Investment regimes have been well established in many of these jurisdictions; Singapore is still arguably the current landmark for incentivized investment in Southeast Asia. In jurisdictions less explored, loosening of investment restrictions and more solid elucidation of their respective legal landscapes increasingly entice investors to brave playing fields that were once obscure.
This article discusses recent developments in Myanmar and Indonesia’s foreign investment regimes as markets contend with rigorous efforts to become more attractive foreign investment destinations. It also revisits Thailand, which investors are watching ever more closely, where inbound foreign investment activity is expected to peak in the coming years.
Foreign Investment Regime
Myanmar’s recent move towards economic liberalization, which has stemmed from a remarkable process of political and social reform that began in 2011, has paved the way for an influx of foreign investments. With the enactment of its Foreign Investment Law of 2012 (MFIL 2012), Myanmar has replaced its erstwhile foreign investment law passed in 1988 with the aim of clarifying and updating the legal framework for investing in Myanmar and creating a more welcoming and stable environment for foreign investments. Now, operating under the regulatory regime of the MFIL 2012 and the Myanmar Companies Act of 1914 (MCA) as administered by the Companies Registration Office (CRO), enterprising foreign investors are pushing forward into Myanmar’s largely uncharted markets and helping to develop new standards of business and regulation.
Investment by Entities Formed Exclusively Under the Myanmar Companies Act
Entities formed exclusively under the MCA are the simplest and quickest path for investment in Myanmar. Typical structures include wholly foreign-owned private limited companies, foreign-domestic joint venture companies, and branch offices (including representative offices that are set up as non-revenue-generating branch offices) (collectively, CRO companies). In reality, the foreign-owned private limited companies and foreign-domestic joint ventures are structurally similar; both are, in fact, private limited companies operating as separate legal entities in Myanmar. Branch offices, on the other hand, are not separate legal entities from their head offices; branch offices, therefore, enable foreign companies to engage, in Myanmar, in revenue-generating activities related to the primary business of their foreign head offices.
Establishment of a CRO company typically takes from four to six months, although the timing may vary depending on the industry concerned and the pace at which any necessary approvals from relevant ministries are processed and obtained. A temporary registration in the form of a temporary registration certificate (TRC) can usually be obtained within a week or two of application, provided the relevant requirements are met. The CRO requires that a foreign-owned company, which includes any company with even a single share of foreign ownership, must be minimally capitalized to U.S. $50,000 for service businesses and U.S. $150,000 for manufacturing and industrial investments, for which the Myanmar Investment Commission (MIC) permit, as discussed below, is usually required.
While CRO companies offer investors the ability to quickly begin operations in Myanmar, certain industries require the additional permission of the MIC. The MIC is the body responsible for implementing the MFIL 2012 and authorizing investment by foreigners under its rules and regulations. Under the MFIL 2012, the MIC may issue an investment permit authorizing investment in certain restricted sectors and offering certain incentives discussed below.
Investment Under the MFIL 2012
While Myanmar’s economy has opened up significantly since the passage of the MFIL 2012, the MIC has maintained restrictions on certain kinds of investment as set forth in MIC Notification No. 1/2013 (Notification 1/2013). Restricted investments are divided into three categories: those prohibited outright, activities that may only be undertaken through a joint venture with a local party, and activities subject to certain specific conditions. Among those activities included in Notification 1/2013 are:
- A category of 21 prohibited activities, including
- small and medium scale mineral production,
- trading of electric power, and
- management of natural forests;
- A category of 42 activities requiring the participation of a local joint venture partner, including
- manufacturing and marketing of a variety of products,
- large-scale mineral production,
- residential property development,
- construction of buildings,
- air transportation,
- tourism, and
- An extensive third category further subcategorized into specific circumstances and those requiring special approvals, such as
- industry-specific approvals, and/or
- conditions to be met, such as foreign investment quotas, the imposition of industry-specific standards,and/or environmental impact assessments.
The approval of the MIC is required for investments in the sectors or activities listed under the second and third categories mentioned above. It is also important to note that Notification No. 1/2013 facilitates access to industries that had been previously reserved to the state under the State Owned Economic Enterprise Law of 1989 (SOEEL), the previous exemption from which was rarely granted or only granted with special conditions and/or the requirement of a joint venture with the government. Approval by the MIC and other relevant industries may now be obtained for foreign investment into a number of these sectors, including oil and gas production and exploration, mining, and telecommunications.
The application for an MIC permit is typically undertaken at the same time as an application for incorporation with the CRO. The process is more in-depth than a standard incorporation and requires the submission of detailed investment plans, draft joint venture agreements, and draft land leases where applicable. The MIC will rely on certain “key factors” in determining whether to approve a proposed investment, including the likelihood that a proposed investment will result in a significant level of domestic labor, the required importation and use of heavy equipment and/or advanced technology, the value added by the investment to the domestic economy, and the degree to which the investment will improve the living standards of Myanmar citizens.
Considerable incentives may be obtained by companies in possession of an MIC permit. These include a range of tax benefits that include a five-year income tax holiday, as well as operational incentives subject to MIC approval such as the capacity to import and export materials necessary for the investment and exemption from certain duties and taxes on such imports. Additionally, companies with an MIC permit are exempt from the single-year lease term requirement of Myanmar’s Transfer of Immovable Property Restriction Law (TIPRL). Under TIPRL, foreigners and foreign companies may only lease land for a single year; however, with an MIC permit, a foreign investor may lease land for up to 50 years with two additional ten-year extension periods.
Special Economic Zones
Presently, Myanmar hosts two special economic zones (SEZs), including the Thilawa SEZ and Dawei SEZ, while a third SEZ in Rakhine, the Kyaukphyu SEZ, is expected to commence soon after the selection of a master developer through the required tender process. An update to 2011’s SEZ Law was passed in late 2013, streamlining administrative procedures and providing a number of incentives to encourage participation in Myanmar’s SEZs. Among other provisions, the law requires review of applications within 30 days of submission and the creation of “one-stop centers,” instituted to provide for single points of contact for permit issuance, registration, and other regulatory matters.
Additionally, the law includes incentives for investors, such as income tax holidays for the first five to seven years of investment depending on the category of investment, an additional 50 percent income tax relief for the five years following the initial holiday, and another 50 percent tax relief on operating profits for a second five-year period if those profits are maintained in a reserve fund and reinvested within one year. Land to be leased pursuant to an SEZ investment may be leased for a period of 50 years with an optional renewal period of an additional 25 years, and projects are guaranteed against nationalization throughout the permitted term of investment.
Foreign Investment Regime
Having lately witnessed large outflows of foreign investment funds, Indonesia has repeatedly reiterated its commitments to attracting foreign investment.
Indonesia’s foreign investment restrictions come primarily in the form of a “Negative List” issued by Presidential Regulation No. 39 of 2014, a presidential decree updated from time to time. Driven by Indonesia’s commitments to the AEC and overarching legislative policies of equal treatment between foreign and domestic investors, many limits on foreign investment have been relaxed, marking a noticeable departure from this regulation’s predecessor, Presidential Regulation No. 36 of 2010.
Indonesia’s restrictions on foreign investment take the form of industry-specific quotas capping foreign ownership in, for instance, sectors such as
- fixed cable line services (65 percent),
- telecommunication network provider (65 percent), and
- Internet service providers (49 percent);
- insurance (80 percent);
- mining (100 percent with a requirement to divest to local/Indonesian shareholders within 15 years from commerical production);
- energy and mineral resources (mostly 95 percent or 100 percent under partnership with government);
- transportation (mostly 49 percent or 95 percent under partnership with government);
- health service (mostly 49 percent or 67 percent); and
- pharmaceutical (85 percent).
Special allowances over some of these quotas are available to ASEAN countries, but whether these are actually implemented in practice remains to be seen.
Standing out as Indonesia’s most popular sector for foreign investment, the manufacturing sector permits 100 percent foreign ownership, save for certain niche manufacturing industries such as craft, traditional foods, pulp, and tobacco, which may attract further conditions.
Indonesia-bound foreign investments need to be approved by the Investment Coordinating Board (BKPM). Industry-specific approvals may be required from their corresponding ministries, such as, for instance, those of the oil and gas and mining sectors.
Incentives that may be derived from granted investment approvals include, among other tax benefits, a ten-year allowance for accelerated depreciation and amortization to fixed assets and an extended loss compensation period for five to ten years.
Choice of Investment Vehicle
Prescribed by statute, a foreign investment company, known by the acronym PT PMA, has to take the form of a limited liability company as its mandatory vehicle. PT PMA status requires at least two shareholders and minimum capitalization, according to the current Regulation of the Head of BKPM No. 5 of 2013 on Guidelines and Procedures for Licensing and Non-Licensing Matters in relation to Investment, as last amended by Regulation of the Head of BKPM No. 12 of 2013.
The incorporation of the PT PMA is preceded with initial approval from the BKPM, followed by (in general order) (i) execution of a “deed of establishment” (similar to a memorandum and articles of association), (ii) approval by the Minister of Law and Human Rights, and (iii) procurement of a permanent business license from BKPM, followed by acquiring all post-incorporation operational licenses.
All in all, the timeline for incorporation may take roughly six months.
Zone-specific promotion is available in Indonesia in the form of “bonded zones” that attract special incentives over and above the general BKPM ones, which include both tax and operational incentives.
In Indonesia, a significant shortcoming that had previously repelled foreign investment is the lack of clearly defined laws, both in relation to foreign investment and local commercial laws in general. For this reason, efforts in achieving a clearer legal framework are being undertaken. For instance, in relation to Indonesia’s mining sector, which is often seen as lucrative given the country’s large mineral reserves and low mining costs, mining laws have undergone substantive reform in the form of the Law on Mineral and Coal Mining No. 4 of 2009, setting forth a proper regulatory framework, transparent tendering procedures for license grants, an area-based system for licensing, and a number of other legal framework improvements.
Thailand remains attractive to foreign investors in its efforts to become one of AEC’s hubs, over and above its already pivotal role in facilitating the influx of foreign investments into the Indochina region. This is so despite the political “intramurals” ongoing at the time of this writing—with some cautious, wait-and-see investors putting their investments on hold while others gear up for an anticipated economic “rebound” expected to follow an eventual resolution of the political episode.
The crux of Thailand’s foreign investment restrictions is enshrined in the Foreign Business Act B.E. 2542 (A.D. 1999) (FBA), which consolidates restricted business operations into three classes.
- Schedule 1. Absolutely restricted business activities, which include:
- newspaper, radio broadcasting, and television station
- forestry; and
- land trading.
- Schedule 2. Businesses that are accessible only by joint venture with a local partner (40 percent minimum) and ministerial approval, which include:
- land, waterway, and air transportation;
- mining; and
- wood fabrication.
- Schedule 3. Businesses that may be fully foreign owned with a foreign business license (FBL), which include:
- brokerage or agency;
- advertising; and
- hotel (other than hotel management).
Significantly, Schedule 3 of the FBA has a catch-all provision for service businesses. Special allowances to the foreign investment quotas in certain Schedule 2 and Schedule 3 sectors are given to nationals from America, Australia, and Japan under the AMITY, TAFTA, and JTEPA treaties, respectively.
Industry-specific regulations on foreign investment exist in industry-specific legislation, generally in the form of quotas, in sectors such as banking and finance, where a foreign bank may own 25 percent of a Thai bank or 49 percent with the approval of the Bank of Thailand or more with approval of the Ministry of Finance; insurance at 25 percent, 49 percent upon recommendation by the Insurance Commission or more with approval of the Ministry of Finance, respectively; shipping, where foreign ownership of a company owning Thai-flagged vessels is limited to 30 percent; telecommunications (49 percent); and insurance brokerage (49 percent).
Notably, over and above all other industries not specified in the FBA, Thailand’s manufacturing, import, and export sectors are open to 100 percent foreign ownership without requiring the FBL. Listed industries, such as construction, trading, wholesaling, distribution, retailing, and a number of service sectors, such as brokerage and securities, are all open to full-foreign ownership without the need for the FBL, provided prescribed minimum capitalization requirements and other industry-specific conditions are met.
A peculiar thing about Thailand-bound investments is the distinction between a foreign entity and a Thai entity that is based almost entirely on its shareholding. As shareholding essentially does not equate to control, given that various voting rights may be attributed to different tiers of shares, this substantially deviates from more traditional definitions of a corporate entity’s nationality. A company incorporated in Thailand, even if foreign-controlled but without majority foreign shareholding, is deemed a Thai company, and so foreign shareholding of not more than 49 percent does not necessitate an application under the FBA whatsoever.
Apart from the FBL or cabinet approval, the primary governmental body empowered to promote and incentivize foreign investment, the Board of Investment (BOI), grants substantial incentives to foreign investors. These include full-foreign ownership and even land ownership to investors for a number of sectors under Schedules 2 and 3, as well as a wide range of tax incentives that may include a tax holiday of up to eight years (depending on location), withholding tax exemption of dividend distribution, customs duty exemptions, and so forth.
Pursuant to Thailand’s commitments to the AEC, Thailand is expected to open up its service industries to 70 percent ownership by ASEAN investors, but whether this occurs or not remains to be seen.
Choice of Investment Vehicle
The most common vehicle for market entry is the private limited company, governed under Chapter IV of the Thailand Civil and Commercial Code. There are also public limited companies and partnerships. Representative and regional offices are also used, but capabilities of the same are limited in that they are not allowed to generate revenue and are basically limited to activities in support of their overseas businesses.
Minimum capitalization required for foreign majority private limited companies is Thai baht (THB) 2,000,000 and THB 3,000,000 for companies engaging in Schedule 2 or Schedule 3 businesses, subject to the sufficiency of such capital for the company’s scope of business activities. Subject to the same sufficiency requirement, minimum capitalization for a Thai-majority private limited company (whether or not “foreign-controlled”) is minimal and, in practice, THB 100,000 is generally acceptable.
Commercial registration from the Department of Business Development under the purview of the Ministry of Commerce may be obtained within the same day as submission of the application, armed with which business operations may commence.
A minimum of one director and three initial individual shareholders (known as promoters), whose shares may subsequently be transferred to corporate shareholders, are required. At least three shareholders need to be maintained throughout the life of the company.
Recently, Thailand has seen a relaxation of its eligibility requirements for a Thailand subsidiary to be granted the status of Regional Operating Headquarters (ROH), as well as an increase in the incentives that may be granted. Thailand’s ROH scheme is competitive and offers a wide range of tax benefits, including ten-year exemptions from corporate tax on profits from services provided to foreign affiliates and dividends, ten-percent reductions on corporate tax on profits from services rendered to local affiliates, and royalties for ten years. As of late last year, only 122 companies were registered as ROHs in Thailand, and it remains to be seen whether Thailand will become an ROH favorite.
Along with the BOI, the Industrial Estate Authority of Thailand also provides foreign investors with geographical zone-based promotions ranging from tax benefits to even land ownership.
Gearing up for the AEC, both the Myanmar and Indonesian markets have seen an influx of foreign investments in recent years, and foreign investment is expected to expand as the market continues to liberalize and inter-regional treaties with other AEC members further facilitate expansion. Thailand, a long-standing favorite as an Indochina hub, may become even more attractive as it rides on its neighbors’ efforts, as well as its own increased efforts to further internationalize the Thai market.