Laos Sets Out Rules For Securing Investment Promotion Incentives.
Legal News & Analysis - Asia Pacific - Laos - Corporate/M&A - FDI - Regulatory & Compliance
18 June 2021
Laos has issued important new guidelines on obtaining investment promotion incentives in the country. The Instructions on the Promotion of Investment Incentives concerning the State Land Rental and Concession Fee, which was published in the Lao Official Gazette on May 28, 2021, supplement the Law on Investment Promotion of 2016 by clarifying procedural requirements for general investment requirements, obtaining an incentive certificate, activity-specific requirements, and zone categories for various districts.
The Law on Investment Promotion plays a key role in clarifying Laos’ approval process for investments and business activities. The law provides a list of promoted sectors that can receive certain incentives (e.g., profit tax holidays and exemption from state land rental or concession fees) if they fulfill the law’s general requirements. The incentives can last for 4 to 15 years, depending on the type of promoted activity and the zone in which it is located (i.e., zone 1 for remote areas, zone 2 for developed areas, and zone 3 for special economic zones). Additionally, the Law on Investment Promotion introduced the “incentive certificate,” which is issued upon request when an investment activity is approved for receiving promotion incentives.
However, the Law on Investment Promotion was considered to be very general, and these instructions represent the Lao authorities’ attempt to clarify the law by specifying the types of investment activities eligible for incentives, the procedure for requesting and obtaining an incentive certificate, and other requirements for businesses and investments to thrive in Laos.
According to the investment promotion instructions, legal entities must submit an application for an incentive certificate to the appropriate section of the Ministry of Planning and Investment (MPI), which will coordinate internally and with other governmental agencies, including the Ministry of Finance. If the activity is deemed eligible and all requirements are met, the authorities will issue the certificate within 30 working days in accordance with the following procedure:
A legal entity submits a request for an incentive certificate via the one-stop service at the central or provincial level.
Within 10 working days, the appropriate section of the MPI coordinates with relevant governmental agencies at the central and provincial levels to conduct an on-site inspection of the entity’s investment activity.
The one-stop service will submit its opinion on the matter to the Investment Promotion and Management Committee, which will issue its decision within 15 working days.
If approved, the incentive certificate will be issued within five working days. If the request is rejected, the one-stop service will inform the applicant within two working days.
According to the instructions, large investment projects that have signed a concession agreement with the Lao government, and are subject to a National Assembly resolution on incentives beyond those provided in the Law on Investment Promotion, do not have to request an incentive certificate.
A legal entity that receive an incentive certificate must implement the incentive-eligible activities from its certificate, comply with its sector’s laws and regulations, pay its taxes and other official fees, and report its activity every six months to the MPI, Ministry of Finance, and any other relevant governmental agencies.
The instructions provide that an initial warning will be issued to a legal entity that does not observe the country’s law and regulations. If it does not correct the wrongs in accordance with the warning within 45 working days, its tax incentives may be withdrawn.
The instructions group investment requirements into two categories—general and specific.
All legal entities seeking investment promotion incentives must fulfill the general investment requirements (termed “horizontal requirements” in the instructions). According to the instructions, an entity must invest LAK 1.2 billion (approx. USD 127,000) in one of the promoted sectors, or employ at least 30 Lao technical staff or at least 50 Lao workers with employment contracts of at least one year. In addition, entities must pay up their registered capital, comply with all applicable laws and regulations (including environmental requirements), and fulfill their tax obligations.
Additional specific requirements apply to 108 activities within the promoted sectors in the Law on Investment Promotion, a list of which are detailed in the instructions. The law’s promoted sectors are broad, each encompassing a range of business activities as follows:
High and modern technology applications, scientific research, research and development, use of innovative and environmental-friendly technology, efficient use of natural resources and energy;
Clean and toxic-free agriculture, seed production, animal breeding, industrial plantations, forestry development, protection of environment and bio-diversity, activities promoting rural development and poverty reduction;
Environmentally friendly agricultural processing, national traditional and unique handicraft processing;
Environmentally friendly and sustainable natural, cultural, and historical tourism development;
Education, sports, human resource development and labor skill development, vocational training institutions or centers, production of educational and sports equipment;
Construction of modern hospitals, pharmaceutical and medical equipment factories, traditional medicine production and treatment;
Investment, service provision and development of public infrastructure for urban traffic congestion reduction and residence facilities, infrastructure development for agricultural and industrial production, transportation of goods, transit services and international linkages;
Policy banks and microfinance focusing on poverty reduction for people and communities with limited access to banks; and
Modern commercial centers promoting domestic products and world-renowned brands, fairs for domestic products (industrial, handicraft, and agricultural).
The annex that contains the 108 activities mentioned above also contains the specific requirements for the activities that are subject to them. These are myriad and are often concerned with meeting domestic or international standards—for example:
Factories that process sugar must comply with the ISO 9001 and ISO 14000 standards and be certified as a GMP or HACCP within four years of its date of starting the operation.
Factories that assemble two-wheeled vehicles (e.g., motorcycles) must assemble vehicles in an automated or semi-automated process using technologically advanced machines, which must not be more than five years old from their year of manufacture. The activity must meet ISO 9001 standards issued within four years, and factories must be of the semi knocked down (SKD) type.
As mentioned above, the Law on Investment Promotion offers different promotional incentives based on the location—or “zone”—of the activity, with zone 1 being remote areas with limited infrastructure, zone 2 for areas with better socioeconomic infrastructure to support investment, and zone 3 for special economic zones. The Law on Investment Promotion did not provide further guidance on which specific areas of the country were located in zone 1 or zone 2, and the recently issued instructions clarify this point by listing the districts that fall into each zone.
The instructions strengthen the Law on Investment Promotion by adding clarity and legal certainty to areas of the law that had formerly been left up to the discretion of local authorities. Now, however, the conditions and requirements are confirmed by the recent instructions and are made available to every investor in Laos. This movement toward regulatory consistency is another encouraging step taken by the Lao government to improve the country’s business climate and foster a more welcoming environment for foreign direct investment.
For further information, please contact:
Dino Santaniello, Tilleke & Gibbins