Remote Work in Puerto Rico: A Legal Update for Global Employers
Puerto Rico has recently relaxed its requirements for remote work, implementing significant changes. The first set of changes occurred in 2022 with the enactment of Law 52-2022. In January 2024, further reforms were enacted with the signing of Law 27-2024 by then-governor Pedro Pierluisi.
Quick Hits
Puerto Rico has relaxed its remote work requirements with Law 52-2022, which exempts foreign employers without a nexus to Puerto Rico from making income tax withholdings for employees working remotely in Puerto Rico, provided certain conditions are met.
Law 27-2024, effective January 2024, clarifies that nondomiciled employees temporarily residing in Puerto Rico are exempt from Puerto Rican employment laws and contributions, with their employment governed by their domiciles’ laws.
Puerto Rico’s new remote work regulations have provided increased flexibility for foreign employers and employees, allowing remote work without the burden of local employment laws and tax obligations, reflecting a global trend toward accommodating remote work arrangements.
Law 52-2022
Law 52-2022 exempts foreign employers without a nexus to Puerto Rico from making income tax withholdings for employees working remotely in Puerto Rico, provided certain conditions are met. These conditions include:
The employer must be a foreign entity, not registered or organized under Puerto Rican laws.
The employer must have no economic nexus to Puerto Rico, meaning no business operations, tax filings, fixed place of business, or sales of goods or services in Puerto Rico through employees, independent contractors, or any affiliates.
Remote workers cannot provide services to clients with a nexus in Puerto Rico and cannot be officers, directors, or majority owners of the employer.
Employers must ensure that Social Security and payroll contributions for employees are filed either through a W-2 in the United States or in Puerto Rico.
If these conditions are met, foreign employers can hire remote workers in Puerto Rico without the obligation of withholding and remitting income taxes to the Puerto Rico Department of the Treasury (Departamento de Hacienda de Puerto Rico).
Law 27-2024
Law 27-2024 addresses which employment laws will govern the employment relationships of remote employees working from Puerto Rico for employers with no business nexus to Puerto Rico, depending on whether the employees are domiciled in Puerto Rico or elsewhere. Law 27-2024 exempts nondomiciled employees temporarily residing in Puerto Rico from Puerto Rican employment laws and contributions. These employees are not entitled to employment benefits under Puerto Rican law, including workers’ compensation, unemployment, or certain disability benefits. The employment relationship will be governed by the employment contract, or if there is no contract, by the laws of the employee’s domicile location. The employer will have no income tax withholding obligations for these employees. If there is any tax obligation, the employee will be the one to file separately.
Domicile Considerations
The concept of “domicile” is crucial in determining the applicable laws. Domicile is based on the employee’s intention to reside in a particular location. Factors such as where the employee’s family, doctors, and children’s schools are located will be considered. If an employee is domiciled in Puerto Rico, and exempt under the Fair Labor Standards Act (FLSA), certain requirements apply. The employment relationship will be covered by an agreement between the parties, and Puerto Rican employment laws will not apply unless agreed upon. However, workers’ compensation, short-term disability, unemployment insurance, and driver’s insurance for employees who drive as part of their duties in Puerto Rico will be applicable unless the employer provides similar or greater benefits through private insurance.
Implications for Employers
Foreign employers hiring domiciled employees in Puerto Rico must comply with specific requirements. For example, if short-term disability and unemployment benefits are provided through a private policy or in another state, employers do not need to register with the Puerto Rico Department of Labor or obtain workers’ compensation insurance. However, if these benefits are not provided, employers must register and make the necessary contributions (even when income tax withholdings are not required).
Note: The exclusions and rules apply only to (i) nondomiciled employees and (ii) domiciled employees who are exempt under the FLSA. For domiciled, nonexempt employees covered by the FLSA, all Puerto Rican employment laws will be applicable.
Future Trends in Remote Work
There is a noticeable trend of employers accommodating remote work arrangements. This trend is proliferating globally, allowing employees to work remotely without being subject to local employment laws and tax obligations. Puerto Rico, as a U.S. territory, is at the forefront of this trend, providing increased flexibility for employees to work remotely and for employers to hire remote workers without the burden of compliance with local employment laws and tax obligations. Similar changes are likely to be adopted in other jurisdictions, further increasing the flexibility of remote work arrangements.
Conclusion
The new rules governing remote work in Puerto Rico represent a significant shift in employment law, providing greater flexibility for both employers and employees. As companies continue to adapt to the post-COVID-19 landscape, these changes offer a promising start for more flexible remote work arrangements.
Texas AG Investigates DeepSeek + List of Banned Countries Expands
Texas Attorney General Ken Paxton announced on February 14, 2024, that his office has opened an investigation into DeepSeek’s privacy practices. DeepSeek, an artificial intelligence company with ties to the People’s Republic of China, has been banned on state owned devices in Texas, New York, and Virginia. The Pentagon, NASA, and the U.S. Navy have also prohibited employees from using DeepSeek.
According to Paxton’s press release, he has notified DeepSeek “that its platform violates the Texas Data Privacy and Security Act.” He sent civil investigative demands to tech companies to obtain information about their analysis of the application and any documentation DeepSeek forwarded to the tech companies before they were offered to consumers.
DeepSeek has been banned in Italy, South Korea, Australia, Taiwan, and India.
China on the Move: Lessons from China’s 2024 National Negotiation of Drug Prices
China’s share of the global drug development pipeline grew from 3% in 2013 to 28% in 2023, positioning China as the second-largest region for clinical trials after the United States. Additionally, the proportion of drugs launched first in China increased from 9% in 2017 to 29% in 2023, placing China just behind the United States in terms of first-in-class launches. This trend highlights the contributions of domestic companies, whose pipelines are replenishing the global pharmaceutical landscape. As a result, NextPharma estimates that the combined value of China’s licensing-out deals reached around $46 billion in 2024, up from $38 billion in 2023 and $28 billion in 2022.
On the demand side, from 2019 to the first quarter of 2023, the National Healthcare Security Administration (NHSA) allocated 60% of savings from generic drug procurement to innovative drugs listed on the National Reimbursement Drug List (NRDL). This shift mirrors trends in developed markets where patented drugs dominate sales. By 2023, innovative drugs accounted for 15.1% of hospital drug expenditures in sample hospitals, up from less than 10% in 2018. However, affordability remains a challenge, which is significant as China continues to push for increased access to cutting-edge therapies.
The 2024 NRDL negotiations, which concluded in November 2024, offer insights into how China is addressing these affordability concerns while seeking to ensure access to innovative medicines. This GT Advisory explores five key takeaways from the 2024 NRDL negotiations and their potential implications for the future of innovative drug pricing and reimbursement in China.
A Contradiction Between NRDL Outcomes and the Growing Influence of Chinese Companies in Global Innovation
Support for First-in-Class and Innovative Drugs
BMI Fund Sustainability
A Continuous Dilemma for Multinational Companies (MNCs)
Reimbursement Coverage Expansion: Category C and Commercial Health Insurance
Continue reading the full GT Advisory.
The ReAIlity of What an AI System Is – Unpacking the Commission’s New Guidelines
The European Commission has recently released its Guidelines on the Definition of an Artificial Intelligence System under the AI Act (Regulation (EU) 2024/1689). The guidelines are adopted in parallel to commission guidelines on prohibited AI practices (that also entered into application on February 2), with the goal of providing businesses, developers and regulators with further clarification on the AI Act’s provisions.
Key Takeaways for Businesses and AI Developers
Not all AI systems are subject to strict regulatory scrutiny. Companies developing or using AI-driven solutions should assess their systems against the AI Act’s definition. With these guidelines (and the ones of prohibited practices), the European Commission is delivering on the need to add clarification to the core element of the act: what is an AI system?
The AI Act defines an AI system as a machine-based system designed to operate with varying levels of autonomy and that may exhibit adaptiveness after deployment. The system, for explicit or implicit objectives, infers from input data how to generate outputs – such as predictions, content, recommendations or decisions – that can influence physical or virtual environments.
One of the most significant clarifications in the guidelines is the distinction between AI systems and “traditional software.”
AI systems go beyond rule-based automation and require inferencing capabilities.
Traditional statistical models and basic data processing software, such as spreadsheets, database systems and manually programmed scripts, do not qualify as AI systems.
Simple prediction models that use basic statistical techniques (e.g., forecasting based on historical averages) are also excluded from the definition.
This distinction ensures that compliance obligations under the AI Act apply only to AI-driven technologies, leaving other software solutions outside of its scope.
Below is a breakdown of what the guidelines bring for each of the seven components:
Machine-based systems – AI systems rely on computational processes involving hardware and software components. The term “machine-based” emphasizes that AI systems are developed with and operate on machines, encompassing physical elements such as processing units, memory, storage devices and networking units. These hardware components provide the necessary infrastructure for computation, while software components include computer code, operating systems and applications that direct how the hardware processes data and performs tasks. This combination enables functionalities like model training, data processing, predictive modeling, and large-scale automated decision-making. Even advanced quantum computing systems and biological or organic systems qualify as machine-based if they provide computational capacity.
Varying levels of autonomy – AI systems can function with some degree of independence from human intervention. This autonomy is linked to the system’s capacity to generate outputs such as predictions, content, recommendations or decisions that can influence physical or virtual environments. The AI Act clarifies that autonomy involves some independence of action, excluding systems that require full manual human involvement. Autonomy also spans a spectrum – from systems needing occasional human input to those operating fully autonomously. This flexibility allows AI systems to interact dynamically with their environment without human intervention at every step. The degree of autonomy is a key consideration for determining if a system qualifies as an AI system, impacting requirements for human oversight and risk-mitigation measures.
Potential adaptiveness – Some AI systems change their behavior after deployment through self-learning mechanisms, though this is not a mandatory criterion. This self-learning capability enables systems to automatically learn, discover new patterns or identify relationships in the data beyond what they were initially trained on.
Explicit or implicit objectives – The system operates with specific goals, whether predefined or emerging from its interactions. Explicit objectives are those directly encoded by developers, such as optimizing a cost function or maximizing cumulative rewards. Implicit objectives, however, emerge from the system’s behavior or underlying assumptions. The AI Act distinguishes between the internal objectives of the AI system (what the system aims to achieve technically) and the intended purpose (the external context and use-case scenario defined by the provider). This differentiation is crucial for regulatory compliance, as the intended purpose influences how the system should be deployed and managed.
Inferencing capability – AI systems must infer how to generate outputs rather than simply executing manually defined rules. Unlike traditional software systems that follow predefined rules, AI systems reason from inputs to produce outputs such as predictions, recommendations or decisions. This inferencing involves deriving models or algorithms from data, either during the building phase or in real-time usage. Techniques that enable inference include machine learning approaches (supervised, unsupervised, self-supervised and reinforcement learning) as well as logic- and knowledge-based approaches.
Types of outputs – AI systems generate predictions, content, recommendations or decisions that shape both their physical and virtual environments. Predictions estimate unknown values based on input data; content generation creates new materials like text or images; recommendations suggest actions or products; and decisions automate processes traditionally managed by human judgement. These outputs differ in the level of human involvement required, ranging from fully autonomous decisions to human-evaluated recommendations. By handling complex relationships and patterns in data, AI systems produce more nuanced and sophisticated outputs compared to traditional software, enhancing their impact across diverse domains.
Environmental influence – Outputs must have a tangible impact on the system’s physical or virtual surroundings, exposing the active role of AI systems in influencing the environment they operate within. This includes interactions with digital ecosystems, data flows and physical objects, such as autonomous robots or virtual assistants.
Why These Guidelines Matter
The AI Act introduces a harmonized regulatory framework for AI developed or used across the EU. Core to its scope of application is the definition of “AI system” (which then spills over onto the scope of regulatory obligations, including restrictions on prohibited AI practices and requirements for high-risk AI systems).
The new guidelines serve as an interpretation tool, helping providers and stakeholders identify whether their systems qualify as AI under the act. Among the key takeaways is the fact that the definition is not to be applied mechanically, but should consider the specific characteristics of each system.
AI systems are a reA(I)lity; if you have not started assessing the nature of the one you develop or the one you procure, now is the time to do so. While the EU AI Act might be considered by many as having missed its objective (a human-centric approach to AI that fosters innovation and sets a level playing field), it is here to stay (and its phased application is on track).
January 2025 ESG Policy Update— Australia
Australian Update
Mandatory Climate-Related Financial Disclosures Come Into Effect
The first phase of the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth) (Bill) commenced on and from 1 January 2025. The Bill amends the Corporations Act 2001 (Cth) to mandate that sustainability reporting be included in annual reports.
The first phase requires Group 1 entities to disclose climate-related risks and emissions across their entire value chain. Group 2 entities will need to comply from 2026, followed by Group 3 entities from 2027.
First Annual Reporting Period Commences on
Reporting Entities Which Meet Two out of Three of the Following Reporting Criteria
National Greenhouse and Energy Reporting (NGER) Reporters
Asset Owners
Consolidated Revenue for Fiscal Year
Consolidated Gross Assets at End of Fiscal Year
Full-time Equivalent (FTE) Employees at End of Fiscal Year
1 Jan 2025(Group 1)
AU$500 million or more.
AU$1 billion or more
500 or more.
Above the NGERs publication threshold.
N/A
1 July 2026(Group 2)
AU$200 million or more.
AU$500 million or more.
250 or more.
All NGER reporters.
AU$5 billion or more of the assets under management.
1 July 2027(Group 3)
AU$50 million or more.
AU$25 million or more.
100 or more.
N/A
N/A
Mandatory reporting will initially consist only of climate statements and applicable notes before expanding to include other sustainability topics, including nature and biodiversity when the relevant International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards are issued by the International Sustainability Standards Board (ISSB).
Entities are also not required to report Scope 3 emissions, being those generated from an entity’s supply chain, until the second year of reporting. Further, there is a limited immunity period of three years for Scope 3 emissions in which actions in respect of statements made may only be commenced by the Australian Securities and Investments Commission (ASIC) or where such statements are criminal in nature.
Further information on the mandatory climate-related disclosures can be found here.
New Vehicle Efficiency Standard Comes into Effect
On 1 January 2025, the New Vehicle Efficiency Standard (NVES) came into effect.
The NVES aims for cleaner and cheaper cars to be sold in Australia and to cut climate pollution produced by new cars by more than 50%. The NVES aims to prevent 20 million tonnes of climate pollution by 2030.
Under the NVES, car suppliers may continue to sell any vehicle type they choose but will be required to sell more fuel-efficient models to offset any less efficient models they sell. Car suppliers will receive credits if they meet or beat their fuel efficiency targets.
However, if a supplier sells more polluting cars than their target, they will have two years to trade credits with a different supplier or generate credits themselves before a penalty becomes payable.
The NVES aims to bring Australia in line with the majority of the world’s vehicle markets, and global manufacturers will need to comply with Australia’s laws. This means that car suppliers will need to provide Australians with cars that use the same advanced fuel-efficient technology provided to other countries.
For Australians who cannot afford an electric vehicle, it is hoped the NVES will encourage car companies to introduce more inexpensive options. There are approximately 150 electric and plug-in hybrids available in the US, but less than 100 on the market in Australia. There are also currently only a handful of battery electric vehicles in Australia that regularly retail for under AU$40,000.
Inaugural Australian Anti-Slavery Commissioner Appointed
On 2 December 2024, Mr Chris Evans commenced a five-year term as the inaugural Australian Anti-Slavery Commissioner (Commissioner), having been appointed in November 2024.
Mr Chris Evans previously served as CEO of Walk Free’s Global Freedom Network “Walk Free”. He and Walk Free played a significant role in campaigning for the introduction of the Modern Slavery Act 2018 (Cth) (Modern Slavery Act).
Prior to his time at Walk Free, Mr Evans was a Senator representing Western Australia, serving for two decades.
The Australian Government has committed AU$8 million over the forward estimates to support the establishment and operations of the Commissioner.
Among other functions, the Commissioner is to promote business compliance with the Modern Slavery Act, address modern slavery concerns in the Australian business community and support victims of modern slavery. We expect the Commissioner will take a pro-active role in implementing the McMillan Report’s recommendations for reform of the Modern Slavery Act supported by the Australian Government including penalties on reporting companies who fail to submit modern slavery statements on time and in full and the Commissioner’s disclosure of locations, sectors and products considered to be high-risk for modern slavery.
For more information on the role of the Commissioner, you can read our June 2024 ESG Policy Update – Australia.
View From Abroad
Trump Administration Provides Early Insight Into Their Position on ESG-Related Regulations
On 20 January 2025, shortly after new US President Donald Trump was inaugurated, the White House published the America First Priorities (Priorities). Several of these priorities are relevant to ESG-related policies and have been incorporated into Executive Orders and Memoranda issued by President Trump.
These Priorities, Executive Orders and Memoranda provide an insight into the new administration’s position on ESG-related regulations and include the following:
Reviewing for rescission numerous regulations that impose burdens on energy production and use, including mining and processing of non-fuel minerals;
Empowering consumer choice in vehicles, showerheads, toilets, washing machines, lightbulbs and dishwashers;
Declaring an “energy emergency” and using all necessary resources to build critical infrastructure;
Prioritising economic efficiency, American prosperity, consumer choice and fiscal restraint in all foreign engagements that concern energy policy;
Withdrawing from the Paris Climate Accord;
Withdrawing from any agreement or commitment under the UN Framework Convention on Climate Change and revoking any financial commitment made under the Convention;
Revoking and rescinding the US International Climate Finance Plan and policies implemented to advance the US International Climate Finance Plan;
Freezing bureaucrat hiring except in essential areas; and
Ordering those officials tasked with overseeing diversity, equity and inclusion (DEI) efforts across federal agencies be placed on administrative leave and halting DEI initiatives taking place within the government.
It is expected that the Trump administration will continue to prioritise economic growth over the perceived costs of ESG-related initiatives. Corporate ESG obligations may decrease, potentially creating short-term reporting relief and less shareholder pressure on companies to adopt ESG-focused policies.
Any relaxation of ESG-related regulations in the US may have extra-territorial effects on other jurisdictions as they determine whether to pause, roll-back or expand their reform programs in response. Multinational enterprises may find it difficult to navigate these potentially increasingly divergent national regimes.
UK Accounting Watchdog Recommends Sustainability Reporting Standards
On 18 December 2024, the Financial Reporting Council, as secretariat to the UK Sustainability Disclosure Technical Advisory Committee (TAC), recommended the UK Government adopt International Sustainability Standards Board reporting standards, IFRS S1 (Sustainability-related financial information) and IFRS S2 (Climate-related disclosures) (the Standards).
The purpose of these Standards is to provide useful information for primary users of general financial reports. Broadly:
IFRS S1 provides a global framework for sustainability-related financial disclosures and addresses emissions, waste management and environmental risks; and
IFRS S2 focuses on climate risks and opportunities.
Adopting these Standards in tandem ensures that companies account for their full environmental impact. TAC has also recommended minor amendments to the Standards for better suitability to the UK’s regulatory landscape. For example, extending the ‘climate-first’ reporting relief in IFRS S1 will allow entities to delay reporting sustainability-related information, by up to two years. This will allow companies to prioritise climate-related reporting.
This endorsement comes after the TAC was commissioned by the previous government to provide advice on whether the UK Government should endorse the international reporting Standards. Sally Duckworth, chair of TAC, stated that the adoption of these reporting standards is “a crucial step in aligning UK businesses with global reporting practices, promoting transparency and supporting the transition to a sustainable economy”.
With more than 30 jurisdictions representing 57% of global GDP having already adopted the Standards, the introduction of these Standards in the UK will align UK companies with international reporting standards and provide greater transparency and accountability, which is important for achieving sustainability goals and setting strategies going forward.
Sustainable Investing Spotlight for 2025
Whilst Europe has dominated the sustainable investing charge with regulators prioritising disclosure and reporting initiatives, 2025 is set to be a challenging year with the Trump administration expected to reorder priorities in the US that are likely to impact the sustainability landscape going forward. Investment data analytics from Morningstar predicts that there will be six themes that will shape the coming year:
Regulations
The US Securities and Exchange Commission (SEC) may reverse rules requiring public companies in the US to disclose greenhouse gas emissions and climate-related risks and roll back a number of other sustainability related initiatives. This is at odds with the European Union and a number of other jurisdictions globally who are focusing on rolling out climate and sustainability disclosures.
Funds Landscape
Fund-naming guidelines that have been introduced by the European Securities and Markets Authority will see a large number of sustainable investment funds across the EU rebrand, which is likely to reshape the landscape. Off the back of the de-regulation occurring in the U.S., there is an expectation that the number of sustainable investment funds will shrink. It will be interesting to see how the market responds and what investor appetite for these products across the rest of the world, will be.
Transition Investing
Investors will look to invest in opportunities arising out of the energy transition. Institutional investment is vital to meet targets, with focus predicted to be on renewable energy and battery production.
Sustainable Bonds
It is predicted that sustainability related bonds will outstrip US$1 trillion once again. Institutional investors have been targeting sustainability related bonds to aid their net zero efforts. Global players like the EU are poised to play a critical role in the global energy transition and boost the sustainability bond markets by implementing regulatory frameworks to encourage investment.
Biodiversity Finance
Nature will increasingly be recognised as an asset class, thanks to global initiatives aimed at correcting the flawed pricing signals that have contributed to biodiversity loss. These efforts seek to acknowledge the true value of nature and address the ongoing degradation of biodiversity. There is an appetite for nature-based investment, but regulatory uncertainty and uncharted pathways remain a deterrent.
Artificial Intelligence
This prominent investment theme in 2024 is likely to continue well into this year. However, there are risks associated with this asset class. The rapid adoption and volatile regulations are proving costly, along with the immense amount of energy generation required to run artificial intelligence fuelled data centres.
Canada Releases First Sustainability Disclosure Standards in Alignment with ISSB Global Framework
The Canadian Sustainability Standards Board (CSSB) has released its first Canadian Sustainability Disclosure Standards (CSDS), which align closely with IFRS Sustainability Disclosure Standards whilst also addressing considerations specific to Canada.
Broadly, and similar to IFRS Sustainability Disclosure Standards:
CSDS 1 establishes general requirements for the disclosure of material sustainability-related financial information; and
CSDS 2 focuses on disclosures of material information on critical climate-related risks and opportunities.
The CSSB has also introduced the Criteria for Modification Framework which outlines the criteria under which the IFRS Sustainability Disclosure Standards developed by the ISSB may be modified for Canadian entities.
CSSB Interim Chair, Bruce Marchand has stated that the introduction of these standards “signifies our commitment to advancing sustainability reporting that aligns with international baseline standards – while reflecting the Canadian context. These standards set the stage for high-quality and consistent sustainability disclosures, essential for informed decision-making and public trust”.
Other features of the CSDS include:
Transition relief through extended timelines for adoption;
Its voluntary adoption by entities, unless mandated by governments or regulators in the future; and
Its role in being the first part of a multi-year strategic plan by the CSSB which includes building partnerships with First Nations, Métis and Inuit Peoples to ensure Indigenous perspectives are integrated into sustainability-related standards.
The authors would like to thank lawyer Harrison Langsford and graduates Daniel Nastasi and Katie Richards for their contributions to this alert.
Nathan Bodlovich, Cathy Ma, Daniel Shlager, and Bernard Sia also contributed to this post.
EDPB Adopts Statement on Age Assurance and Creates a Task Force on AI Enforcement
On February 12, 2025, during its February 2025 plenary meeting, the European Data Protection Board (EDPB) adopted a statement on assurance, which outlines ten principles concerning the processing of personal data when determining an individual’s age or age range. The EDPB is also cooperating with the European Commission on age verification in the context of the Digital Services Act (DSA) working group.
In addition, the EDPB extended the scope of the ChatGPT task force to artificial intelligence (AI) enforcement. The EDPB members underlined the need to coordinate the actions of the Data Protection Authorities (DPAs) regarding urgent sensitive matters and will set up a quick response team for that purpose.
In the statement, the EDPB outlines ten key principles to follow to implement a governance framework that complies with the General Data Protection Regulation (GDPR) to protect children and how their personal data is processed. The EDPB Chair, Anu Talus, stressed the importance of balancing the responsible use of AI within the GDPR framework. Businesses should ensure compliance with these evolving data protection standards, and our team is available to provide guidance on navigating the GDPR requirements and implementing effective compliance strategies.
“The GDPR is a legal framework that promotes responsible innovation. The GDPR has been designed to maintain high data protection standards while fully leveraging the potential of innovation, such as AI, to benefit our economy. The EDPB’s task force on AI enforcement and the future quick response team will play a crucial role in ensuring this balance, coordinating the DPAs’ actions and supporting them in navigating the complexities of AI while upholding strong data protection principles.” – EDPB Chair Anu Talus
www.edpb.europa.eu/…
The EU’s Foremost Economic Retaliation Device – The Anti-Coercion Instrument
Under the leadership of President Trump, the US has adopted a new trade policy that may lead to the adoption of trade measures on imports from the EU. Given the importance of the US/EU trade relationship and the EU’s stated commitment to a free trade environment, the EU has said that it will adopt measures in response to such a US policy. During the election campaign, President Trump spoke of tariffs to re-balance the US economy and replace some tax revenue (i.e. new tariffs as a permanent feature of the trading landscape). The EU’s response may be calibrated according to the purpose of tariffs applied by the US Administration.
In this blog post, we provide an insight into the functioning of perhaps the most assertive (yet so far unused) trade instrument at the EU’s disposal to retaliate, the EU Anti-Coercion Instrument (ACI, available here).
EU Retaliation
Should the EU consider that its interests are impaired by the US measures, it may decide to take retaliatory action against it.
Such retaliatory action is already being announced. On February 11, 2025, following the US announcement of a 25% import tariff on steel and aluminum, EC President Ursula von der Leyen affirmed that the EU would respond to “unjustified tariffs” with “firm and proportionate countermeasures”, and that the EU will act to safeguard its economic interests” (see here).
The EU has different instruments at its disposal for this purpose, including setting retaliatory tariffs on US products, using conventional trade defense instruments or acting under the EU International Procurement Instrument.
The EU ACI is one of the more resolute tools at the EU’s disposal. It is aimed at addressing economic coercion by third countries against the EU or one/several of its member states. So far, the ACI, which was adopted in 2023, has never been used by the EU. Nevertheless, the EU could choose to resort to it, should EU-US relations severely deteriorate.
When Could the EU Resort to the ACI
The ACI can only be resorted to in case of “economic coercion.” This is understood as a situation where a third country applies or threatens to apply a measure affecting trade or investment to make the EU or a member state thereof act (or stop acting) in a particular manner.
Certain circumstances may guide the EU towards an economic coercion finding. This includes the magnitude of trade or investment disruption, the pressure arising from it, the extent of the sovereignty encroachment or whether particular acts are expected from the EU or one/several of its Member States.
EU Examination of Third Country Actions and Omissions
The EC may examine any third country action or omission to evaluate if it constitutes economic coercion. It may do so at its own initiative or if requested to do so (subject to conditions).
Where the EC considers that the third country action or omission constitutes economic coercion, it must submit a proposal to the Council of the European Union (“the Council”, i.e. the EU member states) for an act formally determining that the third country action, or omission constitutes economic coercion. Should it declare economic coercion (by a qualified majority of its members), the Council may also request reparations for the injury to the EU.
Consultants
Next, the EC would request the country in question to immediately cease such economic coercion (as well as to repair any injury, if requested to do so by the Council).
The EC would also seek consultations with the country in question. Options that could be explored in such consultations would include direct negotiations, or the submission of the matter to international adjudication, mediation or conciliation.
Simultaneously, the EC would seek to obtain the cessation of the economic coercion by raising it in international fora, where applicable. It could also collaborate with any country affected by the same or similar economic coercion, for example to coordinate their respective responses.
EU Response Measures
Foreign economic coercion could result in the EC adopting response measures, which may amount to measures of general application (potentially affecting an entire third country, or only specific sectors, regions or companies thereof), or measures targeting specific natural or legal persons.
Substantially, response measures may include:
Customs duties
Other import charges
Import or export restrictions
Measures on transiting goods
EU internal measures applying to goods
The non-performance of international obligations concerning the right to partake in tender procedures
Measures affecting trade in services (including through EU subsidiaries)
Measures affecting access to foreign direct investment to the EU (including through EU subsidiaries)
Restrictions on the protection of intellectual property rights or their commercial exploitation
Restrictions in access to EU capital markets and other financial service activities
Restrictions on the possibility of marketing goods subject to EU rules on chemicals
Restrictions on the possibility of marketing goods subject to the EU sanitary and phytosanitary rules
Response measures should, in any event, be proportionate and not exceed the level of injury to the EU.
The adoption of response measures would, in any event, be subject to three conditions:
That any request to the third country in question to cease or repair the economic coercion, as well as any consultations and possible further action (such as international adjudication or mediation) has not resulted in the cessation of the economic coercion is a reasonable period of time;
That the adoption of EU response measures is necessary to protect the interests and rights of the EU, and its member states in the particular case;
That the adoption of the EU response measures is in the EU interest (including with respect to the ability of the EU and its member states to make legitimate sovereign choices free of economic coercion).
EU response measures are also possible where the economic coercion in question has ceased, but the third country has not repaired in full the injury to the EU, despite having been requested to do so.
After the Imposition of Measures
Upon adoption of response measures, the EC would offer to negotiate a solution with the third country. The entry into force of the measures could be delayed by up to three months following their adoption, extendable where the third country in question would take steps to cease the economic coercion and, where appropriate, repair the injury to the EU.
Once response measures would be applied, the EC would monitor the evolution of the economic coercion – and potentially amend them. Where economic coercion would be suspended, the EC would also suspend the application of the response measures.
The EC would be required to terminate EU response measures when any of the following five situations would arise:
Where the economic coercion would end, and any requested injury reparation would be carried out;
Where economic coercion would end without injury reparation (event where requested) – subject to conditions;
Where a mutually agreed solution would be reached with the third country in question;
Where a binding decision in relevant international third-party adjudication would require the termination of the restrictive measures;
Where termination would be appropriate in light of the EU interest.
Response measure termination would be carried out through EC implementing acts. To adopt such implementing acts, the EC would have to follow an examination procedure. As part of that examination procedure, a committee representing EU member states would have to deliver an opinion (adopted through a qualified majority) asking for the measures to be terminated. The EC would be required to follow the committee’s opinion and terminate the measures. Under some circumstances and provided the committee would not deliver an opinion, the commission could also terminate the EU response measures at its own initiative.
How We Can Help
The ACI is at the apex of the EU’s policy arsenal in international economic matters – it is for that reason that is has been referred to as a “bazooka”. While it has never been used so far, a very aggressive trade policy measure against the EU could prompt the EC to at least brandish the ACI as one of the more assertive instruments at its disposal against third countries, including the US or China. Should it ever be triggered, ACI response measures could severely affect trade or financial relations. US goods and services may be directly targeted. At the most extreme end of the spectrum, US trade restriction measures and the EU’s response could combine to alter current patterns of trade across the Atlantic for some time into the future.
The Intellectual Property Enterprise Court
In the UK, intellectual property (IP) infringement claims and other disputes in which IP is a major concern can be brought in either the High Court or in many cases the specialist Intellectual Property Enterprise Court (IPEC). Based at the Rolls Building in central London, the IPEC has a more streamlined procedure than the High Court and employs a full-time specialist IP judge (currently Judge Hacon) and a number of specialist deputy judges, which aids the development of a consistent approach to cases that can often cost less than in the High Court.
Is IPEC Suitable for a Claim?
The IPEC can hear all types of IP disputes, including IP infringement claims along with other disputes in which IP is a major concern. Importantly, the court has the power to award all of the same remedies available in the High Court (interim injunctions, damages, delivery up etc.). Examples of the types of cases which have previously been heard in the IPEC include: IP infringement claims, amendments of patents, compensation for employees in respect of patented inventions created by them and claims relating to a breach of confidentiality including misuse of trade secrets.
However, limitations are placed on the value of claims which can be heard by the IPEC as it offers either a small claims track for low value disputes (where the amount in dispute is £10,000 or less) or a multitrack option for claims valued between £10,000 to £500,000, meaning that any claim above £500,000 must be brought in the High Court.
A number of procedural restrictions also apply for IPEC claims. As such, in practice the IPEC is generally best-placed to hear less complex IP disputes that do not involve very complex legal or fact heavy disputes as these restrictions include:
IPEC trials should last for two days or less (and in practice many cases are heard in a single day).
The default position is that there is no disclosure of documents as part of an IPEC trial unless IPEC orders that; however, IPEC may order the disclosure of “adverse” documents known by the parties to an IP dispute.
IPEC has strict controls regarding the cross-examination of witnesses, which is only permitted on topics which the judge deems necessary.
Orders for recovery of legal costs are capped at £60,000 meaning that the losing party will only ever have to pay the other party’s costs up to £60,000 (excluding court fees and wasted costs orders).
Whilst an important benefit of the streamlined IPEC procedure is improved access to justice for small and medium sized companies involved in IP disputes, it is important to remember that access to the IPEC is not limited only to small and medium-sized companies and is available to all claimants regardless of size. As such, at the outset of any IP dispute claimants should always consider whether the IPEC as opposed to the High Court may be the most suitable forum. For more details of IPEC click here.
Draft of Decree for Patent Linkage by the Mexican Government.
On February 12, 2025, the Federal Commission for Protection against Health Risks (COFEPRIS) and the Mexican Institute of Industrial Property (IMPI) published a draft of the technical collaboration mechanism between both entities, with the intention to comply with the United States-Mexico-Canada Agreement (USMCA).
It mainly establishes two “formats” that each authority will publish in their web page and specifies the information to be included in the Allopathic Medicines Gazette and information of the communication before COFEPRIS and IMPI.
It also mentions that COFEPRIS’ “format” for the technical cooperation must include the opposition format, along with the information provided by the patent owner or its licensee and/or sublicensee.
This implies that the notice and opposition opportunity will take place before COFEPRIS and not IMPI and we assume that it is going to be described in further formats or in any other law or regulation.
In conclusion, we consider that there are some positive considerations from this draft, as follows:
This was due since 2020; therefore, it is a good sign that they are moving forward.
Although there is not an express language including use patents, the wording is more positive than the current linkage regulation to include use claims, by IMPI or through litigation.
It clarifies the information to be included in both formats by each authority.
The negative aspect is that we consider that still there are no rules for an appropriate notice to the title holder. From the draft, it seems that neither the notice nor a described process. Additionally, it seems that it will take place before COFEPRIS and not IMPI, which in our view is not the best venue for a notice to be heard by the patent holder.
Definitively, at least in this publication, apparently no compliance with the USMCA of a proper notice is expressly considered.
What Every Multinational Company Should Know About … The New Steel and Aluminum Tariffs
What Has President Trump Announced?
On February 10, 2025, President Trump signed proclamations titled Adjusting Imports of Steel Into the United States and Adjusting Imports of Aluminum into the United States. The proclamations cover both steel and aluminum tariffs, which will be raised to a flat 25%. In particular, the steel and aluminum proclamations establish the following tariff principles:
The Section 232 aluminum tariffs, which the Trump administration imposed in his first administration, are raised from 10 percent to 25 percent.
The Section 232 steel tariffs, which already were set at 25 percent but which contained significant carveouts for most major sources of steel products, including steel from Brazil, Canada, and South Korea, will be implemented “without exceptions or exemptions.”
All product-specific exemptions that had been granted under the prior Section 232 tariffs are eliminated.
The steel and aluminum proclamations apply not only to products previously identified in Proclamation 9705 (2018) and Proclamation 9980 (2020) but also to additional derivative steel products and derivative aluminum products to be identified in forthcoming annexes to the proclamations.
The United States will set up a process to allow U.S. industry groups and U.S. producers of steel and aluminum to request that other derivative products be added to the annexes.
The steel and aluminum proclamations include exemptions only for derivative steel products “melted and poured” in the United States and derivative aluminum products “smelted and cast” in the United States, to curb imports of minimally processed metals from other countries that circumvent the prior tariffs. In other words, derivative products that are produced from steel and aluminum that originated in the United States, which then were processed abroad into a derivative product, would be exempt from the new 25 percent tariffs.
The full impact of these tariffs will take time to work through the market. Nonetheless, the announcements sent major shock waves through the manufacturing community. To help companies sort out the potential impact of these new tariffs, this article works through the top-of-mind questions for most major aluminum and steel importers. It then provides some strategies for companies looking to manage tariff-related risks, including by buttressing supply chains and building in contractual flexibility.
Our expectation is that these are the opening salvos in a likely international trade war, not the last shot. Notably, after the issuance of the steel and aluminum proclamations, a White House official confirmed these tariffs would “stack” on any other tariffs. For example, if the currently suspended 25% increase in tariffs for Canada and Mexico are implemented, then imports of Canadian and Mexican aluminum and steel would face new 50% tariffs.
What Are the Key Open Questions and Ambiguities in the Announcement?
What products are covered? The coverage of the presidential proclamation is broad, covering all basic forms of steel and aluminum. In addition to steel and aluminum products subject to previous Section 232 duties, the proclamations will include forthcoming annexes incorporating further derivative steel and aluminum products.
How far downstream does the proclamation extend? The coverage likely extends to numerous downstream products such as pipes, tubes, and aluminum extrusions. The full list of derivative products covered by the proclamations will be listed in yet-to-be-published annexes.
How does this interact with the prior Section 232 duties imposed in President Trump’s first term? The effect of the steel and aluminum proclamations is basically to replace the prior Section 232 duties — including all their exemptions and negotiated alternative quota arrangements — with new, uniform duties under the current proclamations, including to a potentially larger set of products to be covered in the forthcoming annexes. This has the effect of both broadening the scope of the prior duties and also extending them to countries that had negotiated alternative measures to the prior Section 232 tariffs, such as by imposing quotas for exports of steel and aluminum to the United States in exchange for having the tariffs dropped. The proclamations also eliminate all the product-specific exemptions granted under both the prior Trump and Biden administrations. Thus, the proclamations represent a level-setting of the prior Section 232 tariffs, bringing everything to a uniform 25% rate for all countries and for all products.
What about the Section 301 duties? The Section 301 duties applicable to Chinese-origin products remain fully in place. Because those tariffs (recently increased by an additional 10%) cover basically all imports from China, including aluminum and steel products, the new aluminum and steel tariffs ladder on top of the Section 301 duties. Thus, there can be duties as high as 60% for Chinese aluminum and steel, in addition to the normal Chapter 1–97 tariffs, of the Harmonized Tariff Schedule of the United States (HTSUS) that generally apply to imports from all countries.
What about all the antidumping and countervailing duty orders on various steel and aluminum products? In addition to Section 232, Section 301, and standard Chapter 1–97 duties, in situations where there are antidumping or countervailing duty orders on steel or aluminum products, these duties also would be added on. Because antidumping and countervailing duty orders are placed on products from a particular country or countries, the analysis of whether such additional duties are due for steel and aluminum imports would depend on the country at issue, as well as whether the product being imported falls within the written scope of the antidumping and countervailing duty orders. But because of the large number of antidumping and countervailing duty orders, an appreciable number of products will be covered by these tariffs as well. It accordingly is essential for steel and aluminum importers to be carefully scrutinizing the potential applicability of such orders to their steel and aluminum products.
Would the USMCA allow us to avoid these duties by importing first into Canada or Mexico? Merely transshipping products through a third country, such as Canada or Mexico, does not alter the tariffs to be paid on that product if it eventually comes into the U.S. customs territory. Further, the steel and aluminum proclamations impose a new U.S. melt-and-pour requirement for steel and a smelting requirement for aluminum in order to claim an exemption from the Section 232 tariffs.
Can we avoid the tariffs by doing a moderate amount of processing before importing the steel and aluminum? This would depend on whether the processing is sufficient to take the product out of the HTS classifications listed in the forthcoming annexes of derivative steel/aluminum products.
Are the trade courts likely to strike this measure down? The imposition under Section 232 of aluminum and steel tariffs in the first Trump administration was appealed to both the Court of International Trade and the Court of Appeals for the Federal Circuit. The end result was that the prior use of Section 232 to invoke national security grounds to impose tariffs to protect the U.S. aluminum and steel industries was upheld. While a challenge to the new proclamations is likely, these precedents will make it difficult for such a challenge to succeed.
Don’t these special tariffs violate the WTO Agreements? WTO agreements will not provide relief from these tariffs for steel and aluminum importers. Several countries have already brought a WTO challenge or indicated that they will be doing so soon. But the WTO’s dispute resolution process has been effectively brought to a standstill in recent years, as multiple U.S. administrations have blocked appointments of panelists to the WTO’s Appellate Body, which is the final stage of any dispute resolution. Also, WTO dispute resolution takes years to finish.
Will major importing countries negotiate a resolution to these tariffs? It is likely that they will try. Australia already has indicated it will seek to negotiate an alternative to the imposition of the tariffs. Australia is viewed as being better positioned than most countries for such a resolution because it maintains a trade deficit with the United States, whereas other major steel and aluminum exporters to the United States have trade surpluses. That said, it would not make sense to eliminate the prior settlements through the new imposition of aluminum and steel tariffs if the end goal were to put something similar back in place. Because the U.S. aluminum and steel industries were viewed as having their relief undermined by prior negotiated alternative provisions, as well as the grant of hundreds of product-specific exemptions, it is expected that negotiated alternatives to the tariffs will be much more difficult to achieve this time around.
How will we get clarity regarding the scope of these new tariffs? The new Section 232 tariffs are to go into effect on March 12, 2025. Additional information — including the publication of the annexes — will need to be provided so these tariffs can be applied. We expect that the publication of the proclamations in the Federal Register will provide at least some further clarification as to the scope of the measures — including the annexes — as well as subsequent guidance from U.S. Customs & Border Protection.
Are there any other trade- or tariff-related measures we need to be monitoring? Yes. Speaking from the Oval Office, President Trump said the steel and aluminum tariffs were “the first of many” to come. In particular, he said his international trade team would be meeting over the next four weeks to discuss potential new tariffs on cars, chips, pharmaceuticals, and other goods. He already has imposed 10-percent tariffs on Chinese-origin imports (on top of the existing Section 301 duties from the first Trump administration, which apply to around half of all goods imported from China and impose tariffs up to 25 percent). He has threatened tariffs of up to 25 percent on all goods from Canada and Mexico, which are currently suspended for 30 days to give negotiators time to work out an agreement to address unauthorized immigration and illegal trafficking in fentanyl and other drugs. And he has threatened reciprocal tariffs, which would raise U.S. tariff rates on any products from countries that impose higher tariffs on the same goods when exported from the United States. Finally, he also has vowed to raise U.S. tariffs still further on any country that retaliates against the U.S. tariffs.
What Should Our Company Do to Cope With These Potentially Costly New Duties?
Gather information on importing patterns to determine tariff-related vulnerability. Importers should gather information regarding their steel and aluminum products, and their importing patterns related to those products, to pinpoint tariff-related risks and vulnerabilities. Supply chain mapping, the process of documenting all suppliers and the flow of goods and products in a supply network, can be an important tool for importers looking to gain proper insight into their network. A clear picture of one’s supply chain allows importers to identify tariff-saving opportunities and to proactively address pressure-points creating vulnerabilities.
Gather contracts and determine tariff-related flexibility. Global trade dynamics necessitate flexible supply chain contracts for both suppliers and purchasers. The starting point is to identify goods facing high tariff rates and to gather all of your supply- and sell-side contracts and determine how they handle tariff-related risks for these goods. In general, when it comes to tariff-related risks, these contracts generally fall into two buckets: (1) ones that contain no provision relating to tariffs or that contain pricing-related provisions, which may indirectly allocate risks relating to tariffs but not provide any real flexibility to deal with unexpected tariff changes; and (2) ones that include clear tariff-related provisions. To the extent possible, in any situation where your company bears tariff-related risks (generally, where your company has agreed to act as the importer of record), you want to be in the posture of moving contracts toward the second scenario.
Look for ways to update supply-side contracts for supply chain flexibility and sharing of risk. Fixed-price contracts typically assign cost risk to the seller. If tariffs increase costs, suppliers cannot unilaterally demand price adjustments unless the contract allows for cost-sharing mechanisms. An example of price adjustment protection language would be as follows: Supplier reserves the right to adjust prices to reflect the impact of any tariffs, duties, or similar governmental charges imposed after the date of this proposal. These adjustments will be calculated to ensure fair allocation of the increased costs. Supplier will provide advance notice of any such adjustments along with documentation supporting the changes.
Look for ways to update sell-side contracts for allowing surcharges and pricing flexibility. Sellers wanting to protect themselves and to have added flexibility should seek to include price adjustment rights in their contracts. Some contracts tie prices to commodity indexes, mitigating the impact of sudden market changes. If a supplier anticipates tariff risks, an indexed pricing structure may provide some protection.
Incorporate procedures to regularly review new contracts and contracts coming up for renewal to incorporate tariff flexibility and tariff-sharing provisions. Regularly reviewing new contracts and contracts up for renewal allows companies the opportunity to amend their standard terms and conditions and to incorporate provisions that can lead to more flexibility and an equal tariff-sharing burden. An example of contract language to create flexibility in a tariff-changing environment would be: If new tariffs, duties, or similar government-imposed charges are introduced after contract execution, the parties will renegotiate pricing in good faith to reflect the impact of such charges.
Look for ways to create commercial leverage to share tariff-related risks. The imposition of additional tariffs can be just as devastating for sellers as it is for buyers. Look for contractual leverage points relating to contract renewals or potential expansion of purchasing patterns. Consider moving up contract renewals to combine term extensions with tariff-related risk sharing. By proactively addressing these issues in supply chain agreements, businesses can better navigate economic volatility while maintaining contractual clarity and financial stability.
Health Canada Launches FOP Labeling Awareness Initiative
As we have previously blogged about, Health Canada published front-of-pack (FOP) labeling regulations in 2022, which require warnings for most foods high in saturated fat, sugars, and/or sodium. See also Front-of-package nutrition symbol labelling guide for industry – Canada.ca. The regulations will begin to be enforced on January 1, 2026, although the warnings can be voluntarily implemented earlier and have already begun to appear on Canadian shelves.
Recently, Health Canada’s Food and Nutrition Directorate launched an initiative to bring awareness to the new warnings. The initiative aims to inform consumers of the symbol that will be used (black and white box with a magnifying glass, a “high in [X]” declaration, and the words “Health Canada”), its utility (intended to help consumers make informed health choices), and the reason why some pre-packaged foods don’t have it (e.g., the food is a fruit or vegetable or other food exempted because it offers health protection benefits).
We will continue to monitor developments on FOP labeling rules in Canada, the U.S., and other jurisdictions.
Parked: The Extension of the UK’s Sustainability Disclosure Requirements to Portfolio Managers
On 14 February 2025, the Financial Conduct Authority (the “FCA”) updated its webpage on consultation paper (CP24/8) on extending the sustainability disclosure requirements (“SDR”) and investment labelling regime to portfolio managers. In the update, the FCA confirmed that it no longer intends to do so and will continue to reflect on the feedback received and provide further information in due course.
The FCA had scheduled publishing a policy statement on this in Q2 2025, but has now stalled this, setting out they are continuing to want to ensure the extension of SDR to portfolio management delivers good outcomes for consumers, is practical for firms and supports growth of the sector.
We reported on the consultation paper here: FCA Sustainability Disclosure Requirements Consultation Paper on the Extension to Portfolio Managers now published – Insights – Proskauer Rose LLP.