I OVERVIEW OF M&A ACTIVITY

Myanmar’s economic climate has been lifted by its recent political developments. The National League for Democracy won nearly 80 per cent of contested seats in the Myanmar parliament during the general elections on 8 November 2015, and successfully transitioned into civilian-led power with Daw Aung San Suu Kyi as State Counsellor and U Htin Kyaw being sworn in as President in March 2016.

The country’s GDP growth rate is set to increase by 8.6 per cent in 2016 compared with 5.6 per cent in 2011, and the growth rate of per capita GDP in 2016 is expected to be 7.6 per cent compared with 4.5 per cent in 2011.2 Foreign investments approved reached a high of US$9.4 billion in the last financial year and has been largely channelled into telecommunications, oil and gas as well as manufacturing in garments with expansions into the transport industry.3 Reforms undertaken in Myanmar’s financial sector further support the country’s growth, as evident from the kyat-managed floated exchange rate system established in 2012, the creation of a Central Bank licensing mechanism for new foreign banks and the expansion of foreign branch networks. Development of special economic zones4 (SEZs), such as the opening of Thilawa SEZ Zone A and approval of developments in Kyaukphyu and Dawei SEZs, similarly point to a promising financial sector.

Substantial progress has been made in recent years with the passing of relevant laws on investment.5 The Financial Institutions Law 2016 (FIL) permits mergers between banks and allows foreign banks to acquire all or part of another bank established in Myanmar. However, this is subject to Central Bank of Myanmar (CBM) approval. Another recently enacted Arbitration Law 2016 (AL) gives effect to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and provides a reliable option for dispute resolution concerning M&A deals.

The Yangon Stock Exchange (YSX), which launched on 9 December 2015, made notable progress in Myanmar’s capital markets sector, which began trading in March 2016. First Myanmar Investment Co,6 was the first company listed on the YSX on 25 March 2016, followed by Myanmar Thilawa SEZ Holdings Public Ltd on 20 May 2016.

M&A activity into the country will continue to be delayed until the government allows foreign investors to buy shares in local companies, which includes local companies trading on the YSX. This will require the government to remove its existing policy of prohibiting foreigners from purchasing shares in local companies.

The retained US sanctions against dealings with individuals and entities on the Specially Designated Nationals List (SDN List) is also preventing an influx of M&A activity into Myanmar. Sanctions against the YSX were only removed in May 2016. It is hard to predict when US sanctions will be completely lifted.

i Infrastructure

Poor infrastructure, adverse weather conditions, substantial start-up costs and restrictions on trading pose various challenges to foreign investors doing business in the country. Ninety-four per cent of Myanmar companies experience power shortages due to a lack of electric power, as Myanmar currently has less than 4,000MW of installed operating electric power capacity.7 Although the literacy rate is currently over 95 per cent with the state emphasising free and compulsory primary education under the Private School Registration Act (2011), only 75 per cent of primary school pupils complete the final grade of primary education,8 leaving a shortage of sufficiently trained human capital. Nonetheless, improvements are under way in sectors such as telecommunications, with two telecom licences having been awarded to Ooredoo of Qatar and Telenor of Norway, along with a partnership of MPT with KDDI of Japan.

II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A

Myanmar’s legal framework for M&A comprises company legislation such as the Myanmar Companies Act 1914 (MCA) and the Myanmar Special Companies Act 1950 (SCA), which work in conjunction with the Myanmar Foreign Investment Law 2012 (MFIL) and the Myanmar Citizens Investment Law 2013 (MCIL). Investors should pay particular to attention to the MCA and MFIL, as these are the two most critical pieces of company legislation. These currently form the investment regulatory regime governing foreign and domestic investment in Myanmar. An updated version of the Myanmar Companies Act (NMCA) is expected to update the current centuries-old legislation, and a new Investment Law (NIL) will be harmonising the existing MFIL and MCIL provisions to improve both local and foreign investors’ rights.

The Myanmar Investment Commission (MIC) is the government-appointed body responsible for verifying and approving investment proposals, including the issuance of MIC permits (investment permits) to foreign investors. The MIC is basically the caretaker for dealing with most issues under the MFIL, and regularly issues notifications about sector-specific developments. The MIC is composed of representatives and experts from government ministries, departments, and governmental and non-governmental bodies. It depends from the MFIL and the MCIL.

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 (including both 100 per cent foreign-owned companies and joint venture companies), although other legal forms are permitted. Companies limited by shares include companies incorporated in Myanmar but with 100 per cent foreign ownership (shareholders can be both companies and individuals); and joint venture companies incorporated in Myanmar between foreign-owned companies or individuals and Myanmar companies or individuals (including state-owned entities).

Both 100 per cent foreign-owned companies and joint venture companies are governed by the MCA or the SCA, or both, depending on whether the state is involved.

Foreign companies can establish their presence in Myanmar as a branch office (typically for oil and gas companies, airlines and foreign banks). A representative office is also permitted (typically for foreign banks not licensed to operate in Myanmar and insurance companies). Other less common options include establishing a not-for-profit organisation, a business association (such as a chamber of commerce), a company limited by guarantee (with or without share capital) or an 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 MIC under the MFIL. Registration under the MFIL and the obtainment of a project-related MIC permit enables the investor to enjoy tax incentives, long-term land lease options and other incentives. There are certain criteria to be met that are often higher in terms of required share capital and percentage of employment of local staff in skilled roles when compared with companies’ registration under the MCA without an MIC permit. Industrial and manufacturing activities require registration under the MFIL, while for companies engaged in service-related businesses it is generally sufficient to register under the MCA only.

Special rules apply to joint ventures with government entities, which must be formed under the SCA.

Given the government’s existing policy of prohibiting foreigners from purchasing shares in local companies, an M&A transaction in Myanmar would be typically structured in one of the following ways, whereby the foreign investor acquires shares in a foreign-owned Myanmar company held by an existing foreign shareholder; establishes a new joint venture company with a Myanmar partner who provides capital contribution as assets that were agreed to be purchased (e.g., land); or establishes a company in Myanmar and purchases the relevant assets from the target.

i MFIL

The MFIL was enacted in November 2012, and was supplemented in 2013 and 2014 by subsidiary legislation known as Notifications 49, 50, and 51. Foreign investment in Myanmar such as permitted corporate structures, foreign land ownership, share transfer procedures and tax arrangements are generally governed under the MFIL and Notifications 49, 50, and 51, and are administered by the MIC.

All investments or share transfers relating to companies formed under the MFIL are subject to the approval of DICA and the MIC. In a share acquisition scenario for MFIL companies where the acquirer (either a foreign investor or a domestic investor) seeks to purchase all the shares in the target company, the share transferor must obtain certification from the Internal Revenue Departmental Office for clearance of ‘revenue-related’ matters in connection with the proposed share sale. Certification is not required if the proposed transfer is only for a portion of the share capital of the company. Once certification is received, the transferor submits a share transfer application to DICA for approval. DICA may, with the approval of the MIC, form a panel from relevant government authorities to assist in determining whether the reason for the transfer of all or a portion of the shares through a sale is valid; whether interests of the state and citizens may be harmed by the transfer of all or a portion of shares through a sale; and whether the purchaser receiving all or a portion of the shares through a sale has the capacity to successfully continue operations.

If DICA deems that the sale and transfer of all or a portion of the shares should be permitted, then the matter will be referred to the MIC for a final determination as to whether to approve or reject the transaction. The share transfer must then be recorded with the Company Registration Office as a formal requirement under the MCA.

III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT

i MCA

The MCA is over 100 years old and is in desperate need of modernisation to bring it up to an international standard. Many parts of the MCA are irrelevant to modern-day business practices, such as the provisions relating to the company registration process that require investors to file lengthy application dossiers.

The MCA underwent a process of revision involving DICA, the Ministry of National Planning and Economic Development, the Office of the Attorney General and the Union of Myanmar Federation of Chambers of Commerce with the involvement of other multilateral agencies and the international business community. The NMCA is set to replace the MCA, and to provide improved disclosure and transparency laws. The new NMCA will be based in part on corporate law regimes utilised by other common law jurisdictions such as Singapore, the United Kingdom and Australia. Changes under the new NMCA will likely provide for improvement of company formation and management procedures, a revised corporate governance structure emphasising directors’ duties, online company registration, financial reporting and audit requirements, protections for minority shareholders, regulation of related-party transactions and, notably, the removal of a distinction between foreign and domestic companies. For instance, the need to apply for a permit to trade before incorporation will no longer be required. A public registry for companies is expected to be created that will include information on directors, shareholders, share capital, registered securities and all statutory filings. As part of the reform process the business community and members of the public were invited to provide submissions. It is expected that the NMCA will make it easier for foreign investors to commence start-up operations in Myanmar.

ii NIL

The NIL was drafted by DICA in cooperation with other multilateral agencies and the international business community, and is aimed at modernising the existing rules and regulations with respect to foreign investment. The NIL consolidates and replaces the MFIL and the MCIL. Changes to be made will likely comprise the restructuring of the MIC as an autonomous agency with perpetual succession. Distinctions between foreign and domestic investors are likely to be removed in general, and investors in a company will in future only be considered ‘foreign’ if a certain percentage of shares are owned by a foreign investor. The NIL lists economic sectors in which foreign investments are strictly prohibited (including economic activities detrimental to health). In the event of a dispute between the government and an investor, Myanmar courts shall (if the agreement does not provide otherwise) have automatic jurisdiction to hear the dispute. Offshore arbitration is still permissible. The NIL no longer contains the employment quotation system. While an investor shall employ citizens for unskilled labour, it may appoint foreigners or Myanmar citizens as skilled labour, but shall implement measures to prevent discrimination of remuneration based on the nationalities of employees. Previous rules on the remittance of funds out of Myanmar by investors and expatriate employees with work permits may also be relaxed.9

Notification 26/2016 published 21 March 2016 (Notification 26/2016) includes key changes relevant for investors in specific sectors. Economic activities in certain sectors10 will no longer need to be carried out under a joint venture with Myanmar citizens and may instead be wholly foreign-owned. Nonetheless, Notification 26/2016 carries a proviso that if the MIC determines that a proposed economic activity may not be carried out as a 100 per cent foreign investment if it requires the permission of a relevant ministry. Furthermore, service businesses ‘that are not suitable as an investment’ may only be conducted with the permission of the relevant ministry.

iii FIL

The new FIL, which replaced the Financial Institutions of Myanmar Law 1990, was passed on 25 January 2016 with much more comprehensive regulations on risk management, Basel III compliance, anti-money laundering measures and prudential requirements for banks in Myanmar. It allows the CBM, as an integrated supervisor, to oversee banks, finance companies, and companies offering leasing, factoring and credit services.

The minimum capital requirement for local banks has been raised to 20 billion kyats, and to 92 billion kyats for the branch office or subsidiary of foreign banks. There are currently a total of 13 foreign bank branch licences issued in Myanmar by the CBM allowing foreign banks to offer credit to foreign companies and local banking institutions. Nine foreign bank branches are in operation,11 and four more have preliminary licences.12 All banks are to deposit 5 per cent of their customer deposits with the CBM in the form of cash as a reserve that cannot be invested in treasury bonds or any other interest-bearing instruments.

iv Securities and Exchange Law (SEL)

Enacted on 31 July 2013, the SEL was supplemented by the Securities and Exchange Rules issued on 27 July 2015. The Securities and Exchange Commission of Myanmar (SECM) offered provisional licences to 10 securities companies13 in October 2015 to operate. This was followed by the YSX’s14 official launch on 10 December 2015 and two company listings subsequently, with another four companies currently shortlisted for listing.15

For companies proposing to list on the YSX, the criteria issued by the YSX on 14 August 2015 cover requirements on corporate existence, level of paid-up capital, shareholder composition and profit levels, as well as corporate governance and management compliance, including corporate policies on auditing, tax, insider trading and reporting. The SECM may soon allow foreign investors access to the YSX, and local–foreign joint ventures may be able to list upon the expected enactment of the new MCA.16

The benefits of having a dynamic and modern securities exchange to both prospective investors and shareholders in terms of exit strategies and its overall positive impact on the economy and M&A scene make it an exciting development.

IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS

i Easing of US sanctions

In May 2016, the Obama Administration announced several key changes to sanctions imposed on US citizens and companies investing in Myanmar. These changes provide further clarity to the private sector for engagement with Myanmar citizens and companies.17 The sanctions against Myanmar have been maintained by the US government, but there have been some important modifications:

  • a The renewal of IEEPA preserves the US State Department’s responsible investment reporting requirements, meaning any US individuals or companies investing in Myanmar are still obligated to continue to file an annual report with the US State Department outlining information regarding policies and procedures with respect to human rights, workers’ rights, environmental stewardship, land acquisitions, arrangements with security service providers and payments to Myanmar government entities. The renewal of the IEEPA most prominently retains sanctions against individuals and entities on the SDN List other than those that have been removed. There is still a ban on imports into the US of jade and rubies sourced from Myanmar.
  • b OFAC has added a general licence that allows US individuals residing in Myanmar to conduct most otherwise-prohibited transactions related to living in Myanmar, including payment of rent and other living expenses such as buying goods and services for personal use. This means that US individuals living in Myanmar may be able to deal with companies and properties for those purposes that would otherwise previously be off limits. This is intended to make it easier for US individuals to reside and work in Myanmar.
  • c Reportedly, the State Department maybe increasing the aggregate investment-reporting threshold from US$500,000 to US$5 million. However, this is yet to be officially confirmed.
  • d OFAC has also updated the existing general licence authorising most transactions with certain sanctioned financial institutions in Myanmar. Sanctions against two of those financial institutions have been removed, and two other sanctioned Myanmar financial institutions have been added to the general licence. Apart from investment, ordinary transactions with Asia Green Development Bank, Ayeyarwady Bank, Innwa Bank and Myawaddy Bank are now authorised.
  • e Seven state-owned enterprises were removed from the SDN List: Myanmar Timber Enterprise, Myanmar Pearl Enterprise, Myanmar Gem Enterprise, No. 1 Mining Enterprise, No. 2 Mining Enterprise, No. 3 Mining Enterprise and Co-Operative Export-Import Enterprise; as well as three state-owned banks: Myanmar Economic Bank, Myanmar Foreign Trade Bank, and Myanma Investment and Commercial Bank.
  • f US individuals and companies may engage in all transactions with any non-sanctioned Myanmar bank or company, including those that have just had sanctions removed, subject to the applicable rules and US State Department reporting requirements.
  • g Sanctions against the YSX were also removed. However, Myanmar law still prohibits foreigners from trading on the YSX.

The Obama Administration has strongly supported the democratic transition that is taking place in Myanmar. The new regulations represent an easing of the sanctions and ongoing US support for the continued political and economic reforms currently underway in Myanmar.

ii AL

Under the AL, which follows the UNCITRAL Model Law, domestic arbitrations are to be decided according to Myanmar law. Parties may further request Myanmar courts to determine any question of law arising out of arbitral proceedings. On the other hand, international arbitrations are to be decided according to the law agreed upon by the parties involved or as determined by the arbitral tribunal.

AL provisions encourage parties to first seek interim measures from an arbitral tribunal. Any subsequent court intervention in arbitral proceedings will be restricted to matters set out in the AL. While domestic awards may be set aside on grounds similar to Article 34 of the Model Law or appealed on a point of law, the procedure with regard to an international arbitration award made in Myanmar remains uncertain.

With the AL in force, greater legal security and stability is expected, which will be of benefit to investors. Foreign investors will likely also have recourse to protections under bilateral investment treaties or free trade agreements.18

Despite the passage of the AL, however, additional steps still need to occur for a smooth enforcement of international arbitration awards, such as Myanmar courts updating or introducing new rules and procedures, and training judges about the process of enforcing such awards.

V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES

According to the International Monetary Fund’s most recent World Economic Outlook, Myanmar is currently ranked as the world’s fast-growing economy, with an expected projected growth of 8.6 per cent in 2016.19 Myanmar remains very attractive to foreign investors: it is one of the most natural resource-rich countries in Asia with plentiful supplies of oil and gas reserves (both on and offshore), various minerals, jade, precious stones and gems, forest products, and solar and hydro power project potential. While there has been very little exploration of Myanmar’s natural resources due to a lack of developed exploration techniques and availability of equipment, the geographical location of Myanmar is central to key markets; in addition, the cost of local labour remains low, with the minimum wage set at approximately US$56 per month for a standard five-day working week.20

i Manufacturing sector

The growth rate of merchandise exports in Myanmar is expected to be 16.9 per cent in 2016 and to increase to 18.8 per cent in 2017, the highest among South-East Asian countries. The European Union’s reinstatement of preferential access for Myanmar’s exports and the US’ suspension of its ban on imports from Myanmar, coupled with the country’s appeal to investors as a low-cost manufacturing base given its low operating overheads and wage rates, point toward a promising growth in Myanmar’s manufacturing industry.

Garment manufacturing has been the largest recipient of foreign direct investment in Myanmar in previous years. Other recent projects include Nissan’s plans to transfer production of the Sunny compact sedan to a new plant in the Bago region. This is expected to employ about 300 people and have an annual output capacity of 10,000 cars.21

ii Infrastructure sector

There have been several high-profile deals in the energy sector. Singapore-based Sembcorp Utilities22 signed a power purchase agreement for a US$300 million gas-based plant project with the Myanmar Electric Power Enterprise (MEPE). This will involve the construction of a 230MW gas-fired power plant in Mawlamyaing, and a 225MW gas-fired power plant in Myingyan.23

China Three Gorges Corporation and MEPE will be developing a wind farm in Chaungtha, in the Ayeyarwady region.24 These projects should provide some much-needed supply to Myanmar’s power deficiency, and improved grid reliability should facilitate the development of industrial zones.

ii Hospitality sector

In 2015, the travel and tourism sector in Myanmar saw a 6.8 per cent growth in direct contribution to the country’s GDP, and the sector is expected to grow at about 8.4 per cent per annum in its direct contribution to GDP from 2015 to 2025.25 In anticipation of the continued surge in visitor numbers, developers have moved to take advantage of the opportunity to address the scarcity of hotel accommodation in the country. Starwood Hotels & Resorts Worldwide Inc has signed on to build the Sheraton Yangon Hotel in the Tamwe Township. Future Group Co Ltd and Pyay Phyo Tun International Co Ltd have plans to develop a US$150 million sea view condominium and hotel in Myeik, Tanintharyi. In January 2016, Yoma Strategic Holdings Ltd announced the Landmark development project located at the heart of the downtown Yangon business district, which will convert the former headquarters of the Myanmar Railway Company into the Yangon Peninsula Hotel, complemented by luxury residences, hotel and commercial developments.

The increased demand in this sector is likely to see M&A investment opportunities with local developers and management contracts involving a range of hospitality projects, including heritage redevelopments in the city centre, serviced apartments to cater to a growing influx of expatriates and business hotels in the country’s growth hubs.

iv SEZs

The Special Economic Zone Law (SEZL), enacted on 23 January 2014 for the development of private sector-led SEZs in Myanmar, offers tax incentives and other benefits, such as leases of up to 75 years to promote the entry of export-oriented enterprises such as in the manufacturing sector. Under the decentralised governing system, applications for investment permits within each SEZ will be approved by respective management committees that are separately overseen by a central working body. Foreign insurance companies and joint venture insurance companies are allowed to operate within the SEZs.

Thilawa SEZ, which is located 25km south of Yangon along the Yangon River, was the first SEZ in Myanmar and established in October 2013 by Myanmar-Japan Thilawa Development Ltd,26 with Zone A being opened on 23 September 2015. In the next five years, 100 companies27 are expected to set up businesses in this area.

In August 2015, Italian-Thai Development and Rojana Industrial Park together signed an agreement with the government to resume the initial phase of the Dawei SEZ project. This will be located about 614km south of Yangon in the Tanintharyi region, and will involve building of a port, power plants, a road to Thailand, an LNG terminal, a township, a telecom landline and an industrial estate. The Japanese government has also participated in developing the Dawei SEZ, and a Chinese state-affiliated company has plans to build an oil refinery near Dawei SEZ.28

The Kyaukphyu SEZ was approved in December 2015 by the Myanmar Parliament and is situated about 400km northwest of Yangon in the Rakhine region. CITIC will hold 85 per cent stake in it.29 Development projects will include the building of a deep-sea port, an industrial park and residential estates.

To date, the Thilawa SEZ is the only SEZ to attract large-scale foreign investment.

VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS

As a cash-based society, Myanmar’s finance sector has been largely under-developed due to its exclusion from the global banking system coupled with its ongoing struggle to recover from the 2003 banking crisis and subsequent heavy-handed regulation. Taking security as a foreign investor over immoveable property (in the form of land and buildings) involving a mortgage over land as well as ‘land use rights’ (as a large majority of land ownership is in the form of leasehold rights) is challenging. The basic rule is that foreign ownership of ‘immoveable property’ (defined under the Transfer of Immoveable Property Restriction Act (1987) to include ‘land, benefits from the land, buildings and things constructed or situated on that land and things installed on those buildings’) is significantly restricted. Accordingly, M&A financing is typically sourced offshore as tight domestic and international restrictions limit the sources of financing for the private sector.

i Central Bank Law 2013 (CBL)

The government initiated a reform of the financial sector and on 11 July 2013, a new CBL came into force. This has given the CBM greater autonomy, and it is now an institution that acts as the licensing authority and regulator of all banks in Myanmar. The CBM can independently adjust interest rates as well as conduct currency and exchange operations. It also has statutory responsibility for developing Myanmar’s capital markets sector.

The CBM has since issued a total of 12 foreign bank licences for operations in Myanmar’s commercial banking sector. However, the scope of permitted operations is limited to banking for foreign corporations and foreign-exchange services, including providing loans to foreign entities in both foreign and local currency. Foreign licensed banks are not allowed to participate in retail banking, but can partner with local banks to engage in trade finance and lend to local banks directly.

The CBM has alluded to the fact that current official interest rates for loans and deposits would not apply to loans by foreign banks to foreign entities, and that syndicated loans could take place between foreign banks and Myanmar entities in the future.

The Financial Institutions Law (recently passed on 25 January 2016) is the current legislative authority in Myanmar governing the entire banking and finance sector; this replaced the Financial Institutions of Myanmar Law (1990). To date, there are no new implementing rules or regulations.

ii Capital market

Raising finance through Myanmar’s capital market is now a viable reality for Myanmar companies and citizens with the opening of the YSX in December 2015. Regulated by the SECM, the YSX currently only allows local Myanmar citizens or companies to invest in companies listed on the YSX, although this is expected to change upon the future enactment of the NMCA. A key issue from a liquidity standpoint will be a change in the NIL allowing foreign investors to invest in Myanmar companies; until then, this remains a barrier to foreign investment in the Myanmar market. With the current regulations only allowing for local retail investors who largely lack capital and sufficient know-how of the operations of the capital market, the participation of institutional and foreign investors will be crucial to increasing liquidity and the continued success of the YSX. Training and capacity building will be needed for intermediary stakeholders, as there is currently a limited talent pool of skilled finance professionals in Myanmar. Over-the-counter markets will also be established by securities companies for public companies that may not be ready to list on the YSX.

iii Offshore and cross-border financing

While most developed and developing jurisdictions have in place well-defined mechanisms and legal procedures regarding the provision of financing with corresponding onshore security of the borrower (in the form of land mortgages, charges on assets or the taking of other types of collateral), this process remains very much in its infancy in Myanmar. That said, several non-recourse offshore finance projects occurred in 2015 in Myanmar, primarily within the telecom sector and involving foreign-owned telecom tower companies that are working with telecom licence-holders Ooredoo and Telenor. Structuring these financing deals involved complex challenges, given the absence of defined procedures in permitting offshore private and multilateral financiers in not only taking onshore security from Myanmar borrowers but also perfecting said security. Whether financial closure was obtained remains to be seen, as we believe, in most cases, conditions precedent were either waived or shifted to conditions subsequent in order to permit a partial drawdown of the loan facilities by the Myanmar borrowers.

To this end, these deals have highlighted the current issues surrounding project financing in Myanmar, essentially pushing the issue into the spotlight, with the international business community requesting both policy and legal reform, such as the enactment of a Secured Transactions Law to address the issue of security over the assets and property of a Myanmar borrower, as well as the perfection and registration of such security in the name of the lender or lenders.

VII EMPLOYMENT LAW

Myanmar labour laws do not specifically deal with transfers of employment in an M&A situation. Where employees are to be transferred to a new entity, this can be done via a contractual arrangement, and investors should take measures to ensure that any formalities or requirements in the contract are observed and complied with. Where an employee does not consent to a change in employer, or to enter into any transfer arrangement, the employee’s existing employment will have to be terminated and termination severance will be payable. Termination standard practice calculations are based on the employment period as follows:

  • a from the completion of six months to less than one year, a severance payment in an amount of half of one month’s salary;
  • b from the completion of one year to less than two years, severance payment in an amount of one month’s salary;
  • c from the completion of two years to less than three years, severance payment in an amount of one-and-a-half month’s salary;
  • d from the completion of three years to less than four years, severance payment in an amount of three months’ salary;
  • e from the completion of four years to less than six years, severance payment in an amount of four months’ salary;
  • f from the completion of six years to less than eight years, severance payment in an amount of five months’ salary;
  • g from the completion of eight years to less than 10 years, severance payment in an amount of six months’ salary; and
  • h from the completion of 10 years to less than 20 years, severance payment in an amount of eight months’ salary.

The MFIL stipulates that only local citizens can be employed for unskilled work. At least 25 per cent of skilled employees must be local citizens for the first two years of operation, and at least 75 per cent in the fifth and sixth year from the commencement of operations. In addition, foreign employers are required to submit vocational training plans annually and commit to training their local employees to upgrade their skills. These employment provisions within the MFIL affirm the government’s support for local workers and recognise the importance of upgrading the Myanmar workforce to achieve sustainable economic growth. This is set to change with the expected passing later this year of the NIL: the NIL no longer contains the quota system. While investors shall employ citizens for unskilled labour, such investors may appoint foreigners or Myanmar citizens as skilled labour, but shall implement measures to prevent discrimination in terms of remuneration based on the nationalities of employees.

Navigating the employment law framework is highly complicated for employers in Myanmar. Labour laws are still in a state of flux, and there is no single uniform piece of employment legislation in Myanmar; instead, a plethora of different laws exist regulating the employment sector with regard to issues such as work hours, holidays, leaves of absence, maternity, wages, and overtime and severance pay.30 The Ministry of Labour also issues regulations and guidelines on the legal rights and duties of employers and employees, model employment contracts and fair labour practices, with a view to establishing and maintaining industrial harmony.

VIII TAX LAW

The taxable period of a company (income year) in Myanmar coincides with its financial year, from 1 April to 31 March. Income tax returns must be filed within three months of the end of the income year. Capital gains tax returns must be filed and the corresponding payment made within one month of the date of disposal of the capital assets, defined as the date of the execution of the deed of disposal or the date of delivery of the capital assets, whichever is earlier.

Under the Income Tax Law (ITL), double tax agreements31 (DTAs) entered into by the government with any foreign state on income tax will be followed notwithstanding any terms contrary in the ITL. However, this first requires approval of the Director General of the Internal Revenue Department in Nay Pyi Taw.

i Corporate income tax

Corporate income tax is levied at a rate of 25 per cent on total income, not including capital gains (except the transfer of shares in an oil and gas company, where rates ranging from 40 to 50 per cent will apply on gains). It is applicable to both resident and non-resident companies in Myanmar. A resident company is defined as one formed under the MCA or any other existing law of Myanmar, including companies under the MFIL. Resident companies are taxed on a worldwide basis; hence, income deriving from sources outside of Myanmar is also taxable. Non-resident companies are those that are not formed under the MCA or any other existing Myanmar law. Taxable income includes trade or business income and rental income from moveable or immoveable property.

ii Capital gains tax

Capital gains tax of 10 per cent, applicable to both resident and non-resident companies, is payable on any gains realised from the sale, exchange or transfer of one or more capital assets, including shares in a company. Higher rates of between 40 and 50 per cent apply on gains from the transfer of shares in an oil and gas companies.

iii Withholding tax

Myanmar has a one-tier corporate tax system where dividends, branch profits and shares of profits of an association of persons (i.e., partnerships, joint ventures, companies) that have been taxed are exempt; therefore, no withholding tax is deductible.

Withholding tax on interest payments only applies to payments made by non-residents or foreigners at a rate of 15 per cent. The payment of royalties for the use of licences, trademarks or patents is subject to a withholding tax rate of 15 per cent for residents and 10 per cent for non-residents.32

iv Commercial tax

Commercial tax is generally a 5 per cent turnover tax on goods and services produced or rendered within Myanmar based on sales proceeds, and is dependent on the nature of goods and services. All services are subject to 5 per cent commercial tax, except 26 types of services that are specifically exempted from commercial tax (e.g., home rental, life insurance, banking services). It is only applicable to specific commercial transactions listed in the Commercial Tax Law, including imported goods based on the landed cost, which is the sum of the cost, insurance, freight value and customs duties.

v Special goods tax

The Union Tax Law 2016 took effect on 1 April 2016, with key developments including the reintroduction of the Special Goods Tax Law. This imposes tax rates ranging from 5 to 120 per cent on listed special goods including cigarettes, tobacco leaves, cheroots, cigars, pipe tobacco, alcoholic beverages, gemstones, teak, petroleum, jet fuel and natural gas.

IX COMPETITION LAW

Myanmar’s Competition Law (CL), which was enacted on 24 February 2015, will only come into force on 24 February 2017 according to Notification 69/2015 issued by the President’s office on 12 December 2015.

The CL is far-reaching, and provides for the creation of a Competition Commission with investigative and adjudicative powers. It classifies violations into four categories to regulate competition, market monopolies, anticompetitive acts and merger control. Civil and criminal penalties will be imposed, and include the conviction of senior managers. The CL will likely have significant impact once enforced, and businesses would be well advised to seek necessary assistance.

X OUTLOOK

As Myanmar gains momentum in its reform process, with the transition to a more civilian-led government and the slight easing of US sanctions, many changes are taking place in Myanmar.

In a new move to streamline government activity, a reorganisation of the union ministries was announced on 17 March 2016, reducing the overall number of ministries from 36 to 21. In a further development, on 24 March 2016, the Union Parliament approved the appointment of 18 key ministers to form the new government. Some of these ministers will have oversight of more than one major ministry.

The merger of the Ministry of Finance and the Ministry of National Planning is expected to exploit synergies and facilitate investment. The integration of the ministries related to transportation and communications will benefit major projects, a number of which are still in progress. Finally, the merger of the Ministry of Electric Power and the Ministry of Energy will help to streamline the process for the development of new power projects. It is expected that consolidating the ministries will promote an easing of administrative processes concerning foreign investment, and will hopefully be of significant benefit to current and future projects. We remain optimistic.

The Pyidaungsu Hluttaw (Myanmar’s house of parliament) recently approved a bill in April 2016 that creates a specific new role for Daw Aung San Suu Kyi. The role did not previously exist in the government. According to Myanmar’s Constitution, Daw Aung San Suu Kyi is unable to become President. Her post of State Counsellor is a role that corresponds officially to the new President of Myanmar, U Htin Kyaw, who was sworn in on 30 March 2016. Daw Aung San Suu Kyi has also taken on ministerial portfolios as the Minister of Foreign Affairs and the Minister of the President’s Office.

In May 2016, Daw Aung San Suu Kyi revisited Myanmar’s Anti-Corruption law with a set of guidelines lowering limits on gifts by civil servants. The Anti-Corruption Law (Law), passed by parliament in August 2013, sought to ‘eradicate bribery as a national cause’. The Law sets out a framework for a presidential commission to investigate cases of bribery, and look into the assets of public officials on its own initiative. While primarily targeted at bribe-taking by those in the public sector, the net can be cast to catch those in the private sector. There is a ban on the receipt of gifts from organisations or individuals seeking gains from civil servants, whether of a business or other nature. Gifts subject to the new limit include ‘money, gold, silver, air tickets, hotel stays, free meals, golf club membership fees’. The new guidelines state that they aim to distinguish ‘gifts offered as a means of social courtesy […] from ones given with the intention of bribery’. The new guidelines offer specificity to many aspects outlined in the 2013 law, and will be a development welcomed by those seeking to invest in and do business in Myanmar.

Draft laws are still pending consideration by parliament. Lawyers and investors alike are still eagerly awaiting the passing of the new NMCA (which was meant to be enacted in late 2015) and the NIL.

Myanmar is still in desperate need of a Secured Transactions Law and an improved Intellectual Property Law to help stimulate foreign investment.

Myanmar is moving towards a more open economy and democratic society, although these transitions will neither be seamless nor occur overnight. As the country readies itself for increased foreign investment, it will remain a challenging frontier market for investors. Nevertheless, from multinational corporations to private equity firms, companies still seem to be drawn to one of the world’s last economic frontiers. If prospective investors are able to identify and mitigate risks through focused risk assessments, comprehensive due diligence and appropriate compliance measures, there are opportunities available to be taken.

Footnotes

1 Krishna Ramachandra is managing director of and Rory Lang is an associate at Duane Morris & Selvam LLP.

2 Asian Development Bank, ‘Asian Development Outlook 2016: Asia’s Potential Growth’. Mandaluyong City, Philippines: Asian Development Bank, 2016.

3 Ibid.

4 Special Economic Zones Law (2013).

5 Foreign Investment Law (2012); Myanmar Citizens Investment Law (2013); Financial Institutions Law (2016).

6 Which was advised by Duane Morris & Selvam LLP.

7 World Bank Group, ‘Myanmar Investment Climate Assessment: Sustaining Reforms in a Time of Transition’, Report No. 93848-MM. January 2015.

8 UNESCO Institute for Statistics, (nd). Retrieved 16 June 2016, from data.uis.unesco.org.

9 Ibid.

10 Ecotourism, the manufacturing of rubber and rubber products, the production and distribution of hybrid seeds as well as the production and propagation of high-yield seeds and local seeds.

11 Australia and New Zealand Banking Group Limited; Bangkok Bank; Bank of Tokyo-Mitsubishi UFJ; Industrial and Commercial Bank of China; Malayan Banking Berhad; Mizuho Bank; Overseas-Chinese Banking Corporation; Sumitomo Mitsui Banking Corporation; United Overseas Bank.

12 Amara Investment Securities; Aung Myint Mo Min Securities; AYA Trust Securities Company; CB Bank Securities; Expert Investment Securities; Global World Securities; KBZ Stirling Coleman Securities; KTZ Ruby Hill Securities; Myanmar Securities Exchange Centre; Union Trust Securities.

13 Owned by Yangon Stock Exchange Joint Venture Co Ltd as a joint venture between Myanmar Economic Bank (51 per cent), Daiwa Institute of Research (30.25 per cent) and Japan Exchange Group (18.75 per cent) with a paid up capital of 32 billion kyats.

14 First Private Bank; Great Hor Kham; Myanmar Agribusiness Public Corporation; Myanmar Citizens Bank.

15 Thiha. (6 June 2016). Yangon Stock Exchange to Open to Foreign Investors. Retrieved 17 June 2016, from consult-myanmar.com/2016/06/06/yangon-stock-exchange-to-open-to-
foreign-investors.

16 Ibid.

17 To enable this change, the US Treasury Department’s Office of Foreign Assets Control (OFAC) issued new regulations. President Obama also renewed the legal authority underlying these sanctions, the International Emergency Economic Powers Act (IEEPA). The IEEPA provides the basis for most US sanctions programmes, including the remaining requirements and restrictions for Myanmar.

18 Myanmar Enacts New Arbitration Law. (5 January 2016). Retrieved 17 June 2016, from globalarbitrationnews.com/myanmar-enacts-new-arbitration-law-2016-03-11.

19 World Economic Forum, Which are the World’s Fastest Growing Economies? (2016, April 18). Retrieved 17 June 2016, from www.imf.org/external/pubs/ft/weo/2016/01/index.htm.

20 A minimum wage was set in August 2015, nearly two-plus years after the enactment of the Minimum Wage Labour Law (March 2013). The minimum wage has been set at 3,600 kyats per day calculated at a rate of 450 kyats per hour.

21 ‘Nissan says to start assembling cars in Myanmar this year’ (2016, February 17). Retrieved 17 June 2016, from www.reuters.com/article/nissan-myanmar-idUSL3N15W2QH.

22 Advised by Duane Morris & Selvam LLP.

23 Sembcorp. ‘Sembcorp Signs Agreement to Develop the Largest Gas-Fired Independent Power Plant in Myanmar’ (7 December 2015). Retrieved 17 June 2016, from www.sembcorp.com/en/news_detail.aspx?NewsID=1135#.V2QOXRKLqTA.

24 Gaung, J S (4 March 2016). ‘China Three Gorges to set up Wind Farm’. Retrieved 17 June 2016, from www.dealstreetasia.com/stories/myanmar-dealbook-a-wind-powered-
project-to-kick-off-in-the-coastline-of-myanmars-delta-western-coastal-city-kyauk-phyu-to-
complete-k40-million-waste-incineration-project-32928.

25 World Travel & Tourism Council. Travel and Tourism Economic Impact 2015: Myanmar. 2015. London, United Kingdom.

26 Mitsubishi, Marubeni, Sumitomo, Japan International Cooperation Agency (49 per cent); Government of Myanmar (10 per cent); local enterprises (41 per cent).

27 Including companies such as Acecook, Pokka Sapporo and Asahi Group Holdings.

28 Matzui, M (11 April 2016). ‘Chinese Company to Build Oil Refinery near Dawei SEZ in Myanmar’. Retrieved 17 June 2016, from asia.nikkei.com/Politics-Economy/International-Relations/Chinese-company-to-build-oil-refinery-near-Dawei-SEZ-in-Myanmar.

29 Gaung, J S (30 December 2015). ‘Myanmar Gives Go-ahead to Kyaukphyu SEZ, China’s CITIC to Hold 85 per cent Stake’. Retrieved 17 June 2016, from www.dealstreetasia.com/stories/kyaukphyu-sez-to-be-handled-by-citic-with-85-pc-stake-25243.

30 Social Security Law 2012; Minimum Wage Labour Law (March 2013); Immigration Act 1947; Employment and Skill Development Law 2013; Employment and Training Act (1950); Factories Act 1951; Foreign Investment Law 2012; Payment of Wages Act 1936; Shops and Establishments Act 2016; Leave and Holidays Act 1951; and Workman’s Compensation Act 1923.

31 DTAs have been concluded with India, Indonesia, Malaysia, Singapore, the Republic of Korea, Thailand, the United Kingdom, Vietnam, Laos and Bangladesh.

32 For residents, deductions as above shall be set off against tax due on final assessment. For non-residents, the above withholding tax from payments to non-resident companies is a final tax (Ministry of Finance and Revenue Notification No. 41/2010 of 10 March 2010).