In this article we would like to discuss how a foreign investor (for purposes of this article, from the European Union) may fund its project in Laos and eventually repatriate funds from Laos to the EU. Two main forms of funding are:

• Through the advance of an interest-bearing shareholder loan by the parent company in the EU to the Lao subsidiary (Loan); or
• By the parent company in the EU injecting the funds as capital into the Lao subsidiary.

As funding may usually procured from a financial institution in the EU (“EU Lender”), the foreign investor (“EU Company”) would also have repayment obligations to consider back in Europe. Although many foreign investors prefer to set up a holding company in a jurisdiction having a double taxation agreement (DTA) with Laos, e.g. Singapore, for the purposes of this article, we assume that the EU Company directly owns 100% of the shares in its subsidiary in Laos (“Lao Subsidiary”).

When structuring funding and repatriation of funds, the foreign investor (in this case – EU Company) may have two main objectives:

1. Ensure that funds are repatriated to the parent company (EU Company) in view of the payments that are required to be made to the EU Lender;
2. Ensure that the funds are repatriated in a tax-effective manner.

Below we discuss the various ways by which funds can be repatriated, along with the tax implications.

Dividends

In general, the most straightforward manner by which funding is made is through the infusion of equity. While ultimately this form of investment cannot be avoided given certain equity requirements, the key to ensuring the flow of repatriation of funds would be through a combination of loans, royalties, and service fees paid to the EU Company.

From a tax perspective, especially in the case of Lao PDR, the payment of dividends to repatriate profits, is not entirely the most tax-effective. Generally, Lao PDR imposes a 20% Tax on Profits on the local entity (in this case, the Lao Subsidiary) and further imposes a withholding tax of 10% on dividends paid by the local to its parent company (in this case, the EU Company) from after-tax retained earnings. This two-tier imposition of tax on profits results in a high effective tax rate.

Furthermore, equity in the local entity is expected to be retained unless shares in the local entity are transferred, the local entity reduces its capitalisation, or the local entity is dissolved. Investing 100% of the funds by way of equity particularly through investment in common shares in Lao Subsidiary is, therefore, cannot be recommended. In addition, the use of preferred shares within the structure may be considered, however, the Lao PDR tax authorities may not be familiar with how to treat preferences on payments of preferred shares.

Interest

In general, there are three options how to structure the offshore loan and its repayment:

1. The loan may be assigned to the Lao Subsidiary such that the EU Lender effectively becomes the direct creditor of the Lao Subsidiary;
2. The EU Lender, the EU Company and the Lao Subsidiary may enter into a back-to-back loan agreement, in which the EU Lender is the creditor of the EU Company while the EU Company becomes the creditor of the Lao Subsidiary; or
3. The EU Company may extend a shareholder loan to the Lao Subsidiary (while maintaining status quo with the EU Lender).

Further, Lao PDR imposes a withholding tax of 10% on the interest paid to an offshore lender. The flow of funds through interest is more tax-effective than payment of dividends because:

1. The tax base for payments of loans is interest only. The principal is not subject to withholding tax; and
2. Payments for loans are deductible to the local payer.

Although, non-interest bearing loans generally remain possible in Lao PDR in the absence of transfer pricing rules, we recommend that the transactions between related parties to be at arm’s length (both parties are independent acting in their own self-interest) as a way of complying with transfer pricing requirements, if any, of the lender jurisdiction.

Payment of Service Fees

As a means of ensuring continuous flow of funds to the EU Company, service/management contracts may be entered between the EU Company or other related entity with the Lao Subsidiary.

Foreign companies not registered in Lao PDR that derive income from Lao PDR or enter into joint venture contracts with project owners in Lao PDR are technically also subject to 24% Profit Tax. The Profit Tax is based on the deemed profits which rates vary depending on the type of services rendered. The rate of deemed profit of 10% of the total investment applied to building services, consulting, and other services, irrespective of where the services are rendered. For compliance purposes, the tax is withheld by the Lao PDR payer. In addition, a 10% value-added tax is imposed on the total payment.

Example:

• Total payment is USD 1,000.
• Deemed income is 10%.
• Thus, USD 100 x 10% = USD 100 deemed income.
• Profit Tax rate is 24%.
• Thus, USD 100 x 24% = USD 24 Withholding Profit Tax.
• VAT is 10%. Thus, USD 1,000 x 10% = USD 100 VAT.
• Total taxes withheld = USD124.

Conclusion

• Repatriation of the funds as well as income should ideally be a mix of various payments in the form of dividends, interest, or service fees.
• Among these, payments of interest and service fees are the most preferred from a tax perspective.
• For payments of interest and service fees, we recommend that these be properly documented and the benefit enjoyed by the Lao Subsidiary must be readily demonstrable to the tax authority.