Shaping up: The government is aiming to create an investment-friendly environment

Considered by many as the last economic frontier, Myanmar has been the object of much investor interest, especially following further liberalisation of its foreign investment regime through the passage of the Foreign Investment Law in 2012. At a time when other more developed South-east Asian economies have generally seen a net outflow of foreign direct investment, Myanmar has registered a net inflow of FDI amounting to an estimated $43.6bn as of the third quarter of 2013. This is not surprising, considering the significant investment opportunities in virtually all areas of commerce and industry, from manufacturing, to real estate, energy and power, telecoms and natural resource extraction.

While the delicate transition towards greater openness and democratisation has caused some to take a wait-and-see attitude, large multinational conglomerates have decided to claim first-mover advantage in this nation of 60m consumers. Firms like Unilever, Coca-Cola and Ford Motor Company have established business presences with major investments that have led the McKinsey Global Institute to estimate that Myanmar could receive as much as $100bn of foreign investment by 2030, more than double the current estimate of $43.6bn.

Government Contribution

The government, for its part, has been very active in fostering an environment conducive to foreign direct investment. Apart from updating and liberalising the legal regime for investment, it has allowed foreign participation in activities previously reserved for state entities, such as oil and gas exploration and telecoms.

Along with opening up sectors previously dominated by state-run firms, the government has moved towards developing and expanding its banking sector and financial markets, beginning with the float of the country’s currency, the kyat, in April 2012. Representative offices of foreign banks are now allowed to operate with the approval of the Central Bank of Myanmar and foreign exchange controls have been overhauled, enabling both locals and foreigners alike to deal with foreign currency more freely.

Opening and modernising a long-isolated economy is no easy task, and there will surely be bumps along the road to a system fully integrated into regional and global markets. While acknowledging these obstacles, we can confidently say that Myanmar is assertively pursuing the necessary policies to allow for greater integration and is firmly committed to the process of reengagement.

What follows is an overview of the foreign investment environment of Myanmar, and a discussion of the legal and regulatory framework that underpins the foreign investment system as a whole.

Legal System

Myanmar’s legal system draws from a combination of colonial era English common law, traditional Myanmar customary law and modern legislation. The result is a collection of rules and regulations spanning from the late 19th century through the present day that overlap, and at times, offer contradictory or incomplete guidance. As the country continues down the path of modernisation, so too does its legal system, as more comprehensive legislation is brought forward to supplant, supplement and clarify the existing regime that has governed the nation for the past century.

In 2010 the Union Judiciary Law was adopted to set out the structure and operating guidelines for courts in the nation. The hierarchy of courts begins with the Supreme Court at the top, followed by the high courts of the regions and states, the district courts and courts of self-administered divisions and zones, and at the bottom, the township courts and others specially constituted by law.

A separate system of courts martial has exclusive jurisdiction regarding matters involving military personnel. The Supreme Court holds jurisdiction over cases involving treaties, regional disputes, piracy and other matters as determined by law, while a separate Constitutional Tribunal is responsible for constitutional disputes and vetting laws passed by Parliament. Two classes of attorneys make up the legal practice: advocates who may practice in any court, and high-grade pleaders who are restricted from practice in the Supreme Court but may handle matters in subordinate courts.

The past 60 years have seen several shifts in lawmaking. Until 1954 the Burma Code was the primary source of law, though after a coup in 1962, drafting of new legislation stalled. From 1962 to 1988, when a military regime took power, until the enactment of a new constitution in 2008, only a handful of laws were passed to manage the country’s economic affairs and keep pace with the slow import of new technologies. Since the enactment of the new constitution a burst of legislative activity has occurred as the government works to bring the country up to international standards. Among these laws, one that has had the most immediate effect for business and the economy is 2012’s Foreign Investment Law.

Vehicles For Foreign Investment

Foreign investors who wish to undertake specific business activities in Myanmar may rely on the foreign investment framework available under the Companies Act and the Foreign Investment Law. Through these laws, foreign investors may choose to establish a foreign branch office in Myanmar, incorporate a private limited company, or apply for and secure an investment permit from the Myanmar Investment Commission (MIC), which is also known as an MIC Permit.

Entities Under The Companies Act

A branch office under Myanmar law is considered an extension of its foreign parent company and is a non-resident entity for purposes of Myanmar taxation. It is authorised to engage in revenue-generating activities in Myanmar that are related to the primary business of its foreign parent company.

The registration of a branch office is also necessary for any foreign investors who wish to establish a representative office in Myanmar, as there is no separate concept of a representative office under the existing laws. The scope of business of these branch offices would thereby be limited to non-revenue generating activities such as marketing, liaison services and market research.

On the other hand, and unlike a branch office, a private limited company has a juridical person separate from its shareholders, and is considered a resident entity for Myanmar taxation purposes.

Furthermore, this private limited company may be incorporated as a wholly owned subsidiary of a foreign parent, or it may also have an equity structure with shares held by local ownership. Joint venture structures, therefore, are structures that are very common under the Myanmar foreign investment framework. Moreover, this private limited company may engage in and provide myriad activities and services, though care must be taken to ensure that the scope of business applied for and undertaken are not among those that require an MIC Permit.

All foreign entities seeking to operate in Myanmar, including branch offices and limited liability companies, are required to secure a Permit to Trade as a precondition to their commencement of business. This is in addition to their separate applications for registration with the Companies Registration Office.

This Permit to Trade enumerates the business scope that the branch or company is permitted to conduct in Myanmar and is considered to be the general business licence of the branch or company. The minimum investment capital for both a branch office and a private limited company is $50,000.

It is also possible for applicants seeking the registration of a branch or private limited company to seek the issuance of a temporary registration certificate, which, once issued by the Companies Registration Office, will permit the applicant to operate the business entity while its corresponding application is pending evaluation and approval. The issuance of a temporary registration certificate, however, does not guarantee the eventual approval of the application for registration, and should the application be subsequently rejected, the applicant will thereby be unable to continue business operations.

In any event, any such branch or private limited company allowed to operate in Myanmar, while permitted to engage in commercial operations, does not generally enjoy the concessions and benefits extended to foreign investors under the Foreign Investment Law. For this, the foreign investor must secure an MIC Permit from the MIC.

MIC Investment Permit

While foreign investors establishing a private limited company in Myanmar are free to apply for an investment permit from the MIC, existing regulations and policies have appeared to limit the activities for which an investment permit would be available. These include:

• Investments in industrial, manufacturing or real estate development activities;

• Investments in activities reserved for the state and state-owned economic enterprises (such as telecoms, natural resources and hydrocarbons enterprises), and;

• Investments requiring the long-term use of land. The MIC has also issued a notification that enumerates specific economic activities that are generally prohibited for foreign investment, those that must be undertaken through a joint venture with Burmese nationals, and those that require compliance with certain conditions by the applying foreign investor.

The production and exploration of jade and gem stones, for example, are listed among the activities that are prohibited for foreign investment.

The manufacture and marketing of grain products, confectionary products, malt liquors and purified drinking water must be undertaken through a joint venture with Burmese nationals.

Meanwhile, the importation and distribution of petroleum products and the exploration and production of petroleum and petroleum products require additional approval from the government and the recommendation of the Ministry of Energy.

Apart from these threshold requirements, the MIC will also evaluate all investment permit applications according to certain factors, which include whether the investment will result in a significant level of domestic labour, whether the economic activities will involve the importation and use of heavy equipment or advanced technology, the value that the economic activity will add to the domestic economy and the degree to which the economic activity will uplift the living standards of domestic citizens.

MIC Permit applications that do not sufficiently meet these factors will likely not be granted, and although an applicant having been denied an MIC Permit may nonetheless attempt to establish a private limited company with the Companies Registration Office, the Companies Registration Office may similarly deny such application if in its view the applicant’s intended activities are such that they may only be carried out with the approval of the MIC.

Foreign investors granted an MIC Permit are generally permitted certain benefits and guarantees under the Foreign Investment Law that are not otherwise available to foreign investors registering business entities without such permit. These include:

• An exemption from income tax for five consecutive years from the commencement of commercial operations;

• The opportunity to lease and develop land for a period not exceeding 50 years (renewable for two terms of 10 years each);

• The ability to engage in import and export activities in Myanmar, and;

• A mechanism for repatriation of capital/profits. The Foreign Investment Law also expressly provides that grantees of an MIC Permit will not be nationalised during the term of their investment. While there is no specific rule on the minimum investment threshold for the grant of an MIC Permit under the Foreign Investment Law, the MIC has generally looked to a minimum amount of at least $500,000.

The Directorate of Trade and Company Administration regularly provides information on the investment permit applications that have been granted by the MIC. It is interesting to note that while a significant number of such investment permits have been issued in relation to garment manufacturing enterprises, there now appears to be shift taking place towards other investment activities, such as hotel and tourism development, and fast-moving consumer goods manufacturing.

Trading Restrictions

Even with the registration of a private limited company or the grant of an MIC Permit under the Foreign Investment Law, foreigners are still, and as a general rule, restricted from engaging in any kind of trading activities.

There is currently no specific definition of what constitutes trading activities for the purposes of this restriction, although it is generally understood that these include the importation of goods for purposes of resale, as well as the procurement of local goods for purposes of resale.

Recent government issuances, however, have relaxed this trading restriction, so that wholesale trading activities may now be allowed upon approval from the MIC, the Ministry of Commerce and the state/regional government where the wholesale activity is to be undertaken. Retail activities through supermarkets, department stores and shopping centres are now also allowed with an MIC Permit and a joint venture with Burmese nationals.

In addition, policy exceptions have also been routinely applied by the MIC on a case by case basis, whereby foreign companies operating through an MIC Permit have been permitted to sell and distribute products that such foreign investor has manufactured, in whole or in part, in Myanmar.

The MIC has also been known to allow the sale of specific types of products where such sale is necessary and ancillary to the provision of a service that the foreign company is permitted to conduct.

Dealings With Land

There is, at present, no single piece of legislation that governs land ownership and use in Myanmar. Instead, there exists a patchwork of laws that mainly relate to the type of land regulated, from forest land, farm land, fallow land and industrial land, to name only a few.

Myanmar law does recognise freehold rights that are reserved exclusively for Burmese nationals. These are known as “ancestral lands,” which were granted at the time the country was under British colonial rule. The government, however, no longer grants such freehold interests, and as a result, much of the land held by private individuals is in the form of “grants” from the state or from other private persons. Grant land exists mostly in large cities and towns, including Yangon and Mandalay, and the grant holder is permitted to use the land for a stipulated period of time, in most cases, usually a term of 60 to 90 years. Grant land is transferrable and persons with leasehold interests in such lands may carve out and divest lesser interests.

There is an important limitation on land use relevant to foreign investment to be found in the Transfer of Immoveable Property Restriction Act of 1987, which generally prohibits any sale, transfer or exchange of land to any foreigner or foreign company. Foreigners and foreign companies are also only allowed to lease land for a term not exceeding one year. The Act allows exemptions from these prohibitions if granted by relevant government ministries, when extended to foreign governments, diplomatic missions or other organisations of individuals. For purposes of foreign investment, such exemption is secured through an MIC Permit under the Foreign Investment Law, which allows foreign investors the right to lease land for a term of at least 50 years (renewable for two terms of 10 years each).

Real Estate

Foreign investors intending to engage in real estate development projects such as the construction, development and operation of residential, commercial or office buildings and hotels must generally enter into a joint venture with a Burmese national, apart from securing an MIC Permit for the long-term use of land. It is usual, therefore, that in applying for an MIC Permit for a real estate development project, the foreign investor enters into a joint venture with a Burmese national that has rights over a particular parcel of land for development. The Burmese national may contribute the land to the joint venture company that will undertake the real estate development project.

As an exception to this joint venture requirement, the MIC has clarified that if the construction, development and operation of an office or commercial building are made under a build-operate-transfer scheme with the owner of the land, the operating company undertaking the investment activity in Myanmar may be wholly owned by the foreign investor. The conduct of a hotel business has also been exempted from the joint venture requirement, provided that the hotel is rated by the Ministry of Hotels and Tourism to be at least three stars.

Government-Reserved Sectors

While the majority of economic activities are generally open for investment under Myanmar’s liberalised foreign investment regime, there remain specific sectors that are reserved exclusively for the government and its state-owned enterprises.

These include the exploration, extraction and sale of petroleum and natural gas, postal and telecoms services, air and railway services, banking and insurance services, power generation and distribution, and the cultivation and conservation of forest plantations.

Under relevant Myanmar law, however, the government has the discretion of allowing non-governmental persons, including foreigners, to participate in these otherwise reserved sectors, either through a joint venture with the government, or under specified requirements and conditions.

Approval for foreign engagement in these reserved sectors usually proceeds from a recommendation from the relevant ministry or government-owned entity granted jurisdiction over such reserved sector. For example, for investments relating to the exploration, extraction and sale of petroleum and natural gas, the recommendation of the Ministry of Energy, through the state-owned Myanma Oil and Gas Enterprise, is necessary to secure MIC Permit approval. Similarly, the recommendation from the Ministry of Mines is necessary for the exploration and development of Myanmar’s mineral resources.

The discretion to allow foreigners to participate in what are otherwise state-reserved sectors was precisely exercised by the government in the award of separate telecoms licences to Telenor and Ooredoo, both foreign companies, for the development of Myanmar’s telecoms sector.

Oil and gas blocks have similarly been offered via government tenders to both local and foreign companies, with major industry players such as Shell, ExxonMobil, ConocoPhilips and Chevron/Unocal shortlisted for possible awards for deep-water oil exploration opportunities. Companies awarded concessions will be required to enter into production sharing agreements with the government and, in some cases, with a local partner.

The willingness of the government to open these otherwise reserved industries is an acknowledgment of the limitations of existing government resources in developing these crucial economic sectors, and a recognition of the indispensable role that foreign investors have the potential to play in the development of Myanmar’s overall economy.

Thus, other foreign investors wishing to enter such sectors do have an available avenue through specific government approval, which also involves an investment permit application with the MIC.

Intellectual Property (IP)

IP protection in Myanmar is weak, with a Copyright Act first promulgated in 1914 and no formal laws on protection of trademarks and patents. The currently applicable Copyright Act is limited in scope and only provides protection for original literary, dramatic and artistic works if they are either first published in Myanmar, or if unpublished, are works of a citizen or a person inside Myanmar at the time of creation.

Copyrighted works from other nations are afforded no protection in Myanmar under this system, although a practice of registering aspects of a foreign work through trademark where possible has developed to provide some semblance of protection.

Trademark Ownership

While the country does not currently have any laws that specifically regulate trademarks and their registration, a de facto registration regime has developed through the existing legislation. Via the combined regulations of Section 18(F) of the Myanmar Registration Act (1908) and Direction 13 issued by the Inspector General of Registration, parties may assert their ownership of trademarks by filing a Declaration of Ownership with the Yangon Registration Office of the Settlement and Land Records Department (SLRD).

In addition, trademark owners may publish a “cautionary notice” in an English-language newspaper of general circulation, for the purposes of (i) notifying the public of trademark ownership, (ii) warning the public against infringement, and (iii) enhancing a trademark owner’s claim of ownership in case of court litigation. Publication of the notice is usually repeated every three years.

The registration of trademark with the SLRD and the publication of cautionary notices are not compulsory, though they may be presented as prima facie evidence of trademark ownership.

Registration, therefore, is merely for evidentiary purposes. It does not, by itself, confer any proprietary rights in the mark. Instead, and as recognised by extant rulings of the Supreme Court, prior use of the mark is the prevailing and definitive standard for trademark ownership. Thus, to establish a valid claim to a trademark, the claimant must show the use of the trademark in Myanmar.

There was at one time a Burma Patents and Designs Act; however, it was repealed in 1993 and has not been replaced with any legislation to protect either patents or industrial designs. Notwithstanding the lack of a proper patent protection scheme, patent or invention ownership may still be registered with the Register of Deeds. Through this system a patent holder theoretically may apply for a perpetual injunction under section 54 of the Specific Relief Act against anyone who would violate their patent property rights. Notwithstanding the practice as outlined in theory, the lack of actual patent protection in law and uncertainty regarding the outcome of any request for injunctive relief from the courts results in an altogether unreliable patent protection scheme.

The current system could be described as inadequate for the purposes of protecting the valuable IP of major foreign investors; however, a new IP regime presently being drafted is expected to result in retooled laws for copyrights, trademarks, patents and industrial designs. This massive upgrade is the result of nearly a decade of work to develop laws strong enough to meet Myanmar’s WTO membership obligations, while flexible enough not to stifle development. While the deadline for the new scheme is technically 2021, there is widespread expectation that some, if not all, of the new draft bills may be introduced as early as 2014.

Anti-Corruption Law

Myanmar’s Anti-Corruption Law came into effect in August 2013, replacing the outdated and underutilised Suppression of Corruption Act. Targeting in particular the bribery of public officials, the new law establishes the Commission for the Eradication of Bribery, which has the power to require annual asset reporting by certain officials. Members of the Commission and public officials ordered by the Commission are now required to prepare a list of assets and liabilities in their names and in their family members’ names, to be submitted to the President’s Office. Other powers granted to the Commission include the ability to seize evidence, freeze properties, investigate accounts in financial institutions, and confiscate money and property as part of the investigation process.

Public officials found guilty under the new law face imprisonment of up to 15 years and the confiscation of properties earned through corruption. The law also applies to non-public officials who have assisted public officials in corrupt dealings.

Bilateral Investment Agreements

Apart from a fast-developing foreign investment framework, to further bolster investor confidence in the domestic market Myanmar has also entered into bilateral investment agreements with the Philippines, China, Laos, Vietnam, Thailand, Kuwait and India. The government is negotiating similar investment agreements with Japan and Korea and is expected to conclude such agreements in the near future.

As an ASEAN member Myanmar is also party to various multilateral agreements that aim to develop cross-border trade and investment among ASEAN states. These include the ASEAN Comprehensive Investment Agreement and the agreement to establish an ASEAN Economic Community in 2015.

Myanmar law recognises various dispute resolution mechanisms, including domestic and international arbitration, to resolve investment and other disputes. The country has recently acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which would allow Myanmar courts to recognise arbitral awards made in jurisdictions party to the same convention.

Together with the existing Arbitration Act of Myanmar 1944, the ratification of the New York Convention should give foreign investors an added measure of security in protecting their investment, although the government has yet to enact domestic laws to implement a framework capable of supporting the recognition and enforcement of foreign arbitral awards by the Myanmar courts.

Special Economic Zones

The government has established and is developing special economic zones in Dawei, Kyauk Phyo and Thilawa. These zones are envisioned to provide port facilities and other infrastructure for cargo handling and related services, and, through the Special Economic Zone Law of 2011, provide a venue for foreign investors to locate their industrial business.

Among the incentives available for foreign investors in the special economic zones include an income tax exemption on the proceeds of export sales for the first five years from the day of commencement of production or service. This income tax exemption may be extended at a graduated rate for the next two five-year periods.

Labour & Employment Law

There is no overarching labour legislation or employment code, and a significant portion of labour regulations are found in government notifications and sample employment contracts that are issued from time to time by relevant authorities. As a result, labour authorities are able to assert a fair amount of authority and control in terms of determining and deciding the applicable conditions for employment. Still, there are specific laws that provide some indication of the minimum employment standards.

Among these is the Shops and Establishments Act of 1951, which outlines the maximum hours of work for employees in shops, commercial establishments, establishments for public entertainment and industrial establishments. The Leaves and Holidays Act of 1952 also mandates the provision of casual and earned leave days, and the manner by which they may be availed of by covered employees.

All employees are similarly entitled to social security benefits under the Social Security Act of 1954, where both the employer and the employee are required to remit monthly contributions. Employment disputes are required to be resolved through employer-employee conciliation and arbitration under the Labour Dispute Settlement Law of 2012.

Meanwhile, for foreign investors operating under an MIC Permit, the Foreign Investment Law requires that all unskilled workers be Burmese citizens. Engagement of foreign workers is allowed only for skilled work, provided that for the first two years of commercial operations, 25% of all skilled workers must be Burmese citizens. This percentage increases by 25% every two years, such that by the end of the sixth year of commercial operations, 75% of skilled workers must be Burmese citizens.

The MIC may extend the timeline for reaching these employment quotas in light of knowledge requirements for the industry involved, although there is no specific guidance on what constitutes skilled and unskilled work for purposes of such manpower requirements. For the foreign workers engaged under this MIC Permit, it will also be possible to apply for permits that will allow them to work and remain in Myanmar for the duration of their engagement.

Dealings With Foreign Currency

The promulgation of the Foreign Exchange Management Law in 2012 significantly liberalised the ability of both locals and foreigners to deal with foreign currency. Though the law requires all foreign exchange transactions to occur through authorised banks, at present, all banks in Myanmar have been so authorised. This means that foreign investors may now open both local and foreign currency accounts in any Myanmar bank, maintain foreign currency accounts abroad, and remit foreign exchange abroad subject to the approval of relevant government authorities.

For foreign investors operating under an MIC Permit, in particular, it is permissible with approval from the MIC to transfer or remit abroad foreign currency brought into Myanmar for purposes of the investment. These amounts include net profits, dividends received by shareholders who had brought foreign capital into Myanmar, and amounts receivable upon liquidation of the enterprise.

Apart from remittance of foreign currency by foreign investors operating under an MIC Permit, the Foreign Exchange Management Law also enumerates following foreign currency transactions called “ordinary transferred payments,” and which, according to the law, cannot be restricted, whether or not one is operating through an investment permit:

• Trading and services, and payments for short-term bank loans;

• Interests payable on loan, and net profit accrued from investments;

• Repayments of loan in instalments, or depreciations for direct investments; and

• Remittance of money from local or abroad for family living. Notwithstanding such language, Myanmar banks still generally require the approval of the MIC for any loan repayments, even for those companies that may not be operating under an MIC Permit. The practical effect of this is that foreign investors without an MIC Permit may not be required to submit any intended remittance of principal, interest or profits to the Central Bank of Myanmar for approval. However, the procedure for such approval remains uncertain.

Conclusion

The pace of change remains rapid in Myanmar, with new legislation being passed at an accelerated rate. In terms of foreign investment, major additions are on the horizon, including a longoverdue redraft of the near-century-old Companies Act, which is expected to be completed before the end of 2014. With the approval of the Securities Exchange Law in July 2013, the country is also pressing ahead with plans to open a full-fledged stock exchange, with an intended launch date in 2015.

Presently, the legal framework for investment is being modernised to keep pace with the flurry of new interest. As further investment pours into the country, there is an expectation that legal structures and regulatory professionalism will progress in kind.