Proposed market entry into Papua New Guinea? Things to consider
Background Papua New Guinea (PNG) is a growing economy presenting enumerable opportunities for foreign businesses. Entering a foreign market can be challenging and there are a range of considerations foreign businesses should consider when devising a successful market entry strategy. By now your business plan is probably well developed and you have a handle on PNG’s market trends, the geography, political
atmosphere, customs and culture and you’ve analysed the opportunities for your business.
Whether your business is large or small; and irrespective of the industry you operate in you’ll need to give some thought to the legal process surrounding entry into the PNG market. These are a few tips we have picked up along the way: 1. What structure should I adopt? You’ll need to carefully consider the type of legal structure you are going to adopt. Some of the most common ways businesses choose to enter a foreign market is through:
a wholly-owned subsidiary: is a separate legal entity incorporated in PNG, but wholly owned by its foreign parent company. An advantage is that it can more easily raise capital (through equity funding), and sell-off the PNG business in future when compared with an overseas company.
registering as an overseas (foreign) company: is essentially creating a branch office of your existing overseas company so that it is recognised in PNG. While there are arguably less administrative burdens associated with this type of structure, it does not afford the advantages and shield-like protection of a separate legal entity.
entering into a joint venture with a local PNG organisation: a joint venture is when two or more business collaborate and combine resources to achieve a purpose. Joint ventures can be either incorporated or unincorporated (usually via a contractual relationship). A joint venture can be great to utilise the local expertise and experience, although can be susceptible to failure where (for example) there is poor communication about the objectives of the business or an imbalance of experience.
entering into a distribution agreement: if you’re in a goods business a distribution arrangement can be a low risk method of entering the PNG market. While this method is low cost (by removing some of the administrative burden of establishing a physical presence), there is a lesser degree of control over the distributor and distributors usually charge a higher margin which can affect product pricing/profits.
Evidently, while there are advantages and disadvantages to each of these types of models, the structure you choose to adopt will necessarily be influenced by the business needs and objectives of your organisation and what you are specifically setting out to achieve in PNG. 2. Do I need foreign investor approval? Any foreigner (person or company) must ascertain whether it is “carrying on business” under the Investment Promotion Act 1992 (PNG) well before market entry. If that is the case, then certification must be obtained from the Investment Promotion Authority (IPA). ‘Carrying on business’ under the Investment Promotion Act (1992) includes:
making an application for any permit, licence, lease or authority issued for commercial purposes;
administering, renting, managing or otherwise dealing with property as an owner, agent, legal personal representative or trustee whether by a servant or agent or otherwise;
maintaining an agent, employee or officer for the purpose of soliciting or procuring or entering into orders, arrangements, agreements;
maintaining an office, agency or branch (however described); or
undertaking a building, construction or assembly project or certain activities
The term also has an extended meaning under the Companies Act (1997) for foreign companies. Aside from penalties which may apply for failure to comply with obligations, there is also a risk that contracts entered into involving foreign companies who have not registered may be found to be unenforceable. It is best to obtain advice on whether the provisions of the Act are triggered by your proposed business activity or structuring in PNG, given the wide ambit of the legislation and the consequences of non-compliance. 3. What about Tax? Whether you like it or not, tax is a fundamental driver for most business operations and how to structure holdings when entering a foreign market. There are various types, and rates of taxes in PNG, which may impact on the structure of a business, or the business activities operated in a manner outlined in this article. The important thing is to seek advice early, rather than establish operations, or continue trading for a period, and then finding that certain tax consequences are going to impact on profits, remittances of capital or dividends from PNG, payment of royalties from PNG for the use of IP, the payment of head office management fees, and the like. It is wiser to invest in obtaining advice at the offset, then trying to reverse engineer your operations or structure when the tax position becomes less negotiable. 4. If a PNG subsidiary is preferred? If you are planning on setting up a wholly-owned PNG subsidiary you will need to register an entity with the Companies Registrar (through the IPA). Here are a few things to consider when setting up a wholly-owned subsidiary:
you’ll need to have one shareholder and at least two directors, one of whom must be a PNG resident;
while there is no requirement to appoint a company secretary under PNG law, a company secretary fulfills a vital administrative role in all companies by ensuring compliance with legal obligations at law and under the company’s constituent documents, so appointing a company secretary is recommended for assistance with these types of necessary legal and administrative requirements.
you’ll need a registered office address in PNG (which must be a physical address and cannot be a Post Office Box).
There are certain reserved activities for PNG nationals only, and you may find that your business activity prompts the need to have a PNG local as an equity holder in the PNG subsidiary. Again, timely advice is important and it is best to engage assistance when you commence negotiations with a local investor, not when the relationship turns sour. More questions? The key to successful entry into a new market in any type of business or industry is a comprehensive business plan that addresses not only business-related aspects of the strategy, but also the legal (and accounting) processes for market entry. If you’ve got more questions or need assistance, feel free to contact the Pacific Legal Network. We have a team of dedicated lawyers who can assist you with all aspects of your business in PNG and across the Pacific. Disclaimer The information set out in this article is a general guide only about the laws in PNG and is not intended as specific legal advice.
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