Franchising in Myanmar
Franchise Alert 05/16/19 Robert A. Smith, Sher Hann Chua
The relaxation of foreign investment restrictions and a growing, aspiring middle class have encouraged new players to enter Myanmar’s franchising industry in recent years. Previously, franchises in Myanmar predominantly operated in the food and beverage industry; however, in the last few years, the country has witnessed a growth spurt of franchise operations in the services and education sectors. While no official statistics are available on overseas franchises in the country, brands currently present in Myanmar include, among others, Best Western, Europcar, Gloria Jean’s Coffees, Gymboree, KFC, Krispy Kreme, Pingu’s English, and Swensen’s.
Myanmar does not currently have any specific legislation regulating franchise relationships. In addition, there are no statutory, pre-sale disclosure requirements. Nevertheless, franchise relations are subject to relevant provisions under other statutes applicable to contracts and business operations in the country, such as the Competition Law 2015, the Consumer Protection Law 2019, the Contract Act 1872, the Myanmar Companies Law 2017, and the Trademark Law 2019.
Many franchisors are rightly concerned that a former franchisee will utilize the knowledge and experience gained from running a franchise operation to open a competing business. To prevent this, it is vital for franchisors to protect themselves by using clear and comprehensive language in their franchise agreements.
Myanmar enacted its new Trademark Law and Industrial Designs Law in January 2019, and its Patent Law in March 2019, paving the way for a stronger intellectual property landscape in the country. Under this new system, trademark, industrial design, and patent licenses must be recorded with the intellectual property office to be deemed enforceable in Myanmar. Similarly, under the Science, Technology, and Innovation Law 2018, all agreements on technology transfers must comply with the terms set by the National Council for Science, Technology, and Innovation Development, and must be registered with the designated registrar to be deemed enforceable. Franchisors should take note of these requirements to ensure that they develop a robust intellectual property protection and commercialization framework under their franchise systems.
While Myanmar courts generally honor and enforce contractual terms, a franchisor should be cautious about abusing its bargaining power or imposing conditions that may result in interference in the franchisee’s business operations, as these may violate provisions of local law. Charging different franchise fees to different franchisees may raise anti-competitive concerns. Restrictive covenants prohibiting a former franchisee from engaging in a similar business upon the expiration or termination of a franchise relationship should contain carefully drafted limitations on the term and geographical area in which the restrictive covenants are applicable. Further, franchise agreements should also be supplemented by robust provisions prohibiting the disclosure and use of information, knowledge, and trade secrets obtained from operation of the franchise. Under the Competition Law 2015, unauthorized disclosure of trade secrets is an act punishable by imprisonment for a term of up to two years, a fine of up to MMK 10 million (approximately US $7,700), or both.
Initial fees and ongoing royalty fees are subject to a withholding tax payable by a non-resident foreign franchisor at a rate of 15 percent, and by a resident foreign or local franchisor at a rate of 10 percent. For goods sold or services rendered as part of a franchise transaction by the franchisor, such as operational equipment and training fees, a withholding tax of 2.5 percent is applicable for a non-resident foreign franchisor, whereas, since July 1, 2018, no withholding tax is payable by a resident foreign or local franchisor. Subject to the discretion of the Ministry of Planning and Finance and the Internal Revenue Department, the withholding tax amount payable by non-resident foreigners may be reduced or exempted if there are existing double-taxation agreements in place. To date, Myanmar has entered into double-taxation agreements with India, Laos, Malaysia, Singapore, South Korea, Thailand, the United Kingdom, and Vietnam.
It is common for foreign franchisors in Myanmar to opt for the franchise agreement to be governed by foreign laws, and for disputes to be settled via arbitration outside of Myanmar, such as in Singapore under the Singapore International Arbitration Centre Rules. In accordance with the Arbitration Law 2016, the default position is that a Myanmar court will not intervene in matters governed by the Arbitration Law 2016, except where the act so provides. Myanmar courts also refer parties to an arbitration agreement if a party so requests before submitting its written statement, unless the arbitration agreement is null and void, inoperative, or is incapable of being performed.
As a signatory to the New York Convention, foreign arbitral awards are recognized and enforceable by Myanmar courts, except in certain cases. For example, a Myanmar court may refuse to recognize foreign arbitral awards if it finds that the subject matter of the dispute is not capable of settlement by arbitration under Myanmar law, or if the enforcement of the award would be contrary to the national interest. Myanmar courts may also enforce interim orders, orders, and directives given by arbitral tribunals seated both inside and outside of Myanmar. Therefore, unless the dispute arising from a franchise agreement falls within one of the limited exceptions of the Arbitration Law 2016, Myanmar courts are required to honor an election of international arbitration dispute resolution where an arbitration clause has been incorporated into such franchise agreement.
A foreign civil court judgment is enforceable in Myanmar under the Civil Procedure Code, if it was pronounced by a court of competent jurisdiction, was decided on merits, was not obtained by fraud, is not against the principles of natural justice, is in accordance with the principles of international law, and does not sustain a claim founded on breach of any law in force in Myanmar.
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Sher Hann Chua is a Consultant at Tilleke & Gibbins’ Bangkok and Yangon offices. She regularly assists global franchisors, across a variety of industries, with expansion into Myanmar, Thailand, and throughout Southeast Asia. Bob Smith is a partner in the Washington, DC office of Quarles & Brady LLP. He has represented franchisors for almost 40 years in a variety of transactions, including franchise deals in more than 80 countries.