforts to reduce civil service
employment and moderate economic growth rates of around 2.5% will
help guarantee sufficient labor supply. Additional immigration,
including from EU member states, will be necessary to balance the
impact of low birth rates on the overall labor supply. Without
additional immigration, Austria’s labor supply will decline 15% by
2015. Long-term population estimates indicate a slight increase in
the working age population (15-60 years) to 5.27 million by 2015, up
from 5.18 million in 2007, but then a decline to 5.20 in 2020 and
further to 4.93 million in 2030.

In general, skilled labor is available in sufficient numbers.
However, regional shortages of highly specialized laborers in
specific sectors, such as systems administration, metalworking,
healthcare, and tourism, may occur. Data for 2006 indicate that
strong economic growth and the government’s labor market policy
helped to exceed the EU goals for 2010 of a labor market
participation rate of 70% (now 70.2%) and for women of 60% (now
63.5%). However, Austria has not yet reached the 2010 EU goal of
50% for workers aged 55-64, but the percentage is increasing (now
35.5%). The government introduced new regulations requiring
recipients of unemployment benefits to be more flexible regarding
which jobs they would accept. Companies hiring workers age 50 and
above are eligible for financial bonuses, but face penalties for
laying off workers within this age group.

Austrian social insurance is compulsory and comprises health
insurance, old-age pension insurance, unemployment insurance, and
accident insurance. Employers and employees contribute a percentage
of total monthly earnings to a compulsory social insurance fund.
Although EU requirements encourage greater job flexibility, various
Austrian laws closely regulate terms of employment. These include
working hours, minimum vacation time (five weeks), holidays,
maternity leave, statutory separation notice, protection against
dismissal, and an option for parents with children under the age of
seven to choose part-time work for several years. The latter
regulation only applies to parents working for companies with at
least 20 employees. The severance pay system aims to enhance worker
flexibility by providing employees the right to carry their accrued
entitlements with them to subsequent jobs. Ongoing issues, which
could seriously affect the social insurance system, are the immense
shortage of nursing personnel to care for the fast growing number of
elderly people and the lack of funding for available nursing
personnel, which could eventually lead to a rise in social insurance
contributions.

Since World War II, labor-management relations have generally been
harmonious in Austria, as reflected in extremely low strike figures
in past decades. No major work stoppages occurred in 2005, 2006 or
2007. About 36% of the work force belongs to a union. The Austrian
Trade Union Federation is trying to recover from a major financial
scandal, and will therefore probably temper short-term wage and
benefit demands.

Collective bargaining revolves mainly around wage adjustments and
fringe benefits. Existing legal provisions stipulate a maximum
workweek of 40 hours, but collective agreements also provide for a
workweek of 38 or 38.5 hours per week for more than half of all
employees. Starting in 2008, the government introduced additional
flexibility allowing collective agreements to stipulate a maximum
workweek of 50 hours. The government also transferred
responsibility for agreements on flextime or 4-day work weeks to the
company level. Part time employment is high in Austria: 41% of
female workers and 7% of male workers have part time jobs.

Foreign Trade Zones/Free Ports


Austria has no foreign trade zones.

Foreign Direct Investment Statistics


The net inflow of new foreign direct investment (FDI) in 2006
reached Euro 1.7 billion ($2.4 billion), much less than the 2005
figure of Euro 13.3 billion ($17.9 billion). A high inflow of new
FDI in 2006 was largely offset by very large disinvestment. New FDI
in the first half of 2007 amounted to Euro 12.2 billion ($16.7
billion). The value of FDI stock in Austria was about Euro 58.9
billion ($80.6 billion) at the end of 2006 and an estimated Euro
72.8 billion ($99.8 billion) by mid-2007.

In 2006, U.S. investment accounted for about 9% of total FDI in
Austria. This represented a drop from 12% of total FDI in Austria
in 2005. The decline in U.S. FDI was primarily due to the sale of
the Austrian Western Wireless International subsidiary, the mobile
phone operator tele.ring. However, the 2007 Cerberus takeover of
Austria’s fourth largest bank, BAWAG P.S.K., the takeover of the
Moeller Group, a leading supplier of electrical components and
industrial controls, by Eaton Corp. in early 2008 and other new FDI
by U.S. companies will drive up U.S. FDI in Austria to a new record
total of more than Euro 11 billion ($15 billion) and should move the
U.S. up again to the number two position among foreign investors in
Austria.

At Euro 4.1 ($5.6 billion), the flow of Austrian direct investment
abroad in 2006 was lower than in 2005, but continued on an
impressive level. In the first half of 2007, FDI abroad was a
record Euro 14.3 billion ($19.5 billion). This raised the value of
Austrian direct investment stock abroad to about Euro 59.6 billion
($81.6 billion) at the end of 2006 and an estimated Euro 73.9
billion ($101.2 billion) by mid-2007.

Note: Figures converted at the 2007 annual average exchange rate of
$1.00 for Euro 0.73.
Source: Austrian National Bank.

Austria’s International Investment Position (EUR billion)

Year 2005 2006 (1) 2007 (2)


------
FDI in Austria 58.9 60.6 72.8
Austrian FDI Abroad 55.5 59.6 73.9

Footnotes:
(1) preliminary figures;
(2) first half year, preliminary figures.
FDI in Austria - Source Country Breakdown 2005
(share of total in percent)


-
U.S. 12.2
Germany 38.2
Netherlands 9.5
U.K. 8.0
Switzerland/Liechtenstein 7.9
Denmark 3.1
France 2.8
Japan 2.0
Italy 1.7
All other countries 14.6

FDI in Austria - Industry Breakdown 2005
(Euro billion)


-----
Mining and energy 717
Metals, machinery 1,830
Vehicles 376
Electrical engineering, electronics 1,614
Petroleum, chemicals 3,302
Paper, wood 1,374
Food, drink, tobacco 2,643
Building and allied trades 711
Trade 10,794
Transport, communication 2,121
Banking, insurance, finance 6,309
Real estate, business related services 26,571
Other industries 512
------
Total 58,874

Austrian FDI Abroad - Destination Country
Breakdown 2005 (share of total in percent)


U.S. 3.9
Germany 12.7
Czech Republic 8.9
Switzerland/Liechtenstein 8.3
Netherlands 7.5
Hungary 7.0
U.K. 5.7
Poland 5.3
Romania 5.1
Croatia 4.2
Slovakia 3.6
Slovenia 2.2
Italy 2.0
All other countries 23.6

Austrian FDI Abroad - Industry Breakdown 2005 (Euro billion)


------
Mining and energy 1,172
Metals, machinery 1,687
Electrical engineering, electronics 1,131
Petroleum, chemicals 4,867
Paper, wood 1,152
Food, drink, tobacco 916
Building and allied trades 2,270
Trade 8,775
Transport, communication 1,220
Banking, insurance, finance 14,935
Real estate, business related services 15,960
Other industries 1,391
-------
Total 55,476

List of Major Foreign Investors:


More than 340 U.S. firms hold investments in Austria, which range
from simple sales offices to major production facilities. The
following is a short list of U.S. firms holding major investments in
Austria.

American Express Bank Ltd.
Baxter International Inc.
Capital Research and Management Company
Cerberus Capital Management
Cisco Systems, Inc.
Citibank Overseas Investment Corp.
The Coca-Cola Company
CSC Computer Sciences Corporation
Deloitte & Touche LLP
Eaton Corp.
Electronic Data Systems Corp.
Exxon Corporation
General Electric Capital Corporation
General Electric Company
General Motors Corp.
Harman International Industries Inc.
Hewlett-Packard Company
Honeywell Inc.
IBM World Trade Corp.
ITT Fluid Technology Corp.
Johnson & Johnson Int.
Johnson Controls Inc.
Kraft Foods International, Inc.
Lear Corporation
Lem Dyn Amp
McDonald’s Corporation
Marriott International, Inc.
Mars Inc.
MeadWestvaco Corp.
Merck & Co., Inc.
Modine USA
Otis Elevator Co.
Pioneer Hi-Bred International Inc.
PricewaterhouseCoopers LLP
PQ International Inc.
Quintiles Transnational Corp.
Schindler Elevator Corp.
Starwood Hotels and Resorts Worldwide, Inc.
Toys"R"Us, Inc.
UGI Corporation
United Global Com, Inc.
Unysis Corporation
Verizon Information Services Inc.
Western Union
Worthington Cylinder Corp.
York International
Xerox Corporation

The following is a brief list of firms headquartered in countries
other than the U.S., holding major investments in Austria.

Alcatel Holding, Netherlands
Allianz AG, Germany
Amer, Finland
Asea Brown Boveri, Switzerland
Assicurazioni Generali, Italy
Aventis, Germany
Axel Springer Verlag, Germany
BASF, Germany
Bayer AG, Germany
Bayerische Motorenwerke (BMW), Germany
Bombardier, Canada
Bosch Robert AG, Germany
Borealis, Denmark
BP Amoco, UK
DaimlerChrysler, Germany
Detergenta Investment, Germany
Deutsche Telekom, Germany
DM Drogerie Markt, Germany
Electricite de France, France
Electrolux, Sweden
Epcos AG, Germany
Ericsson, Sweden
Flextronics International, Singapore
Fomento de Construcctiones & Contratas, Spain
Heineken, Netherlands
H&M, Netherlands
Infineon, Netherlands
Japan Tobacco, Japan
Kone Corp., Finland
Koramic, Belgium
Liebherr, Switzerland
Magna, Canada
MAN, Germany
Metro, Germany
Mondi Europe, Luxembourg and UK
Nestle S.A., Switzerland
NKT Cables, Denmark
Novartis, Switzerland
Nycomed Holding, Denmark
Philips, Netherlands
Plus Warenhandel, Germany
RENO, Germany
REWE, Germany
RWE, Germany
Sappi Ltd, South Africa
Schlecker, Germany
Shell Petroleum N.V., Netherlands
Siemens, Germany
Smurfit Group, Ireland
Solvay et Cie, Belgium
Sony, Japan
Sueddeutscher Verlag, Germany
Svenska Cellulosa Ab (SCA), Sweden
Unibail-Rodamco, France-Netherlands
UniCredit Group, Italy
Unilever N.V., Netherlands
Voith, Germany
Westdeutsche Allgemeine Zeitung (WAZ), Germany

KILNER