2009 INVESTMENT CLIMATE STATEMENT FOR AUSTRIA

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09VIENNA101 27 January 2009 No clasificado Embassy Vienna

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P 271015Z JAN 09
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 1904
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
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STATE FOR EB/IFD/OIA, EUR/ERA AND EUR/AGS
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TAGS: EINV, EFIN, ELAB, ETRD, PGOV, KTDB, OPIC, USTR,
AU
SUBJECT: 2009 INVESTMENT CLIMATE STATEMENT FOR AUSTRIA

REF: 08 STATE 123907

1. Following is the 2009 Investment Climate Statement
for Austria, keyed to reftel instructions:

2009 INVESTMENT CLIMATE STATEMENT — AUSTRIA


Introduction


Major structural conditions and the decisive parameters
for foreign investors remain unchanged and favorable,
despite the global economic downturn. As a small, open
and highly internationalized economy, Austria is swayed
by world developments including the current downturn:
2009 will be the first full-year recession in Austria
since 1981. As of late January, the Austrian economy
is projected to contract by 0.5-1.2% in 2009 — not as
deep as in Germany or in the European Union as a whole,
due to AustriaQs close ties with growing Central,
Eastern and Southeastern European (CESEE) economies.
The Austrian government is implementing an economic
stimulus package to support the labor market, stimulate
investment, and finance infrastructure. These measures
and the shrinking economy will drive the public sector
deficit above the 3% Maastricht deficit limit, but
economists regard this as justified by the current
downturn. For 2010, modest recovery of 0.6-1.3% is
expected.

With the European UnionQs (EU) enlargements in May 2004
and January 2007, Austria solidified its central
position in the EU. As an investment location,
however, 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. Austria has improved road and rail
transportation links, e.g. to Bratislava, but many
transport links to Central, Eastern, and Southeastern
European (CESEE) neighbors are still inadequate. The
Austrian government will continue to address and close
these infrastructure gaps. The sale of troubled
national carrier Austrian Airlines (AUA) to German
Lufthansa may mean a lesser hub role for Vienna
International Airport over the long term. In December
2007, the EUQs Schengen area expanded to include the
Czech Republic, Hungary, Slovakia, and Slovenia
(Switzerland in December 2008), removing border
controls between these countries and Austria.
AustriaQs 2005 corporate tax cut has kept Austria
competitive with newer EU member states and induced
firms to open regional headquarters in Vienna. Some
340 U.S. companies have invested in Austria; most have
expanded their original investment over time.

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

Openness to Foreign Investment


Government attitude towards foreign private investment:
Observers do not expect AustriaQs basic policies and
openness to foreign direct investment to change under
the renegotiated coalition government between the
center-left Social Democratic Party (SPO) and the
center-right PeopleQs Party (OVP) which took office in
December 2008 for a five-year term. The coalition
program includes commitments to promote foreign
investment and to further strengthen AustriaQs
attractiveness as a location for investment and
headquarters for international firms. Like the grand
coalition government itself, AustriaQs government
program is broad-based and the government is unlikely
to reverse structural and economic reforms implemented
after 1990. Reforms will continue at a slower pace and
with an emphasis on social policy rather than
deregulation, liberalization, or privatization.

The new Austrian government will profit from extensive
structural reforms implemented in recent years, which
helped streamline government, create a more competitive
business environment, and strengthen AustriaQs
attractiveness as a location for investment. Relative
to most other EU member states, Austria made a major
policy shift in 2000 to 2006 by pursuing liberal market
reforms, a largely balanced budget, pension reform,
privatizations, reorganizing financial market
supervision and competition policy, and implementing a
corporate tax cut in 2005. The reforms have improved
the Austrian economyQs long-term growth potential, but
Austria remains in transition from a highly regulated
economy with a large government sector to a flexible
social market economy.

However, in 2007 and early 2008, the reform agenda came
to a standstill: with the prospect of new elections in
September 2008, parties engaged in a spending spree by
instituting a thirteenth monthly family allowance and a
higher nursing care allowance, abolishing university
student fees, extending the possibility for early
retirement without cuts in pension payments, and
cutting the VAT on pharmaceuticals from 20% to 10%.
These pre-crisis measures bolstered private consumption
but will increase the deficit. The new government has
acted decisively to avert a credit crisis, stimulate
the domestic economy, and avert mass layoffs. Its
other economic priorities include: an income tax cut
in 2009; balancing the budget once growth returns;
increasing economy-wide spending on R&D to 3% of GDP by
2010 and 4% by 2020, improving R&D policy and
infrastructure; improving education and training;
streamlining administration; furthering reform of
public health insurance; securing the pension system
over the long-term; and ensuring adequate, affordable
long-term care for AustriaQs aging population.

In addition, many economists believe that to remain
competitive in the medium-term, the government should
also implement strategic measures 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 business costs. However,
remaining barriers to entry and competition have
resulted in only partial liberalization. There are few
incentives for customers to switch from incumbent
electricity and gas providers, and pricing is not
completely transparent.

Austria welcomes foreign direct investment that does
not have a negative impact on the environment.
Austrian authorities particularly welcome 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 overall,
but due to a 25% corporate tax rate, has become
increasingly attractive as a headquarters location.
Because of tax base adjustments, experts estimate the
effective corporate tax burden at no more than 22%.
Austria also offers a highly favorable framework 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 group taxation.
AustriaQs corporate tax rate and group taxation rules
make it competitive vis-a-vis its EU neighbors.

Under certain conditions, limited amounts of the
business profits of non-corporations are 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, unlike neighboring Germany. As of August
1, 2008, the government abolished the inheritance and
gift taxes, but introduced a reporting requirement for
large donations and gifts.

There are no sectoral or geographic restrictions on
foreign investment. In some regions, Austria offers
special facilities and services (Qcluster packagesQ) to
foreign investors. For example, these can include
automotive producers or manufacturers of integrated
circuits, 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
AustriaQs eastern and southern borders. In most of
these areas, eligibility for co-financing subsidies
under EU regional and cross-border programs will
decline under the EUQs 2007-2013 financial framework
from EUR 2 billion to EUR 1.3 billion.

Resistance to investment in the industrial sector may
arise from environmental concerns. Potential U.S.
investors need to factor AustriaQs strict environmental
laws into their decision-making process. While import
bans have had to be lifted, Austrian ordinances still
ban the planting of all EU approved biotechnology
crops. For new varieties, EU legislation on the
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. Many industries also
fall under greenhouse-gas Emissions Trading System, the
EUQs implementation of the Kyoto Protocol.

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,
social factors and health infrastructure. However,
Austria receives lower marks for economic growth, tax
burden, high cost of living, 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 and introduced a highly competitive
corporate tax system, while the personal income tax
burden remains heavy.

Surveys show that Austria faces stiffer competition
from countries in Central, Eastern, and Southeastern
European (CESEE) markets, as well as from the twelve
new EU members, especially the four that border Austria
and particularly in sectors where wage costs are
decisive.

The International Institute for Management
DevelopmentQs (IMD) 2008 World Competitiveness
Scoreboard ranks Austria fourteenth, down from the
eleventh position in 2007; A.T.KearneyQs 2007
Globalization Index, which measures variables such as
economic integration, technological connectivity or
political engagement, ranks Austria number fourteen (by
comparison, the U.S. was seventh, the UK twelfth, and
Germany twenty-second); and A.T.KearneyQs 2007 FDI
Confidence Index ranks Austria eleven (by comparison,
the U.S. was number three, the UK four, and Germany
ten). The 2009 Index of Economic Freedom of The
Heritage Foundation/Wall Street Journal ranks Austria
number twenty-three worldwide and eleven among the 43
European countries. In A.T.KearneyQs 2008 Global
Cities Index, Vienna ranks number eighteen among the
worldQs most globalized cities (just behind Berlin).

Acquisitions, mergers, takeovers, cartels: AustriaQs
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 limited personnel.

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 EUR 300
million ($441 million at the 2008 average exchange rate
of $1.00 / EUR 0.68), domestic sales exceed EUR 30
million ($44.1 million), or if two of the firms
involved each have worldwide sales exceeding EUR 5.0
million ($7.4 million). Special M&A regulations apply
to 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 companyQs 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 apply and
take precedence over national regulations in cases
between Austria and other EU member states.

AustriaQs 1999 Takeover Law applies to 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 companyQs voting shares) must offer to buy out
smaller shareholders at a defined Qfair marketQ price.
The law also includes provisions 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 EUQs Takeover Directive prohibits defensive action
to frustrate bids. The law did not implement the
directiveQs breakthrough regulations, but allows
individual companies to address these in company
bylaws. The Shareholder Exclusion Act of 2006 allows a
primary shareholder, with at least 90% of capital
stock, to Qsqueeze outQ 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: After many successful privatizations
in previous years, the government did not privatize any
public enterprises in 2007 or 2008 except Austrian
Airlines (AUA), which it sold to Lufthansa in December
2008. The AUA sale was not a typical privatization,
but rather a crisis sale to a strategic partner for a
symbolic price, in order to resolve AUAQs cash crunch
and avert a shutdown. The government program does not
identify any public enterprises for privatization, so
no major privatizations are expected in 2009 or 2010.
The larger party in the new coalition government, the
Social Democratic Party, has announced its opposition
to further privatization, including of the federal
railroads and the postal service. Moreover, the weak
economy, the situation on stock and capital markets,
and AustriansQ increasingly skeptical attitude towards
privatizations also seem to rule out privatization
tenders in the near future. In past privatizations,
foreign and domestic investors received equal
treatment. Despite Austrian authoritiesQ historical
preference for having domestic shareholders keep a
blocking minority, foreign investors have successfully
gained control of enterprises in strategic sectors of
the Austrian economy, including telecoms, banking,
steel production, power generation and infrastructure.
For example, in early 2007, the U.S. investment fund
Cerberus Capital Management bought about 90% of BAWAG
P.S.K. Bank, AustriaQs fourth largest banking group,
from its previous owner, the Austrian Trade Union
Federation.

Treatment of foreign investors: There is no
discrimination against foreign investors, but they are
required to follow numerous 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 had
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
governmentQs Qone-stop shopQ 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 fifteen 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. The U.S. Embassy is aware of a U.S.
investor who faced unfair bureaucratic delays and added
costs when it attempted to introduce competition to a
market entirely dominated by a large local employer.

Performance Requirements/Incentives


Austria is in compliance with the World Trade
OrganizationQs 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.
Over the years, immigration quotas have remained static
at approximately 8,000 per year. The annual quota for
2009 has been set at 8,145.

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. Entrenched political interests
may make it more difficult to challenge quasi-monopolies
in some sectors where they still exist. However, U.S.
investors have had success in this regard, especially
when they have used local partners and contacted the U.S.
Embassy at an early stage.

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 QParis UnionQ 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.

AustriaQs 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 2007, Austrian customs authorities
confiscated pirated goods worth EUR 15.2 million ($22.3
million), a sharp increase compared to 2006, mainly due
to confiscated pharmaceuticals.

Transparency of the Regulatory System


AustriaQs 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 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 less than three
months, except for large projects requiring an
environmental impact assessment. The Qone-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 will continue plans to reduce by 25% the
administrative cost burden for companies no later than
2010, by streamlining regulations and data collection/
information requirements and by expanding the use of e-
government.

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,
Eastern, and Southeastern Europe (CESEE) and the former
Soviet Union (FSU) and operate 73 fully consolidated
subsidiaries in CESEE/FSU, of which 37 are in the 12
new EU member states, 23 in other SEE countries and 13
in FSU. Six out of the seven largest Austrian banks
hold sizeable investments in CESEE/FSU; three of them
are among the five largest banking groups in the area.
Austrian banks have a 15% share of the entire CESEE/FSU
banking market (21.8% excluding Russia) and hold about
20% of all loans extended by EU banks in the area.

Total assets of AustriaQs five largest banking groups
(Bank Austria (BA), Erste Bank, Raiffeisen Zentralbank
(RZB), Bank fuer Arbeit und Wirtschaft und
Oesterreichische Postsparkasse (BAWAG P.S.K.), and
Oesterreichische Volksbanken) amounted to approximately
EUR 750 billion ($1,103 billion) in 2008, representing
63% of AustriaQs total bank assets.

The subprime crisis has had limited impact on Austrian
banks, with total write-downs of about EUR 2 billion
($2.9 billion) through mid-2008. Banks were spared
immediate fallout from the U.S. crisis due to their
strong CESEE/FSU focus. However, Austrian banks are
suffering indirectly from the worldwide financial
crisis through higher refinancing costs and credit
scarcity. In response to the crisis, the outgoing
government crafted a large-scale EUR 100 billion ($147
billion) financial sector rescue package in October
2008, comprising EUR 15 billion ($22 billion) for
equity injections into banks and insurance companies
and EUR 85 billion ($125 billion) to guarantee
interbank lending.
All Austrian banks active in CESEE/FSU say they can
manage risks in emerging Europe and are determined to
remain in those growing markets. An IMF Qstress test
in 2008 showed considerable resilience in Austrian
banks against shocks. All Austrian banks active in
CESEE/FSU are Qsystem-relevantQ in Austria — Qtoo big
to failQ — so the Austrian government will not
willingly allow them to collapse.

2008 was the worst year for the Vienna Stock Exchange
since the Austrian Traded Index (ATX) debuted eighteen
years ago. At year-end 2008, the ATX stood at 1,801 —
60.1% lower than a year before (4,513) — a worse fall
than many other OECD stock exchanges. At year-end
2008, market capitalization of listed domestic shares
was down 66% rom year-end 2007 at only EUR 53 billion
(about 9% of GDP).

The Vienna Stock Exchange (VSE) use Xetra, FrankfurtQs
electronic trading system, for trading securities, so
traders worldwide have o-screen information and direct
access to all stoks listed in Vienna. Listed
companies must publsh quarterly reports. The VSE
operates regulate markets (the Official Market and th
Second Regulated Market) and Multilateral Trading
Systems (MTF) pursuant to the EUQs Markets in Financial
Instruments Directive (MiFID), which differentiates
between regulated markets and MTFs. Companies and
investors should be aware that the operation of MTFs is
not part of exchange trading.Therefore, the
requirements of the Stock Exchange Act regarding
financial instruments admitted to trading in a
regulated market (especially obligations imposed on
issuers) do not apply to financial instruments traded
on an MTF. However, the VSEQs Third Market Rules and
the provisions of the Securities Supervision Act apply.

In pursuing its idea of establishing a regional
QCentral European Stock ExchangeQ alliance, the VSE, as
leader of a consortium of Austrian and Hungarian
investors, holds a majority share in the Budapest Stock
Exchange. The VSE also holds a majority in the Prague
Stock Exchange and the Slovenian Ljubljana 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) and a number of county-specific CEE/SEE indices,
including for Russia.

Criminal penalties apply to insider trading, money
laundering and terrorist financing. 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. Beginning in the late
1990s, scandals in AustriaQs financial sector raised
questions about the effectiveness of financial
oversight. As a result, the government in 2008
strengthened regulation and instituted a strong dual-
oversight system with bank supervisory roles for both
the Austrian National Bank and the FMA.

AustriaQs venture capital market is small and remains
underdeveloped. The market, which has been flat since
it peaked in 2000, started to recover in 2005 and
continued to grow in both 2006 and 2007, 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 EUR 2.1 billion ($3.1
billion), according to the Austrian Private Equity and
Venture Capital Organization (AVCO). After a 30%
increase in 2006, fund raising rose 55% in 2007 to EUR
431 million ($634 million). The bulk of the money
invested is used for buy-outs and expansion projects,
only a small portion for start-ups and seed financing.
Figures for 2008 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). Further, for firms with annual sales
exceeding EUR 400,000 ($588,000), the Austrian
Enterprise Code 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


To implement the United Nations Convention against
Corruption (UNCAC), which Austria ratified on January
11, 2006, the Austrian government tightened the
Criminal CodeQs corruption regulations effective
January 1, 2008 and is now establishing a special
central public prosecution department with Austrian-
wide authority for corruption cases. The new
regulations cover managers of Austrian public
enterprises, civil servants and other officials
(holding a function in legislation, administration or
justice on behalf of Austria, a foreign country or an
international organization), but also representatives
of companies. In the Criminal Code the term
QcorruptionQ includes several offense such as bribery
and illicit intervention; abuse of office; and
accepting an advantage by public officials, senior
executives of a public enterprise or experts; and could
also include fraud, embezzlement, breach of trust, or
accepting an advantage by managers. Criminal penalties
for all cases of corruption include imprisonment of up
to several years for all parties involved. Criminal
Code legislation prohibiting tax deductibility for
bribes is in place since summer 1998. Austria has
ratified the OECD Anti-Bribery Convention, joined the
Group of States against Corruption (GRECO) within the
Council of Europe, has ratified the Council of EuropeQs
Civil Law Convention on Corruption and signed, but not
yet ratified, the Criminal Law Convention on
Corruption. AustriaQs Law on Responsibility of
Associations, in force since 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 this 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 EUR 50 ($74) and not more
than EUR 10,000 ($14,700). Transparency
InternationalQs 2008 Corruption Perceptions Index ranks
Austria number 12, up from number 15 in 2007 (by
comparison Germany is 14th, and the U.S. 18th).

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, Namibia
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
and Zimbabwe, but the agreements are still pending
ratification by these countries and have not yet
entered into effect. An agreement with Tajikistan has
been initialed, two others with Bahrain and
Turkmenistan are ready for initialing. An agreement
with North Korea was initialed in 2001, but has not
been signed, yet. 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. With regard to the
latter treaty, the U.S. government may seek changes or
cancellation of the treaty following AustriaQs
abolition of inheritance/gift taxes on August 1, 2008.

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. AustriaQs labor market is more rigid than
that of the U.S., but more flexible than markets in
some other EU member states. Since January 1, 2008,
important work hour flexibility regulations have been
in effect, which among other features allow firms to
increase the maximum regular time hours from 40 to 50
per week. 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 segments, 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 425,000. 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
2009, the Austrian government plans to extend the
restrictions for the last two years, which, however,
requires EU Commission approval. For new EU members
Bulgaria and Romania, which joined the EU on January 1,
2007, Austria adopted the same 7-year transition period.
At the same time, the government plans additional
exemptions and to open the market gradually for the
recruitment of specialists or managers from all twelve
new EU members apply. Industry keeps pressing the
Austrian government to shorten these transition periods
with the argument of a shortage of qualified labor in
specific industrial sectors.

Compared to other EU countries, Austria had a relatively
low unemployment rate of 4.3% in 2007. After record
employment growth of 2.4% in 2008, the unemployment rate
dropped to 3.5%. However, with the economic downturn,
the labor market has started to deteriorate. The 2009/10
forecasts call for an unemployment rate of 3.9-5.1% in
2009 and 4.1-6.1% in 2010, assuming a recession with the
economy contracting by 0.5-1.2% in 2009 and modest
recovery with growth of 0.6-1.3% in 2010. Analysts
expect no 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 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, AustriaQs 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 2007 indicate that strong
economic growth and the governmentQs labor market
policy helped to exceed the EU goals for 2010 of a
labor market participation rate of 70% (now 71.4%) and
for women of 60% (now 64.4%). However, Austria has not
yet reached the 2010 EU goal of 50% for workers aged
55-64, but the percentage is increasing (now 38.6%
compared to 35.5% in 2007). 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, and 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 an increasing
deficit of the health insurance, 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, 2007 or 2008.
About 36% of the work force belongs to a union. The
Austrian Trade Union Federation is still trying to
recover from a major financial scandal and reform its
organization. However, the difficult economic period
ahead is likely to raise again the unionQs importance
and help sharpen its profile, while it will probably
temper short-term wage and benefit demands.

Collective bargaining revolves mainly around wage
adjustments and fringe benefits. About 80% of the
labor force worked under a collective bargaining
agreement. All collective bargaining agreements
meanwhile provide for a minimum wage of EUR 1,000 per
month. 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. Effective in 2008,
the government provided for 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: 39% of female workers and 4% of male
workers have part time jobs. On average, Austrian
employees are absent 12 days annually for sickness.

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 2007 reached a record of EUR 21.7 billion ($31.9
billion). A high share of this new FDI inflow and
parallel also FDI outflow was due to the Italian
UniCreditQs takeover of Bayerische Hypovereinsbank

(HVB), in course of which UniCredit also took over
HVBQs Austrian subsidiary, Bank Austria, AustriaQs
largest bank. New FDI in the first half of 2008
amounted to EUR 6.0 billion ($8.8 billion). The value
of FDI stock in Austria was about EUR 106.1 billion
($156.0 billion) at the end of 2007 and an estimated
EUR 112.0 billion ($164.6 billion) by mid-2008.

In 2007, U.S. investment accounted for more than 7% of
total FDI in Austria. This represented an increase
from the 5.5% of total FDI in Austria in 2006, but is
still below the 10% level of 2005. The decline in U.S.
FDI from 2005 was primarily due to the sale of Austrian
mobile phone operator tele.ring by the U.S. Western
Wireless International; the increase in 2007 was due to
the Cerberus takeover of BAWAG P.S.K., AustriaQs fourth
largest bank. In 2008, new U.S. FDI included Eaton
CorporationQs takeover of the Moeller Group, a leading
supplier of electrical components and industrial
controls, while the takeover of GE Money Bank by the
Spanish Bank Santander was another U.S. disinvestment.

At EUR 22.9 billion ($33.7 billion), the flow of
Austrian direct investment abroad in 2007 also reached
a new record, which in part was due to the Bank Austria
transaction (see above). In the first half of 2008,
FDI abroad showed a continued high level of EUR 9.3
billion ($13.7 billion). This raised the value of
Austrian direct investment stock abroad to about EUR
105.1 billion ($154.5 billion) at the end of 2007 and
an estimated EUR 114.4 billion ($168.2 billion) by mid-
2008.

Note: Figures converted at the 2008 annual average
exchange rate of $1.00 for EUR 0.68.
Source: Austrian National Bank.

AustriaQs International Investment Position (EUR
billion)

Year 2006 2007 (1) 2008 (2)


------
FDI in Austria 84.3 106.1 112.0
Austrian FDI Abroad 80.3 105.1 114.4

Footnotes:
(1) preliminary figures;
(2) first half year, preliminary figures.

FDI in Austria Q Source Country Breakdown 2007
(share of total in percent)


-
U.S. 7.4
Italy 28.0
Germany 14.0
Netherlands 11.1
U.K. 7.2
Switzerland/Liechtenstein 7.2
Gulf States 3.8
All other countries 28.7

Austrian FDI Abroad Q Destination Country
Breakdown 2007(share of total in percent)


U.S. 3.0
Germany 126
Croatia 8.7
Hungary 7.0
Czech Republic 6.9
Romania .5
Switzerland/Liechtenstein 4.8
Netherlands 4.4
Russia 4.2
Slovakia 3.7
Poland 3.6
Bulgaria 3.1
Italy 2.7
Ukraine 2.7
U.K. 2.6
All other countries 24.5

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.
ExxonMobil 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
McDonaldQs 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.
ToysQRQUs, 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
Axel Springer Verlag, Germany
Banco Santander, Spain
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
Sanfoi-Aventis, France
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