Recent reforms to Myanmar's legal framework and updated rules for investors

In 2017 the Myanmar government continued its efforts to update and streamline the country’s legal framework. The long-awaited Companies Law has been enacted and is expected to greatly modernise the corporate regulatory regime, bringing it in line with international best practices.

The Myanmar Investment Rules (MIR) of 2017 have also been issued, implementing the Myanmar Investment Law (MIL) of 2016. In addition, there have been several further updates to a number of laws and regulations, which, taken altogether, constitute a legal environment that is increasingly hospitable to foreign investors and growing domestic businesses.

Foreign Investment 

The foreign investment framework in Myanmar comprises the Myanmar Companies Law (MCL) of 2017, the MIL, the MIR and the Special Economic Zone (SEZ) Law of 2014. Which of these laws will apply to a given foreign investor depends on the specific business activities they intend to undertake in the country.

Under these laws, foreign investors can opt to establish a branch office in Myanmar or incorporate a private limited company, obtain a Myanmar Investment Commission (MIC) Permit or MIC Endorsement from the MIC, or obtain an investment permit, also known as a SEZ Permit, from the relevant Myanmar SEZ Management Committee.

The New Companies Law

The most prominent legal update in Myanmar in 2017, not least from an investment perspective, was the recent enactment of the MCL, replacing the post-centennial Companies Act of 1914. It is not yet clear how and when the provisions of the MCL will be implemented by the regulators in lieu of the Companies Act. It is speculated that it will be deferred until the planned electronic platform goes live, which is expected to take place by August 2018.

A notable change for foreign investors is the way in which a foreign company is defined. Under the MCL a company will only be considered a foreign company if:

• It is a body corporate that is incorporated outside Myanmar; or

• It is a body corporate incorporated in Myanmar, but more than 35% of its issued share capital is directly or indirectly owned by foreigners. As such, it should now be possible for a foreigner to obtain shares in a local company without changing its nature as Myanmar-owned, provided that this 35% threshold is not exceeded. This rule thus allows foreign companies abiding by the restriction to enjoy the same privileges as if they were wholly Myanmar-owned firms, which includes participating in nationalised sectors such as banking.

Under the MCL, the requirement that a company have both articles of association and a memorandum of association has been dispensed with. Instead, the company shall have a constitution that serves as a single constituent document for such entity.

The Companies Act provided that a branch office of a foreign company is considered an extension of that company and is thus a non-resident entity for the purposes of Myanmar taxation. The MCL no longer includes the term branch office. Instead, the designation of overseas corporation is introduced, which refers to a body corporate incorporated outside Myanmar that may be registered under the MCL.

The MCL further sets out a range of detailed requirements and specifications applying to overseas corporations, including for registering the overseas corporation, using of the overseas corporation’s name, preparing and submitting annual filings, and the process by which an overseas corporation may cease to conduct business in Myanmar.

There has been no separate legal concept of a representative office under Myanmar law, except in relation to foreign banks and insurance companies. The MCL does not alter this position.

The MCL also contains a detailed list of activities that when taken in isolation are insufficient for an overseas corporation or other body corporate to be deemed to be conducting business in Myanmar, thereby dispensing with the requirement of registration designated under the MCL. These activities include: holding meetings of directors or shareholders, or carrying out other activities concerning the management of the corporation’s internal affairs; maintaining a bank account; or investing funds or holding property in Myanmar.

Under the MCL a company is now permitted to have a sole director and a sole shareholder, unless it is a public company, in which case it must have at least three directors. It is also a requirement that any company registered under the MCL have at least one director who is an ordinary resident in Myanmar, which means a resident for 183 days of each relevant 12-month period.

Until now, branch offices and private limited companies were required to secure a form of permit to operate. A completed form of permit describes the scope of a branch office or private limited company’s business activities, and is considered to be the business licence of the branch or company. Under the MCL, it is no longer an express requirement that a foreign company obtain a form of permit, whether in respect of an overseas corporation or otherwise.

Share Issuances 

The MCL introduces detailed provisions relating to various classes of shares and share issues. Notably, shares are no longer deemed to have a nominal or par value. This means that the share capital of a company is determined based on the actual amount to which a shareholder subscribes. Contributions-in-kind for share capital and other securities are now also expressly permitted.

There are detailed requirements that must be met by a company that accepts non-cash consideration in exchange for the issuance of shares or other securities. The list of requirements includes determining the present cash value of the consideration and recording the basis for assessing that cash value. The present cash value must not be less than the amount to be credited for the issuance of shares, as resolved by the company’s board of directors.

Another update under the MCL is that a shareholder is now entitled to bring a derivative action on behalf of a company as long as the court determines, among other things, that the company was unlikely to bring the action itself, and that the shareholder is acting in good faith. There are also more expansive director’s duties, including, among others, the duty to act with care and diligence, the duty to act in good faith in the company’s best interest and the duty to avoid reckless trading.

Solvency Test

The MCL also introduces a solvency test threshold that a company must prospectively determine and meet immediately after one of the following actions is taken: redeeming redeemable preference shares; paying dividends; undertaking a reduction in share capital; undertaking a share buyback; or providing financial assistance. The solvency test requires that at the time of assessment a company should be able to pay its debts as they become due and payable, and that the company’s liabilities do not exceed its assets.

Lastly, the MCL bestows on companies the ability to grant mortgages and charges, which may also be over immoveable property. The Transfer of Immoveable Property Restriction Act (TIPRA) of 1987 generally prohibits the sale, transfer or exchange of land to a foreigner or foreign company. However, under the MCL, TIPRA is not taken to apply any restriction, nor to be breached, by the grant of a mortgage or charge under these provisions, thus giving way to a potential regulatory grey area.

The same exception to TIPRA applies in the exercise of any rights of the mortgagee or chargee to realise the value of the property that is secured by the mortgage or the charge. It should be noted, however, that the MCL also provides that its provisions “relating to foreign companies shall not affect the operation of any provision of the [TIPRA].” Considering that TIPRA restrictions on foreign companies also include the exercise of any rights of the mortgagee or chargee to realise the value of the property secured by the mortgage or charge, it is unclear as of the time of writing how the relevant authorities will implement these provisions.

Entities that were registered under the Companies Act, and now under the MIL, are subject to investment protections without having obtained any additional permits or approvals from the MIC. Such investment protections include equality of treatment between domestic and foreign investments, and non-nationalisation or non-expropriation, subject to certain conditions and payment of appropriate compensation.

Investment Permit from the Mic 

The former investment scheme had involved separate processes for local investors and foreign investors. Such investments were governed by the Citizen Investment Law of 2013 and the Foreign Investment Law (FIL) of 2012, respectively. Under the MIL, enacted in 2016, both local and foreign investors must now apply for an MIC Permit from the commission if the investment activity corresponds with one of five restricted categories.

The first restricted category is business activities which are strategic for Myanmar, and includes:

• Investments with an expected investment value exceeding $20m made either in technology, transport infrastructure, energy infrastructure, building urban development infrastructure and new cities, extractive/natural resources or the media sector, or otherwise made pursuant to the grant of a concession, agreement or similar authorisation by a government authority;

• Investments in a border region, conflict-affected area, or conducted across the national borders, which are made by a foreign investor, or otherwise by a Myanmar citizen investor with an expected investment value exceeding $1m;

• Investments that will be conducted across the states or regions of Myanmar; and

• Investments that include the right to occupy or use more than 1000 acres, whether made primarily for agriculture-related purposes or otherwise. The second restricted category requiring an MIC Permit is any large capital investment having an investment value exceeding $100m.

The third restricted category is any investment taken to have a large potential impact on the environment and local community, such as if the investment: (i) has been or is likely to be classified as a project falling within the purview of Myanmar’s environmental laws and regulations; or (ii) is located in a protected or reserved area, a major biodiversity area, or any other specified area. There are also a range of considerations relating to the size of the land to be used or occupied, land that is subject to a claim, or land likely to require expropriation, among other things.

The fourth category comprises business activities that will use state-owned land and buildings.

The fifth category comprises business activities designated by the government, which will require the submission of a proposal to the MIC.

The MIC has clarified through Notification No. 15 of 2017 a further list of investment activities that are either prohibited or otherwise restricted. These activities are divided into the same categories of restricted investment as specified in the MIL, being:

• Investment activities eligible to be carried out only by a union;

• Investment activities that are not allowed to be carried out by foreign investors;

• Investment activities permitted only in the form of a joint venture with any citizen-owned entity or any Myanmar citizen; and

• Investment activities to be carried out with the approval of relevant ministries. However, if a firm is covered under Notification No. 15, obtaining an MIC Permit may not be required. A company can also apply for an MIC Endorsement – for example, if an investment activity is to be carried out through a joint venture – provided that the conditions in the notification are satisfied.

Investment Endorsement from the Mic 

The MIL provides an alternative investment permit for a foreign investor that is not required to have an MIC Permit, but would like to enter into a long-term land lease or enjoy tax benefits and exemptions. This form of approval is called an MIC Endorsement, the procedural details of which are set out in the MIR. A grantee of an MIC Endorsement may apply for land use rights and/ or tax benefits or exemptions.

In terms of land rights authorisation, a foreign company that leases land from an entity that has rights granted to it under the FIL of 2012 can benefit from those rights without securing separate authorisation, as was the case previously. The authorisation stipulated in the FIL allows for an initial 50-year land lease, extendable for two period of 10 years each.

The MIC has also clarified, through Notification No. 84 of 2017, that existing businesses that have not previously sought an MIC Permit or an MIC Endorsement may now apply for the latter. Although such companies may not be eligible for an income tax holiday, they will be permitted to apply for the following benefits conferred under an MIC Endorsement:

• Exemptions or relief from Customs duty or internal taxes on the importation of raw materials or partially manufactured goods conducted by export-oriented business for the purposes of the manufacture of products for export;

• Reimbursement of Customs duty or other internal taxes on imported raw materials and partially manufactured goods which are used to manufacture products for export; and

• Exemptions or relief from Customs duty or other internal taxes on machineries, equipment, instruments, machinery, spare parts, and other materials and parts that are imported as part of an investment that is increasing in volume, with the approval of the MIC.

Further Mir Provisions 

The MIR clarifies the rules and assessment procedure that businesses must undertake when applying for tax incentives. Notably, investments in a promoted sector are eligible for an income tax exemption. The MIC has issued, by Notification No. 13 of 2017, the list of promoted sectors, which include agriculture, livestock, city development, construction, power generation, production of renewable energy, telecoms, education, health care, IT, and hotels and tourism. The extent of the exemption depends on the location of the investment, with remote and rural regions benefitting from a longer income tax holiday.

Furthermore, the MIC has, by issue of Notification No. 10 of 2017, designated three zones for investment. The least-developed regions are categorised as zone 1; regions that are moderately developed have been designated as zone 2; and developed areas occupy zone 3. The income tax holidays available are for seven, five and three years, respectively.

The MIR also offers some helpful clarifications. For example, if an investor makes an investment in another business entity or investment vehicle that already holds an investment permit, that investor is not required to obtain an additional permit.

The MIR authorises the provision of a one-stop service centre to fulfil a broad range of functions for investors. The MIC has, through Notification No. 70 of 2017, provided a basis for a reorganised one-stop service centre, which now officially performs the following duties: providing guidance to investors on the implementation of their investment, accepting proposal applications that are required by any relevant laws on behalf of government authorities that have assigned officers to the one-stop centre, and accepting requests for information.

The MIR also sets out a series of comprehensive annual reporting requirements and mandatory insurance requirements for investors holding an MIC Permit or are otherwise subject to tax incentives under an MIC Endorsement. The insurance policies that need to be taken out by the company – when relevant to the nature of the business being conducted – include property and business interruption insurance, engineering insurance, professional liability insurance, professional accident insurance, marine insurance and workmen compensation insurance.

Special Economic Zones 

Foreign investors may also find it advantageous to locate their business operations within one of Myanmar’s SEZs, which requires an SEZ Permit. Such a permit can entitle foreign investors to certain benefits and guarantees. This process is governed by the SEZ Law, and the entitlement of a foreign investor to benefits and guarantees hinges upon whether the foreign investment is located within a free zone area, is categorised as a free zone business, is located within a promotion zone area or is categorised as a promotion zone business.

The SEZ Law defines free zone as an area deemed outside the country that is entitled to be exempted from Customs duty and other taxes relating to goods in, and imported into, the SEZ. Free zone businesses are entitled to benefits that include an exemption from income tax for the first seven years from commencing commercial operations, the entitlement to lease and develop land for a period of up to 50 years (renewable for an additional 25 years), permission to engage in import and export activities in Myanmar, and a mechanism for repatriating profits and capital.

A promotion zone is defined as the internal taxation area situated within the SEZ and includes other activities which are not the activities of a free zone. Promotions zone businesses receive an exemption from income tax for the first five years from commencing commercial operations and are also permitted to lease land with the SEZ for a period of up to 50 years, which is renewable for a further 25 years. There are additional benefits, such as a limited exemption from Customs duties and other taxes, as well as the aforementioned profit and capital repatriation mechanism.

As of March 2017 the Insurance Business Regulatory Board can, under Notification No. 2 of 2017 of the Ministry of Finance, issue provisional permits to foreign insurance companies, allowing them to operate within any of the SEZs. However, there is a relatively high threshold for foreign insurance companies seeking a provisional permit. Such company must have been operational for at least 10 years and must have total assets or paid-up capital of $1bn.

Trading Restrictions for Foreigners

Even upon the registration of a private limited company or the receipt of an MIC Permit or MIC Endorsement, foreigners are generally restricted from engaging in any trading activity. While a specific definition of trading activity is not provided under Myanmar law, it is understood to include the importation of goods for the purposes of resale and the procurement of local goods for the purposes of resale.

The authorities have, however, routinely provided exceptions to this policy and have permitted a foreigner to engage in trading activity under specified circumstances. Such policies are separately issued and applied by the MIC in relation to entities operating under an MIC Permit or MIC Endorsement; by the Thilawa SEZ Management Committee for entities operating in the Thilawa SEZ; and by the Ministry of Commerce for foreign investment companies that are registered under the Companies Act, but do not benefit from any additional investment approvals.

Generally speaking, the MIC permits foreign companies operating with an MIC Permit or MIC Endorsement to sell and distribute products that they have wholly or partially manufactured in Myanmar.

There has been a further relaxation in 2017 by the Ministry of Commerce on the trading restrictions that apply to foreigners’ businesses. Formerly, foreigners were allowed to engage in import, export and retail or wholesale trading activities with respect to select products if their participation was part of a joint venture with a Myanmar partner.

The relevant products were pesticides, seed, chemical fertilisers, medical equipment and construction materials. The Ministry of Commerce has, by issue of Notification No. 36 of 2017, now allowed foreign-owned companies to engage in trading activity in relation to these products without the requirement of a local joint venture partner. OTHER OPTIONS FOR TRADING/RETAIL ACTIVITY: If the intended business activity of a foreigner does not fall within one of the aforementioned trading exemptions, this does not preclude them from participating in the retail market in Myanmar using alternate legal contractual structures. Such alternate structures include licensing and distributorship arrangements entered into between the foreigner and qualified 100% Myanmar-owned entities.

Under such an arrangement, the local entity is the party to undertake the relevant trading activity. This means the local entity imports the foreigner’s goods and directly engages in sales and distribution of such goods in the domestic market.

As such, the foreigner’s role is narrowed to engaging as a contracting party to a licensing or distribution agreement. However, the foreigner is permitted to enter into a provision of service arrangement with a qualified Myanmar entity to assist with the marketing of its products and to promote their sale. However, such an arrangement must be structured to avoid the impression that the foreign party is using the formal structure of a marketing agreement to directly or indirectly engage in trading activity.

Land Laws 

Land law reform remains on the agenda in Myanmar. In the meantime, there is as yet no centralised legislation governing land ownership and use. Instead, there is a collage of generally land-specific laws. This includes laws relating to farm land; forest land; vacant, fallow and virgin land; and industrial land, among others. The concept of freehold land is recognised in Myanmar’s legal framework, however, such land is reserved for citizens and there is a relative paucity of it. Freehold rights apply only to “ancestral lands”, a concept which is a holdover from colonial times.

Freehold rights are no longer granted by the government, and much of the landholding of private individuals is by grant from the state or from other private persons. Most grant land is concentrated in the larger cities and towns, such as Yangon and Mandalay. Under the grant, the grantee is permitted use of the land for a specified time period. The majority of grants have a term of 60 to 90 years. Rights in grant land are transferable and may be divested. An interest in grant land may also be renewed an unlimited number of times.

From a foreign investment perspective, a key restriction comes in the form of the TIPRA. The TIPRA prohibits sale, transfer or exchange of land to a foreigner, which includes foreign companies. Further, foreigners are prohibited from leasing land for a period longer than one year. The TIPRA does permit exemptions to these restrictions if they are granted by the relevant government ministry.

These exemptions apply when extended to foreign governments, diplomatic missions or other organisations of individuals. With respect to foreign investment, such exemptions may be secured through the grant of land use rights to the holder of an MIC Permit or MIC Endorsement under the MIL, or through a SEZ Permit under the SEZ Law, each of which gives foreign investors the right to lease land for a term of at least 50 years for the initial term.

Sectors Reserved for the Government 

Certain sectors still remain off-limits to foreign investors, as they are traditionally reserved for the Myanmar government and state-owned enterprises. Such sectors include the exploration, extraction and sale of petroleum and natural gas, postal and telecoms services, pilotage and air navigations services, power generation and distribution, and the cultivation and conservation of the country’s forest plantations.

However, the government has the discretion to allow non-governmental parties, including foreigners, to take part in some of these otherwise reserved sectors. This can take the form of a joint venture with the government or under certain requirements and conditions specified by the government. Foreign engagement in the reserved sectors is usually instigated by issue of a recommendation by the relevant ministry or state-owned entity, which has jurisdiction over the reserved sector in question, as well as an investment permit from the MIC.

Petroleum Sector Development 

August 2017 saw the enactment of the Petroleum and Petroleum Product Law (PPPL). The PPPL pertains to a range of fuel sources, including liquid petroleum gas, liquefied natural gas and compressed natural gas. The PPPL governs both importing to and exporting from the territory of Myanmar, but excludes inter-Myanmar distribution from the respective definitions of import and export activities.

The PPPL confers wide-ranging powers on the Ministry of Electricity and Energy (MoEE). These include the authority to set terms on imports and exports, as well as set the periods for licence applications, and the power to confiscate unlicensed products. The MoEE also has the power to enter any commercial place where liquefied natural gas is being used to monitor whether it is being stored and used correctly. The PPPL provides for the formation of a supervisory committee with extensive powers to conduct the inspections and enforce the provisions of the law.

Financial Rules & Regulations 

In March 2017 the Central Bank of Myanmar (CBM) issued a regulation on credit information reporting systems. This regulation is intended to provide for the establishment of credit reporting companies, such as credit bureaus. A formalised market for lending has yet to take hold in Myanmar, and there is, at present, only a very limited mortgage market. The establishment of a credit bureau would be a positive step towards shifting this situation.

The central bank has also proven eager to set tighter regulatory requirements on banks. By issue of Notification No. 18 of 2017, the CBM has limited the amount of exposure that a banking company under CBM licence is permitted to take on. Under this ruling, a bank is not permitted to take on financial exposure constituting, in aggregate, a liability of more than 20% of the core capital of the bank. This limit applies to any financial exposure taken on in respect to a person, a single counterparty, or a group of connected counterparties.

Under the Financial Institutions Law of 2016, core capital is specified to include permanent shareholders’ equity, capital grants and disclosed reserves, goodwill, pre-operating expenses and prepaid expenses, deferred taxes, capitalised leasehold rights and any other intangible assets.

Furthermore, by issue of Notification No. 19 of 2017, the CBM has mandated that banks maintain a minimum liquidity ratio of 20%. The banks are obligated to calculate their daily liquidity ratio position and, at the start of each succeeding week, report their weekly average in a supplied format to the CBM. Failure by a bank to meet its minimum liquidity ratio may render it liable to administrative penalties under the Central Bank of Myanmar Law.

These moves represent a positive shift toward greater fiscal regulation and a more formalised banking sector. This effort should provide foreign investors greater confidence in their interactions with Myanmar’s financial institutions.

Tax Update 

The yearly update of the Union Tax Law (UTL) came into force on April 1, 2017, which was the beginning of the 2017/18 Myanmar fiscal year. The corporate tax rate remains at 25% under the UTL, however, newly established small and medium-sized enterprises (SMEs) that have net profits under MMK10m ($7640) during the first three years of business – including the year of commencement – are exempt from income tax. Further, any income tax is assessed only on income that SMEs earned exceeding that threshold.

A change to the Myanmar fiscal year was recently approved by the Union Parliament. Commencing in FY 2018/19, the new fiscal period will run from October of each year to the following September. This is resulting in a six-month fiscal year for changeover that will occur between April 1, 2018 and September 30, 2018.

Labour & Employment

After several substantive legislative enactments throughout 2016, it has been a comparatively quiet period for labour law advancements in Myanmar. One recent significant update has been the issue by the Ministry of Labour, Immigration and Population of a revised Standard Employment Contract Template (SECT) under Notification No. 140 of 2017, superseding the previous employment contract template issued in 2015.

Based on the current policies of the relevant Township Labour Office (TLO), amendments to the SECT are permitted as an annex to the SECT, but must first be submitted for prior evaluation and approval.

While not a law itself, the SECT implements a provision of the Employment and Skills Development Law of 2013, which also provides that employment contracts must be made and signed within 30 days from the appointment of an employee. The employment contracts are registered with the TLO that has jurisdiction over the workplace of the relevant employee.

A further update was the release of a draft Workplace Safety and Health Law (WSH Law), which intends to put in place a new safety framework for both employers and employees. In its current draft, the WSH Law applies to the following industries: factory manufacturing, construction, engineering, mining and gems exploration, oil and gas exploration, agriculture, education and health care services, among others. The draft WSH Law specifies that permission must be applied for prior to the construction or demolishing a building, and that a licence will be required to run a business in any of the industries specified in the law.

The draft WSH Law also provides for the establishment of a Workplace Safety and Health Committee, as well as for the appointment of workplace inspectors. Under the current draft, the inspectors are given a wide range of powers, including inspecting and seizing all records, books and documents related to a workplace under inspection. An inspector may also seize any substances the use of which they determine to be limited or prohibited as evidence, and to initiate legal proceedings. The draft WSH Law also sets out a range of duties applying to employers and employees within the workplace.

Recapping other recent enactments, the Payment of Wages Law (PWL) of 2016 provides that any form of remuneration or salary, including overtime and bonuses, constitutes a wage. The PWL also specifically excludes certain payments from the definition of wage, such as social security entitlements, accommodation and meal expenses, medical expenses and severance pay, among other things. In addition, the Factories Act of 2016 governs the employment of persons hired as part of a manufacturing process, as well as to persons employed in a clerical role in a workplace related to a manufacturing process.

Foreign Arbitration 

The 2016 Arbitration Law makes enforceable under Myanmar law the obligations set out in the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which Myanmar is an acceding party. The Arbitration Law provides a legal mechanism for enforcing foreign arbitral awards, which may now be recognised in the same manner as would an order of a Myanmar court.

However, the courts have some discretion under the current Arbitration Law to deny recognition of a foreign award when certain grounds are met. These include a determination by the court as to the incapacity of parties to the arbitration agreement, or a failure to provide proper notice of the appointment of an arbitrator, among other reasons.

The Trading Floor 

Since its inauguration in December 2015, four companies have listed on the Yangon Stock Exchange (YSX). In order of the date of the initial public offering, these are: First Myanmar Investment, Myanmar Thilawa SEZ Holdings, Myanmar Citizens Bank and First Private Bank. In a positive development, the Ministry of Finance is now providing tax relief for YSX-listed companies. The prevailing corporate income tax rate for listed firms has now been reduced from 25% to 20%. This incentive is a welcome inducement to companies considering going public.

Outlook

In spite of ongoing challenges, the government continued to press ahead with its reform agenda in 2017. Steps were taken with a healthy combination of liberalisation and, where needed, regulation. Crucially, the MCL is now in place and the investment regime has been fully implemented.

At the same time, the banking sector has instigated prudent regulations that should help to promote increased confidence among investors. The impact of the MCL, particularly, remains to be seen, but it is a promising leap toward a modernised regime that oversees an increasingly attractive business environment.