Funding and Repatriation Strategies for Foreign Investors in Laos

In this article, we examine how a foreign investor, specifically one based in the European Union (EU), may fund a project in Laos and eventually repatriate funds to the EU.

Two primary funding mechanisms are typically used:

1. An interest-bearing shareholder loan advanced by the EU parent company to its Lao subsidiary (“Loan”); or
2. A capital injection by the EU parent company into its Lao subsidiary.

In many cases, funding is procured from a financial institution in the EU (“EU Lender”), meaning the foreign investor (“EU Company”) must also consider repayment obligations in Europe. While many foreign investors prefer to route investments through a holding company in a double taxation agreement (DTA) jurisdiction like Singapore, this article assumes that the EU Company directly owns 100% of the Lao subsidiary (“Lao Subsidiary”).

Objectives in Structuring Funding and Repatriation

When planning funding and repatriation, the EU Company generally aims to:

1. Ensure timely repatriation of funds to meet its repayment obligations to the EU Lender; and
2. Structure the repatriation of funds in a tax-efficient manner.

Below, we outline the key mechanisms available for repatriating funds and analyse their respective tax implications.

Dividends

Equity infusion is often the most straightforward way to fund the Lao Subsidiary. However, from a tax perspective, dividends are not the most efficient method of repatriating profits.

Tax Treatment in Laos:

• Lao Subsidiary pays 20% profit tax on net income.
• Dividends paid to the EU Company from after-tax retained earnings are subject to a 10% withholding tax.
• This two-tier taxation significantly increases the effective tax burden.

Additionally, equity capital is typically retained unless:

• The company is dissolved,
• Capital is formally reduced, or
• Shares are transferred.

Therefore, investing the full amount via common shares is not advisable. While using preferred shares may offer flexibility, Lao tax authorities may lack clear guidance on their treatment, particularly regarding preference payments.

Interest

Three structures are commonly used for loan arrangements:

1. Assignment of the loan: The EU Lender becomes the direct creditor of the Lao Subsidiary.
2. Back-to-back loan: The EU Lender lends to the EU Company, which in turn lends to the Lao Subsidiary.
3. Shareholder loan: The EU Company directly lends to the Lao Subsidiary.

Tax Treatment in Laos:

• 10% withholding tax applies to interest payments made to offshore lenders.
• Principal repayments are not taxable.
• Interest expenses are generally deductible from the Lao Subsidiary’s taxable income.

This structure is more tax-efficient than dividends because:

• Only interest, not the entire repayment, is subject to tax.
• Deductibility reduces the Lao Subsidiary’s profit tax base.

Although non-interest-bearing loans are technically allowed in Laos (due to the absence of transfer pricing rules), we strongly recommend that related-party transactions be structured at arm’s length, in line with best practices and the lender jurisdiction’s compliance requirements.

Payment of Service Fees

To maintain a continuous cash flow to the EU Company, a service or management agreement can be established between the EU Company (or an affiliate) and the Lao Subsidiary.

Tax Treatment in Laos:

• Foreign entities earning income from Lao sources are subject to a 20% profit tax based on deemed profits, depending on service type.
• A 10% VAT is also imposed on the gross service fee.
• The Lao payer withholds both taxes at source.

Example Calculation:

• Service fee: USD 1,000
• Deemed profit: 10% → USD 100
• Profit tax (24%): USD 100 × 20% = USD 20
• VAT (10%): USD 1,000 × 10% = USD 100
• Total tax withheld: USD 120

The total tax burden on service fees is relatively predictable and often preferable to dividend repatriation.

Conclusion

Repatriating funds from Laos to the EU should ideally involve a balanced combination of:

• Dividends
• Interest payments
• Service or management fees

Among these, interest payments and service fees are generally the most tax-efficient. However, to withstand regulatory scrutiny:

• All payments must be properly documented;
• The economic benefit to the Lao Subsidiary must be demonstrable;
• Agreements should comply with local regulations and international tax norms.

Law Hero's Services Include:

• Structuring and documenting loan and service arrangements;
• Advising on transfer pricing and withholding tax obligations;
• Liaising with local authorities on tax registration, loan approvals, and repatriation;
• Ensuring regulatory compliance and tax efficiency.