Monday, September 25, 2017

The Fine Print: Legal & tax insight

Generally speaking, there are two ways for shareholders to finance a company: by injecting equity capital or providing a loan.

The difference between equity and a shareholder loan becomes clear if the company becomes insolvent. Shareholders have no right to demand repayment of their equity, but may demand repayment of the loan. In other words, equity is used to satisfy creditors, with any leftovers going to the shareholders.

With regard to loans, in contrast, shareholders are in an ideal situation, treated like any other creditor. Company assets must be used to repay the loan, and shareholders are not reduced to waiting for leftovers. If the company has nothing left, of course, both creditors and shareholders go empty-handed.

Another difference between equity capital and a shareholder loan is that a company can repay equity only if either the registered capital of the company is reduced or the company is wound up. If the company operates under an investment permit from the Myanmar Investment Commission (MIC), MIC approval is required in both scenarios.

In contrast, a loan can be repaid after the end of the term stipulated in the loan agreement between the shareholder and the company. This means in practice that the shareholder can schedule the repayment of the loan to a time of his convenience by wording the loan agreement accordingly.

A company operating under an MIC permit has to obtain MIC approval before signing the loan agreement if the funding comes from abroad. The MIC requires the company to obtain approval from the Central Bank, the opinion of the Union Attorney General’s Office, and recommendations from the Foreign Economic Relations Department of the Ministry of National Planning and Economic Development and the ministry in charge of the sector in which the company is operating.

Without MIC approval, the company can neither pay interest on the loan nor repay the principal on a foreign loan – the company’s bank will simply refuse to transfer the money.

Companies that do not operate under an MIC permit have to obtain approval from the Central Bank before taking up a loan from abroad.

Taxation of equity and loans is different. Having equity in the company gives a shareholder the right to receive dividends, which do not attract withholding tax in Myanmar. Furthermore, dividend income is often privileged tax-wise in the home jurisdiction of the shareholder, meaning that the income tax burden of the shareholder is often not influenced too much by the receipt of dividends. The company cannot deduct dividend payments as business expenses.

In contrast, there is a withholding tax of 15 percent on interest paid by the company to a non-resident shareholder on account of a shareholder loan. There are usually no tax privileges on interest income in the home jurisdiction of the shareholder. However, the company can deduct interest payments as business expenses.

Sebastian and Hnin are consultants with Polastri Wint & Partners Legal & Tax Advisors.