Foreign Investment Law of Myanmar Sebastian Pawlita Partner

Doing Business in Myanmar Summary

• The real importance Investment Law;

of

the

new

Foreign

• Provisions of the new Foreign Investment Law; • Incorporating a commercial entity in Myanmar; • Foreign Investment Law vs Companies Act (1914); • Q&A session.

Doing Business in Myanmar Foreign Investment Law – Why did it take so long? • The Government announced the reform of the existing Foreign Investment Law in 2011. • The new law was expected to be in force and effect by the Myanmar New Year (April 2012). Ultimately, the law was enacted on 2 November 2012. • Main reasons why it took so long: Priority given to political stability; internal lobbying

Doing Business in Myanmar New Foreign Investment Law – Previous Drafts •

Minimum Threshold: – Last August, Parliament amended the draft Foreign Investment Law and inserted, amongst others, a minimum investment threshold of USD5 million. – The President rejected this amendment and sent the bill back to Parliament. – No more minimum threshold; however, MIC may insert further criteria in due course.

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49% - 51% equity ratio: – Parliament amended the draft Foreign Investment Law, requiring Myanmar citizens to be majority shareholders in certain industries. – Successfully rejected by the President.

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Role of the Parliament: – Parliament inserted a requirement for parliamentary approval of large investments. – Now: parliamentary approval required if the project potentially has a great effect on the security, economic, environmental and social interests of the Union.

Doing Business in Myanmar Foreign Investment Law – Provisions •

Corporate Vehicles: – 100% foreign-owned entity (i.e. limited liability company); – Joint-venture company with a local partner or with State-Owned Enterprises;

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In addition: – Unincorporated arrangements based on production sharing contracts/joint operating agreements in specific industries (i.e. oil & gas, mining). (However, at this stage, the wording of the FIL is ambiguous).

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Equity Policy: – The minimum capital requirements have been deleted; – In addition, the parties are free to agree on the shareholding ratio in case of a joint venture; – MIC may fix minimum investment amounts “sector-wise”.

Doing Business in Myanmar New Foreign Investment Law – Restricted Industries •

The State-owned Enterprises Law contains a list of sectors that are state monopolies (in particular timber, forests, oil & gas, jade, pearls and precious stones, post & telecom, air and railway transport, banks, insurances, mining, power generation, defense-related manufacturing); joint ventures or production sharing contracts are allowed on a case-by-case basis

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State-monopolies in the process of being dismantled in certain sectors (in particular banks, insurance, telecom)

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Chapter II Foreign Investment Law contains a list of businesses which are “restricted or prohibited”.

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The MIC has wide discretion to approve foreign-invested projects that are within the scope of Chapter II. 1) 2) 3) 4) 5)

Industries/investments which may impact/affect the traditions and customs of ethnic groups in Myanmar; Industries/investments which may affect the health of people; Industries/investments which may cause damage to the natural environment and/or the eco diversity and/or archeological heritage; Industries/investments which may bring toxic waste and/or chemicals into Myanmar; Industries/investments which may produce or use chemicals considered hazardous under international agreements/conventions;

Doing Business in Myanmar New Foreign Investment Law – Restricted Industries (Continued) 6)

Production and services businesses reserved to locals (now specified in the Foreign Investment Rules); 7) Industries/investments which involve untested technologies, pharmaceuticals, consumer goods; 8) Farming activities reserved to locals (now specified in the Foreign Investment Rules); 9) Livestock farming reserved to locals (now specified in the Foreign Investment Rules); 10) Fishery in Myanmar maritime waters reserved to locals (now specified in the Foreign Investment Rules); 11) Industries/investments which are within 10 miles of the border with neighboring countries other than in designated economic zones.

Doing Business in Myanmar New Foreign Investment Law – Provisions •

Employment Policy: – Within 2 years from the date of incorporation of the entity, 25% of the total employees must be locals; – Within 4 years from the date of incorporation of the entity, 50% of the total employees must be locals; – Within 6 years from the date of incorporation of the entity, 75% of the total employees must be locals; – Locals must be employed for works which do not require skills; – General rule is that, if a local worker/employee can be found, the employment of a foreigner may not be approved. Employment of foreigners are allowed provided their set of skills/knowledge/know-how/expertise is not locally available.

Doing Business in Myanmar New Foreign Investment Law – Tax Incentives •

Tax incentives include: – Non-discretionary: Income tax exemption for a 5 year period (extensions may be granted on a case-by-case basis); At the discretion of the MIC: – 50% reduction of income tax on profits derived from the export of goods; exemption or relief from commercial tax with regards to goods produced for export – Exemption from customs duty and “internal taxes” with regard machinery, equipment, instruments, components, spare parts and materials imported during the construction period (exact scope of the relief not clear); and – Exemption from customs duty and “internal taxes” with regard to raw materials imported for production during the first 3 years of operation; – “Right to pay income tax of foreign employees at the rate applicable to locals”

Doing Business in Myanmar New Foreign Investment Law – Miscellaneous •

Insurance is mandatory: – –

Other than Myanmar Insurance (Government owned), no private insurance companies are operative at this stage yet; However, the Government already issued several insurance licenses to private companies which are in the process of setting up their operations.

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Guarantee against nationalization.

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Administrative penalties for violation of FIL: – – –

Temporary measures/suspension; Revocation of the investment permit; Blacklisting (= permanent ban from investing in Myanmar).

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Parties can decide how to settle a dispute.

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Parliament may be involved in the approval procedure if the investment can affect the general interest of the nation (i.e. oil&gas (?), telecom (?), banking(?)).

Doing Business in Myanmar New Foreign Investment Law – Land Lease • Foreigners are not allowed to own land in Myanmar. • Notification no. 39/2011 (Land Use) sets out some provisions with regard to the land lease involving foreign companies approved by Myanmar Investment Commission. • According to this Notification, the initial leasing period was of 30 years extendable twice for 15 years each extension. • However, according to the Foreign Investment Law, the terms is now 50 years extendable twice for 10 years each time. • However, MIC may grant longer terms if the investment is in an underdeveloped region.

Doing Business in Myanmar New Foreign Investment Law – Repatriation of Profits • Notification no. 40/2011 (Foreign Currencies) and now the Foreign Investment Rules regulate the use of foreign currencies in investments under the Foreign Investment Law. • Opening of foreign currency account: – Right to open foreign currency accounts at any bank which has the right to operate in foreign currencies.

• Foreign currency deposit: – The approved investment capital shall be deposited in the foreign currency account.

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Repatriation of profits/salaries: – Right to repatriate net annual profits, net salaries; – Any amount of foreign currency permitted by the MIC to be repatriated; and – Amount receivable after termination of the investment (exact scope unclear).

Doing Business in Myanmar New Foreign Investment Law – Incorporating an entity •

As in some other countries in the region, bigger foreign investments are only allowed after the relevant authorities have done a due diligence of the investor, its experience and financial standing, and the investment project.

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This requires a great deal of disclosure on the part of the foreign investor.

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Unless it is a high priority investment, one has to expect that it takes a minimum of 23 months until the MIC issues an investment permit..

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In order to obtain the benefits under the Foreign Investment Law, prior approval of MIC is required before it is possible to proceed to obtain a “permit to trade” (note: no “permit to trade” required for joint-ventures with state-owned enterprises) and incorporate the investment vehicle at the Company Registration Office.

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Note: According to the new Foreign Investment Rules, the Corporate Registration Office shall register the investment vehicle at the point of time in which the MIC permit is granted. The foreign investor is supposed to apply for registration of the investment vehicle at the same time as the application for an MIC permit is filed.

Doing Business in Myanmar New Foreign Investment Law – FIL vs MCA (1914) •

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It is presently not entirely clear when investors may/have to apply for an MIC permit and when they may incorporate an entity under the Myanmar Company Act (MCA) without having applied for an MIC permit first Incorporating a company under the MCA is faster, cheaper and less troublesome. However: no tax benefits, no long-term use of land, no guarantee in the law with regard to the repatriation of profits Vehicles

Regime

Minimum Capital

Limited Liability Company

Foreign Investment Law

To be decided by MIC

Limited Liability Company (Services)

Myanmar Company Act

USD 50,000

Limited Liability Company (Manufacturing)

Myanmar Company Act

USD 150,000

Registered Foreign Branch

Myanmar Company Act

USD 50,000

Doing Business in Myanmar New Foreign Investment Law – Timeframe and Procedure • Proposal to MIC – Within 15 days MIC shall inform the investor whether the application will be taken into consideration; – Within 90 days MIC shall approve, or reject the investment proposal; – If approved, the investor shall receive an investment permit with the terms and conditions negotiated with the MIC (tax benefits, duration of the permit, repatriation, restrictions, etc.).

• Once the approval is obtained, the investor can: – proceed to obtain the “permit to trade” and register the investment vehicle at the CRO (it usually takes 4-5 weeks for the temporary certificate of incorporation); – Note: it should be possible to start the incorporation process at the same time as the filing of the application for an MIC permit according to the new Foreign Investment Rules – execute the lease agreement with the Government/private party; – obtain the final relevant approvals from Government (i.e. Ministry of Tourism, etc.);

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Myanmar

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