Myanmar Adopts New Foreign Investment Law

November 20, 2012

After a period of intense political wrangling and lengthy delays, on 2 November 2012 the President of Myanmar signed into effect a new foreign investment law (the FIL) to replace the previous foreign investment law enacted in 1988.  The new FIL comes at a time of momentous political and economic change within Myanmar that has seen the country move at an unprecedented pace in rejoining the international community after decades of isolation.  Following is a summary of the key provisions of the FIL based on an unofficial translation made available to us, concluding with a brief assessment of the reception the law has received in the foreign investment community.

Pertinent Authorities

The FIL designates the Myanmar Investment Commission (the MIC) as the principal government organ for administering the law, with the Myanmar Union Government Board (the Board) also playing an important role.  Under Chapter 9 of the law, foreign investors may not make investments without an MIC permit.  The MIC is empowered to operate with relatively limited oversight, and its decisions are final and conclusive under Chapter 20.

Permitted and Restricted Sectors

Chapter 2 of the FIL states that the law applies to economic activities prescribed by the MIC with the prior approval of the Board.  Under this provision, the MIC will promulgate regulations specifying which sectors foreigners may invest in based on an assessment of the benefits that would be received by the country.

At the same time, Chapter 2 also classifies certain types of investments as restricted or prohibited to foreign investors, with the MIC to issue regulations detailing the applicable restrictions or prohibitions on those investments following Board approval.  Investment categories subject to such classification include the following:

• enterprises that are detrimental to traditional cultures and customs, public health or the environment;
• manufacturing, service, agricultural, livestock and fishery enterprises to be prescribed; and
• enterprises operating within 10 miles of land borders unless inside approved special economic zones.

Other statutes such as the State-Owned Economic Enterprises Law likewise restrict foreign ownership of businesses in specific sectors, including oil and gas, telecommunications and banking and insurance.  Those laws are not altered by the FIL and remain in effect.

Forms of Investment and Restrictions on Foreign Ownership and Transfers

Chapter 5 of the FIL permits enterprises that are not categorized as restricted or prohibited to be 100% foreign-owned.  Foreigners are also allowed to form joint ventures with local partners, in which case their ownership percentages can be established in the joint venture agreement that they enter into.  Additionally, foreigners can make investments through a permitted form of business contract.  However, if an enterprise is classified as restricted or prohibited per the preceding paragraph, then foreign investors must observe any applicable ownership limits (or refrain from investing at all, if wholly prohibited).  In all cases, a foreign investor must make its investment through a company formed in Myanmar in order to avail itself of the FIL.

Under Chapter 8 of the FIL, foreign investors must obtain MIC approval before leasing out, mortgaging or transferring shares in an enterprise or the land or buildings used in an enterprise.

Minimum Capital Requirements

Although an earlier version of the FIL imposed a controversial US$5 million minimum capital threshold for foreign investors, this provision has been removed and the FIL as enacted does not contain any fixed minimum capital amount.  Instead, Chapter 5 provides that the MIC will determine minimum capital requirements on a case-by-case basis depending on the business sector activity.  Subject to those MIC-imposed requirements, joint venture partners can agree on minimum capital amounts in their joint venture agreements.

Employment of Locals

Chapter 11 sets out the requirements for the employment of locals by foreign-invested enterprises.  For skilled workers, at least 25% must be locals for the first two years of the enterprise, at least 50% must be locals for the next two years and at least 75% must be locals for the third two years, although the MIC may make exceptions for "knowledge-based enterprises."  For unskilled workers, all hires must be locals.  Foreign-invested enterprises must pay identical salaries to locals and expatriates who are at similar employment levels.

Tax Exemptions and Relief

As a means of promoting foreign investment, Chapter 12 entitles foreign-invested enterprises providing goods or services to exemption from income tax for five years starting in the year in which the goods or services are first provided, with the possibility of an extension for an additional "reasonable" period where beneficial for the country.  Foreign investors will view these terms as comparing favorably with the 1988 foreign investment law, which limited the income tax holiday to three years.

The MIC may also grant other types of tax exemptions and relief under the FIL, including the following:

• income tax relief for business profits that are reinvested within one year;
• up to 50% income tax relief for profits earned from exported products;
• the right to pay income tax on foreign employees at the same rates that apply to Myanmar citizens;
• the right to carry forward losses incurred within two years following the expiry of the aforementioned five-year tax holiday, with the carry-forward period lasting up to three years; and
• customs duty relief for (i) imported machinery, equipment and materials that are required for the business of the enterprise during its establishment, (ii) raw materials imported during the first three years of commercial production after its establishment, and (iii) imported machinery, equipment and materials that are necessary for use in its expanded work if the amount of investment is increased and the original enterprise is extended.

Government Assurances

Under Chapter 13 of the FIL, if the Board extends the term of a business enterprise, it may not nationalize the enterprise.  The Board is also prohibited from terminating any enterprise operating under an MIC permit before the expiration of its permitted term without a proper reason, and must ensure that the repatriation of invested sums is in the same currency that the sums were originally invested in.

Land Use Rights

Chapter 14 allows a foreign investor to lease land for up to 50 years with the possibility of two extensions of 10 years each, depending on the type of enterprise and the investment amount.  Additionally, with the Board’s approval, the MIC may prescribe a longer lease term for investors in remote or economically undeveloped areas.  This represents a change from the prior foreign investment legal regime, which permitted an initial 30-year lease term with two extensions of 15 years each if approved by the MIC.

Approval Process

Under Chapter 9, the MIC has 15 days after receiving an application to accept or reject it for review, and if the application is accepted the MIC has an additional 90 days to approve or decline it.  After being granted a permit by the MIC, a foreign investor must establish an enterprise by signing a contract with the relevant government department or the relevant local company or individual.

Foreign Reception

On the whole, the FIL has been favorably received by foreign observers as an encouraging sign that the country is committed to attracting investment from abroad while preserving the flexibility that is necessary in such a rapidly changing environment.  The international investment community has been particularly cheered by the improvements and enhancements that the FIL has brought when compared with the 1988 foreign investment law, including stronger tax incentives, longer allowable lease terms and increased flexibility in structuring investments.  As such, while some uncertainty remains around the manner in which the law will be administered and the content of the implementing regulations, the prevailing overall view is that the FIL represents a significant positive step for Myanmar and should serve as a key driver for its ongoing development.