Sherpa Hossainy's Blog

Foreign investment rules in practice in Myanmar – Part 3

Posted in Business, Investment, Legal, Myanmar, Yangon by Sherpa Hossainy on July 10, 2013

Part 3: Mining; distribution, wholesale and trading; retail, supermarkets and hypermarkets; hospitality and foreign currency remittances

Published in Myanmar Business Today (Vol 1, Issue 21) on June 27, 2013

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Recently, international law firm Clifford Chance and VDB Loi have jointly released a briefing note on the practical implementation of the Foreign Investment Law in Myanmar. This is the third part of Myanmar Business Today’s series of sector-wise analysis based on the briefing. This week’s topic is mining; distribution, wholesale and trading; retail, supermarkets and hypermarkets; hospitality and foreign currency remittances.

The Myanmar government implemented the country’s Foreign Investment Law (FIL) 2012 with two notifications or FIL Rules, creating a practical framework to match the government’s policy of welcoming foreign investment. Both notifications, 11/2013 of the Ministry of National Planning and Economic Development and 1/2013 of the Myanmar Investment Commission (MIC), were released on January 31.

Mining

“Most large-scale mining projects are subject to the requirement of having a local partner, although there have been exceptions to this in the past,” Edwin Vanderbruggen, co-author of the report and a partner at VDB Loi, a specialised law and tax advisory firm with offices across Southeast Asia, told Myanmar Business Today.

Mining concessions take the form of a Production Sharing Contract (PSC), where the government’s take comprises royalties, production sharing and income taxes, he said. According to the report, under the current rules, foreign investors may hold up to 80 percent of the capital in a large scale mining enterprise.

However, mining of minerals from riverbeds or near rivers, the surveying and production of jade and other gems, and all small- and medium-sized mineral production enterprises are prohibited for foreign participants, the report said.

“A joint venture (JV) is required for small- and medium-scale mining extraction, the exploration and testing of industrial raw materials related to mining, and the large-scale mining of minerals,” Edwin said. A JV with the government is required for the production and sale of rare earths, strategic minerals, radioactive minerals and gems and investors involved in exporting raw minerals such as granite, stone or coal must first obtain approval from the government.

For investors involved in large-scale mining, the production period may not exceed 15 years, but it is extendable four times for periods of five years each with six months’ advance notice, and for investors involved in the production of pearls, the limit is 15 years, but it may be extended twice for up to five years each, with one year’s advance notice, according to the new rules.

The time limit for investors involved in carrying out mining feasibility studies is two years, while for prospecting and exploration the limits are two and three years respectively.

Distribution, wholesale and trading

The distribution of goods manufactured by investors themselves in Myanmar was already allowed under the previous regulation. “There are no limitations on who investors can sell to. A foreign invested manufacturing company can sell its products directly to retailers, for example,” Edwin said.

Previously, “trading” was considered a prohibited activity for all foreign-invested companies, even JV companies. In the wake of the new FIL, this policy is evolving, according to the report.

“The limit on what the government is prepared to allow in terms of distributing goods without manufacturing is not yet entirely clear,” Edwin said.

Wholesaling is also allowed for foreign investment, but is subject to the receipt of an opinion by the Ministry of Commerce beforehand. In addition, a JV is required for all “packaging enterprises.”

Retail, supermarkets and hypermarkets

“The government’s policy is aimed at facilitating foreign investment for large modern trade,” Edwin said regarding foreign investments in the retail sector. Foreign investors are permitted to own and operate “supermarkets” so long as the store surface is between 12,000 and 20,000 square feet, and they may own and operate “hypermarkets” so long as the store is at least 50,000 square feet. For smaller surface areas, retail shops are not allowed to be located in close proximity to local businesses and they must sell mainly local products, according to the new rules. If a retail shop is operated through a JV agreement, the local partner must have at least a 40 percent shareholding.

Retail enterprises other than those mentioned above are expected to be permitted as of late 2015 (except car and motorbike retailers), but will require a minimum capital investment of $3 million. Such enterprises will be given no tax exemptions, and special rules apply for the retail of alcohol or tobacco products.

Hospitality

For hotels classified as three-star or above, 100 percent foreign ownership is permissible, while lower ratings will require a JV. Hotels constructed on government land are usually organised through a build-operate-transfer structure. “In this structure, the investor has the ownership and management of the hotel for a period of 15 to 30 years, after which the buildings are transferred to the government,” Edwin explained.

The government, often through the Ministry of Hotels and Tourism, receives an annual lease fee which is either a certain amount per square metre, or a percentage of the hotel’s revenue. A substantial payment to the government may also be due at the outset of the agreement for obtaining the land right.

Myanmar is also preparing for the licensing casino enterprises. Casinos will require government permission, must follow the rules and regulations of the Ministry of Hotel and Tourism and the Ministry of the Interior and must be located in restricted areas of hotels. They can only be accessed by foreign nationals. Wellness or spa enterprises must be located in 3-star or above hotels or boutique hotels, the new rules say.

Foreign currency remittances

The new FIL allows for the remittance of foreign currency through banks authorised to make such transactions at prescribed rates of exchange. According to the Foreign Exchange Management Law foreign-invested companies have the right to hold foreign currency and a foreign currency bank account and there are no limitations on inward/outward remittances from a current account.

The rules also say foreign currency may be retransferred overseas after examination and approval from the MIC or from the Central Bank.

“In practice, a foreign-invested enterprise is required to open a capital remittance account in Myanmar for the inward remittance of the capital and monies raised through loans. In terms of outward remittances, the company is allowed to open any bank account with a licensed Myanmar bank in a foreign currency and in kyat,” Edwin said.

Payment of dividend, interest and repayment of capital on loans by a foreign invested enterprise with an MIC Permit must be approved by the MIC before the bank is allowed to execute the outward remittance, according to the rules.

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