Understanding the best corporate structure required for conducting an investment into Myanmar is the first step for any foreign investor. In Myanmar the right or wrong corporate structure can be the difference between future expansion and limitation on investment, and can tangibly be a difference of up to 10% in annual tax liabilities.
There are always risks to consider when entering into a frontier market, such as Myanmar, including political stability and foreign exchange control, to name a few, however once an investor has considered these risks and determined to proceed, the important questions for choosing the best corporate structure for market entry become: (1) what are the types of activities that the foreign investor wishes to conduct in Myanmar; and (2) what Myanmar corporate income tax and financial requirements will be applicable.
For foreign investors the most employed corporate structures are:
- A private Limited Liability Company – either 100% foreign owned, split ownership or as a JV vehicle;
- A Branch Office; and
- A Representative Office.
Let’s discuss the first corporate structure consideration, being the proposed business activities to be conducted in Myanmar. This means considering what of the companies activities will actually take place inside Myanmar. For instance, under Myanmar Law, foreign companies can form a Representative Office in Myanmar. A Representative Office cannot be revenue earning but may serve for investment activities such as customer support or market research. As a Representative Office is not revenue-generating it has less cumbersome capital requirements than a Limited Liability Company or a Foreign Branch Office. The Myanmar Foreign Investment Law 2012 (“FIL”) and its ancillary rules and regulations also schedule a range of activities that by law are restricted from foreign investment, required to be in JV with a Myanmar citizen or have other specified conditions.
Once that box is checked, the second consideration concerns corporate income tax. The difference being that a private Limited Liability Company incurs a corporate income tax of 25% (applicable after any tax holidays provided to the foreign investor under the FIL) whereas a Foreign Branch Office will incur a corporate income tax of 35%.
For large multinationals, a Foreign Branch Office is a more familiar corporate structure from other jurisdictions around the world and we are seeing many foreign investors instructing us to establish a Foreign Branch Office as opposed to a private Limited Liability Company. However, in Myanmar the difference in corporate structure can make an important impact on profits and return on the investment.
What is the right structure then in Myanmar?
This depends based on answers to the two key questions of business activities and tax liabilities, however, we believe any investor intending to conduct profit related activities in Myanmar will benefit most from a private Limited Liability Company corporate structure as opposed to a Foreign Branch Office (notwithstanding current practice in some sectors, like the oil and gas sector, is to use a Foreign Branch Office). The main reason being the tax rate associated with a Foreign Branch Office as opposed to a private Limited Liability Company.
There are also corporate governance differences between a Foreign Branch Office and a Limited Liability Company that may favour a corporate structure of a Myanmar-registered Limited Liability Company.
This issue of the corporate tax rates relevant to the possible corporate structures under Myanmar law as at the forefront recently on the interpretation of tax rates applicable to investments under the FIL. For those investors in the Oil and Gas sector recently awarded Production Sharing Contracts, there were conflicting positions taken by government ministries, the Myanmar Investment Commission and the Internal Revenue Department as to the taxation status of Foreign Branch Offices.
The Internal Revenue Department opined that under §25 of the 2014 Union Tax Law that corporate tax rates for Foreign Branch Offices under the FIL ought to have a 35% tax rate. The industry in turn pointed to other provisions in the FIL containing tax breaks for that sector. The issue was thought to be holding up the signing of recently awarded Production Sharing Contracts. Fortunately, the Myanmar Investment Commission has recently confirmed that Foreign Branch Offices established under the FIL will have a 25% corporate tax rate. The issue highlights the importance of clarifying the applicable tax rates to an investment before the corporate structure is formed.
The Final Word
Understanding the appropriate legal structure when investing into Myanmar is pivotal as it can affect the future return on investment. This piece is meant to introduce misconceptions when entering into a new market solely relying on prior business practice from other jurisdictions. Therefore, entry into Myanmar using the right model will help reduce risk and potentially unnecessary tax exposure.
This piece does not touch upon the offshore structure to consider for investment, as establishing an investment vehicle in a jurisdiction having a double taxation agreement with Myanmar is another pivotal factor in the overall investment structure undertaken by a foreign investor. In this regard, we recommend contacting professionals that can provide you with comprehensive advice regarding the structuring of onshore investments and the appropriate offshore jurisdiction.