Profit tax incentives are available based on the investor’s activities and location of the planned investment.
Article 49 of the LIP lists the levels of promoted activities from (1) to (3), (1) being Highly Promoted, (2) being Moderately Promoted, and (3) being Low level Promoted activities.
Promoted activities are in sectors that the Government of Lao PDR (“GOL”) has listed as priority areas to develop, such as education and mixed farming. Activities that are not listed will not be entitled to any profit tax incentives, for example banking activities. Investments into concession activities, for example telecommunications are subject to specific negotiation with the GOL.
In determining the level of profit tax incentives an investor is entitled to receive, each investment location will be graded into a zone between (1) and (3), as listed in Article 50 of the LIP, with (1) representing the most underdeveloped and rural areas of the country, and (3) in areas with good infrastructure to support investments.
Furthermore, Article 51 of the LIP provides investors with profit tax incentives depending on the level of priority that the GOL has assigned to the investors’ activities. The profit tax exemptions will be categorized as follows:
- Investments into the most underdeveloped locations (i.e. zone 1) will be entitled to profit tax exemptions ranging from 4 to 10 years
- Investments into locations with moderate levels of infrastructure (i.e. zone 2) will be entitled to profit tax exemptions ranging from 2 to 6 years
- Investments into locations with moderate levels of infrastructure (i.e. zone 3) will be entitled to profit tax exemptions ranging from 1 to 4 years
In contrast with the previous Law on the Promotion of Foreign Investment, investors are required to pay profit tax at the domestic rate once the exemption period has expired. For example under the previous foreign investment law, investors with highly promoted activities into zone (1) locations are entitled to a profit tax exemption of 7 years and then 10% thereafter for the life of the investment.
The current rate of profit tax is 35% and is expected to lower to 28% from 01 October 2011 once the amended tax law has been implemented.
One notable between the new LIP and the existing Law on the Promotion of Foreign Investment is the date the profit tax exemption actually commences for investments into R&D, new product development and new technology. Article 51 of LIP entitles enterprises who have investments in these sectors to postpone the commencement date of the of the profit tax exemption period until the enterprise is making profits. In comparison with the previous Law on the Promotion of Foreign Investment, profit tax exemptions for all activities, excluding tree plantations commence once the enterprise starts operations.
It should be noted that while the Law on Investment Promotion and the supporting Implementing Decree are already effective, these are not currently fully implemented and the GOL has yet provide a definite date for full implementation.