What is the nature of the legal regime in Myanmar today?
Stemming from its time as a colony of Great Britain, Myanmar’s legal system has its roots in UK law including the Burma Companies Act, which has similarities to laws in other former British colonies such as Hong Kong, Singapore and India. That foundation, however, has been overlaid by laws adopted during the period of “the Burmese way to socialism” from 1962 to 1988, and the period of military rule from 1988 to the present. These quite different systems have created a complex web of laws, regulations and orders that present challenges for doing business in the country.
What foreign investment is occurring in Myanmar today?
Until 1988, foreign investment was largely prohibited, but there has been significant foreign investment in Myanmar since then, particularly from Asian countries such as China and South Korea. In recent years, Thailand has emerged as Myanmar’s largest official foreign investor. For a time, the prominent dissident Aung San Suu Kyi saw foreign investment as a means of propping up an illegitimate regime, and the adoption of US and EU trade sanctions severely constrainedWestern investment. Today, however, representatives from a large number ofWestern business associations and individual companies are visiting Myanmar to explore opportunities there, and there is significant interest from energy companies in Myanmar’s oil and natural gas reserves, timber and metals such as tin, copper and zinc. As trade sanctions are eased, Myanmar is likely to receive financial aid from multilateral financial organizations, which in turn will attract companies interested in assisting with infrastructure projects.
The Union of Myanmar Foreign Investment Law (Foreign Investment Law) adopted by the State Law and Order Restoration Council on 30 November 1988 identifies a number of objectives that the government has established and wishes to achieve through foreign investment. Specifically, foreign investment is to be made in accordance with the following principles:
- promotion and expansion of exports;
- exploitation of natural resources that require heavy investment;
- acquisition of high technology;
- supporting and assisting production and services involving large capital;
- opening up of more employment opportunities;
- development of works that save energy consumption; and
- regional development.
What is the process for making a foreign investment in Myanmar?
The foreign investment process was established by the Foreign Investment Law, and implemented in accordance with the Procedures Relating to the Union of Myanmar Foreign Investment Law (Foreign Investment Procedures) adopted by the Government of the Union of Myanmar on 7 December 1988 , to which are attached certain relevant forms. A new foreign investment law has been under discussion for some months and with recent political changes may be more likely to pass soon, but this article focuses on the law currently applicable.
In brief, Myanmar has established a Myanmar Investment Commission (MIC) composed of representatives of 11 government ministries, with the Ministry of Industry appointing two members. The MIC meets twice per month.
A proposal for foreign investment must be submitted by the investor to MIC. The proposal must specify the name, citizenship, place of incorporation and business, type of business, commercial and financial references, the form the foreign investment will take, the total capital of the new organization and the ratio of foreign and local contribution, the term of the investment, the amount of energy the business will require, the amount and value of machinery to be used during the construction of the facility that the business will use, the annual production value, the annual amount of foreign exchange that will be required and the estimated foreign exchange earnings, the volume and value of goods to be sold locally and abroad, the number, category, and tenure of personnel required locally and from abroad, the economic justification for the business and other mandatory content. The proposal must follow the form attached to the Foreign Investment Procedures.
MIC will review the proposal in accordance with the applicable law and procedures. MIC has the discretion to approve any proposal it believes will promote the interests of the state that does not violate the applicable law. MIC is required by the Foreign Investment Law to examine the proposal and to direct other agencies such as the Myanmar Foreign Trade Bank to review through foreign correspondent banks the business standing of the foreign investor. MIC may request supporting evidence and seek the advice of government agencies and other organizations.
Once approved, MIC will issue a permit in the form attached to the Foreign Investment Procedures and enter into any “necessary” contracts. These will typically include any particular incentives or rights that the foreign investor may negotiate with MIC. MIC may subsequently amend the permit and contracts as appropriate. Upon its establishment, the new foreign invested entity is obligated to open a foreign exchange bank account in Myanmar for foreign investment, and any expatriates who will work for the newlyestablished entity will likewise be compelled to establish a local foreign exchange bank account.
Does Myanmar law allow foreign investment in all sectors?
No. In accordance with Section 5 of the Foreign Investment Procedures, MIC has identified in its Notification No. 1/89 dated 30 May 1989 that foreign investment is permitted in the following business categories: Agriculture, Livestock and Fishery, Forestry, Mining, Industry (i.e., Foodstuffs, Textiles, Personal Good, Household Goods, Leather Products and the Likes, Transportation Equipment, Building Materials, Pulp and Paper, Chemicals, Chemical Products and Pharmaceuticals, Iron and Steel, and Machinery and Plant), Construction, Transportation and Communications, Trade and certain other activities. Notification No. 1/89 describes each of these categories in some detail to further specify which particular activities are available for foreign investment. Foreign investment in other business sectors may be permitted with MIC approval.
What incentives are available for foreign investment today?
Under present law, any foreign-invested enterprise will be entitled to a three-year tax holiday. As noted above, new foreign investment legislation was drafted earlier this year by Myanmar’s Foreign Investment Commission, and the most recent draft offers additional incentives for foreign investment. Specifically, the existing three-year tax holiday available to foreign-invested companies is expected to be extended to five years from start-up, and additional tax relief may be available depending on the size and nature of the investment. For example, foreign-invested manufacturing companies will be exempt from 50 percent of the tax due on profits from exports. The draft must still be approved by Parliament and then signed by President Thein Sein, and then the adoption of further and more detailed implementing regulations will be necessary before the anticipated benefits can be understood and effectively realized.
What forms may a foreign investment take?
A foreign investment may take the form of a sole proprietorship, partnership or limited company. Regardless of the form of the enterprise, the formation of the company, its registration with the Company Registration Office, the conduct of the company’s business and its liquidation on termination of business must be done in accordance with other laws and procedures, such as The Burma Companies Act. Those provisions are too lengthy to summarize here.
May a foreign enterprise own 100% of a legal entity in Myanmar or is a joint venture mandatory?
Yes. A foreign investor may generally establish either a joint venture in which the foreign party contributes at least 35% of the total capital or as a wholly foreign-owned company. If a joint venture is formed, it will be entitled to all the benefits/incentives of a foreign-invested enterprise. In that case, a local company can take advantage of the tax holidays and loss carry-forwards if it obtains a foreign investment equal to at least 35% of its total capital.
What protections are available to foreign investors from expropriation?
Article 22 of the Foreign Investment Law guarantees that any enterprise established on the basis of a permit issued by MIC may not be nationalized during the term of the permit or any extension thereof.
How might a foreign company do business in Myanmar without establishing a presence there?
Historically, the US and EU trade sanctions have prohibited or restricted the importing of many products from Myanmar. ManyWestern companies refrained from engaging in various forms of business activity due to concerns of being targeted by human rights and consumer groups resulting in harm to the company’s reputation. That is changing as sanctions are eased. A subsequent article by Squire Sanders’ trade lawyers will focus on the US and EU trade sanctions.
Is the currency stable? If not, may a foreign investor rely on the use of a convertible foreign currency?
Countries with emerging markets often restrict both the convertibility of local currency and the use of foreign exchange, and Myanmar has likewise suffered from a controlled currency for decades. The official currency of Myanmar is the kyat. Since 1 April 2012, the government has allowed the currency to float, radically altering the local currency landscape as the kyat had previously been fixed at 6.00 – 6.50 kyat to US$1, though the prevailing rate on the black market has been about 800 kyat to US$1. In practice, US dollars are widely used, however, according to local law, these may be accepted only at establishments that have been licensed to accept foreign currency.
How significant are the corruption problems in Myanmar?
With greater government involvement in economic affairs, typically there is expanded potential for corruption and, correspondingly, greater need for compliance programs. Recently, the draft of Myanmar’s Bribery and Corruption Law was issued and submitted to the Parliament for approval. Once approved, improvements might be expected to Myanmar’s corruption status. Myanmar was ranked 180/183 by Transparency International and scored 1.4 on the Corruption Perception Index for 2010, tied with Afghanistan and worse than Iraq. According to local sources, the corruption problems are pervasive at all levels and throughout the country. As a result, Squire Sanders’ Global Compliance Group will prepare a related article next month focusing on strategies for compliance programs in Myanmar.
Some Practical Matters
Internet access is quite limited throughout the country. in the five star business hotels in major urban centers such as Yangon, however, it is generally available and at reasonable speed. Foreign cell phone service has not generally been available except in some portions of the northeastern part of the country where trade with China is most pronounced. Local cell phones are available for local communication.
Infrastructure almost everywhere is in desperate need of improvement and travel delays should be anticipated.
Most laws and regulations are not available in English. As a result, it is recommended to work with international legal counsel experienced in underdeveloped markets who work with knowledgeable local counsel in Myanmar.
Despite the challenges discussed above, the size of Myanmar (50 million people) and its location (wedged between China and India at the heart of the world’s most vibrant economies) as well as its vast resources (natural gas, oil, timber, coal shale, gems and minerals) and inherent beauty (and the potential for tourism and real estate development), all seem to ensure that Myanmar merits attention. For that reason, Squire Sanders will supplement this initial article with others focusing on such topics as US and EU trade sanctions, best practices for dealing with corruption issues in Myanmar, and intellectual property and employment matters.
Mr. U Tin Thaung, Esq of Myanmar assisted in the preparation of this article.