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Myanmar – Foreign Direct Investment.

4 July, 2013

 

Legal News & Analysis – Asia Pacific – Myanmar

 

Background

 

On 31 January 2013, the Directorate of Investment and Company Administration of the Myanmar Ministry of National Planning and Economic Development published the Foreign Investment Rules (Government of the Republic of the Union of Myanmar, Ministry of National Planning and Economic Development, Notification No. 11/2013: Foreign Investment Rules, an unofficial translation obtained from http://www.networkmyanmar.org/images/stories/PDF14/FIL-Rules.pdf) (FI Rules) and the Classification of Types of Economic Activities Notification (The Republic of the Union of Myanmar, Myanmar Investment Commission, Notification No. 1/2013: Classification of Types of Economic Activities, obtained from http://www.dica.gov.mm/includes/FILnotification _English_ A4.pdf

(Classification Notification) pursuant to the new Foreign Investment Law approved on 2 November 2012 (The Foreign Investment Law (The Pyidaungsu 
Hluttaw Law No 21/2012) (The 3rd Waning of Thadingyut, 1374ME) (2 November 2012), obtained from http://www.dica.gov.mm/includes/FIL English Version_ 29-1-2013_.pdf) (FIL). The FIL, FI Rules and the Classification Notification are part of a series of economic and political reforms, revising the framework of foreign investments in Myanmar. 

 

Investment Permit 


While not necessary for the commencement of business, in order to fall within the ambit of the FIL and benefit from its regulations, the foreign investor must apply to the Myanmar Investment Commission (MIC)for an investment permit (Article 19 of the FIL). The MIC will grant the permit if, inter alia, the foreign investment satisfies the aim (Article 7 of the FIL) and the basic principles (Article 8 of the FIL and Article 47(a) of the FI Rules ) of the FIL. These include, supporting the main objectives of the economic development plan, development of employment opportunities, acquisition of high technology and development of manufacturing business involving high technology, supporting capital intensive businesses, promoting energy conservation businesses, regional development, exploration and extraction of renewable energy sources, protection and onservation of the environment, and the development of banking services in accordance with international standards (Ibid.). Such investments should not affect the sovereignty and public security of Myanmar (Article 8(n) of the FIL). The FIL also prohibits investments in certain specified areas such as framing, activities that use hazardous chemicals, or those that can affect public health or cause damage to the environment (Article 4 of the FIL). 


The FI Rules and the Classification Notification provide further details on 
the activities that are: 


(a) open to foreign investment, 
(b) allowed only in the form of joint ventures where the foreign investor cannot hold more than 80.0% of the joint venture. These include food and agricultural activities, infrastructure development, residential and commercial developments, and air transportation services; 
(c) allowed subject to certain conditions. These conditions include limitation of foreign ownership for activities relating to forestry and timber; limitation of the duration of the permit for mining projects; and requiring a joint venture with the government for activities such as marine training, distribution of explosive chemicals and coal exploration; 
(d) allowed after an environmental impact assessment, such as investment projects in the minerals and construction sectors; and 
(e) restricted to Myanmar citizens, such as forest conservation and production, small scale mining operations, farming and fishery activities, administration of electric power and Myanmar language publishing and media. 

 

While there is no minimum investment threshold prescribed, the MIC has discretion to accept or refuse the permit application and impose any investment thresholds on a case by case basis. As the minimum foreign share capital for incorporation of companies generally in Myanmar (without applying for the investment permit) is US$150,000 and US$50,000 for manufacturing and service companies respectively, the investment threshold for the investment permit applicants is likely to be at least that stated in the old FIL regulations of US$500,000 and US$300,000 for manufacturing and service companies respectively (Union of Myanmar Foreign Investment Law (December 1988), obtained from http://www.dica.gov.mm/rl1.htm). 

 

Incorporation of company


The FIL provides for foreign investments in Myanmar to be conducted through companies formed under the existing company law of Myanmar (Article 10 of the FIL), either through a 100.0% foreign owned company, a joint venture between a foreigner and a citizen or the relevant government department/organization in Myanmar, or pursuant to contract (Article 9 of the FIL). When forming a joint venture, the ratio of foreign capital and local capital invested can be determined by the parties to the joint venture (Article 17(b) of the FI Rules). 


Corporations are generally formed either as a limited liability company, a 
registered branch, a representative office of a company incorporated 
outside Myanmar, or a joint venture. A private limited liability company is required to have at least two (2) shareholders (Section 5 of the Myanmar Companies Act 1914) while a public limited liability company is required to have at least seven (7) shareholders (Ibid). At least two (2) directors are required for private companies and three (3) directors for public companies as well (Section 83A of the Myanmar Companies Act 1914). However, there is no requirement for the shareholders to be natural persons or for the directors to be residents in Myanmar. Unlike branch offices, representative offices are not allowed to perform direct commercial or revenue generating activities in Myanmar. It is only permitted to liaise with its head office and collect relevant data (Canada-ASEAN Business Council ASEAN Regulatory Update, obtained from http://www.canasean.com/home/opportunities/asean-regulatory-update). 

 

The corporation will be required to apply for a permit to trade from the Directorate of Investment and Company Administration, and apply for a registration certificate from the Companies Registration Office. If the investor intends to apply for an investment permit, permission to incorporate or register as a foreign company must be made simultaneously to the Directorate of Investment and Company 
Administration and the Companies Registration Office in accordance with the laws of Myanmar (Article 18 of the FI Rules). 


Duties of investor 


Upon obtaining an investment permit, foreign investors must comply with the laws of Myanmar, and in particular, with the provisions of the FIL and the investment permit. The duties of the investor are set out in Chapter 8 of the FIL (Article 17 of the FIL).

 

Insurance and employment of workers 


In addition, the foreign investor shall also obtain necessary insurance for its business (Article 23 of the FIL), and comply with the FIL regulations in relation to the employment of staff and workers. For unskilled workers, foreign investors must appoint only Myanmar citizens (Article 24(c) of the FIL). In appointing skilled workers, citizens of Myanmar must make up at least 25.0% of such workers in the first two (2) years of investment. This percentage increases to 50.0% in the subsequent two (2) years, and 75.0% in the fifth and sixth year (Article 24(a) of the FIL). The foreign investor must also provide training to the Myanmar citizens to upgrade their skills (Article 24(b) of the FIL and Article 83 of the FI Rules). The employment agreement for the employment of all staff (including the minimum wages (Article 80 of the FI Rules ) must be in accordance with Myanmar labour laws and rules (Article 24(e) of the FIL and Article 81 of the FI Rules), and there should not be differentiation in the wages paid to Myanmar citizens and foreigners who possess similar skills (Article 24(f) of the FIL). 


Transfers 


In contrast with the previous position in Myanmar where transfers of shares between foreigners and citizens were almost impossible, the FIL provides that the foreign investor has the right to sell all or some of its shares to any foreigners/citizen/foreign company/citizen company (Article 18(b) of the FIL). However, such transfers of shares must be registered in accordance with the laws of Myanmar and with the prior permission of the MIC (Articles 17(i) and (j) of the FIL).


Nationalisation 


To provide additional security to the foreign investors, the Myanmar government, in the FIL, guarantees that a business holding the investment permit shall not be nationalized within the term of the contract (or any such extended term, if so extended) (Article 28 of the FIL). The business shall also not be suspended before the expiry of its term without sufficient cause (Article 29 of the FIL). 


Land ownership 


Under the FIL, foreign investors are permitted to lease or use land for an initial term of up to 50 years (Article 31 of the FIL), with the option of extending the period for two (2) additional 10-year terms, depending on the category of business and volume of investment (Article 32 of the FIL). Further, the MIC may also stipulate a longer lease term to investors who are investing in less developed or more inaccessible regions of Myanmar (Article 36 of the FIL). 


Tax 


Under the FIL, foreign investors are granted an automatic five (5)-year income tax exemption for any business in the production of goods or services (Article 27(a) of the FIL). This exemption period may be extended for any suitable period depending on the success of such business. In addition, the investor may also apply for (Articles 27(b) to (k) of the FIL): 


(a) tax reliefs on income tax on profits of the business if they are reinvested within one (1) year; 
(b) right to deduct depreciation in respect of machinery, equipment, building or other capital assets used in the business; 
(c) tax relief of up to 50.0% of the profits accrued from exports of manufacturing businesses; 
(d) right for foreigners to pay income tax at the same rate as Myanmar citizens; 
(e) right to deduct expenses from assessable income; 
(f) right to carry forward and set off trading losses for up to three (3) years; 
(g) exemption/relief from custom duty on machinery, equipment, instruments, machinery components, spare parts and materials used in the business; 
(h) exemption/relief from custom duty on raw materials; and 
(i) exemption/relief from commercial tax on goods produced for export. 


In addition, Myanmar has set up special economic zones (SEZ) which are designated zones for foreign investors to set up manufacturing bases to export products internationally. Foreign investors and manufacturers in the SEZs will enjoy pioneer tax exemptions and incentives, including (a) initial five (5)-year 100.0% tax exemption, followed by 50.0% tax relief for the next five years; and import duties on raw materials and equipment will be waived, as will VAT on commercial tax (IE Insights, Volume 2 / July 2012 “Myanmar: Opportunities in Asia’s Last Frontier Economy”, p. 11, obtained from http://www.iesingapore.gov.sg/wps/wcm/connect/03d627004bdd3658b

528bde35d112ac6/IE_Insights_Myanmar.pdf?MOD=AJPERES

  

Foreign exchange and repatriation of profits 


In the event of termination of business, the foreign investor may withdraw the foreign capital he had invested in the same currency it was invested in, within a stipulated period in accordance with the procedures prescribed by the MIC (Articles 30 and 38 of the FIL) 

 

The FIL also provides that foreigners have the right to remit foreign currencies (in the form of (a) the investment made by the investor; (b) such amount that is permitted for withdrawal by the MIC; (c) net profits of the business after payment of taxes and any funds; and (d) salary and lawful income obtained during his performance of service in Myanmar, after the deduction of taxes and living expenses) through banks authorised to carry out foreign banking, at the stipulated exchange rate (Article 39 of the FIL ). Foreigners working with organizations holding the investment permit may also open a foreign currency account in Myanmar bank (9 Article 41 of the FIL).


Dispute resolution 


The FIL stipulates that any dispute arising in respect of the investment business should be settled amicably (Article 43(a) of the FIL and Article 170(a) of the FI Rules ). If such dispute cannot be settled amicably, it can be settled in accordance with the dispute settlement mechanism as provided in the relevant agreement (Article 43(b) of the FIL and Article 170(b) of the FI Rules). As such, if a foreign investor agrees with its joint venture partner contractually on the dispute settlement mechanism, this choice should be respected. In April 2013, Myanmar has also acceded to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (Journal of the United Nations, No. 2013/79, p. 20, obtained from http://www.un.org/Docs/journal/En/20130425e.pdf), which should allow for more effective enforcement of arbitral awards made in signatory countries in Myanmar. 


Conclusion 


While the FIL has only recently come into effect and the application of MIC’s discretion in applying the FIL has not been tested, the FIL and its accompanying rules demonstrate Myanmar’s commitment to economic reforms and attracting foreign investment in Myanmar. The FIL offers certain benefits and guarantees to investors as outlined above and creates a more favourable investment climate as compared to its previous regimes. Singapore and Myanmar have also strengthened economic cooperation, with the opening of International Enterprise (IE) Singapore’s overseas centre in Yangon (IE Singapore Media Release “Deeper SingaporeMyanmar economic ties with opening of IE Singapore Overseas Centre in Yangon”, 4 April 2013, obtained from http://www.news.gov.sg/public/sgpc/en/media_releases/agencies/ie singapore/press_release/P-20130404-2/AttachmentPar/0/file/MR00913_IE Singap
ore Yangon OC Opening_2013 04 04.pdf
). Agreements and memoranda of understanding have also been signed between Singapore companies and their private sector counterparts in Myanmar, across the telecommunications, hospitality, consumer and business services sectors (Ibid). It is likely that there will be increased investments from Singapore to Myanmar in the coming years as Myanmar takes further steps in its economic liberation.

 

 
For further information, please contact:

 

Jolie Giouw, ATMD Bird & Bird

jolie.giouw@twobirds.com
 

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