Making property work for JVs - The Fine Print Legal & tax insight

In a common scenario, a Myanmar citizen has acquired land and intends to contribute it to a joint venture with a foreign partner with the capital and the know-how to develop it.

The difficulty the partners face is: How can the land be transferred to the joint venture given that it is prohibited for foreign-invested companies to own immovable property?

Strictly speaking, Myanmar citizens also cannot “own” land. In Myanmar, the concept is that all land is owned by the state who administers it for the people. However, Myanmar citizens can obtain a land grant or a freehold. These are long-term leases from the state with elements of ownership, as the lease is easily renewable and can be sold to other citizens and passed on by way of inheritance.

Foreigners – this includes foreign-invested companies – cannot obtain a land grant or a freehold. The Transfer of Immovable Property Restrictions Act of 1987 only allows them to lease immovable property (land and/or buildings) for a period of up to one year. The lease is renewable, but it may of course be an unsatisfactory situation for the foreign tenant to be at the mercy of the landlord every year.

Foreign-invested companies operating under an MIC permit, however, are not subject to the limits imposed by the Transfer of Immovable Property Restrictions Act. They may lease land for the duration of their project. The permissible duration depends on the type of the project. If, for instance, the company is to operate a factory, the MIC may allow a project term of 20 to 30 years. The Foreign Investment Rules contain absolute upper limits (30 years for agricultural and 50 years for other projects with the possibility to renew twice for 10 years each), but the project terms approved by the MIC would often be shorter.

If foreign-invested companies can only obtain a “normal” lease and are barred from having a land grant or a freehold, how can the local partner contribute land to the joint venture company? Unlike in other countries in the region with foreign ownership restrictions, there are no specific legal procedures in Myanmar for land contributions to joint venture companies with foreign shareholders. The solution to this problem seen in practice is for the local partner (landlord) to enter into a lease agreement with the joint venture company (tenant) for the sake of form and to state in the lease agreement that “the rental fee has already been paid in advance for the entire rental period”. Alternatively, the local partner contributes cash to the joint venture company and leases the land out to the company in return for actual rental payments.

Some experts have voiced concern, however, that these practical solutions amount to an illegal circumvention of the prohibition to transfer land to foreigners. We do not think so as in no case could the foreign-invested joint-venture company enjoy possession of the land for longer than the period permitted by the MIC, but regulatory clarification would be welcome.

There is also a tax issue: As the only way for the local partner to contribute land to the joint venture company is via the detour of a lease agreement, the local partner has taxable rental income. This runs counter to the idea of a capital contribution which normally results in (non-taxable) income from dividends. Again, regulatory clarification would be welcome. Often, land is the only asset that the local partner to a joint venture can or wants to contribute, and matters should not be made too difficult for the local partner.

Sebastian Pawlita and Nan Kin Kham are with Polastri Wint & Partners Legal & Tax Advisors.

source: The Myanmar Times
http://www.mmtimes.com/index.php/business/8215-making-property-work-for-jvs-the-fine-print-legal-tax-insight.html