Welcome to My Jurisdiction — Sri Lanka

By:  John Wilson
John Wilson Partners
Sri Lanka

Introduction:  According to some commentators, Sri Lanka’s general education system has made important gains in the recent past.

The continued increase in investment in the education system has placed Sri Lanka in a position relatively above the educational system attainments in many countries in the South and South East Asian Region.

The Global Competitiveness Report (2012-2013), which surveyed 144 countries in the world, positioned Sri Lanka at 33 in terms of quality of the education system.[1]

The Government aims at an educational system that will provide the competencies and technological skills required for the rapid economic and social development of the people.

Thus the education policy aims at creating a knowledge-based society, with educational institutions producing a workforce with the required skills to face the emerging challenges in society. It recognizes the necessity of promoting quality and enhancing the quality and relevance of education.

In the field of international higher education, the desire to become a central “hub” for a particular region of the world is a clearly discernible trend having regard to a growing number of countries.

Post conflict Sri Lanka is one such country with aspirations to establish itself as a higher education hub for the South and East Asia region. The Government of Sri Lanka is currently developing strategic action plans and systems to achieve this vision. Thus, the role of higher education as a major drive of economic development is well established.  It is the hope of the Government that the “Knowledge Hub” initiative will help to develop Sri Lanka as a destination for investments in higher education and position the nation as a centre of excellence and regional hub for learning and innovation.

The higher education policy focuses on (a) increasing access by enabling more choices in courses, modes of learning and alternative institutions within a regulatory framework for all prospective students, (b) enhancing quality and upgrading standards with emphasis on employability and ability to cope with national development needs and global competitiveness, (c) fostering a culture of research and innovation, and (d) ensuring accountability, sound performance and financial sustainability. Universities are encouraged to become engines for economic development, agents of innovation and incubators of entrepreneurship.

Sri Lanka has targeted achievement of excellence in higher education by 2020, becoming the most preferred country for higher education in the Asia subcontinent. It aspires to be among the top countries for higher education in Asia. It is envisioned that Sri Lankan Universities will offer internationally recognized courses that are recognized by local and global employers.

Success in transforming Sri Lanka to a Knowledge Hub will greatly depend on the availability of an enabling environment and infrastructure to attract prominent international research and education institutions.

According to the Mahinda Chintana (the President/Government of Sri Lanka’s core policy document), the concept of “Knowledge City” will provide an attractive model for private investors in this field. Government will designate a specific area for the proposed city and provide the supporting infrastructure including necessary buildings and service centres while encouraging international research and education institutions to set up their affiliated institutions in the proposed Knowledge City. This target will be achieved by offering a carefully designed incentive package.

A new tax incentive regime was proposed by the President of Sri Lanka in 2012 in his budget speech to promote private investments, both domestic and foreign.

Under the new regime for investment in education services within the investment range between Rs. 50 million and Rs. 100 million, Rs. 100 million and Rs. 200 million and over Rs 200 million, a full tax holiday period for 4, 5 and 6 years respective will be available.

For an educational service project with an investment of over Rs. 300 Million (large scale projects) – approximately US$ 2,850,000 – being a project which has made investment in fixed assets on or after 1st April 2011 – such project would be eligible to a 12 year tax holiday if the minimum ‘export’ requirement of the output is 70% of turnover in convertible foreign currency as applicable and if the amount of investment is greater that Rs. 2,500 million.

An institution engaging in educational activities in Sri Lanka would also enjoy reduced tax rates of 10% after the expiration of full or partial tax holiday period as applicable.

Many foreign universities in collaboration with Sri Lankan Institutions already offer affiliated or external degrees and transfer programmes from the respective foreign Universities. Some examples are:

  1. American Education Centre Limited (AECL) also known as ANC – offers degree programmes by Northwood University, USA – a world leading American Business University, and  of the Missouri University of Science and Technology (Missouri S&T), USA – a leading American State University, highly specialized in Science, Technology & Engineering.
  2. American College of Higher Education – is affiliated to the Broward College, Fort Lauderdale, Florida, USA, North Dakota State University, USA, Excelsior College, member of the University of the State of New York and Seneca, the largest Technical College in Canada.
  3. Royal Institute – offers degrees from the University of London in the United Kingdom and Deakin University in Australia.
  4. ACBT – ACBT is in association with Edith Cowan University Perth Western Australia and offers professionally focused degree programmes and provides an opportunity for Sri Lankan students to earn an Australian degree from Sri Lanka.
  5. National Institute of Business Management – awards degrees and diplomas by Limkokwing University of Malaysia
  6. Asia Pacific Institution of Information Technology (APIIT) – awards British internal degrees of Staffordshire University, United Kingdom.
  7. British School of Commerce (BSC) – the BSC is a division of the London School of Commerce (UK) which is the associate college of Cardiff Metropolitan University.

FREQUENTLY ASKED QUESTIONS

  1. When must an entity register to do business in your jurisdiction? Are there alternative forms of registration (i.e. a representative office)?

An entity wishing to do business in Sri Lanka would normally either incorporate a subsidiary in Sri Lanka for this purpose, or, (assuming that the entity is a company incorporated outside Sri Lanka), register itself (branch office type situation) with the Registry of Companies as an overseas company which has established a place of business in Sri Lanka.

The practice at the Registry of Companies is not to allow incorporations of companies with a foreign subscriber of the Articles of Association, unless a letter of approval from the Board of Investment of Sri Lanka (“BOI”) is submitted.

The BOI is the investment promotion agency of the Government of Sri Lanka. Its main priorities are to attract foreign and domestic investment in the economy thereby bringing in capital, creating job opportunities and encouraging the development of new skills.

A foreign company can have presence in Sri Lanka through any of the following forms:

Subsidiary Companies:  Upon incorporation of a subsidiary in Sri Lanka, the subsidiary will enjoy the same benefits and has the same obligations as any other company incorporated in Sri Lanka.

One of the basic advantages of having a subsidiary will be limitation of liability. This means that the parent company is not liable for the debts of the subsidiary company and the liability of the parent company is limited to any amount unpaid in respect of the shares taken by the parent company in the subsidiary.

Branch Office:  Part XVIII of the Sri Lankan Companies Act provides for the registration of companies incorporated abroad, (section 488 of the Companies Act refers to such companies as “overseas companies”), which establish a place of business in Sri Lanka.

The law provides that registration is mandatory where an overseas company establishes a place of business. There is no clear guidance in the law as to what the meaning of “establishing a place of business” is. The formalities which have to be complied with by an overseas company which establishes a place of business in Sri Lanka are that it must  within a month of so establishing a place of business in Sri Lanka submit to the Registrar of Companies certain documents for the purposes of registration.

An “overseas company” is permitted to carry out activities in Sri Lanka as detailed below.

1.  Activities which may be carried on by an overseas company:

An overseas company registered under the Companies Act may carry on in Sri Lanka:

(a) Any commercial, trading, or industrial activity other than those specified in Schedule I of the relevant regulation, provided prior permission has been obtained from the Controller of Exchange for any such activity specified in Schedule II of the relevant regulation.

(b) Any non-commercial, non-trading or non-industrial activity such as the activity undertaken or carried on by a liaison office, representative office, regional office or other similar office, provided such activities do not provide any income directly or indirectly to the company.

In the case of (a) above, a minimum of US$ 200,000 must be brought into Sri Lanka and deposited in a special account.

Certain activities are not permitted for overseas companies – education is not included in this category.

Certain activities require the prior permission of the Controller of Exchange. Education is one such activity.

2.     Are there any treaties that govern foreign entities doing business in your jurisdiction? Are their exemptions for educational activities under those treaties?

Sri Lanka has a strong legal framework for the protection of foreign investments. Article 157 of the Constitution of Democratic Socialist Republic of Sri Lanka guarantees the inviolability  of the protections provided for in investment protection treaties/agreements where such agreements/treaties have been approved by Parliament by a two thirds majority.

Sri Lanka has entered into a number of Investment Protection Agreements with several countries including Belgium, China, Australia, Denmark, Egypt, France, Canada, Finland, Pakistan, Germany, Italy, Indonesia, India, Iran, Japan, Korea,  Qatar, Kuwait, Vietnam, Czech Republic, The Netherlands, Norway, Romania, Singapore, Sweden, Switzerland, Thailand, U.K. and the U.S.A.

Bilateral investment protection agreements/treaties are generally operative for 10 years. They generally contain provision for automatic extension unless terminated by either party.

If a bilateral protection agreement/treaty is terminated, investments already made are protected for another 10 years. Such treaties/agreements generally provide for:

a)    protection against nationalization;
b)    payment of prompt and adequate compensation in the case of expropriation;
c)     free remittance out of Sri Lanka of earnings, capital and business fees;
d)    settlement of disputes under ICSID

There are no specific provisions in those bilateral investment promotion and protection agreements regarding companies carrying out educational activities.

As for taxation treaties, Sri Lanka has entered into and ratified  38 treaties for the avoidance of double taxation and 8 more are reported to be in the process of negotiation and finalization. The 38 countries include Australia, Italy, Qatar, Bangladesh, Japan, Romania, Belgium, Canada, China, Denmark, Finland, Korea, Russia, Kuwait, Saudi Arabia (this is a limited scope treaty),  Malaysia, Singapore, Mauritius, Nepal, Sweden, Switzerland, Thailand, Netherlands, France, Germany, Hong Kong (this is a limited scope treaty), Norway, Oman (this is a limited scope treatyt), UAE, United Kingdom, USA, Pakistan, India, Indonesia, Philippines, Vietnam, Poland and Iran.

3.     What is the test for when a foreign entity is subject to local taxes?

The general rule is that any person who/which is not resident in Sri Lanka for the purposes of the Inland Revenue Act is only liable to pay tax in respect of profits and income arising in or derived from Sri Lanka.

A person who/which is resident in Sri Lanka for the purposes of the Inland Revenue Act is liable to pay tax in respect of profits and income wherever arising.

The test of residence in the case of a company is set out in section 79(1) of the Inland Revenue Act, No 10 of 2006 (as amended) which provides that “Where a company or a body of persons has its registered or principal office in Sri Lanka, or where the control and management of its business are exercised in Sri Lanka, such company or body of persons shall be deemed to be resident in Sri Lanka for the purposes of this Act.”

The taxation of foreign entities

Three scenarios are considered below.

1.  A foreign company conducts business in Sri Lanka through a fully owned subsidiary company which is resident in Sri Lanka for the purposes of the Inland Revenue Act.

Such a subsidiary would operate as a stand alone entity for income tax purposes and would not be treated as a permanent establishment for the purposes of a double taxation treaty.

A resident company would have to pay the following taxes (inter alia):

–        tax at the appropriate rate on the taxable income of the company
–        remittance tax in respect of any remittances made by such a subsidiary
–        a tax of 10% of the gross dividends distributed out of profits to any shareholder;
–        a deemed dividend tax under certain circumstances.

It should be noted that the rules generally change with the implementation of budget proposals contained in the President’s budget speech each year and so up to date advice should always be sought.

Sri Lankan law also imposes obligations to pay Value Added Tax, Nation Building Tax, Social Responsibility Levy and, where the turnover exceeds Sri Lanka Rupees 30,000,000 per quarter, Economic Service Charge, irrespective of the type of operation conducted in Sri Lanka. Any Economic Service Charge paid can be set off against income tax liability.

2.  A non-resident  company

The income tax which a company which is not resident in Sri Lanka in any year of assessment, would be obliged to pay for that year of assessment would consist of (i) a tax on the taxable income as specified in the Second Schedule of the Inland Revenue Act; (ii) where there are remittances by such company in that year of assessment, a sum equal to ten per centum of the aggregate amount of such remittances by such company; (section 62 of the Inland Revenue Act No. 10 of 2006 (as amended)).

Section 83 of the Inland Revenue Act, No.10 of 2006 (as amended), makes provision for the profits of a non-resident person to be computed on a deemed profit basis as a percentage of the sum receivable by such a person from its business. Such a deemed profit must not be less than six percent but the actual rate specified by the Department of Inland Revenue is often higher than this.

3.  A foreign company which has a permanent establishment in Sri Lanka

The concept of a permanent establishment is found in all the comprehensive double taxation treaties which Sri Lanka has entered into. If there is a permanent establishment in Sri Lanka, it is generally the business profits of the foreign company attributable to the permanent establishment which  would be liable to income tax in Sri Lanka. As per the provisions contained in certain double taxation treaties which Sri Lankan has entered into,  income arising from all sources where the foreign company has permanent establishment would be subject to tax in that State thereby including sales of goods or merchandise or other business activities of the same or similar kind sold through the permanent establishment.

A non-resident company would be liable to pay all other taxes such as Value Added Tax, Nation Building Tax, Social Responsibility Levy, and Economic Service Charge where applicable in terms of the relevant Statutes.

4.  Any tax treaties that provide exemptions? In general, what types of exemptions are available?

A tax holiday is offered by the BOI to enterprises, (has to be a company incorporated in Sri Lanka), which enter into agreements with the BOI. The nature of the concession would depend on the number of students who would be trained per annum and the number of institutes which are set up in locations outside Colombo and the adjacent Gampaha administrative districts as shown in the Table below:

No. of Students to   be trained per annum

 

No. of units   outside Colombo and Gampaha Districts

Tax Holiday

250

5 years

500

1

6 years

750

2

7 years

1000

3

8 years

1250

4

9 years

1500

5

10 years

1750

6

11 years

A new tax incentive regime was proposed by the President of Sri Lanka in 2012 the budget speech to promote private investments, both domestic and foreign.

These new incentives are applicable to the following categories of investments.

1). Medium Scale – New Enterprises* (investments of Rs. 50 Mn and above)

Activity

Qualifying Criteria   Amount of Investment* (Rs. Mn)

Tax Exemptions (No.   of years)

3. Services
Education

50 – 100

100 – 200

Over 200

 4

5

6

 2). Large Scale – New Enterprises

Any new enterprise engaged in “specified activities” with an investment of over Rs. 300 Million (large scale projects) – approximately US$ 2,850,000 and which has made investment in fixed assets on or after 1st  April 2011 would be eligible for the following tax holidays.

Category

Qualifying Criteria

Tax Incentives

Min. Export Req. (% of Output)

Amount of Investment (Rs. Mn)

Full Tax Holiday (years)

3. Educational Services 70%   of turnover should be in convertible foreign currency as applicable. >2,500 12

Enterprises falling within small, medium, large scale, strategic import replacement and strategic development project categories which are engaged in the following business activities would enjoy reduced tax rates (as stipulated in the table below) after the expiry of full or partial tax holiday period as applicable.

 

Sector

 

Reduction Rate   After Tax Holiday

Education

10%

5.    Are there special rules for foreign institutions of higher education?

Foreign Institutions of higher education

The Tertiary and Vocational Education Act No. 20 of 1990 as amended by Act No, 50 of 1999 contains the governing legislative framework.

Tertiary education is defined by the said Act as post-secondary education and/or training imparted to persons to prepare and fit them for an occupation/profession or for the purpose of further study in a university of similar institution.

Vocational education is defined by the said Act as education and or training imparted to persons for the acquisition of knowledge, operative skill, technical or craft skill or of experience needed for the pursuit of an occupation or trade.

According to section 14 of the said Act no person shall establish, manage, run or control any institute for the provision of tertiary education and vocational education or tertiary education or vocational education without being registered under the Act. The procedure for such registration is provided for in a regulation under the Act which prescribes a Development Plan for Registration of Institutes.

The prescribed criteria to be considered for registration must be satisfied.

The Commission must approve such an application and upon such approval, the Director General is required to register the Institute under such name and style specified by the Commission.

The said Act prohibits any person from conducting a tertiary education course or vocational educational course, being a specified course, without being registered under the Act.

Section 16 of the Act provides that no person or establishment shall conduct any examination for conferring or granting any tertiary education award or vocational education award without being registered with the Director General under the said Act. Certain exceptions are applicable.

6.  What is the test for an independent contractor vs. an employee in your jurisdiction?

The distinction generally drawn between an independent contractor and an employee is that an employee is governed by a contract of service whereas an independent contractor is governed by a contract for the provision of services.

The criteria applied to determine what the real nature of a contract is and identify whether a person is a workman under a contract of service or an independent contractor under a contract for the provision of services are complicated and difficult to apply given the evolution of employment methods, flexibility in employments and arrangements resorted to by employers to circumvent their obligations.

The Courts have developed many tests to apply to the facts for the purpose of deciding whether a person who provides his or her services is an employee or an independent contractor. The tests developed by the Courts include the control test, the integration test, the economic reality test and the multiple test.

However these tests can only constitute guidelines for any given case and the absence of one or more of the indicia which could be relied upon to decide the nature of the contract is not conclusive.

Briefly, the most common indicia relied upon are:

i.          Performance of work by the employee him/herself is a key feature of a contract of service, while in a contract for the provision of services the contractor only agrees to produce a given result. This rule is difficult to apply in the case of a consultant who legitimately renders personal services without being an employee.

ii.          Whether the employer has the right to the exclusive service of a person is material in deciding whether or not a person is an employee or an independent contractor, the latter being under no obligation to exclusively render service to the person who engages him/her.

iii.          The place where the services are to be rendered is a relevant factor. Where the services are to be performed in the employer’s premises, this may sometimes be relied upon as an indication that the person concerned is an employee.

iv.           The label used by the parties to describe their relationship would be relevant only in the event of a doubt, but does not bind a Court in regard to the determination of the true character of the relationship as the question is essentially one of the law.

v.          The payment of remuneration, as distinct from payment by the job, may be an indication of a contract of service.

vi.          An independent contractor carries on an independent business, while under a contract of service a person sells his/her labour and services to another. The question whether the person is in business on his/her own account or not is called the ‘Economic Reality Test’.

vii.          The question whether the work done is an integral part or a core activity of the business is relevant.

viii.          Who owns the tools or equipments used to produce goods or services is another test which is sometimes applied.

ix.          The right to supervise and give orders is an old test which continues to be applied. This also includes the right to dismiss and disciplinary control. [2]

In many cases, employers who have power to include clauses favourable to them due to unequal bargaining power between the parties have included designations such as self-employed persons, agents, consultants, free-lancers and subcontractors to label the workmen as independent contractors with the belief that they could circumvent their statutory obligations. However the Courts have creatively applied the tests to the facts and decided that they were workman. However, the decisions made by the Appellate Courts in the cases with complex and ambiguous facts show that the tests developed by the courts are relevant even today, and the tests could be creatively applied to make decisions as to the true nature of contract and achieve objectives of labour legislations.

7.     When is a work permit required?

Sri Lankan law prohibits non citizens from engaging in trade profession or business without a visa/visa with permission to engage in employment.

The  rules and administrative practices regulating the grant of visas to foreign nationals with an endorsement thereon permitting employment are stringent and only certain types of employment will be permitted in practice and only certain types of companies will be permitted to employ foreign nationals.

8.     Is there anything else you think a potential client should know about doing business in your jurisdiction?

The principal laws applicable to foreign investment in Sri Lanka are the Exchange Control Act and the BOI Law No. 4 of 1978 as amended read with Regulations made thereunder.

The following outward remittances may be made by in terms of prevailing liberalised exchange control regulations:

  • Profits of branches in Sri Lanka to their parent companies and to nonresident partners of partnership operating in Sri Lanka.
  • Dividends accruing to nonresident shareholders of companies incorporated in Sri Lanka.
  • Interest, royalties and technical service fees by enterprises established in the BOI area in accordance with the agreements entered into with the Greater Colombo Economic Commission.
  • Life insurance premiums by foreign nationals temporarily residing in Sri Lanka.
  •  Remittance of sales proceeds of shares in a company incorporated in Sri Lanka
  • Capital gains and income from investment.
  • Sale proceeds of investment.
  • Capital, including liquidation proceeds.
  • Pensions, salaries and commission paid to non-residents.

As mentioned in the answer to Question 1, the BOI is responsible for authorizing all foreign investments.

There are two regimes under the BOI:  section 17 approval and section 16 of the said Act.

Section 17 approval is generally applicable to investments in nontraditional export oriented manufacturing, advanced technology, electronic and information technology as well as direct or indirect exports and such approval entitles the enterprise to certain tax and other concessions.

Companies that do not qualify under the section 17 regime can apply under section 16. These companies will be governed by the ‘normal laws’ of the country; that is to say,  the provisions of the Inland Revenue, Customs and Exchange Control Laws will apply to such companies.

A minimum investment of USD$ 250,000 is currently required to qualify for approval under section 16.

Advertisements

Welcome to My Jurisdiction — Thailand

By:  Andrew Wynne
PriceSanond
Bangkok, Thailand

Natasha:  When must an entity register to do business in your jurisdiction?  Are there alternative forms of registration (such as a representative office)?

Andrew:  A license under the Foreign Business Act, 1999 (“FBA”) is required whenever business of almost any kind is to be done in Thailand by an entity established under foreign law or 50% or more foreign-owned.  For certain very limited types of business activity, e.g. information gathering (which is regarded as a service to the head office abroad), a so-called “representative office” registration is possible, and where this type of registration suffices then it is somewhat easier in practice to obtain than a registration covering broader types of business activity.  The licensing process and documentation required is however essentially the same, whether for a representative office or for a “full” registration.

Natasha:   Are there any treaties that govern foreign entities doing business in your jurisdiction? Are there exemptions for educational activities under those treaties?

Andrew:  The United States is in a unique position in Thailand in that its nationals and companies are largely exempted by a Treaty of Amity and Economic Relations (“Amity Treaty”) of 1966 from restrictions and the licensing requirement under the FBA, by virtue of being accorded “national treatment” in Thailand. Thailand’s entry into the Amity Treaty however occurred at a time of autocratic government in Thailand and in consequence has never to this day received any Thai parliamentary approval or legislative underpinning, and most Thai jurists maintain that in consequence the Amity Treaty cannot create an exception to any duly enacted Thai legislation unless the law in question specifically allows for this. The FBA does allow for exception to its restrictions to arise where there is an international agreement so stipulating, and it is thus clear that the Amity Treaty does create (subject to a few exceptions mentioned in it, none of which appears likely to apply to an educational institution) relief from FBA restriction.

Operation of a teaching establishment in Thailand for higher education is additionally subject to various other laws, and notably the Private Higher Education Institutions Act, 2003 (“PHEI”).  Through the PHEI a private higher education institute may be established by individual or entity who possesses certain prescribed qualifications, who will hold the license under the PHEI for the institution, and who must transfer to the institution a prescribed area of land to serve as the campus.  The PHEI does not allow for exceptions to its requirements to arise on the basis of an international agreement, and the Amity Treaty will thus create no exception to the PHEI requirements for a US investor.  Also, land in Thailand can (with no exceptions that are relevant here) be owned only by Thai individuals or entities that are 51% or more Thai-owned.  Although Thailand’s Land Code does allow for the possibility of exceptions to arise on the basis of international agreements, there are today no international agreements between Thailand and any other country in relation to land ownership.  Again, therefore, a US investor would by definition be unable to satisfy the need to transfer land to the private higher education institution.  The PHEI then imposes numerous other requirements and restrictions, one of which is that a private higher education institution is to be governed by a Council, comprising individuals having various qualifications and being nominated by various sources, and it is required that at least half the members of the Council be persons of Thai nationality.

Natasha:  What is the test for when a foreign entity is subject to local taxes?

Andrew:  An entity is subject to tax in Thailand when it is, or is deemed to be, in receipt of income paid from or in Thailand, including where the entity has an employee, a representative or a go-between in Thailand who receives such income.

Natasha:  Are there any tax treaties that provide exemptions? In general, what type of exemptions are available?

Andrew:  There is a Thai-U.S. double tax agreement (“DTA”) containing numerous helpful features, notable among which are that:

  • a U.S.-resident entity will not be regarded as subject to tax in Thailand if in receipt of actual or deemed income, even by an employee, representative or go-between, unless its presence in Thailand falls within the meaning of “permanent establishment” as defined in the DTA
  • services rendered from outside Thailand by a U.S.-resident entity, to a recipient in Thailand, may be paid for from Thailand without any Thai tax withholding.

Natasha:  Are there special rules for foreign institutions of higher education?

Andrew:  The DTA also contains special rules for taxation of teachers and students in Thailand, but no special rules for foreign institutions of higher education. In summary:

(a)        Teachers are exempted from tax in Thailand on income from teaching or research, for up to two years, if resident in the US immediately prior to the work assignment in Thailand.  This exemption applies to research income only to the extent that it is undertaken in the public interest and not primarily for private benefit.

(b)        US-resident students are exempt for up to five years from tax in Thailand on gifts or grants from abroad for the maintenance, education, study, research or training, on up to US$3,000 per annum income from personal services performed in Thailand, if

  • studying at university or other recognized educational institution in Thailand
  • securing training in Thailand required for qualification to practice a profession or professional specialty; or
  • studying or doing research in Thailand as a recipient of grant, allowance or award from a government or from a religious, charitable, scientific, literary or educational organization.

There are other small exemptions for U.S.-resident individuals temporarily present in Thailand for acquiring technical, professional or business experience other than as mentioned above, studying at an educational institution other than as  mentioned above, or participating in a government-sponsored program for the primary purpose of training, research or study.

Natasha:  What it the test for an independent contractor vs. an employee in your jurisdiction?

Andrew:  In determining independent contractor vs. employee status Thailand in general follows the standard approach of (i) looking at the degree of independence enjoyed by the individual in manner of discharge of duties and (ii) asking whether the individual is engaged to achieve a specific outcome or to work generally in the business of the employer.  In the sphere of labor protection regulation it is however possible for circumstances to arise where employees of a contractor or a sub-contractor are deemed to be employees of the employer, for purpose of certain statutory benefits.

Natasha:  When is a work permit required?

Andrew:  A work permit is required whenever a foreign national performs any work (exertion of energy for a commercial purpose) in Thailand, no matter how briefly.  The requirement thus applies to, among others, all business visitors – though insofar as it does so the requirement is inconvenient and widely ignored.  The work permit rules are also written in such a way as to make compliance by business visitors impossible under certain circumstances, and in practice enforcement of the rules is lax and open to abuse, i.e. investigation is most commonly launched as a response to a complaint from third party with an axe to grind.

Natasha:  Is there anything else you think a potential client should know about doing business in your jurisdiction?

Andrew:  In Thailand most things are forbidden and almost everything is possible education: registration, taxation, visas/work permits, use of independent contractors, etc.

Welcome to My Jurisdiction — Nigeria

By: Tokunbo Ibrahim
Udo Udoma & Belo-Osagie
Lagos, Nigeria

Natasha:  When must an entity register to do business in your jurisdiction?  Are there alternative forms of registration (i.e. a representative office)?

Tokunbo:  Section 54 of the Companies and Allied Matters Act Cap C20, Laws of the Federation of Nigeria 2004 (“CAMA”, the principal legislation that regulates the affairs of Nigerian companies) provides that in order to do business in Nigeria, a foreign investor must incorporate a separate entity in Nigeria, and until the entity is so incorporated, it “shall not have a place of business or an address for service of documents or processes in Nigeria for any purposes other than the receipt of notices and other documents as matters preliminary to incorporation under CAMA”. Although a foreign company may register as a private company limited by shares, public company limited by shares, private company limited by guarantee and an unlimited company, there are no alternative forms of registration.

The under-listed companies can apply to the Federal Executive Council to be exempted from the requirement to incorporate a local entity in Nigeria:

  • A foreign company invited to Nigeria by the Federal Government of Nigeria;
  • Foreign companies in Nigeria on behalf of specific donor countries or international organization;
  • Foreign government owned company operating an export business; and
    Engineering and technical foreign consultants under contract from any government body or agency.

Natasha:   Are there any treaties that govern foreign entities doing business in your jurisdiction? Are there exemptions for educational activities under those treaties?

Tokunbo:  There are applicable double taxation treaties that have an impact on foreign entities doing business in Nigeria.  There are two categories of double taxation arrangements under Nigerian Law.  The first category involves Nigeria and members of the commonwealth nations and the second category covers Nigeria and individual member states with which Nigeria has signed Double Taxation Treaties (“DTTs”).

Presently, Nigeria has entered into DTTs with ten countries and two of these DTTs are yet to become effective.  This is because under section 12 of the Nigerian Constitution, an international treaty shall not have the force of law until such treaty has been ratified by the National Assembly.

All the Nigerian DTTs contain similar provisions and cover companies’ income tax, personal income tax, petroleum profits tax and capital gains tax in Nigeria.  Under the relevant tax statutes in Nigeria, a Nigerian resident (be it an individual or corporate entity) is required to pay taxes on his global income i.e. ‘ income accruing in, derived from, brought into, or received in’ Nigeria.  Such resident, however, will be entitled to a tax credit or deduction where any foreign tax is due or payable to commonwealth country or a country with which Nigeria has concluded a DTT.

A notable example of the relief under the DTT is the reduced rate of 7.5% withholding tax on dividends, interest, rent and royalties when paid to a bona-fide beneficial owner of a treaty country. This is in contrast to 10% payable by a non treaty country.  There are no exemptions for educational activities under the DTT.

Although this is not a treaty, Nigeria has enacted the Foreign Judgments (Reciprocal Enforcement) Act which provides that judgments obtained from Commonwealth countries may be enforceable in Nigeria if the Commonwealth country concerned would accord reciprocal recognition to a judgment made by a Nigerian court.  What this means is that judgments emanating from Commonwealth courts would be enforceable in Nigeria upon proof by the judgment creditor that, his country of origin, would accord reciprocal recognition and enforcement to judgments made by Nigerian courts.

Natasha:  What is the test for when a foreign entity is subject to local taxes?

Tokunbo:  In order to do business in Nigeria a foreign investor must carry out that business by way of a limited liability company incorporated under the provisions of the Companies and Allied Matters Act. All companies incorporated in Nigeria are only subject to tax in Nigeria on income accruing in, derived from, brought into or received in Nigeria. Under Nigerian law, residents (Nigerians and non-Nigerians) are subject to the same rate of tax.  Non-residents (i.e. foreigners who do not reside in Nigeria) are not liable to tax in Nigeria.  If however, foreign individuals receive income like dividend, interest, rent or royalty from Nigeria, such income will be liable to the withholding of tax at the applicable rate.  Where non-residents, however, reside in Nigeria for an aggregate period of 183 days (inclusive of annual leave or temporary period of absence) in a 12 months period and they carry out their employment in Nigeria, they will be liable to tax in Nigeria.

Natasha:  Are there any tax treaties that provide exemptions? In general, what type of exemptions are available?

Tokunbo:  There are no tax treaties that provide tax exemptions in Nigeria. Nigeria, however, has double taxation treaties (“DTT”) with certain countries that reduce the withholding tax payable from 10% to 7.5%. This is the rate that applies to all countries that Nigeria has a double taxation treaty (“DTT’) with. To date, Nigeria has entered into DTTs with the United Kingdom, the Netherlands, Canada, France, Pakistan, Belgium, Philippines, Romania, South Africa and China. The Nigerian constitution requires all DTTs to be ratified by Nigeria’s National Assembly before they can become part of local laws. The National Assembly is yet to ratify the DTT with South Africa and China.

Natasha:  Are there any special rules for foreign institutions of higher education?

Tokunbo:  There are no special rules for foreign institutions of higher education. All educational institutions are however required to obtain the prior approval of the Ministry of Education before establishing a business in Nigeria.

Natasha:  What is the test for independent contractor vs. employee in your jurisdiction?

Tokunbo:  There is no single piece of legislation or regulation that sets out the factors that would be considered in ascertaining whether or not a person who is engaged to provide service(s) to another is an employee or an independent contractor.   The Nigerian courts have, however, devised several tests and criteria that would be considered in order to come to a conclusion that a person is either an independent contractor or as an employee.  In S.S. Co. Ltd. V. Afropak (Nig) Ltd, the Supreme Court held that the under listed factors are some of the factors which the court would take into consideration in determining the nature of contract which parties have entered into.  We should point out that in delivering its judgment, the Supreme Court used the term “contract of service” to refer to the contract between an employer and an employee, and “contract for service” to refer to the contract retaining an independent contractor.  The factors that the Supreme Court identified are:

a.         Mode of payment – where the payment is made by way of wages or salaries, this is indicative that the contract is a contract of service; alternatively, where payment is made by way of fees, commission only, or on completion of the job, it would suggest a contract for service.
b.         Ownership of the equipment, tools or instruments used in providing the services – where the employer supplies the tools and other capital equipment, this suggests that the contract is a contract of service; however, where the person engaged has to invest and provide capital for the work to progress, this indicates a contract for service with an independent contractor.
c.         Delegation of duty – it is inconsistent for an employee to delegate his duties under a contract of service or employment.  The ability to delegate, therefore, suggests that person providing the services is an independent contractor and the contract could be construed as a contract for services.
d.         Hours of work – where the hours of work are not fixed, the contract is not a contract of service but a contract for services.
e.         Place where the work is carried out – It is not fatal to the existence of a contract of employment or service that the work is not carried out on the employer’s premises, however, a contract that allows the work to be carried on outside the employer’s premises is more likely to be a contract for service.
f.          where office accommodation and a secretary are provided by the employer, this suggests that the contract is one of service.

Natasha:  When is a work permit required?

Tokunbo:  A work permit is required when an expatriate intends to take up employment in Nigeria whether for a temporary period; i.e. up to 3 months, or for an extended period of time.

Natasha:  Is there anything else you think a potential client should know about doing business in your jurisdiction?

Tokunbo:  By virtue of the provisions of the Nigerian Investment Promotion Commission Act, Cap N117, LFN 2004 (“NIPC Act”) it is possible for foreign investors to own 100% of the equity of a limited liability company in almost all sectors in Nigeria, and other than these sectors and certain matters set out in the “negative list”, a Nigerian company that is 100% foreign owned may engage in the same businesses as a Nigerian company that is wholly or partially owned by Nigerians.  The areas of business that are prohibited by the negative list are:

a.     the production of arms and ammunition;
b.    production of, and dealing in narcotic drugs, and psychotropic substances;
c.     production of military and paramilitary wears and accoutrement including those of the police and the customs, immigration and prison services; and
d.    other items as the Executive Council of the Federation may from time to time determine.

Welcome to My Jurisdiction – United Arab Emirates

By:  Jonathan Heath and Sara Khoja
Clyde & Co
Dubai, UAE

1.  Legal Overview

The United Arab Emirates (UAE) legal system is a federal system comprising seven Emirates, of which Abu Dhabi and Dubai are the largest and best known. The right of non-Arabian Gulf Cooperation Council nationals to live and work in the UAE is subject to the requirement to be sponsored for a residence visa and labour card by an employer with an established corporate presence in the UAE. This requirement can cause logistical and practical issues for visiting lecturers or individuals whose role is to foster relations between a local institute and a more established institute of higher education in the US or elsewhere.

The UAE Government (particularly in Abu Dhabi) has tried to encourage foreign educational establishments with high reputations in their home countries to set up operations in the UAE (often offering government subsidies) or to develop relationships with local institutions in order to develop the educational services available in country. The focus is very much on the transfer and sharing of know how and the development of the national Emirati population. Currently 75% of the UAE’s native population are young people under the age of 25.

Certain higher education establishments are set up in free zones within the UAE, such as Knowledge Village and Academic City in Dubai. These allow a streamlined immigration and labour authorisation process in which visas and labour cards are issued to employees by the free zone authority, acting in conjunction with the university or college. Most higher education establishments, however, are established ‘on-shore’, which means they deal directly with the UAE Ministry of Labour and Immigration department to arrange the required authorisations for expatriate employees. On-shore companies must be majority owned by Emirati nationals. In free-zones it is possible to establish as a branch of a foreign company (i.e. Wellington College – Dubai) and foreign ownership requirements do not apply.

The main legislation that applies to all employers and employees with respect to employment matters is UAE Law No. 8 of 1980, as amended (the Labour Law). This is a federal law and applies to each Emirate and, with a few minor exceptions, covers all UAE employees in the private sector (including in free zones). The Labour Law sets out an employee’s minimum entitlements and employers are free to confer different terms, provided these are not less favourable to the employee. Any expatriate who is sponsored by an employer for residence and labour purposes will be deemed as an employee of that company, and will be entitled to the full protections of the Labour Law, including minimum holiday entitlements, maximum working hours and the right to an end of service gratuity.

A major attraction of working in the UAE is that there is, at present, no personal income or corporation tax. Those who own or rent property are required to pay a small social levy (currently 5% of the overall rental value of a lease).

Because of the nature of the employment sponsorship regime in the UAE, it is generally not possible for an educational professional to work for any establishment other than the company sponsoring their residence visa. Special licences, often obtained through the professional setting up their own company, are required to perform consulting services in the UAE. Part-time working for two employers is permitted as long as both employing companies sign a no-objection certificate and the Ministry of Labour issues the professional with a temporary work permit for the secondary employment.

2.  Immigration Requirements

Those who are not sponsored by an employer (whether directly or indirectly as the dependant of a sponsored employee) are unable to remain in the UAE. Sponsorship applications are not normally granted to individuals below the age of eighteen and are harder to obtain for those above the age of sixty-five. That said, the maximum age limit may be discretionarily applied by the undersecretary of the Labour Department and assessed on a case-by-case basis; in the majority of cases, such applications will only be approved if the individual has specialist skills and experience and/or falls into certain professional categories including university professors.

Individuals who are nationals of one of around 30 countries (which include the USA, UK and Australia) are able to obtain a 30 day visit visa on arrival in the UAE. Such visas do not permit the individual to work in the UAE, however, and for employees being recruited or transferred to UAE operations, the sponsorship application process for a residence visa and work permit should be commenced prior to the employee’s arrival in the UAE.

This is a two-stage process where primarily the employer is required to submit a sponsorship application to the Ministry of Labour for an entry permit allowing the employee to enter the UAE and commence work. The first approval of the application can usually be obtained within fifteen days (subject to security clearance), and the entry permit is issued for a period of thirty days. A copy of the entry permit is sent to the employee with the original being collected upon arrival at the airport and stamped at the immigration clearance desk. Once in the UAE, the sponsorship application must be completed within sixty days of the employee’s entry (i.e. the issuing of the residence visa to the employee). Until an employee obtains their residence visa, they have a limited ability to rent or buy property, open bank accounts or purchase vehicles.

3.  Employment Rights

An expatriate employee seeking to live and work “onshore” in the UAE must sign an employment contract, in English and Arabic, in a form prescribed by the Ministry of Labour (the MOL Contract).  The MOL contract is an integral part of the sponsorship application process for a UAE work permit and residency visa.  Such a contract must be entered into and registered with the MOL before it will issue a labour card for the employee. Free zones require similar short form employment contracts to be entered into.

Employers often will have a more comprehensive, supplementary contract of employment. These are similar to a normal contract seen in other jurisdictions, and will go into much more detail regarding the employee’s terms of employment. This additional contract will be construed against the employer and, therefore, will be enforceable only to the extent that it confers additional benefits on the employee and does not contradict the Labour Law and/or other laws of the UAE.  Employees, who are UAE nationals or nationals of another GCC member state, will also have a MOL Contract but with slightly different provisions.

All employees are entitled to minimum rights, including areas such as:

  • Working hours
  • Overtime pay
  • Holiday allowance
  • Maternity leave
  • Sick leave
  • Notice periods
  • End of service gratuity.

End of Service Gratuity

Generally, if an employee has more than one year of continuous service, he or she will be entitled to severance pay of up to 21 days of basic wages for every year of the first five years of service, and 30 days of basic wages for every year thereafter (provided the payment does not exceed two years of wage in total). The entitlement to severance pay is pro-rated for partial years worked once the initial year of service is attained.

Severance pay is calculated according to the last basic wage paid to the employee and is payable upon the termination or expiry of the contract of employment. Allowances and benefits are excluded from the calculation. However, payments such as bonus or commission may be included, depending on the terms for making such payments and the express provisions of the employment contract.

If an employee resigns during the first five years of service, his or her entitlement to severance pay will be reduced as follows:

  • If the employee resigns between the first and third years of service, he or she will be entitled to receive only one-third of the severance pay
  • If the employee resigns between the third and fifth years of service, he or she will be entitled to receive only two-thirds of the severance pay

An employee on a fixed-term contract of employment will lose his or her entitlement to severance pay if the employee resigns before the expiry of the fixed-term and has less than 5 years of continuous service.

If an employee is dismissed summarily or resigns without notice (other than in certain prescribed circumstances), he or she will lose all entitlements to severance pay.

4.  End of employment

Employees can either be employed on an unlimited term basis, or for a contract of fixed duration. Employees may be entitled to compensation of 3 months’ remuneration if terminated ahead of the end of the fixed term, or if terminated for an invalid reason on an unlimited term contract. There is no set list of reasons that are ‘valid’ and ‘invalid’ under the Labour Law, and the minimum notice period (other than dismissals for ’cause’) is 30 days.

Employees are entitled on termination to notice pay, pay in lieu of untaken holiday allowance and end of service gratuity. Employees are required to cancel their residence visa and labour authorisation under their employer’s sponsorship as soon as possible following the termination of employment. Employees then have 30 days from the date of the visa cancellation to secure alternative employment or to leave the UAE. If the employee has had their employment terminated by their employer, they are entitled to an air ticket to return them to their country of origin.