D espite the uncertainty that surrounds every investment decision,there are places in the world where continuous development offerspositive opportunities for investors to expand their potential.

Macau is a free-market economy in compliance with the principle ‘onecountry, two systems’. It is a special administrative region (SAR) of the People’sRepublic of China (PRC) autonomously governed (the Chief Executive wasreelected last August for another five years’ mandate), with a political systembased on the separation of powers.

Macau is located 60 km from Hong Kong, borders the special economiczone (SEZ) of Zhuhai, and is very close to other Chinese SEZs, such asShenzhen and Shantou. With a population of 607,500, it is a place where casi-nos flourish and new tourism facilities and infrastructure projects continue tobe developed, such as the Macau Light Rapid Transit System (MLRTS), thenew Taipa ferry terminal and the Macau International Airport CapacityUpgrade. The construction of new infrastructure in the region as part of theplan for the reform and development of the Pearl River Delta, aims at estab-lishing a metropolitan sphere comprising Guangdong, Hong Kong and Macauas a so-called quality living sphere. Further, a gigantic bridge (50 km in lengthand with expected costs of $10.7 billion) between Hong Kong, Zhuhai andMacau is an ongoing construction project due to be ready in 2016.

The so-called Las Vegas of the Orient ranks 29th on the global economicfreedom index. Between 2002 and 2014, its annual GDP growth rate was onaverage 13.6%. It is a booming tourism destination as one of the most visitedcities in 2013, with around 29.3 million visitors. Its gaming industry is themost successful in the world, with revenues of $45.3 billion in 2013 (at leastfive times that of Las Vegas).

In addition to its low standard tax rate for general businesses, Macau alsohas an offshore legal regime which provides an almost tax-free basis for certaincommercial or financial activities. With a free port policy and market econo-my system, the entry and exit of merchandise, capital and people can be freelycarried out. Procedures for investment and company formations are fairly sim-ple and there are no restrictions on overseas capital investment.

As a Portuguese colony until 1999, Macau’s relations with Portugal andother Portuguese speaking countries (PSC) such as Brazil, Angola andMozambique are also privileged. Macau is an excellent point of contact forinvestors of PSCs investing in China and vice versa, as well as for internation-al investors in China and PSCs.

Macau is quickly becoming a regional platform for trade and economicservices, especially in the promotion of the economic and trade cooperationbetween enterprises in mainland China (Macau’s Trade and InvestmentPromotion Institute – IPIM – has liaison offices in Chengdu, Hangzhou,Fuzhou, Jieyang and Shenyang), PSCs and overseas Chinese entrepreneurs.

The gaming industry and the Cotai stripMacau is considered a continuous game zone, where casinos must operate alldays of the year (save for very exceptional cases where suspension of services can

be permitted). The contribution of the gaming industry to the region’s financialstability is undeniable: a debt-free government enjoying significant budgetaverage surpluses of 15.4% GDP from 2003 to 2012. In the context of aworldwide financial crisis, the market outpaced other Asian regions andaccumulated fiscal reserves of $30 billion in 2013.

Six months into 2013 and the gaming operators were seeing an Ebitda[earnings before interest, taxes, depreciation, and amortisation] of $2.2 billionon the Cotai strip, representing 54.2% share of the market, and $1.9 billion or42.9% on the Macau Peninsula. In 2013, casinos transcended market expec-tations, with gross gaming revenues of $45.1 billion, an 18.6% increase from2012.

Casinos did not pay off as expected in the latest months of 2014, mainlydue to junket crackdowns, restrictions on the use of CUP [China Union Pay]cards in the gaming industry, a slowdown of China’s economy and visa restric-tions to mainlanders.

The setback in this year’s revenue growth of the main casino operators,however, does not discourage analysts from growth predictions for the future.This is due to the new ongoing construction developments on the Cotai Stripand the continuing growth of mass-market, which will maintain the confi-dence of foreign investors.

As commented by the IMF in July 2014, Macau is now the world’s largestgaming centre and has one of the highest levels of GDP per capita in the world,benefiting from financial stability and a strong external position, where growthshould stay strong over the next few years.

Grown from the junction of the two islands of Coloane and Taipa, Cotai isa bustling area, with new entertainment and lifestyle projects. To date, morethan 120,000 square metres of meeting, incentive, convention and exhibition(MICE) space and most of Macau’s multi-billion gaming industry have theirgrounds in Cotai, a narrow but quite impressive strip of land. The second waveof construction, known as Cotai 2.0, will extend existing casino properties andresorts for at least the so-called Big Six gaming enterprises by 2017.

Land concessions (government leaseholds) are granted provisionally by theMacau Government for the development of approved projects, becomingdefinitive for a period of 25 years after full payment of the premium, when theconcluded project is licensed by the Public Works Department. The MacauLand Law (Law 10/2013) further allows for the automatic renewal of thedefinitive government leasehold for successive extensions of 10 years each.

Other economic sectors Tourism is at the core of Macau’s economy. Other than gaming facilities, thecasinos’ properties also comprise other business operations, such as world-classhotels and resorts, food and beverage establishments, spas, high-end brands andgeneral retail.

The banking system has been further strengthened, with the capital ade-quacy ratio raising to nearly 15% and the non-performing loan ratio falling

The secret to FDI successRita Martins and Pedro Manero Lemos of DSL Lawyers look at how Macau has cultivated, andcontinues to build on, its success as a global investment hub

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dramatically, a sign that investors continue to find in Macau the conditions todevelop their projects and leverage their investments. Banking and financeindustries have seen an increase in dimension and solidity due not only to theexponential growth of casinos and hotels, but also to property developmentinduced by the continuous increase in the number of expatriates and migrantworkers.

Meanwhile, the Macau Government continues to set the conditions to con-solidate other sectors and reduce the region’s economic activity reliance on itsgaming industry.

Besides a low tax environment (for example, professional tax rates ofbetween seven percent and 12% and income tax between three percent and12%), Macau SAR provides investors with several incentives for their invest-ment and for the development of their interests in the territory, and an offshorelegal regime encouraging certain businesses.

The tax incentives for projects promoting economic diversification, addingvalue within the company’s activity value chain or contributing to technologi-cal modernisation, can take the form of a total exemption of property tax forreal estate purchased exclusively for industrial purposes. It can also take the formof a partial exemption for a period of up to five years (in Macau) or 10 years(on Taipa and Coloane), for new real estate rented for industrial purposes.

In terms of industrial tax (company tax) a total exemption is available anda 50% reduction may be granted for businesses located on the islands (exceptfor offshore banking operations). A 50% reduction of complementary (profit)tax is also possible. Fuel, if supplied to industrial units, is tax free.

Other than these exemptions, which are subject to application and approvalby the Government, motor vehicles tax is not levied if the vehicles are intend-ed for use in Macau’s public services, tourism sector or public transport.

There are financial incentives in place aiming to encourage private enter-prises to increase their investments and business operations in Macau, provid-ed that they contribute to the promotion and diversification of the economy,strengthen environmental protection, or promote innovation and restructur-ing of the company’s technology. Beneficiary enterprises are entitled to a year-ly interest rate subsidy of four percent on their loans in Macau, with a maxi-mum period of four years from the date of the first installment’s payment.

Subsidies for investment projects may be granted for new products manu-facturing involving high economic risk if justified by: technical innovation;development of projects of an industrial nature that will benefit Macau; or,anti-pollution equipment or energy maximisation systems that may be benefi-cial to Macau.

The financial incentives and subsidies are granted on a case-by-case basiswith a fully documented application addressed to the Macau’s Chief Executive.

Macau’s offshore sector comprises different economic activities benefitingfrom the tax-free scheme. There are offshore financial activities to be licensedwith the Monetary Authority of Macau (AMCM) and IPIM’s supervised com-mercial activities in overseas sales, hardware consultancy, software consultancy,

data processing, database related activities, research and development, tests andtechnical analysis, management and administration of ships and aircraft.

On proof of being directly generated or related to the offshore business, off-shore entities are exempt from income tax, industrial tax, stamp duty on prop-erty transfer, insurance policies, donations, bank transactions and incorpora-tions of offshore institutions and increases of share capital. The scope of thisscheme also applies to non-Macau residents working as managers or specialisedtechnicians in offshore entities who are exempt from professional tax for thefirst three years of employment.

Residency application is also an important benefit to be considered byinvestors with qualified relevant investment projects for Macau, as well as high-ly qualified professionals with a prospective employer, who are also eligible.

Economic integration between Macau and south ChinaWith the intention of diversifying economic activity in Macau and thedevelopment of economic relations between Macau and the GuangdongProvince since the reform and implementation plan of the Pearl River Delta,ongoing since 2008, and the Closer Economic Partnership Arrangementbetween Mainland China and Macau (CEPA), Guangdong Province andMacau SAR entered into a new Special Cooperation Agreement in 2011. Thisis aimed at fostering growth in the region until 2020, particularly focusing onthe Hengqin Island Overall Development Plan.

Hengqin IslandSignificant to Macau for its adjacent location to Taipa and Coloane, andconnected to the Cotai strip by a bridge, Hengqin Island is located on theGuangdong Province in China, south of Zhuhai. In 2009, Xi Jinping, at thetime vice-President of the PRC, announced that the central government haddecided to develop Hengqin Island.

In 2011, the formal agreement was signed to develop cooperation betweenboth regions; coordination of their industries’ development; maximisation ofopportunities in Hengqin; and, research into social and public services’ sharingfeasibility, to facilitate integrated development of the economy, society, cultureand lifestyle. The overarching aim was to develop the most dynamic and inter-nationally competitive megalopolis in the Asia-Pacific region, creating a newworld-class economic area, to ultimately expedite regional economic integra-tion.

This strategy encompassed the diversification of Macau’s economy, the pro-motion of Macau as a tourism and leisure worldwide centre, the promotion ofits commercial services role and the attraction of high-end business resourceswithin and outside China, Hong Kong and Macau.

Hengqin Island emerged as an important land extension and a strategicsolution for the development of creative industries, scientific research andadvanced technology, within the prospects of the synergetic agreementbetween Macau and Guangdong.

Zhuhai Hengqin Investment Company is the PRC state-owned firm (SOE)responsible for the development of the future megalopolis. Set up in 2009, ithas been in charge of attracting and hosting investment, managing propertyand building infrastructure. After applying to the Hong Kong Stock Exchange,the company publicly announced its interest in welcoming financial compa-nies in Hengqin, be it investment funds, leasing or venture capital firms.

Following the 2011 Special Cooperation Agreement, Macau’s Governmentset up the Commission for the Evaluation of Investment Projects in Macau forthe Development of Hengqin in 2013, with IPIM in charge of receivinginvestor applications for the five square kilometres of the Guangdong-MacauIndustrial Cooperation Park.

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In 2014, there were 33 projects approved for the island’s structural devel-opment. Of these, 30% are related to tourism and cultural activities, with com-mercial and business support activities representing 24.2%, scientific and edu-cational investigation at nine percent, and healthcare and new technologies atthree percent. These latter two are deemed to be a new pole of attraction forinternational qualified professionals.

It is expected that by 2015 the cross-border infrastructure network will becompleted, with a noticeable development of the urban area and preliminaryresults of the planned diversification of the economy.

By 2020 Hengqin is hoped to be globally acknowledged as one of the bestleisure and travel destinations. The development plan envisages three resortand tourism districts in the south, one residential area with accessory services,two high-tech and scientific districts and a cultural and creative district.

Two of its largest projects are already fully functional: the new University ofMacau campus, officially opened in July 2013 as an extension of Macau juris-diction, and Ocean Kingdom (Chimelong Group), the world’s largest marinetheme park covering 132 hectares. Once completed, it will agglomerate 10theme parks, 12 hotels, three golf courses, two yacht clubs, shops and conven-tion facilities.

However, resort revenues in Macau are already shifting. Analysts are observ-ing that leisure infrastructures, business options and entertainment besidesgaming are receiving more and more attention from visitors. This shift makesMacau an increasingly mature gaming destination, now shaping itself tobecome one of the world’s centre of tourism and entertainment.

The Macau and Guangdong Governments are prioritising the promotionof service trade liberalisation by strengthening financial cooperation betweenregions and within the cultural and creative sector and in the MICE industry,as well as the exploitation of tourism. By offsetting several disadvantages of thetravel distance between Macau-Zhuhai-Hong-Kong, the bridge to be opened

by 2016 will cut travel time by half, and facilitate the access and migration ofgoods and persons, on a regional and international scope. As well as the bridgedevelopment, the Macau Light Rapid Transit, which is under construction,and the Macau International Airport Capacity Upgrade (which will double theexisting airport capacity to 12 million people per year) are other projects whichwill decrease car traffic and attract visitors to Macau.

Other concerns centre on environmental and health care measures, such asair quality monitoring stations and the development of an environmental pro-tection industry.

The future of Macau’s economyMacau’s economic horizon reveals eight new multi-billion dollar integratedresorts and casinos to be opened in Cotai by 2017, resulting in twice as muchaccommodation and gaming tables. As per CLSA’s recent forecasts, the numbersare also expected to increase, with the new international pole of entertainmentreaching $90 billion in gaming revenues in 2018, the amount currently receivedby the industry worldwide.

The liberalisation of gaming in other Asian regions may affect Macau, butthe region will by then have become resilient and will have accommodated dif-ferent entertainment areas to be able to defend its market share in Asia. Theeconomic diversification associated with some relaxation of policies related tothe granting of work permits for overseas workers (addressing some labourshortage difficulties) will also bolster the economy’s strength in the long term.

According to Guangdong’s authorities, a fully developed Hengqin Islandwith more than 280,000 inhabitants is expected by 2020, and a GDP per capi-ta of approximately $31,340, quadrupling the region’s current earnings.

Macau has become a must-go destination for investors. The region is at thestart of a new era of economic diversification and integration with southernChina, with continued opportunities for new businesses and investments.

About the authorRita Martins joined DSL Lawyers in 2007 as a partner, to lead thebanking and financial practice, with a focus on project and corporatefinance. She advises major financial institutions on regulatory approvalsfor launching new financial products in Macau, and was activelyinvolved in the listing with the Hong Kong Stock Exchange of twomajor Macau gaming companies, among others. Her practice handlesthe licensing procedures with the local regulator (AMCM) for financialinstitutions planning to start operations in Macau, and she advisesinternational clients on how to adapt to Macau employment laws andrequirements.

Rita obtained a degree in law from the University of Lisbon, Portugal in1994 and a post-graduate diploma in corporate consulting in 1996. Sheis a member of the Portuguese Bar Association, the Lawyers Associationof Macau and an associate member with the Chartered Institute ofArbitrators (CIArb).

Rita MartinsPartner, DSL Lawyers

MacauT: +853 8590 0708F: +853 2872 5588E: rmartins@dsl-lawyers.comW: www.dsl-lawyers.com

About the authorPedro Manero Lemos has extensive experience in litigation andarbitration, assisting clients on pre-litigation and dispute resolutionstages. He advises and assists developers and investors in all phases oftheir transactions.

Pedro is a registered lawyer at the Portuguese Bar Association and isundergoing training for full admission with the Lawyers Association ofMacau. In Portugal, he worked as a trainee lawyer for two years, andpreviously as a legal consultant with Sal & Caldeira Advogados inMozambique. He has Masters in law from the University of Coimbraand two post-graduate diplomas in banking and stock market andinsurance law (University of Coimbra) and in intellectual property(University of Lisbon).

Pedro Manero LemosAssociate, DSL Lawyers

MacauT: +853 8590 0703F: +853 2872 5588E: plemos@dsl-lawyers.comW: www.dsl-lawyers.com