MALDIVES: An Introduction to General Business Law
Introduction
Maldives, situated in the Indian Ocean, is renowned for its white-sand beaches, transparent turquoise waters and lively coral reefs. Composed of 26 atolls and more than a thousand islands, the Maldives serves not only as a popular tourist spot but also as a country with a complex history, encompassing politics, legislation and a judiciary of historical importance. The country has made strides in establishing democratic institutions, and its political system revolves around a multiparty framework whereby the president, elected by popular vote, serves as both the head of state and government, overseeing the executive branch.
The legal system in the Maldives operates on an adversarial basis, such as in England and Wales, and judicial precedence and case law are pivotal in shaping legal decisions, offering a basis for interpreting and applying laws in the Maldivian context. The enactment of laws and policies falls under the jurisdiction of the Parliament, where the influence of English laws is pronounced. Notably, acts like the Law of Contract 1991, Law on Mortgages 1993 and the recently ratified Companies Act 2023 closely mirror English legal principles, showcasing the historical imprint on the legal structure of the Maldives as a former British protectorate.
Typically, the majority of commercial lawyers in the Maldives receive their training overseas, obtaining their academic degrees from educational institutions in universities from England, Singapore, Malaysia etc. As a result, most lawyers in the Maldives are well-versed not only in Maldivian law but also possess a thorough understanding of legal systems from other jurisdictions.
Business Overview
Maldives offers a favourable business climate for international investors, characterised by an open trade environment, a robust private business sector, a contemporary tax system, and effective legal safeguards for foreign investments.
Foreign business entities can be registered through three avenues under the standard regulations outlined in the Foreign Investment Act. The options include establishing a new foreign investment company with complete foreign ownership, transferring registration of a foreign-incorporated company to the Maldives, and purchasing shares from a company locally incorporated in the Maldives.
Hospitality
An interested investor has the option to acquire a tourism lease in the Maldives through various means, including the transfer of an existing lease or the transfer of shares in a resort leaseholding entity. Potential investors also have avenues such as obtaining tourism leases through subleases, hotel management agreements or mortgage grants, subject to approval from the Ministry of Tourism.
Interested parties can lease a tourist island, land or lagoon from the Ministry of Tourism in the Maldives through a public bidding process or by submitting a favourable technical and financial proposal for listed islands.
Most tourist resorts in the Maldives are located on undeveloped greenfield islands leased by the Ministry of Tourism, adhering to a “one island-one resort” principle. However, there have been exceptions to this guideline, with some tourist resorts deviating from the norm and now adopting an integrated tourism resort model, incorporating multiple resorts. A prime example is CROSSROADS Maldives, a multi-island destination housing two resorts: SAii Lagoon Maldives, Curio Collection by Hilton, and Hard Rock Hotel Maldives.
From our experience acting for various hoteliers in recent years, we have identified that the current trend and lucrative investment avenues predominantly revolve around villa projects and residences associated with hotel brands, particularly the leasing of villas and rooms on a strata basis, as exemplified by developments such as the Soneva Villa Ownership.
Banking and finance
Many projects in the Maldives, spanning infrastructure and hotel development, often secure funding from international lenders. Notably, foreign banks, including those from China (such as Export-Import Bank of China and Industrial Commercial Bank of China) have been engaged for notable projects such as the redevelopment of Velana International Airport and the construction of Malé–Hulhumalé bridge and link road.
German banks (such as Aareal Bank AG), contribute significantly to financing asset acquisitions in the area of Maldives hospitality. Moreover, the majority of the banks from the United Kingdom, the Middle East, Singapore, Hong Kong and Australia for whom we act/acted play a global role in lending to Maldivian resorts and hotel development.
This process is streamlined, as offshore lenders and borrowers do not require approvals from Maldivian authorities, including the central bank, for granting or obtaining offshore lending for various projects in the Maldives. The encouragement of offshore lending is reinforced by the creation and enforcement of securities in favour of offshore entities, aligning them with the same standing as onshore lenders.
Construction and infrastructure
Construction and infrastructure projects in the Maldives, which include hotel and airport development, follow a bidding process where foreign companies are eligible to participate when the projects are announced by the Maldivian government.
Generally, project agreements follow FIDIC-based contracts, and the comprehensive transactions involve obtaining regulatory approvals and registrations and liaising closely with government authorities on project management. Funding for these construction and infrastructure projects typically comes from offshore lenders (such as HSBC and Chinese-owned banks, eg, Industrial Commercial Bank of China).
Taxation
Maldives features a contemporary and accessible tax system with online services, encompassing both direct and indirect taxes.
Corporate Income Tax applies at a rate of 15%, except for banks, which are taxed at 25% on total taxable income exceeding MVR500,000. Non-resident Withholding Tax, set at 10%, is deducted from payments made by businesses in the Maldives to non-residents.
Goods and Services Tax (GST) is imposed on the value of goods and services, mandatory for businesses with taxable supplies of over MVR1 million annually. Importers and tourism-related suppliers must register, irrespective of meeting this threshold. Tourists in resorts, hotels, vessels and guesthouses pay a daily Green Tax of USD6, while Maldivians and resident permit holders are exempt from this charge.
Maldives signed a Maldives–UAE Double Tax Avoidance Agreement with UAE which establishes rules for determining tax liability for individuals and entities operating in both countries, covering income categories such as dividends, interest, royalties and capital gains. Additionally, Maldives is also part of a specific multilateral agreement within the South Asian Association for Regional Cooperation (SAARC) that focuses on preventing double taxation and providing mutual assistance in tax matters.
Dispute resolution
Dispute resolution in the Maldives involves a multifaceted approach encompassing court proceedings and alternative methods such as arbitration.
The Constitution of Maldives in 2008 restructured the judicial system, establishing the Supreme Court as the highest appellate court, followed by the High Court as the primary court of appeal. In addition to the traditional judicial courts, various institutions address conflicts between private entities and disputes involving government bodies and private parties. Notably, the Employment Tribunal and Tax Appeal Tribunal and the Maldives International Arbitration Centre play significant roles in this regard.
In representing various foreign investors in Maldives, we have observed a preference for foreign-seated arbitration as a meants to achieve a neutral dispute resolution forum. Moreover, with Maldives’ accession to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) in 2019, it is now possible to seek the recognition and enforcement of foreign arbitral awards in the Maldives, allowing enforcement of awards from renowned arbitration centres such as the London Court of International Arbitration and the Singapore International Arbitration Centre.
Conclusion
Maldives emerges not only as a picturesque tropical destination but also as a jurisdiction fostering international collaboration and economic growth. With its diverse legal and business landscape, the country accommodates a thriving tourism industry, dynamic construction projects and a progressive legal framework. The commitment to democratic governance, coupled with a legal system influenced by English law, positions the Maldives as an attractive hub for global investors.