Steps Required for Investment
(kindly provided by the Embassy of Peoples Democratic Republic of Laos to the United States of America)
The rights and activities of foreign investors in Laos are secure under the Law on the Promotion and Management of Foreign Investment in the Lao PDR. The general principles are outlined for reference.
In section Two: Forms of Foreign Investment, it is stated that foreign investors may invest in the Lao PDR in either of two forms
In section Four: The Organization of Foreign Investment Management, the Lao Government has established a State organization to promote and to manage foreign investment within the Lao PDR, titled the Foreign Investment Management Committee of FIMC.
Article 23 states that all foreign investment shall be assisted, licensed and monitored through the "1-stop-service" of the FIMC.
Article 24 states that a foreign investment shall be regarded as legalized only after receiving a written foreign investment license granted by the FIMC.
Article 26 states that the FIMC is required to complete the examination process within 60 days of the application’s submission date.
Article 27 requires that an investor who has already received an investment license has to register and commence its operation within 90 days in line with the steps required by the laws and regulations of the Lao PDR.
Article 28 clearly states that the committee will act as the coordinator with the relevant ministries and local authority in inspecting whether the operation of the investment is in accordance with the request.
Article 29 states that if the law is violated, a foreign investor shall be notified and shall be instructed to promptly desist. In case of a serious violation or the investor’s failure to desist, the license may be suspended or revoked.
The area of investment that the law allows are clearly stated in Article 2 that foreign investors are allowed to invest in all fields, such as agriculture and forestry, manufacturing, energy, mining, handicrafts, communications and transport, construction, tourism, trade, services and others. Exceptions are businesses, which threaten the security of the nation or violate the natural environment, public health and the culture of the nation, or which violate the laws and regulations of the Lao PDR.
As for he stability in the business, Article 3 states that the property and investment of foreign investors in the Lao PDR shall be fully protected by the laws and regulations of the Lao PDR.
Article 10 states that the government provides protection for the investments and the property of foreign investors as required by the laws and regulations of the country. Foreign investors may lease land and transfer their leasehold interests. The law also covers the right to posses improvements on land and other movable property and transfer those ownership interests. Foreign investors have the freedom to operate business under the laws and regulations of the Lao PDR without any interference from the government.
Article 12 clarifies that the Government of the Lao PDR shall facilitate foreign investors, employees, including family members, concerning traveling in and out of the Country as well as staying in Laos to conduct business or on family matters. The investors or employees, in turn, must obey and abide by the laws and regulations of the Lao PDR while staying in the country.
Regarding taxation and finance, the law states that foreign investors and employees in the Lao PDR must pay personal income tax to the government at the rate of 10% of their total income. The foreign investors have to open account both in Kip and in foreign currency with local banks or foreign banks in Laos.
Article 15 states that under the law and regulations on the management of foreign exchange and precious metals, foreign investors are allowed to repatriate their income and investment capital back to their own countries or a third country via a bank located in Laos at the foreign exchange rate quoted by the bank of the Lao PDR on the date of repatriation.
Foreign investors/employees in Laos are also allowed to send their income after payment of income tax, and all other taxes back to their own countries or a third country.
Income tax paid by foreign investors is at the rate of 20% p.a. and to be calculated by the way prescribed in the laws and regulations of the Lao PDR. Import tax for equipment and supplies is one per cent of the value. Imported raw materials and intermediate components for processing and then re-exported are exempt from imported taxes. All exported finished products are also exempt from export taxes. Raw materials and intermediate components imported achieve import substitution receive a special duty reductions in accordance with the government’s incentive policies.
Before commencing operations, all enterprises (domestic, foreign, state, private, joint venture, etc.) must be registered, in conformity with the Lao law on business operations, with the Ministry of Commerce’s Trade Registration Department: at provincial level, with the trade registration service: and at district level for small size investments.
Upon receipt of the completed application and supporting documents, the concerned authority shall screen them and register quickly.
One supporting document, if investment is in the field of agriculture, should be a notification of approval from the Ministry of Agriculture: if in manufacturing or industries there should be approval notification from the Ministry of Industry.
For foreign investment enterprises, before applying for trade registration, these enterprises, must have received a foreign investment license from the Foreign Investment and Management Committee (FIMC) according to the law on the Promotion and Management of Foreign Investment in the Lao PDR.
STRUCTURE OF THE BANKING AND FINANCE SYSTEM
After commencing economic reform towards a more liberalized system, the Lao Government tried to bring the banking and finance system in line with the demands of the economy.
Since 1988, periodic reforms have been made as required under Ministers Council Resolution II/PSL, of 12 March 1988, which stated that the national bank would be managed independently as a commercial entity and the entire banking system adopt a commercial stance.
In mid 1990, a law to establish the Bank of the Lao PDR was enacted. The law determines the role of the bank under the new system.
At the beginning of 1992, provisions were made to protect the gradual evolution of the banking and financial sector until they were able to accept autonomy on the same basis at the international banking and finance community.
Meanwhile, the government began to allow foreigners to play a role in the banking business in terms of joint ventures and the opening of branches or agencies. However, their activities were restricted to Vientiane Municipality.
With the memberships in the international Monetary Fund (IMF) and the World Bank, the Bank of the Lao PDR has joined various funding and banking organization, including the Asian Development Bank. Under the guide and the supervision of the Bank of the Lao PDR, there are 34 commercial banks and branches including domestic and foreign banks. These banks can be characterized as specialized and general commercial banks. While general banks deal with deposits or handle short and long term support funds for investment, they also supply business with working capital needed to back up production activities. Usually general banks are involved in the supply of funds for commercial and financial transaction. Specialized banks were established in order in order to facilitate financing for specific sectors of the national economy whose monetary needs could not be fully supplied by the general banks because of restriction on funds and profitability. Although specialized banks were created for specific and individual business area, they recently conduct activities similar to those of general banks.
Under the supervision of the Bank of the Lao PDR, the commercial banks located throughout the territory are as follows:
1. Bank of Foreign Trade : head office in Vientiane, two branches in
Savannakhet and Pakse
2. Sethathirath Bank : head office in Vientiane, two branches in Phonehong and Paksane
3. Phaktai Bank : head office in Pakse
4. Nakhorn Luang Bank in Vientiane
5. Aloun Mai Bank, regional bank with office in Xamneua
6. Lao Mai Bank, regional bank with head office in Savannakhet
7. Lane Xang Bank, head office in Luangprabang
8. Agricultural Promotion Bank, head office in Vientiane
1. Vientiane Commercial Bank
2. Joint Development Bank
Foreign bank and branches
1. Public Bank, Malaysian branch
2. Standard Chartered Bank
3. Bangkok Bank branch
4. Siam Commercial Bank branch
5. Krung Thai Bank branch
6. Thai Farmer’s Bank branch
7. Thai Military Bank branch
8. Ayudhaya Bank branch
The Bank of the Lao PDR requires commercial banks to maintain the liquidity of their assets. They are required to have a reserve capital set by law and a debt ratio of a specified rate. Most significantly, they are obliged to offer the agricultural sector loans amounting to at least 15% of the total amount of their deposits. The loans may be either operated by the bank itself or deposited with the Agricultural Promotion Bank.
After foreign banks began to operate in Laos, local banks received the opportunity to learn more of international banking standards and have become increasingly competitive, especially in employing strategies to increase deposits. Moreover, they have been absorbing knowledge of international financial practice. The Bank of Foreign Trade has also adjusted itself to meet the requirements of the business community.
Laos has greatly relaxed its control over interest rates since 1991. At present, the Bank of the Lao PDR determines only the prime rate of deposits and the advanced interest rate on loans. For foreign exchange rates, the Bank of the Lao PDR determines the medium rate of the Kip against foreign currencies whereas the actual exchange rate is set by the commercial banks, provided that movement is within the scope determined by the Bank of the Lao PDR. The general public and resident aliens are allowed to have a foreign currency deposit account and to use the account to pay debts, transfer money abroad, for overseas travel, etc. For local payments of goods and services, however, transactions are to be made in Kip.
Since banking and finance play an important role in both the promotion and restriction of trade and foreign investment, banking in Laos has had to be adjusted to a certain extent. Improvements have been undertaken with the assistance of the World Bank, the Asian Development Bank and the International Monetary Fund. For the time being, Laos still relies significantly upon the assistance of foreign finance and banking institutions in the development of the country.
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The development of Laos in the past century had to rely upon external sources of capital mostly with financial assistance and loans from foreign countries. Even now that Laos has opened up and is receiving a huge amount of foreign investment, a substantial part of money used in the development of the country continues to depend on foreign aid and loans. Between 1989-1991, the country received roughly US$ 80 million per annum in financial assistance from international organizations like the World Bank, the Asian Development Bank and the International Monetary Fund.
In 1994, the Lao Department of Civil Aviation prepared a plan to request foreign loans to renovate its three major airports in Vientiane, Savannakhet and Pakse as well as another dozen minor airports in other provinces. The total amount of the loan was around US$ 30 million, of which US$ 15 million was offered by the Asian Development Bank and US$ 6 million by the Nordic Development Fund. The rest, amounting to US$ 8 million, was provided by the Asia Group.
The Thai Government provided financial assistance for the renovation of Luangprabang’s airport to the amount of US$ 2million. The aid was used to construct a building with a capacity of 200 passengers and to renovate the 1,830 metres runway.
Laos has made great efforts to cement good relations with many countries, notably its neighbours but in general with many others in Asia, Europe and the Americas regardless of their political regime. This progressive attitude has in term led to increased support from these friendly nations. In 1994, China provided assistance with cooperative projects in agriculture, forestry, livestock, and education as well as assistance to Lao labor working for companies or those who obtained concessions in various projects.
Assistance has also been forthcoming from western countries such as Sweden, Australia and France. Those countries have provided Laos with development assistance for over a decade. France has focused its assistance on education and culture whereas Sweden has been involved in surveying and research for forest development with the objective of providing timber with higher value by processing for export. Sweden has generously granted US$ 18 million each year.
Over the last 5 years, Australia has provided an average of US$ 9-10 million p.a. in grants to Laos besides financial assistance for the construction of the Thai-Lao Friendship Bridge.
Laos also received a soft loan for the Nam Leuk Dam from a source of capital in Japan that covered most of the actual construction cost. The assistance was offered (80% of the total) jointly with the Asian Development Bank. The construction site is around 65 kilometres from the north of Vientiane and is expected to be completed by 1998. It should also be mentioned that Laos received US$ 51 million from Japan in 1976 to implement the 150 megawatt Nam Ngum Dam.
It has been necessary for Laos to receive such foreign assistance as the country faces financial difficulties resulting in budget deficits. Faces with this, the government has led the search for foreign assistance and loans. Such deficits have been aggravated by the inability to raise funds efficiently through taxation of personal income. Consequently, the government promulgated a tax law in 1994 to correct the situation. Such improvements to the nation’s fiscal regulations have contributed to a reduction in the rate of inflation and laid the basis for future financial stability.
The government estimated that inflation in 1997 would increase slightly to 11 per cent, compared to the year 1996, 10 per cent. By December 1996, inflation had defied all predictions to reach 19 per cent that is more than 15 per cent higher than predicted at the beginning of the year.
The unforeseen increase can be attributed to a sharp rise in the price of consumer goods due largely to a drop in local agricultural output following heavy floods towards the end of the year. A large swathe of cultivated area was badly hit and rice production fell. Laos was forced to import rice from Thailand – which was also suffering from the effects of flooding and this led to an increase in prices. Besides natural disaster, inflation was fueled by the huge amount of imports of capital goods needed to increase production and contribute to the development of the country. Critics made inflation an issue in 1996, the government had to return again to tough measures to solve inflation:
1. It increased the import tariffs of luxury goods.
2. Plans were made to increase domestic production of import substitutes.
3. A state decree restricted credit offered by commercial banks in Laos.
With respect to the foreign exchange rate, the government tried to stabilize the value of the Kip, in which it achieved a measure of success for a certain period. In 1997, the Kip frequently changed its value, particularly when the value of the US dollar kept swinging and the Thai baht also fluctuated. The impact of the two currencies on the Kip was enormous since the government regarded these two currencies as vital to its foreign exchange system. The rate of the Kip at the beginning of 1997 was 720 Kip/dollar (43 Kip/baht) but had dropped to 1,700 Kip/dollar (46 Kip/Baht) by October that same year.
Foreign investors’ concern over effects from the foreign exchange rate
was so immense that the Bank of the Lao PDR immediately searched for measures
to solve the issue and bolster investor confidence.
For more information on doing business in Laos, the Embassy of Peoples Democratic Republic of Laos to the United States of America has kindly provided extensive information in the following Guide to Doing Business in Laos. This can be viewed online or printed to assist you in your research and business efforts.
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Runckel & Associates