Myanmar. New Horizons.

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1 November 2012 Myanmar. New Horizons. Introduction On 2 November 2012, the new Foreign Investment Law approved by Myanmar s parliament came into force. This is a significant milestone, following several months of negotiations with the Myanmar parliament over the form that this law would take. The introduction of the new Foreign Investment Law (the new FIL ) removes a key regulatory uncertainty for foreign investors and should positively influence the willingness of foreign investors to undertake major new investment in Myanmar, particularly in long-term projects that will require significant investment of capital. The new FIL sets out a revised legal framework for foreign investment into Myanmar. Key positive changes include a wider range of permitted forms of investment, greater flexibility on the structuring of joint ventures, enhanced tax and investment incentives, and an enhanced legal framework for land use, employment, foreign currency and resolving investment disputes. Contents Page Introduction... 1 Background... 2 Key Provisions. 2 Analysis Conclusion The new FIL omits some of the provisions that were of most concern to foreign investors in the draft foreign investment law approved by the Parliament in September 2012 (but subsequently rejected by the President) (the draft FIL ). However, a number of key issues have been deferred to implementing regulations (including guidance on the scope of the restricted activities and the levels of foreign ownership that will be permitted in such activities) which will result in a further period of uncertainty for foreign investors. It is important to note that the new FIL does not repeal or amend the existing State-owned Economic Enterprises Law (the SOEE Law ), which restricts private sector investment in most key sectors of Myanmar s economy, including exploration and production of oil and gas, associated products and metals, certain electricity generating services, telecommunication services, and banking and insurance services. Investment in these activities may still only be undertaken with Government approval, and, accordingly, Government policy will continue to determine whether foreign investment is permitted in those sectors and, if so, when and on what terms. Myanmar. New Horizons. Issue 3 1

2 Background Myanmar is an emerging market in Asia that is attracting significant interest from foreign investors. It is rich in natural resources, has a large population (approximately 60 million people), and requires substantial investment in key sectors of the economy including infrastructure, telecommunications, power and financial services. Following a series of positive political and economic developments since 2010, most international sanctions relating to Myanmar were suspended or eased earlier this year. A number of well-known international companies have since announced their intention to invest in Myanmar, and a wide range of international investors are evaluating opportunities in Myanmar. The Government of Myanmar, led by President Thein Sein, has recognised the importance of attracting foreign investment to assist with Myanmar's development, particularly in economic sectors requiring significant capital, expertise or modern technology. As part of its endeavours to attract investment, the Government is undertaking an ambitious legislative reform programme to modernise Myanmar's legal and regulatory environment. A key component of this reform was to enhance the regulatory regime for foreign investment by revising Myanmar's existing Foreign Investment Law, which was introduced in 1988 (the previous FIL ). The draft FIL was passed by Myanmar's Parliament in September However, it contained a number of provisions of concern to foreign investors and, ultimately, it was not approved by the President, who returned it to the Parliament for further consideration. The public debate surrounding the draft FIL indicated divergent views within Myanmar regarding how to balance the interests of local businesses with the need to attract foreign investment, particularly in activities requiring significant capital, expertise or modern technology. The new FIL had initially been expected early in The delay in introducing the new FIL resulted in a period of uncertainty for foreign investors, who were seeking clarity on the terms that would apply to their investment, particularly among investors contemplating long-term projects that would require significant investment of capital. The Government recognised that such uncertainty was delaying much-needed investment, and promptly passed the new FIL in the current parliamentary session. The adoption of the new FIL is a significant milestone in Myanmar's ongoing regulatory reform and modernisation. Key Provisions Key provisions of the new FIL include the following: > Objectives and principles: All new investment proposals must be submitted to, and approved by, the MIC, continuing the requirement established under the previous FIL. However, the new FIL includes a broader range of objectives and basic principles for foreign investment, which the Myanmar Investment Commission ( MIC ) is required to consider when evaluating investment proposals. A number of these Myanmar. New Horizons. Issue 3 2

3 provisions reflect the on-going public debate in Myanmar regarding foreign investment (as described above), for example a new objective 'for citizens to be able to compete on an international level' and a principle that investments must be made 'to support businesses that cannot yet be run by the State and citizens, or businesses that have insufficient funds and technology'. It remains to be seen whether these new provisions will result in any substantive change in the MIC's approach to, and willingness to, approve applications for foreign investment. > Form of investment: Investment may be made in the form of: (i) a 100 per cent foreign-owned enterprise (other than for restricted activities see below), (ii) a joint venture with Myanmar citizens or enterprises, or (iii) a permitted form of business contract. However, foreign investors must form a company in Myanmar in order to be entitled to the benefits of the new FIL. > Permitted sectors for investment: The new FIL applies to investment in economic activities prescribed by notification of the MIC issued with the approval of the Government. This is consistent with the previous FIL, under which the MIC issued a list of activities permitted for foreign investment, classified into 9 sectors (see right). It is important to be aware that the new FIL does not repeal or amend the SOEE Law, which restricts private sector participation (local or foreign) in most key sectors of the economy. In particular, the SOEE Law prescribes a list of economic activities (see right) that may only be undertaken by Stateowned enterprises unless the Government grants an exception by notification. These activities include exploration, extraction and sale of petroleum and natural gas; exploration, extraction and export of metals; certain electricity generating services; telecommunication services; banking and insurance services; broadcasting and television services; air and railway transport services; and certain other activities. Accordingly, Government policy will continue to determine whether foreign investment is permitted in those sectors and, if so, when and on what terms, notwithstanding the new FIL. > Foreign ownership restrictions: The new FIL permits 100 per cent foreign ownership in those activities to which it applies (as described above) other than investment in restricted activities specified in the new FIL which include, for example: > manufacturing and service enterprises that can be operated by Myanmar citizens (to be prescribed by regulation); > enterprises that are detrimental to public health, natural resources, the environment or biodiversity; and > enterprises that import technology or equipment that are still being tested or have not yet been approved. See the right of the next page for a full list of the restricted activities pursuant to the new FIL. MIC Notification on Permitted Activities under the previous FIL: 1. Agriculture 2. Livestock and Fishery 3. Forestry 4. Mining 5. Industry 6. Construction 7. Transport and Communications 8. Trade limited to hotels and tourists industries 9. SOEE Restricted Activities for which consent has been obtained SOEE Restricted Activities 1. Extraction and sale of teak 2. Cultivation and conservation of forest plantations 3. Exploration, extraction and sale of petroleum and natural gas 4. Exploration, extraction and export of pearl, jade and precious stones 5. Breeding and production of fish and prawn 6. Postal and telecommunications service 7. Air and railway transport services 8. Banking and insurance services 9. Broadcasting and television services 10. Exploration, extraction and export of metals 11. Electricity generating services 12. Manufacture of products relating to security and defence Myanmar. New Horizons. Issue 3 3

4 The restricted activities are broadly defined and therefore whether a particular investment will fall within their scope may be unclear. Investment in a restricted activity may only be undertaken if approved by the Government, and must be undertaken in joint venture with local citizens or enterprises. The foreign/local equity participation ratio for such joint ventures must be in accordance with regulations to be issued under the new FIL. The 50 per cent cap on foreign investment in such activities that was included in the draft FIL has been removed. > Minimum foreign participation: The foreign/local equity participation ratio for joint ventures with Myanmar citizens or enterprises may be agreed by the parties, other than for joint ventures in restricted activities (where the required ratio will be determined by regulation). These provisions amend the previous FIL requirement that foreign investors must have a minimum equity participation of 35 per cent if investing under a joint venture. > Minimum capital: The new FIL does not prescribe a minimum capital requirement for foreign investment (the draft FIL had proposed a US$5 million minimum investment). However, initial foreign currency capital requirements will be determined by the MIC on a case-by-case basis depending on the business sector of the proposed investment, with the approval of the Government. New FIL - list of prohibited enterprises: Businesses that - 1. are prejudicial to the country s culture; 2. are detrimental to public health; 3. are harmful to the environment; 4. import hazardous waste; 5. use hazardous chemicals; 6. manufacture goods and provide services*; 7. import unapproved medical equipment; 8. operate in the agriculture sector*; 9. produce livestock*; 10. operate in the fishery sector*; and 11. operate within 10 miles from the country s borders. * and can be operated by citizens as per prescribed law. > Tax and duty incentives: Foreign investments approved under the new FIL will be entitled to a five-year income tax holiday from the year of commencement of production (increased from three years under the previous FIL). The new FIL also provides for a range of additional tax exemptions, reliefs and extensions that may be granted by the MIC for prescribed periods, including in relation to income tax, depreciation, carrying forward losses, deductible expenses, export tax, trading tax, employee income tax, and customs duties. However, the MIC may, by regulation, prescribe investments that are not entitled to tax exemptions and relief. > Land use: Under the new FIL, foreign investors may be permitted by the MIC to lease land from the State or citizens for up to 50 years, which may be extended by two additional periods of 10 years with the consent of the MIC. Longer terms may be prescribed for investments in remote or less-developed areas. The previous FIL did not provide any such land leasing rights, but a regulation had been issued that permitted certain leases for terms of up to 30 years, extendable for two periods of 15 years if approved by the MIC. > Foreign exchange: The new FIL provides guarantees for the remittance in foreign currency of imported foreign capital and profits. Such remittance may be made through any bank authorised to perform international banking, at the prescribed exchange rate. > Employees: When hiring local experts and technicians for enterprises that require special expertise, investors must employ at least 25 per Myanmar. New Horizons. Issue 3 4

5 cent local staff during the first two years from the commencement of a new enterprise, increasing to 50 per cent during the next two years and 75 per cent in the third two-year period. Investors must appoint only local staff for enterprises that do not require special expertise. The new FIL provides no further guidance on when an enterprise will be considered to require special expertise. > Transfers of interests: The New FIL permits investors to transfer the whole or part of their share in a company to either a foreign or local citizen or entity, subject to obtaining approval from the MIC. However, if the entire interest is transferred by a foreigner, the investment permit must be returned. > Large energy projects: The MIC may, with respect to energy production, allow investors to invest in production enterprises requiring 'large amounts of capital', such as for petroleum, natural gas or metals, in the form of a joint venture with the State or Myanmar citizens. Such investment may be approved in the form of a profit-sharing system between the investor and the Government or an authorised Government department or organisation, using the capital of the investor to carry out a feasibility study, exploration and calculation of the reserves, and extraction up to the commercial production stage. Any profits from such an investment must be divided between the parties on a proportional profit-sharing basis. The new FIL does not expressly address the concept of cost recovery. > No nationalisation: The new FIL provides assurances that the Government will not, without a proper reason, terminate an enterprise operating under an MIC permit before the expiration of the permitted term, and will not nationalise an enterprise if it extends the term of the enterprise. However, there is some ambiguity in these provisions which may be of concern to foreign investors. > Dispute resolution: The new FIL explicitly recognises that dispute resolution mechanisms can be contractually agreed between parties, and provides that, in such cases, any dispute that cannot be settled amicably shall be resolved in accordance with the agreed mechanism. If there is no such mechanism provided in the contract, Myanmar laws regarding dispute resolution shall apply. > International treaties: If the new FIL conflicts with any provisions of an international treaty or agreement approved by Myanmar, the provisions of the treaty or agreement will apply. Conclusion The new FIL continues many aspects of Myanmar's current regulatory regime for foreign investment, with some important amendments. Myanmar. New Horizons. Issue 3 5

6 Positive changes in the new FIL include a wider range of permitted forms of investment, greater flexibility on the structuring of joint ventures, enhanced tax and investment incentives, improved land rights, increased certainty on employment matters, greater flexibility in foreign currency and insurance matters, and statutory recognition of contractual dispute resolution mechanisms. However, many of the most contentious provisions in the draft FIL have simply been deferred to implementing regulations, including such matters as the foreign/local equity participation ratio that will be permitted for investment in restricted activities, and the initial foreign currency capital requirement that will be required for investment. As a result, there will be a further period of uncertainty for foreign investors until these regulations are introduced. For many of the key elements an investment the FIL gives the MIC the power to determine how the FIL will be applied to a particular investment proposal. Given some of the broadly drafted and ambiguous provisions in the FIL, this leaves the MIC with a wide-ranging discretion as to whether, and the terms on which, an investment will be made. Accordingly, it may take time before we have clarity around the application of the FIL to particular forms of investment or industry sectors. Furthermore, any disposal by an investor of part or all of its interest will require MIC approval, creating further uncertainty for investors around their ability to realise their investment. It is also important for investors to be aware that the restrictions on investment in key sectors of the economy set out in the SOEE Law (as described above) remain in place. Investment in those sectors is only permitted with Government approval. Accordingly, Government policy will continue to determine whether foreign investment is permitted in those sectors and, if so, when and on what terms. For example, although the Government has indicated that foreign investment in the banking sector will not be permitted until a later date, it is expected to announce within the next few months a tender process for up to four new telecommunications licences and a further international bid round for oil and gas blocks (including deepwater offshore blocks). Contacts For further information please contact: Stuart Bedford Partner Linklaters Singapore (+65) stuart.bedford@linklaters.com Wilailuk Okanurak Partner Linklaters Bangkok (+66 2) wilailuk.okanurak@linklaters.com Marae Ciantar Partner Allens Singapore (+65) Marae.Ciantar@allens.com.au Jonathan Bowden Managing Associate Linklaters Singapore (+65) jonathan.bowden@linklaters.com Authors: Stuart Bedford, Marae Ciantar and Jonathan Bowden This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters Singapore Pte. Ltd. All Rights reserved 2012 Linklaters Singapore Pte. Ltd. (Company Registration No C) is a licensed foreign law practice, incorporated with limited liability in Singapore. Linklaters Singapore Pte. Ltd. is affiliated with Linklaters LLP, a limited liability partnership registered in England and Wales with registered number OC Linklaters LLP is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. Linklaters Singapore Pte. Ltd. One George Street #17-01 Singapore Telephone (+65) Facsimile (+65) Myanmar. New Horizons. Issue 3 6