October 27, 2016
Updated October 31, 2016
This revised alert supplements the version previously circulated on October 27, 2016. Although the 2016 Law does not contain a commencement date, we have learnt from sources at the Directorate of Investment and Company Administration that it will come into force on April 1, 2017.
The Myanmar Investment Law ("2016 Law"), which replaces the Foreign Investment Law, 2012 ("2012 Law") and the Myanmar Citizen Investment Law, 2013 ("2013 Law"), has been enacted and, according to sources at the Directorate of Investment and Company Administration ("DICA"), will come into force on April 1, 2017. This new legislation follows the landmark victory of the National League for Democracy ("NLD") in the November 2015 national elections and the largely smooth transition of power to an NLD-led government.
The 2016 Law comes close on the heels of the lifting of nearly all sanctions against Myanmar by the United States of America on October 7, 2016. This action is expected to significantly increase inbound investment into Myanmar.
At a landmark economic policy event in Naypyitaw on October 22, 2016 State Counsellor, Daw Aung San Suu Kyi, and Minister of Planning and Finance, U Kyaw Win, reiterated that Myanmar was open for business. They had invited over 150 of Myanmar’s biggest tax payers to attend the event and they laid out high level plans to boost economic growth. They emphasised that the government wanted to engage with the private sector in areas such as infrastructure development and reiterated the need to attract increased levels of responsible foreign investment.
This client alert summarises the salient features of the 2016 Law based on an unofficial translation made available by DICA. It focuses on the provisions of the 2016 Law that relate to foreign investments.
With a large and youthful population (an estimated 55% of Myanmar’s total population of over 50 million is under the age of 30) and a burgeoning middle class consumer base, Myanmar offers significant potential opportunities for foreign investors. It is no surprise that Myanmar’s gross domestic product has recorded an average growth rate of 7.9% between 2012 and 2015 and is forecast to grow by 7.8% during the fiscal year 2016-2017. The Union Government of the Republic of the Union of Myanmar ("Myanmar Government") has sought to facilitate the growth and economic transformation of Myanmar by revising several pieces of legislation.
Myanmar’s investment law and policies have been evolving over the last few years. While the 2012 Law stipulated the rules relating to foreign investment, separate legislation – the 2013 Law, regulated investments by citizens of Myanmar. However, these separate legal regimes created the perception of an uneven playing field for foreign investors on the one hand and domestic investors on the other. The 2016 Law is an attempt by the Myanmar Government to harmonise these investment laws and improve the ease of investing into Myanmar. While the Myanmar Government has sought to streamline and simplify investment procedures through the 2016 Law, the success of this endeavour will also depend on the quality of subsidiary legislation that is still in the works.
The rules enacted under the 2012 Law, to the extent that they are not contrary to the 2016 Law, will continue to apply until the Myanmar Government formulates subsidiary legislation for the 2016 Law. Based on recent statements by senior Myanmar Government officials, subsidiary legislation to the 2016 Law is expected to be released by March 2017.
The Myanmar Investment Commission ("MIC") continues to be the focal authority in relation to the regulation of foreign investment into Myanmar and is organised under the Ministry of Planning and Finance. The administrative activities of MIC are undertaken by DICA.
MIC was reconstituted in June 2016, after the NLD-led Government came to power, and now consists of 11 members, including the Chairman. MIC’s key responsibilities include promoting investment into Myanmar and specifying investment conditions for various sectors. MIC also has primary responsibility for scrutinising investment proposals and applications for investment incentives. The 2016 Law mandates that MIC meet at least once every month to consider investment proposals and other applications, among its other duties.
The 2016 Law provides MIC with a range of enforcement powers and enables it to monitor investment activities. It is empowered to impose administrative penalties against investors for violations of the 2016 Law, subsidiary legislation and investment conditions stipulated by MIC. Penalties that can be imposed by MIC include a censure, revocation of the investment permit and blacklisting of the investor.
Unlike the 2012 Law, the 2016 Law regulates both foreign and domestic investments. It classifies investment activities into three categories: (i) promoted; (ii) restricted; and (iii) prohibited.
Under Section 42 of the 2016 Law, an investment activity is considered to be restricted if such activity is: (i) reserved for the Myanmar Government; (ii) not open for foreign investment; (iii) permitted only if undertaken together with a Myanmar national or entity; or (iv) subject to the approval of a ministry of the Myanmar Government. MIC is required to issue notifications identifying promoted and restricted investment activities from time to time.
Section 41 of the 2016 Law lists the types of investment activities that are prohibited. These include businesses or activities that may affect the environment, biodiversity, traditional culture and customs, and public health of Myanmar. Further, MIC is required to obtain the approval of the Pyidaungsu Hluttaw (Assembly of the Union of Myanmar) where an investment activity may significantly impact the security, economic condition and/or national interests of Myanmar.
Based on recent media reports, the ‘promoted’ sectors in Myanmar are likely to include manufacturing, infrastructure, industrial zones, agriculture and food processing.
The 2016 Law seeks to simplify procedures and enable more transparency in the investment approval process. In addition to allowing MIC to draw upon the expertise of external experts, MIC is also permitted under the 2016 Law to engage with investors during the course of its meetings. Further, the 2016 Law appears to decentralise the foreign investment approval process by allowing state governments to scrutinise and approve certain types of foreign investment.
A. Investment Permits
Under the 2016 Law, permits from MIC are required for business activities that: (i) are of strategic importance to Myanmar; (ii) are large-scale capital-intensive projects; (iii) could potentially impact the environment and any local community in Myanmar; (iv) utilise state-owned land or buildings; or (v) require the submission of a proposal to MIC. While some of the thresholds mentioned above appear to be ambiguously worded, MIC is expected to provide more clarity on these terms through subsidiary legislation.
B. Government Endorsements
Even if the investment activity is one which does not require an investment permit, investors are required to obtain the endorsement of MIC in order to be eligible (i) to enter into long leases of land and buildings for conducting their businesses; or (ii) for fiscal exemptions and relief offered by the Myanmar Government.
Upon the receipt of an endorsement from MIC, foreign investors are permitted to lease land and buildings in Myanmar for an initial period of 50 years. Investors can apply to MIC for an extension of their lease rights for an additional period of up to 20 years from the expiry of the initial lease period.
Foreign investors who have obtained a permit and/or an endorsement are required to notify MIC in the event of any transfer of shares in or the business of the investee entity. Such a notice is also required where any encumbrance is created over the shares or assets of the investee company.
The 2016 Law facilitates cross-border fund flows in relation to permitted investment activities in Myanmar. Capital account and loan transactions are subject to greater regulation by the Central Bank of Myanmar ("CBM") than ‘ordinary’ (revenue account) transactions.
The 2016 Law explicitly permits:
(a) repatriations of funds by foreign investors and transfer of capital gains and dividends earned on investments in Myanmar through normal banking channels; and
(b) current account transactions in relation to foreign investments, including payment by Myanmar nationals and entities of royalties, license fees, technical fees or management fees.
The Myanmar Government retains the right to prevent or delay the transfer of funds in certain circumstances such as for the protection of rights of creditors or to ensure compliance with judicial or administrative orders.
Cross-border fund transfers are subject to compliance with the Foreign Exchange Management Law, 2012 and Myanmar’s tax laws. The free flow of funds in relation to investment activities in Myanmar will also depend on the efficiency with which the CBM functions and the ready availability of the Myanmar kyat and ‘freely usable currencies’ such as the U.S. dollar in Myanmar.
The 2016 Law provides investors with greater flexibility than under the 2012 Law in relation to skilled jobs. A business commenced in Myanmar under the 2012 Law was required to employ a prescribed minimum number of Myanmar nationals in skilled jobs. The 2016 Law prescribes no such quotas in favour of Myanmar nationals. Businesses set up under the 2016 Law are permitted to employ foreigners in positions requiring managerial, technical and operational expertise.
Foreign investors will have to comply with a myriad of labour laws and regulations in Myanmar, including the Employment and Skills Development Law, 2013 and the Social Security Law, 2012. Further, closure of a business in Myanmar is permitted only upon compliance with local laws, including the provision of notice and payment of severance to employees of the business.
Foreign investors may apply to MIC for various economic incentives under the 2016 Law. These incentives generally take the form of exemptions and relief from income tax, customs duties and other internal taxes in Myanmar.
A. Zonal Income Tax Exemptions
The 2016 Law follows a more nuanced scheme when compared with the 2012 Law in relation to the grant of income tax exemptions to foreign investors. While the 2012 Law granted a blanket five-year income tax exemption to all foreign investors, the 2016 Law envisages the classification of geographical regions within Myanmar into three zones for the purpose of granting tax exemptions. The zonal classification listed below seeks to address regional disparities within Myanmar.
(i) Zone 1 (Least Developed): Investments in this zone may be granted a tax exemption for a period of seven consecutive years;
(ii) Zone 2 (Moderately Developed): Investments in this zone may be granted a tax exemption for a period of five consecutive years; and
(iii) Zone 3 (Adequately Developed): Investments in this zone may be granted a tax exemption for a period of three consecutive years.
The zonal income tax exemption commences from the year of commencement of the business in Myanmar. MIC, in consultation with the Myanmar Government, is empowered to alter these zonal classifications from time to time. The Secretary of MIC recently indicated that these zonal classifications are likely to take into account disparities within each State of the Union of Myanmar. Further, such income tax exemptions will only be granted to businesses in sectors that are sought to be promoted by the Myanmar Government.
B. Customs and Internal Taxes
MIC is empowered under the 2016 Law to grant, among other benefits, exemptions and reliefs from customs duties and other internal taxes on:
(i) capital goods and construction materials imported during the start-up phase of an investment activity that are not locally available; and
(ii) raw materials or inputs imported for the purpose of manufacturing goods to be exported.
C. Other Income Tax Exemptions
In order to encourage Myanmar businesses to reinvest in and develop themselves, MIC may on receipt of an application:
(i) grant income tax exemptions for profits that are reinvested in the same business or a similar type of business within a period of one year;
(ii) permit depreciation at a rate that is faster than the actual life of the capital asset; and
(iii) permit the deduction of research and development expenses from assessable income.
The Myanmar Government has the right to claw-back exemptions or relief utilised by a foreign investor if such investor discontinues its business activity before the expiry of the period for which it has obtained a permit/endorsement.
The 2016 Law provides more clarity in relation to foreign investment guarantees than the 2012 Law. In addition to providing a guarantee against direct expropriation of investments made by foreign investors, the 2016 Law also addresses the issue of indirect expropriation. The 2016 Law provides that no measures will be taken that will result in indirect expropriation or termination of the business unless such action is (i) necessary for the public interest; (ii) non-discriminatory; (iii) in accordance with applicable laws; and (iv) done upon prompt payment of market-based compensation. The 2016 Law also affords investors an opportunity to challenge measures that they determine to be indirect expropriation of the investor’s business in Myanmar.
The 2016 Law also enshrines the national treatment standard for foreign direct investment in Myanmar. Section 47 of the 2016 Law requires the Myanmar Government to offer treatment to foreign investors and their businesses in Myanmar that is no less favourable than that offered to Myanmar nationals. As is often the case with such guarantees, this national treatment standard is applicable post-establishment of the business in Myanmar. Notwithstanding the national treatment standard, the 2016 Law permits the Myanmar Government to offer more favourable lease conditions, exemptions and relief to local Myanmar investors.
The 2016 Law is an effort to facilitate foreign investor participation in the on-going economic transformation of Myanmar. While the Myanmar Government has attempted to simplify foreign investment procedures through this new legislation, its success in facilitating more foreign investment into Myanmar will depend on the level of clarity that is provided by subsidiary legislation to the 2016 Law and the efficiency with which various governmental agencies in Myanmar implement the law and regulations in practice. For example, merely decentralising the investment approval process to agencies other than MIC might be counterproductive, especially where such other agencies (both at the Union and State levels) lack the capacity or the tools to efficiently process investment proposals.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the following authors. Co-author Robert Pé is a former senior adviser on legal affairs to Burmese/Myanmar leader and Nobel laureate, Daw Aung San Suu Kyi.
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