Attitude Toward Foreign Direct Investment
The Lao government officially welcomes both domestic and foreign investment as it seeks to keep growth rates high and graduate from Least Developed Country status. The pace of foreign investment has increased over the last several years. According to the Lao government’s statistics, mining and hydropower compose eighty percent of Foreign Direct Investment (FDI). China, Vietnam, Thailand, Korea, France, and Japan are the largest sources of foreign investment.
The 2010 Law on Investment Promotion introduced uniform business registration requirements and tax incentives that apply equally to foreign and domestic investors. Foreigners may invest in any sector or business except in cases where the government deems the investment to be detrimental to national security, health or national traditions, or to have a negative impact on the natural environment. There are no statutory limits on foreign ownership or control of commercial enterprises, but in practice, many companies seek a local partner. Companies involved in large FDI projects, especially in mining and hydropower, often either find it advantageous or are required to give the government partial ownership, frequently with money borrowed from the investor or multilateral institutions.
Foreign investors seeking to establish operations in Laos are typically required to go through several steps prior to commencing operations. In addition to an investment license, foreign investors are required to obtain other permits, including; an annual business registration from the Ministry of Industry and Commerce; a tax registration from the Ministry of Finance; a business logo registration from the Ministry of Public Security; permits from each line ministry related to the investment (i.e., Ministry of Industry and Commerce for manufacturing; Ministry of Energy and Mines for power sector development); appropriate permits from local authorities; and an import-export license, if applicable. Obtaining the necessary permits can pose a challenge, especially in areas outside the capital. In 2013, the Lao government began allowing businesses to apply for tax registration at the time of incorporation, slightly simplifying the business registration process.
Many business owners and potential investors claim the process to be overly complex and regulations to be erratically applied. Investors also describe confusion of roles between the ministries, with multiple ministries unexpectedly involved in the approval process.
Foreign partners in a joint venture must contribute at least 30 percent of the company’s registered capital. Capital contributed in foreign currency must be converted into Lao kip (LAK). Currency conversion is based on the exchange rate of the Bank of the Lao People’s Democratic Republic on that given day, typically near 8000 LAK to USD during the reporting period. Wholly foreign-owned companies may be either a new company or a branch of an existing foreign enterprise. Throughout the period of operation of a foreign invested enterprise, the assets of the enterprise must not be less than its registered capital.
Individual companies in the petrochemical industry are required to file an annual import plan. The government controls the retail price and profit margins of gasoline and diesel. Goods prohibited for import and export range from explosives and weapons to certain forestry products and wildlife. Agriculture production and most manufacturing production are private. State-owned enterprises (SOEs) currently account for only one percent of total employment. Over 90 percent of manufacturers have fewer than 10 employees. Equity in medium and large-sized SOEs can be obtained through a joint venture with the Lao government.
Although accurate statistics are difficult to obtain, there is no question that foreign investment has increased dramatically over the last several years. According to UNCTAD, total FDI stock doubled between 2008 and 2013, reaching USD 2.8 billion. There are also small but growing signs of growth in higher-quality FDI, focused on manufacturing, largely through one Special Economic Zone in the southern part of the country.
Other Investment Policy Reviews
The Organization for Economic Cooperation and Development (OECD) initiated an Investment Policy Review of Laos in April 2015 and plans to release the document in mid-2016.
The World Bank's 2014 Lao PDR Investment Climate Assessment is available at https://www.worldbank.org/en/country/lao/publication/lao-pdr-investment-climate-assessment-2014-policy-uncertainty-in-the-midst-of-a-natura-resources-boom.
Laws/Regulations on Foreign Direct Investment
The 2010 Law on Investment Promotion introduced uniform business registration requirements and tax incentives that apply equally to foreign and domestic investors. Foreigners may invest in any sector or business except in cases where the government deems the investment to be detrimental to national security, health or national traditions, or to have a negative impact on the natural environment. There are no statutory limits on foreign ownership or control of commercial enterprises, but in practice many companies seek a local partner.
Most laws of interest to investors will be featured on the Lao Trade Portal website, http://www.laotradeportal.gov.la, with many laws and regulations translated into English, or on the Official Gazette, http://laoofficialgazette.gov.la. The 2012 Law on Making Legislation stipulated that any legislation not posted by the end of 2014 to the electronic Official Gazette would be void. While many laws were placed on the site before the end-2014 deadline, others older laws, which would have been voided on January 1, 2015, have been placed on the site since without being formally re-approved by the relevant legal bodies, resulting in a legal gray area.
The Lao National Assembly approved a new Competition Law in July of 2015, which also affected the investment environment. In addition to provisions that outlaw restraint of competition, the law also contains provisions addressing consumer protections, unfair or abusive business practices, monopolies, mergers, and acquisitions.
Neither the government’s investment bureaucracy nor the commercial court system is well developed. Investors have experienced government practices that deviate significantly from publicly available law and regulation. Some investors decry the court’s limited ability to handle commercial disputes and the judicial system’s vulnerability to corruption. The Lao government has repeatedly underscored its commitment to increasing predictability in the investment environment, though in practice, with some exception in the special economic zones and for larger companies, foreign investors describe inconsistent application of law and regulation.
Laos does not have a central business registration website. Timelines and government agencies involved in business registration can vary considerably. Many investors and even locals will hire consultancies or law firms to shepherd the effort-intensive registration process, which can take from a few weeks to several months.
The Lao government has attempted to streamline business registration through the use of a “one-stop shop” model. For general business activities, this service is located in the Ministry of Industry and Commerce. For activities requiring a government concession, the service is located in the Ministry of Planning and Investment. For Special Economic Zones (SEZ), one-stop registration is run through the Secretariat to the Lao National Committee on Special Economic Zones (SNCSEZ) in the Office of the Prime Minister. According to Prime Minister’s Decree 177, the Savan-Seno SEZ authority is required to establish one-stop service to facilitate the issuing of investment licenses and improve the efficiency of business operations.
Business owners give the one-stop shop concept mixed reviews. Many acknowledge that it is an improvement, though describe it as an incomplete reform with several steps that must still be taken outside of the “single stop.”
The 2004 decree on the promotion and development of small- and medium-sized enterprise (SME) does not differentiate between Lao and foreign-owned business. According to the Lao government, small enterprises are those having an annual average of less than 20 employees, or total assets below 250 million kip (USD 31,000), or an annual turnover below 400 million kip (USD 50,000). Medium-sized enterprises are those having an annual average of less than 100 employees, or total assets below 1.2 billion kip (USD 150,000), or an annual turnover below 1 billion kip (USD 125,000). In practice, services and special funds for SMEs are only known to be available to Lao businesses.
The government has informally encouraged foreign investment in several key industries, including light manufacturing, agribusiness (with a particular focus on local processing and organics), tourism and travel, energy, mining, and transport and logistics services. The Lao government's official website for industrial promotion is www.investlaos.gov.la.
Legislation does not clearly establish a “right” to establish and own a business, though that right exists in practice. The right to own land is a subject of some debate, though private land, or in some cases land use rights, are bought and sold by Lao individuals and entities. Foreign individuals and entities are unable to own land in Laos, though may obtain extended leases of up to 99 years in some circumstances.
The 2010 Law on Investment Promotion introduced uniform business registration requirements and tax incentives that apply equally to foreign and domestic investors. Foreigners may invest in any sector or business except in cases where the government deems the investment to be detrimental to national security, health or national traditions, or to have a negative impact on the natural environment. There are no statutory limits on foreign ownership or control of commercial enterprises, but in practice, many companies seek a local partner. Companies involved in large FDI projects, especially in mining and hydropower, often either find it advantageous or are required to offer the government partial ownership, frequently purchased with money borrowed from the investor or from multilateral institutions.
The Lao government has no specific privatization program.
The government has no known official policy for screening FDI in Laos, although senior government officials have occasionally stated in public that Laos should only accept the “right kinds” of investments.
A new competition law was approved in 2015 which applies to both foreign and domestic individuals and entities. The law was drafted with the assistance of the German government and other donors. The competition law was one of the Lao government’s policy efforts to implement the ASEAN Economic Community, or AEC, before 2016. The law established two new government entities, the Business Competition Control (BCC) Commission and the BCC Secretariat. The BCC Commission is the senior body and its membership is decided by the Prime Minister with the advice of the Minister of Industry and Commerce. According to the legislation, it should include senior officials from multiple ministries as well as businesspeople, economists, and lawyers. The BCC Commission can draft regulations, approve mergers, levy penalties, and provide overall guidance on government competition policy and regulation. The BCC Secretariat, a lower-level institution equivalent to a Ministry of Industry and Commerce department or division, can hear complaints, conduct investigations, and conduct research and reporting at the request of the Commission.