Myanmar’s sweeping wave of new laws and regulations has reshaped the country’s regulatory framework for international financing. Changes to foreign exchange laws, banking regulations, investment regulations and in the practice of the investment regulator, in combination with further softening of foreign sanctions, are expected to result in a more attractive and secure framework for foreign lenders to provide financing in Myanmar.
Required approval now in practice from the Myanmar Investment Commission, not the Central Bank
Although not expressly provided, foreign loans were permitted in practice by the Myanmar Investment Commission (MIC) under the 1988 Foreign Investment Law (1988 FIL) but an approval had to be sought from the Foreign Exchange Controller (Central Bank) as well. With the 2012 Foreign Exchange Management Act (FEMA), the Central Bank’s responsibilities in this matter have been reorganized. Although much of the FEMA still needs to be implemented into practice we have already seen a noted liberalization of foreign exchange transactions in the actual practice.
Under the FEMA, Myanmar banks are authorized to remit foreign currency overseas from Myanmar if it represents interest or reimbursement of loan capital, provided the MIC has approved the loan and the payment schedule.
The MIC approval is part and parcel of the investment licensing process of a foreign (or Myanmar) investor. The approval can be obtained at the outset, i.e. when the investment proposal is submitted to the MIC, or at any other time. Theapproval process requires the submission of anumber of documents and drafts which will be reviewed by the MIC. When the process is finalized, usually a document is provided which will serve as the authorization for the investor’s bank to remit funds.
Foreign Investment Law has precedence over the foreign exchange law in Myanmar
FEMA provides that no limitations on payments will be imposed on “payments of ordinary account”.
24. For transfer payments of ordinary account, direct or indirect limitation on payments and transfers from overseas to in land shall not be imposed.
25. For transfer payments of ordinary account, while payments and transfers from in land to overseas are being made, direct or indirect limitation shall not be imposed.
The term “payments of ordinary account” includes, among other items, interest on loans and capital repayments for loans for the purpose of foreign direct investment (FEMA, art. 2 l)). FEMA provides further that, before allowing an outward re-transfer, the Central Bank will examine whether funds were in fact brought in.
“In order to allow retransfer of capital, interest, dividends and other earnings to overseas, the Central Bank shall scrutinize whether the funds prescribed as foreign investment were actually brought in or not”. (FEMA, art. 26)
In any event, the provisions of the 2012 FIL have priority over FEMA, as is set out explicitly in FEMA art. 31. This may be significant in practice in case of uncertainty in the application or interpretation of the rules.
Taking security under the new regulation
Neither the 1988 FIL nor the implementing regulations provided for any specific rights for foreign investors to offer security over their assets to lenders. The 2012 FIL does mention this possibility (FIL 2012, art. 17 d). This is implemented by Notification 11/2013 (Notification 11/2013, art. 62 to 64) (“the Rules”). The new Rules provide a number of conditions which the MIC will evaluate.
The conditions for MIC approval for an investor to provide security are as follows:
1. Whether or not the reason for wishing to [...] mortgage is true;
2. Whether or not the […] mortgage will be detrimental to the interests of the state and its citizens; and
3. Whether or not the receiver of the mortgage is in a position to proceed with the activity successfully or not.
The MIC has the authority to make a case-by-case evaluation, taking into account the wider implications of the project and its financing. Presumably, the MIC will facilitate the international financing of investment projects that it wishes to promote.
Condition number 3 may require some further interpretation. Commercial lenders are generally not in the position to continue with the investment project if the investor is insolvent, at least not without the intervention of a third party. Feel free to contact your regular adviser at Clifford Chance or VDB Loi to be updated on our practical experiences to date with the MIC on this issue.
What types of security are possible?
Security on land and buildings is referenced explicitly in the Rules. In addition, the legal framework exists for share pledges, security on movable goods, receivables, and floating charges but the enforcement of these securities are largely untested in practice.
Easing of sanctions on banks in Myanmar
The liberalization of foreign exchange transactions comes at a time when the US Department of the Treasury has eased sanctions in relation to four Myanmar banks, notably Asia Green Development Bank, Ayeyarwady Bank, Myanma Economic Bank, and Myanma Investment and Commercial Bank. It provides a “general license” (no. 19) which permits financial transactions from 22 February 2013 onwards with these banks, subject to a few exceptions (e.g. no new investment in these banks, no precious stones, no transactions with the Ministry of Defense or entities in which the Ministry of Defense holds at least 50%).
Approximately two dozen foreign banks have opened representative offices in Myanmar, including Standard Chartered, OCBC, Maybank, and UOB. Foreign investors are allowed to conclude joint ventures with Myanmar banks. Generally speaking, for joint ventures in restricted activities foreign investors may hold up to 80% of the shares. A new law on the Central Bank, which is currently in its final stages of preparation, is expected to provide additional guidance on joint ventures between Myanmar and foreign banks.
Tax considerations of international financing
With respect to commercial lenders it is to be noted that there is no withholding tax on interest paid to domestic recipients. However, a 15% withholding tax applies to payments of interest to non-residents. There is no tax deduction on the remittance of capital reimbursements. The 15% withholding tax rate is reduced to 10% under a number of double taxation agreements (DTA), and even to 8% under the DTA with Singapore (only lenders that are banks). The corporate income tax (the common rate is 25% for corporations) contains general rules on the limitation of the deductibility of expenses, including interest expenses, which need to be taken into account for tax planning purposes. The table below sets out the withholding tax on interest and for those countries with which Myanmar has a DTA.
Withholding Tax on Interest Paid to Non-Residents