15 August, 2017
The Basics for Doing Business in Myanmar
What is the legal system in Myanmar?
The legal system in Myanmar is based on English common law. Myanmar legislation includes 13 volumes of codified laws enacted between 1841 to 1954, known as the Burma Code, in addition to numerous special laws, notifications, rules and regulations enacted from time to time.
Can a business in Myanmar be 100-percent foreign-owned?
Yes, a foreign investor can establish and register a limited company as 100-percent foreign‐owned, however, there are limitations and restrictions to this general rule. For instance, certain business sectors, such as import/export activities (considered “trading”), are reserved for local Myanmar citizens.
What are the most common business structures in Myanmar used by domestic and foreign investors?
A foreign investor has a number of options for structuring a business entity in Myanmar based on the kind of business activity to be carried out.
The most common business structure used in Myanmar is a private company limited by shares (they include both 100-percent foreign-owned companies and joint venture companies) although other legal forms are permitted.
Companies limited by shares include:
(a). Companies incorporated in Myanmar but with 100-percent foreign ownership (shareholders can be both companies and individuals).
(b). Joint venture companies incorporated in Myanmar between foreign-owned companies or individuals and Myanmar companies or individuals (including state-owned entities).
Both 100-percent foreign-owned companies and joint venture companies are governed by the Myanmar Companies Act (MCA) and/or the Special Companies Act, depending on whether or not the state of Myanmar is involved.
Foreign companies can establish their presence in Myanmar as a branch office (typically with Oil & Gas Companies, Airlines, and Foreign Banks).
A representative office is also permitted (typically with Foreign Banks not operating in Myanmar, Insurance Companies).
Other less common options include establishing a not-for-profit organization, business associations (such as a Chamber of Commerce) company limited by guarantee (with or without share capital) and unlimited company without share capital.
The above legal structures will require registration under the MCA through the Directorate of Investment and Company Administration (DICA) and in some cases with the Myanmar Investment Commission (MIC) under the Foreign Investment Law (FIL).
What are the differences for a private company and a public company?
For a private company:
- The number of shareholders is capped at 50.
- Transfer of shares and public subscriptions of shares and debentures are restricted.
- There must be a minimum of two shareholders and two directors at the time of incorporation.
For a public company:
- There is no cap on the number of shareholders.
- There must be a minimum of seven subscribers at the time of incorporation.
- A list of directors and consent forms must be registered with DICA, in addition to the other documents required at the time of company registration.
How does an investor set up a private limited company? What are the minimum capital requirements?
What are the shareholders’ liabilities?
There are two main government administrative vehicles involved, either alone or together, in the foreign investor’s establishment and registration of its limited company. One entity is the DICA, which is the government agency in charge of registering juristic entities. If the applicant does not wish to seek any preferential tax or customs duty treatment, then application is made directly with DICA, and except for specific licensing requirements, no other government agency’s involvement is required.
Conversely, if the applicant wishes to try to obtain preferential tax and customs duty‐free treatment, then they would also submit a proposal to apply for an investment permit (referred to as an ‘MIC Permit’, which offers one‐stop processing where specific, separate Ministry approvals and licenses are also needed. A third way is to establish a company in a special economic zone.
A private limited company in Myanmar is required to have at least two directors and two shareholders (the shareholders may be related, and the second shareholder only need to hold 1 share).
Shareholders and the directors may be the same persons and appointment of local shareholders or directors is not necessary (at this time, but the concept is being considered). The capital structure requirements are:
- Shares to be issued with par value in local currency (Kyat) or United States Dollar (USD).
- The issued and paid-up share capital is the local currency equivalent Kyat of USD50,000 or USD50,000 for a services company and local currency equivalent Kyat of USD150,000 or USD150,000 for a manufacturing company.
- The issued capital brought in is the same as paid-up capital, 50 percent of which is to be brought into Myanmar before the commencement of business operation and the rest into the country within five years.
How long does it take to register a private limited company? Is there a “onestop-shop” system to make the process easier?
What are MIC permit incentives?
A foreign investor may want to consider obtaining an MIC Permit, which would allow a foreign investor to benefit from certain investment incentives available under the FIL. An MIC Permit is not mandatory for operating a business in Myanmar, but companies with MIC permits are entitled to incentives provided for in the FIL. Key incentives include:
Investment Protection. The FIL guarantees that a company operating with an MIC Permit under the FIL will not be nationalized during the permitted period. There is also a further guarantee that investments with an MIC Permit will not be terminated before the expiry of the term of the MIC permit without sufficient cause.
- Tax Incentives. Income tax holiday is for a period of five years, inclusive of the year the enterprise begins operations. If it is in the Myanmar public interest, this five-year period may be extended depending on the success of the investment. The MIC may also grant one or more of the following exemptions and reliefs:
- Exemption from customs duty and/or other internal taxes on imported raw materials within the first three years of commercial production.
- Exemption or relief from income tax on profits of the business kept in a reserve fund and reinvested in the business within one year after the reserve is made.
- Right to deduct depreciation from the profit after calculation of depreciation with regards to machinery, equipment, building or other capital assets used in the business at rates set by Myanmar.
- Relief from tax on up to 50 percent of the profits accrued from the export of goods produced in Myanmar.
- Right to pay foreign employees’ income tax at the rates applicable to citizens residing within the country.
- Right to deduct from assessable income the expenses incurred with respect to necessary research and development carried out within Myanmar.
- Right to carry and set-off losses.
- Right to carry forward and set-off any losses incurred within two consecutive years following the expiry of the five-year tax holiday, for three consecutive years.
- Exemption or relief from customs duty and/or other domestic taxes on imported machines and other equipment used during the period of construction of the business.
- Exemption or relief from commercial tax on the goods produced for export.
- Right to Transfer Foreign Currencies. A foreign investor has the right to transfer abroad the types of foreign currencies set out below:
- Foreign currency entitlement of the person who brought in the foreign capital.
- Net profit after deducting all taxes and reserve funds from the person who brought in the foreign capital.
- Foreign currency permitted for withdrawal by MIC, which may include the value of assets on the winding-up of business.
Furthermore, a foreign employee can transfer his salary and lawful income after deducting taxes and other living expenses incurred domestically.
- Right to Enter into a Long-Term Lease. A foreign-owned company without an MIC Permit is only allowed to enter into a lease agreement not exceeding one year. With an MIC Permit, subject to MIC approval, a foreign investor may be permitted to lease or use land for an initial period of up to 50 years, which may be extended for two further periods of 10 years each.
- Regime for share transfer. The FIL and its implementing regulations set out provisions on transfer of shares, and with the approval of MIC, a foreign investor is allowed to transfer shares to another foreign investor as well as to a Myanmar citizen. (Expect to wait six months to obtain an MIC Permit).
Can foreign-owned companies enter into a long-term lease agreement to lease land in Myanmar?
At present (although this is being discussed in Parliament) A foreign-owned company without an MIC Permit is allowed only to enter into a lease agreement for a term not exceeding one year.
Can a foreign investor enforce an arbitral award in Myanmar?
Yes, but this is yet to be tested in Myanmar courts. On 5 January 2016, the Myanmar Union Parliament adopted a new Arbitration Law (Union Law No. 5/2016) (the 2016 Arbitration Act). This provides a domestic legal framework to fully implement and comply with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the New York Convention), which Myanmar signed and ratified in 2013. Under the New York Convention, arbitral awards issued in a country party to the New York Convention should be automatically recognized and enforceable in other countries that have signed the same, subject to certain, limited defences. The 2016 Arbitration Act, which is perceived as a positive step toward encouraging foreign investment in Myanmar, will replace Myanmar’s Arbitration Act of 1944, which laid out a framework for domestic arbitration but not international arbitration. Despite the passage of the 2016 Arbitration Act, however, additional steps still need to occur for a smooth enforcement of international arbitration awards, such as Myanmar courts updating and/or introducing new rules and procedures and training judges about the process of enforcing such awards.
What are the tax considerations for companies?
Myanmar resident companies are taxed on their worldwide income. This does not apply to companies registered under the FIL, which are not subject to taxes on foreign income. Non-resident companies are taxed only on income from sources within Myanmar. In general, the Myanmar tax structure can be classified into four categories:
(1). Taxes levied on domestic production and public consumption, including excise duty, license fees on imported goods, state lottery, taxes on transport, commercial tax and sale proceeds of stamps.
(2). Taxes levied on income and ownership, including income tax and profit tax.
(3). Customs duties.
(4). Taxes levied on utility of state-owned properties, such as taxes on land; water tax; embankment tax; and taxes on the extraction of forest products, minerals, rubber and fisheries. Income Tax From 15 March 2012, companies operating under the FIL and those incorporated under the Companies Act are subject to a reduced flat tax rate of 25 % of net profits.
Foreigners and foreign organizations are classified into “resident” and “non-resident” foreigners for income tax purposes. A resident foreigner is:
(a). For an individual, a foreigner who lives in Myanmar for not less than 183 days during the income year.
(b). For a legal entity, a company or branch formed under the MCA or any other prevailing Myanmar laws.
(c). For an association of persons other than a company, an association where the control, management and decision making of its affairs are situated and exercised wholly within Myanmar.
(d). Any enterprise or individual operating under the FIL.
Withholding Tax Regime
Payments on income, such as interest, royalties and on contracts, are subject to withholding tax. There is no withholding tax on dividends, repatriation of branch profits and proceeds from sale of shares and stocks.
Type of Income: Dividends
Type of Income Rate applicable to resident recipients: 0
Rate applicable to non resident recipients: 0
Royalties from use of licenses, trademarks,
patent rights, etc.
Payments for procurement and services under contracts, agreements, other form of agreements for state organizations, local authorities, co-operatives, partnerships, companies and entities formed under any existing laws
Payment for procurement and services under contracts, agreements, other form of agreements for foreign entrepreneurs or foreign companies
There is no VAT system in Myanmar, but rather a commercial tax. Commercial tax (may vary but is generally 5%) is turnover tax levied on goods either domestically produced or imported. It is also levied on services, such as transport of passengers, entertainment, trading, operation of hotels, lodging and enterprises engaged in the sale of foods and drinks.
For goods and services supplied in Myanmar, commercial tax is imposed at the time of supply. For the import of goods, commercial tax is collected by the Customs Department at the point of importation in the same manner that customs duties are collected. Exemption from commercial tax is available if this is considered appropriate by the relevant authorities, particularly as an incentive for a newly established business and for exports. An exemption will be granted only on a case-by case basis.
With a few exceptions (for instance this will be exempt for up to three years if having an MIC Permit), all imported goods are liable to customs duties. As for exports, tax is levied on export of a few commodities, namely: rice and rice flour, rice bran, rice dust, oil cakes, pulses and cereals, bamboo and raw hides and skins.
Permanent Establishment Risk
Current practice is that only income earned within Myanmar is subject to tax, either at the resident tax rate or non-resident tax rate. From a corporate entity perspective, we are not aware of any case where the tax authorities have assessed additional income taxable as a result of a permanent establishment within Myanmar.
Double Taxation Agreements
Myanmar has double taxation agreements (DTAs) with the United Kingdom, Singapore, Malaysia Vietnam, Korea Republic, India, Thailand, Bangladesh, Indonesia, South Korea and Lao PDR. Under the Myanmar Income Tax Law, a DTA must be notified before it is to override the provisions of the tax law. Currently, only the UK tax treaty has been notified in accordance with the requirement of the tax law (DTAs with India, Korea Republic, Malaysia, Singapore, Thailand, the United Kingdom and
Vietnam are notified on the Inland Revenue Department website). Thus under domestic law, application of the relevant DTA, with the exception of the UK DTA, is at the discretion of the tax authorities. Therefore, the investor may wish to confer with the Myanmar tax authorities before any transactions or arrangements are implemented.
What are some employment law considerations for investors?
- Myanmar has no single piece of uniform employment legislation. The relevant laws and regulations are spread across a variety of different pieces of employment legislation and notifications that are sector-specific.
- Myanmar employment laws regulate relevant issues associated with: labour relations, work hours, minimum wages, child and female labour, overtime, severance pay, workers’ compensation, social welfare, holidays and leave.
- Template employment contracts as prescribed by the Ministry of Labour stipulating standard terms and conditions are required to be submitted to the relevant local Township Labour office.
- In our view, Myanmar’s employment laws are more employee-friendly than employer-friendly. Ensuring compliance with the myriad of Myanmar’s complex employment laws requires significant assistance to navigate the investor in the right direction. Therefore, any investor wishing to employ staff in Myanmar should consider seeking the engagement of skilled on-the-ground legal counsel.
- It is still the practice that if individuals enter and exit on business trips and as long as they are paid offshore, they are unlikely to be subject to tax in Myanmar. If they work in Myanmar for a Myanmar entity, then they would be subject to tax, although the actual legal position on the tax liability is unclear.
- Employment income is taxed at progressive rate of 0% to 25%.
What common problems may be encountered by foreign investors wanting to do business in Myanmar?
Although Myanmar’s recent political and economic reforms have been rapid and significant, doing business in Myanmar still has its challenges. Investors should be prepared to deal with poor infrastructure, in terms of transport, telecommunications and utilities supply. Improvements to the country’s infrastructure will take time.
- Legal system
As Myanmar gains speed in its reform process, many draft laws are pending consideration by Myanmar’s Parliament. Lawyers are still eagerly awaiting the passing of the new Companies Act. Myanmar is in the process of developing its legal system, and one would likely need to prepare for changes as legislation is being adapted. In addition, investors should note that implementation is not a proven process, and it will take time for the regulations to come into effect.
- Financing issues
Companies involved in sizeable projects should be prepared to finance their own investments, as there are limited project financing options in the country. The regulatory framework does not always provide offshore private or multilateral financiers with the option to take and perfect security. In this regard, difficulties involved on project financing to date mainly revolves around Central Bank of Myanmar and MIC approval (for companies with a MIC Permit) of the loan facilities. Challenges persist in perfecting security interests to the satisfaction of the offshore private or multilateral financiers.
- Property ownership verification issues
There is no official land titles register or electronic database, making it challenging for investors to accurately determine the ownership of privately-held land plots. When local owners sell land, they often do not change the name of the title deed holder in order to avoid payment of tax. Therefore, local owners rely primarily on legal contracts that state the transfer of land ownership after a sale. This could be confusing for investors.
There are concerns on transparency when dealing with the Government in terms of public tendering. In addition, there are corruption issues inherent when dealing with certain department, division, or sub-department of the Government. Transparency remains a large issue in the procurement as well as administration of conducting business in Myanmar.
Meetings with any Ministry, department, division, or sub-department of the Government will generally take place in Nay Pyi Taw. Aside from MIC and DICA, which have offices in Yangon, the Government principal offices are located in Nay Pyi Taw.
Meeting request typically are requested in letter-form, hard-copy originals must be sent to the relevant authority to arrange the meeting. Email communication remains uncommon in practice.
- Patience Required
Myanmar’s recent political and economic reforms have been rapid and significant, paving the way for foreign investments into the country, however, this does not mean that developing a large scale power project and doing business in Myanmar is not without its challenges. Investors must be prepared to deal with the current challenges of poor infrastructure, in terms of transport, telecommunications and utilities supply. Improvements to the country’s infrastructure will take
It is not uncommon when visiting the offices of the Government in Nay Pyi Taw for meetings to be cancelled, delayed, or postponed entirely. In addition, investors may experience long wait times from the original scheduled meeting time. We suggest patience to all investors when visiting the Government, as things rarely go as planned, and this is understandably so, given the limitations and challenges the Government constantly faces as it gradually moves forward with Myanmar’s transformation from the dark to the light.
For further information, please contact:
Krishna Ramachandra, Partner, Duane Morris & Selvam
See our full Doing Business In Myanmar Report via this link. https://www.investingmyanmar.com