MYANMAR. The New Foreign Investment Law - An analysis. Issue 2: November Overview. Next steps

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1 MYANMAR The New Foreign Investment Law - An analysis Issue 2: November 2012 After much speculation and negotiation between the Myanmarese parliament and President Thein Sein, the new Foreign Investment Law (FIL) was signed into law on Friday,. While the spirit of the FIL may indicate that the Myanmarese government (the Government ) is serious about its pledge to open up the country for business in a fair and transparent way, the FIL by no means represents a straightforward and simple investment framework. Overview Earlier versions of the FIL included provisions that were less attractive to foreign businesses, so much so that some referred to the FIL as the "No Investment Law". The new FIL represents a more reasonable compromise between the interests of local businesses and international multinationals, all of whom are seeking to capitalise on Myanmar's enormous opportunities. However, a detailed analysis of the law shows that on the whole, it is not a complete overhaul of the previous law. There are a few notable investor friendly improvements such as: (i) absence of an explicit cap on the foreign ownership of joint ventures; (ii) land leases up to 50 years, which are extendable; (iii) 5 year tax-holiday; and (iv) allowing parties to agree on the dispute resolution regime in their contracts. Where the FIL falls short of providing more comfort to investors is with respect to the greater power and discretions accorded to the Myanmar Investment Commission (MIC). For instance, 100% ownership in an investment vehicle by a foreign investor must be approved by MIC. In addition, although there is no prima facie minimum capital requirement (as provided for under the previous FIL), the MIC may still require a minimum capital requirement. It is wide open as to what that figure could be. Further clarity is required on whether the current minimum investment capital as dictated on the Directorate of Investment and Company Administration website will be maintained. While there is an existing commission formed under the previous FIL, we understand that a new MIC will now be established and the chairman of the MIC will have significantly higher levels of authority. The first commission was also granted discretionary authority under the previous FIL, and it was hoped that the new FIL would convert some of these discretions into obligations on the part of the MIC to create greater certainty for investors. However, these discretions remain in the new FIL and in many cases have been expanded. Furthermore, there are specific sectors which are prohibited or restricted under the FIL and there is no clarity as to how the MIC will approve proposed investment in these sectors. The MIC is also required to inform the parliament of certain types of large projects, but again there is no criteria given to determine how such projects will be defined. Perhaps most uncomfortable for new investors, there is now an explicit criminal offence if an investor is found to have deliberately misrepresented any calculations, data or information submitted as part of the proposal to the MIC. No details of the criminal penalty have been revealed. The new FIL does state that businesses which were set up under the previous FIL can still operate within the terms and conditions of their existing permit until its expiry, but for all other purposes the new FIL applies. Attached to this note is a more detailed analysis of the principle changes in the FIL. Next steps The Government will have to draft bylaws and other regulations under the FIL within 90 days. The new FIL provides that until rules, regulations, procedures and by-laws have been enacted under the new FIL, the previous ones still apply, unless inconsistent with the new FIL. On balance, many foreign investors will see the FIL as positive sign that will help influence their decision to invest. However, there are still areas of uncertainty remaining and it will take some time to understand the broader role of the MIC. Myanmar Focus Partners For further information or to discuss this article please get in touch. Alistair Duffield Partner, Head of Singapore T: alistair.duffield@blplaw.com Ken Cheung Partner, Corporate T: ken.cheung@blplaw.com Nomita Nair Partner, Projects T: nomita.nair@blplaw.com

2 Table: Comparison of the 1988 Foreign Investment Law with the New Foreign Investment Law This table highlights some of the key differences between the New Foreign Investment Law dated ( New FIL ) 1 and the former Myanmar Foreign Investment Law dated 30 November 1988 ( 1988 FIL ). Former: Role of the Myanmar Investment Commission Not stated. Clauses 12 & 13: Specific provisions setting out the MIC s duty and powers, including: analysing and accepting proposals for foreign investment projects; The New FIL gives the MIC much greater administrative and regulatory power. It is yet to be seen whether any guidelines will be issued to outline how these powers will be exercised. examining active investment activities to assess compliance with national laws; providing advice to the Government on promoting foreign investment; determining which tax exemptions and reliefs are available to which businesses based upon sector; and issuing business permits and providing consents for the transfer of shares. 1 Based on unofficial English translations of the New FIL. Investors should note that only the official English translation issued by the Government will prevail. 2 Foreign investors may register their companies under the Myanmar Companies Act without obtaining a permit from the Myanmar Investment Commission ( MIC ). However, without the MIC permit, such entities would not have the benefit of the various tax incentives and government guarantee protections on their investments under the New FIL.

3 Types of Permitted Investment Vehicles Two options - (i) (ii) 100% ownership in locally incorporated Myanmarese company; or joint venture between foreign investors and Myanmarese citizens (including Myanmarese governmental organisations) - foreign investors are required to subscribe to at least 35% of the capital. Clause 9: Three options - (i) (ii) (iii) 100% foreign owned companies are permitted in business sectors approved by the MIC; joint ventures between foreign investors and Myanmarese citizens are permitted but the minimum foreign shareholding requirement has been removed; or such structure as agreed to under a joint venture agreement. The New FIL makes clear that whollyowned foreign investments require MIC approval. While this has always been the case, the change in language suggests that MIC could have more discretion in this area. The ratio of foreign capital and local capital is to be decided by the joint venture parties. However, this may not apply to investments in restricted sectors. Minimum Foreign Share Capital to be eligible under the FIL 3 US$500,000 for industry companies where US$170,000 to be brought into the country in cash and the balance of US$330,000 can be in the form of required materials, machineries and equipment for in kind capital. Clause 10(3): The MIC has discretion to impose minimum foreign share capital requirements on businesses benefitting from foreign investment. It is not clear what the MIC s requests will be under the new FIL, nor whether the figures set out by DICA on their website are still valid. US$300,000 for service companies. 4 3 Foreign trading companies and services can register under the Myanmar Companies Act (the minimum investment capital in such instances is US$50,000). 4 As set out in the Directorate of Investment and Company Administration ( DICA ), Ministry of National Planning and Economic Development website.

4 Restricted Activities No explicit restrictions in the 1988 FIL, but according to section 3 of the State Economic Enterprises Law ( SEEL ), twelve economic activities reserved in the domain of the State sector are as follows:- extraction of teak and sale of the same in the country and abroad. cultivation and conservation of forest plantation. exploration, extraction and sale of petroleum and natural gas. exploration and extraction of pearl, jade and precious stones. breeding and production of fish and prawns in fisheries which have been reserved for research by the Government. Postal and Telecommunication Service. Clause 4: A list of restricted or prohibited business sectors is listed, including: agriculture, fisheries, livestock breeding, production work (i.e. manufacturing) and service activities. businesses which destroy the environment and biodiversity, and affect the public health. businesses located within 10 miles from any international borders except for in areas designated as economic zones. businesses which produce toxic wastes or dangerous chemicals. The MIC may, with the approval of the Government, permit the restricted activities if they are for the benefit of citizens and ethnic nationalities. It is unclear how the new FIL provisions interact with the SEEL provisions. In relation to manufacturing, service activities, agricultural activities, livestock breeding and fishery, these may be reserved for locals if set out in the subsequent enabling rules and regulations of the New FIL. It is also not clear how MIC will determine which projects it must refer to the Parliament, and what happens when these projects are referred. Air Transport Service and Railways Transport Service. Banking Service and Insurance Service. Broadcasting Service and Television Service. Exploration and extraction of metals. There is an additional clause which requires the MIC to submit to the parliament details of any foreign investment in large projects which have a substantial impact on the security of the Government and citizens, the economic benefits in the surrounding areas of the investment and the living standards of the citizens. Electricity Generating Services. Manufacture of products relating to security and defence. According to section 4 of the SEEL, the Government may, in the interest of the State, permit by notification, for other parties to carry out such activities.

5 Investment Guarantee The government guarantees no foreign business will be nationalised during the contract period. The guarantee is extended to cover any extension periods granted by MIC. The Government guarantees that an economic enterprise formed under the permit of the MIC shall not terminate before the permitted period without any reliable circumstances. A former draft of the FIL allowed for nationalisation in the event that compensation was provided. This has since been removed. However, it is unclear if compensation will be provided if termination occurs. Tax Exemptions Investors may be eligible for three year tax holiday from the start of commercial operations. Clause 27: Tax holiday eligibility period extended to five years. The right to pay income tax of foreign employees and deduct the same from the assessable income of the enterprise has been removed. This is a welcome improvement for foreign investors, but note that the tax holiday is still at the discretion of the MIC. New commercial tax relief on goods destined for export. No other material changes, however investors may now apply to the MIC to receive better exemptions and reliefs if their business: has discovered new technologies, improved the quality of products, increased production, reduced environmental impact, and operates in remote areas and is assisting in local development.

6 Leasing of land Not stated, however according to the Order relating to the right to use land in connection with the Myanmar Foreign Investment Law on 30 September 2011, foreign investors may, with the approval of the MIC, lease land from the State and from private owners for up to 30 years with two extensions of 15 years each. Clauses 31-36: The New FIL specifically states that investors are permitted to lease land from the state or private owners for an initial term of 50 years and subject to approval from the MIC, two further extensions of 10 years each. The MIC has discretion to revise the above timescales in respect of businesses operating in remote areas that are assisting local development. Land rights are an important consideration for foreign investors and this provision provides greater clarity in this area. As mentioned above, this is also another area where MIC influence could be substantial. Appointment of Personnel Generic requirement that preference to be given to citizens but foreign experts and technicians may be retained. Clauses 24 26: Foreign workers must obtain a work permit from the MIC. Unskilled workers - All unskilled workers must be local. It is unclear how the distinction between skilled and unskilled workers will be enforced in practice. If strictly enforced, foreign investors may need to consider a waiver of these requirements. Skilled workers An increasing percentage of workforce must be local depending on the length of the business: 25% local skilled employees in the first two years; 50% for the second period of two years; and 75% in the third period of two years. Skilled local workers must be trained by their employers.

7 Settlement of disputes Not stated. Clause 43: Allows for settlement of disputes as prescribed in the agreement between the parties. This appears to alter the position under the Arbitration Act 1944 ( 1944 Act ), which required contracts to be under Myanmar arbitration. While there has been some pressure on the Myanmarese government to ratify the New York Convention on the Recognition and Enforcement of Arbitral Awards (which requires signatories to recognise foreign arbitral awards domestically), the 1944 Act only establishes a framework for domestic arbitration but does not provide for the recognition and enforcement of foreign arbitral awards. A revamp of the 1944 Act or new arbitration legislation may also be required to allow the enforcement of foreign arbitral awards. Penalties for breach of FIL Not stated. Clauses 42 & 46: Penalties are at the discretion of the MIC and can include: warning; temporary suspension of tax reliefs; This is quite significant and investors must get comfortable with. Details of the criminal penalty have not been released and this is an area that requires greater clarity. revocation of business permits; black listing businesses; and the investor may be criminally liable for deliberately providing false documentation relating to financial information or employees.

8 Getting in touch Our Myanmar Focus Partners are based in Singapore. Please get in touch if you would like to discuss investment opportunities in Myanmar. Singapore 9 Raffles Place #24-01 Republic Plaza, Singapore Alistair Duffield Tel: alistair.duffield@blplaw.com Ken Cheung Tel: ken.cheung@blplaw.com Nomita Nair Tel: nomita.nair@blplaw.com About BLP Today s world demands clear, pragmatic legal advice that is grounded in commercial objectives. Our clients benefit not just from our excellence in technical quality, but also from our close understanding of the business realities and imperatives that they face. Our achievements for clients are made possible by brilliant people. Prized for their legal talent and commercial focus, BLP lawyers are renowned for being personally committed to clients success. Our approach has seen us win five Law Firm of the Year awards and three FT Innovative Lawyer awards. With experience in over 70 legal disciplines and 130 countries, you will get the expertise, business insight and value-added thinking you need, wherever you need it. Expertise Commercial Competition, EU and Trade Construction Corporate Finance Dispute Resolution Employment, Pensions and Incentives Finance Funds and Financial Services Intellectual Property Private Client Projects Real Estate Regulatory and Compliance Restructuring and Insolvency Tax Clients and work in 130 countries, delivered via offices in: Abu Dhabi, Berlin, Brussels, Dubai, Frankfurt, Hong Kong, London, Moscow, Paris and Singapore.