Vietnamlawmagazine

Vu Le Bang

Vietnam Counsel of Nishimura & Asahi HCM City Branch

The Law on Enterprises and the Law on Investment were promulgated on November 29, 2005, and came into effect on July 1, 2006. These are the fundamental legal sources governing business and investment activities in Vietnam.Additionally, specialized laws may also govern business and investment activities depending on the investment sector. Where the investment belongs to the common services sector, the governing laws may include the Commitments of Vietnam regarding specific services in its accession to the World Trade Organization (WTO) (WTO Commitments of Vietnam) and the Commercial Law. Where the investment belongs to the real-estate business sector, the Law on Real Estate Business and the Law on Land will govern investment activities.

During the celebrations held regarding the publication of the Annual Report on Vietnamese Enterprises in 2010, which took place in Hanoi on March 28, 2011, the Vietnam Chamber of Commerce and Industry (VCCI) disclosed that Vietnam’s business environment had substantially improved. Specifically, certain reforms of Vietnam’s business environment carried out in 2010 resulted in Vietnam advancing 10 places in the Report rankings, as compared with its ranking in the previous year, to 78^th place out of 183 countries overall; and to 4^th place out of the 10 countries having undergone the most positive restructuring regarding their business environment.[1]

Obviously, a country’s laws on business and investment are an important part of a common business environment. A legal system that is fully equipped and unified, and that facilitates the development of business activities will invariably underpin a highly respected business environment. Improving Vietnam’s laws on business and investment will therefore enhance the improvement of its business environment by encouraging investments and promote the development of the national economy.

VCCI has recently held seminars to obtain expert opinions to perfect its draft reports on the review of various laws relating to business and investment activities. These laws include the Law on Enterprises, the Law on Investment, the Commercial Law, the Law on Land and other specialized laws, aimed at boosting and clarifying Vietnam’s business environment. Various seminars have been held to date that have attracted interest from a variety of legal experts, lawyers, law professors, enterprises and investment management government bodies (licensing authorities) both in Hanoi and Ho Chi Minh City. A variety of opinions on improving the laws on business and investment in Vietnam have been aired in those seminars and by mass media. Because the Law on Enterprises and specialized laws could govern all subject-matters currently governed by the Law on Investment, some legal experts have even proposed that “the Law on Investment should be absolutely omitted.” Within the scope of this article, the writer proposes various recommendations to improve the laws on business and investment that mainly apply to foreign investors in Vietnam.

In-principle approval for investment projects with foreign-owned capital

Investors must obtain in-principle approval (IPA) before carrying out procedures for investment registration or investment evaluation in order to be issued an investment certificate (IC) applicable to important national investment projects, large investment projects and/or important investment sectors under the Law on Investment and its guiding documents. In addition, there are various specialized laws, such as the Housing Law, the Law on Telecommunications and the Law on Technology and Science, requiring investors investing in some investment projects governed by those specialized laws to carry out IPA procedures before being officially approved to implement these investment projects.

Under Vietnamese laws, therefore, there are only a certain number of investment projects that are required to obtain an IPA before carrying out procedures to obtain official approval for investment (i.e., obtaining an IC). Nevertheless, in practice, an IPA seems to be required by licensing authorities throughout Vietnam (except for large cities, such as Hanoi and Ho Chi Minh City) for all foreign investors’ investment projects located outside industrial parks, export processing zones, economic zones or high-tech parks.

The practical application of law and the provisions of law that are inconsistent will always create barriers for investment activities as well as cause foreign investors to doubt whether Vietnam has an open business environment. It is especially doubtful whether Vietnam has truly committed to simplifying administrative procedures in light of the one-stop shop policy. Accordingly, licensing authorities should consider reviewing investment projects and only impose IPA procedures on them as specifically required by law. To save time and cost, foreign investors should be directly permitted to carry out procedures to obtain official approval of their investment projects (particularly for those that are small and unconditional). Furthermore, this permission would probably help reassure foreign investors that they can enjoy a straightforward business environment and simplified administrative procedures in Vietnam.

Request for ICs upon contribution of capital to or purchase of shares in Vietnamese enterprises

In parallel with distinguishing the types of company into limited liability companies and unlimited liability companies, Vietnamese laws distinguish between public companies[2] and non-public companies. In addition, the public company can be classified as a listed public company (i.e., a public company that has shares listed on the Stock Exchange or Securities Trading Center) or an unlisted public company.

Under the Law on Investment, a foreign investor investing in Vietnam for the first time must have an investment project and perform the procedures for investment registration or evaluation of investment with a licensing authority in charge of investment in order to be issued an IC.[3] The licensing authority (at least to the extent applicable in Hanoi and Ho Chi Minh City) is interpreting and applying the law, such that if a foreign investor contributes capital to or purchases shares in a Vietnamese enterprise (the first time in each enterprise), then the Vietnamese enterprise will have to obtain an IC in addition to revision of its business registration certificate or other relevant documents to prove the foreign investor’s ownership of capital contribution or shares in the enterprise. However, where a foreign investor purchases shares in a Vietnamese enterprise that is a listed public company, the enterprise is unlikely to be required to obtain an IC.

Between the practical application and the law, it is unclear whether an unlisted public company, of which the shares are purchased by foreign investors, may be required to obtain an IC. Assuming that the provisions of the Law on Investment regarding the requirement that a foreign investor investing in Vietnam for the first time must have an investment project and must obtain an IC are strictly applied, the unlisted public company would be required to obtain an IC upon foreign investors purchasing shares. Unfortunately, foreign investors have not received the same responses in each case from the licensing authorities of which they made inquiry. In fact, most unlisted public companies do not perform the procedures to obtain an IC upon foreign investors purchasing shares even though one of the companies’ genuine concerns is that they might be required to obtain an IC.

Presently, according to the State Securities Commission, there are some 450 unlisted public companies (this number could be much higher in practice as many public companies do not register with the State Securities Commission). Since domestic investors mostly lack capital sources (as the interest rates for mobilization of capital within the country are quite high), the demand for share purchase by foreign investors in those unlisted public companies has been increasing. In order to create security in terms of legality for foreign investors and to avoid licensing authorities applying the law differently, Vietnamese laws should explicitly regulate the request to obtain an IC upon foreign investors’ purchase of shares in Vietnamese enterprises being listed as public companies. At the same time, should Vietnamese laws consider that the request to obtain an IC be entirely dismissed to create a more straightforward business environment and to encourage foreign capital sources to the maximum extent possible by share purchases in listed public companies?

Request to open a capital account for capital contribution or share purchase

Vietnamese laws specify two types of capital account concerning investment activities from overseas into Vietnam as follows:

Case 1: A foreign investor directly engages in incorporating or co-operation with the Vietnamese party to incorporate a subsidiary in Vietnam to implement an investment project. Under Vietnamese law, the subsidiary will be obliged to open a specialized capital account in a foreign currency with a bank licensed to trade in foreign exchange in order that the foreign investor can perform the transfer and withdrawal of capital contribution, profits, medium- and long-term foreign loans and various other transactions through the specialized capital account. In such a case, the foreign investor is not required to open a capital account under its own name in Vietnam.

Case 2: A foreign investor who contributes capital to or purchases shares in a Vietnamese enterprise with 100% domestic investor(s) will be obliged to open a capital account for capital contribution or share purchase in Vietnamese dong with a commercial bank licensed to operate in Vietnam under its own name so as to contribute capital to or purchase shares in the Vietnamese enterprise. In such a case, the Vietnamese enterprise is not required to open the specialized capital account despite the foreign investor owning the charter capital.

Legally, when a foreign investor has contributed capital to or purchased shares in a Vietnamese enterprise, the Vietnamese enterprise is regarded to be one with foreign-owned capital upon the foreign investor becoming a member or shareholder. As analyzed in Section 2 above, it is obliged to obtain an IC except if it is a listed company. This means that the Vietnamese enterprise is similar to the subsidiary (i.e., both being enterprises with foreign-owned capital). Unlike the subsidiary that is required to open a specialized capital account, the Vietnamese enterprise is not required to do so. At the same time, a new foreign investor who contributes capital to or purchases shares in the subsidiary is fortunately exempted from opening a capital account to perform the transaction of capital contribution or share purchase. Meanwhile, the new foreign investor who contributes capital to or purchases shares in a Vietnamese enterprise will be required to open a capital account in Vietnam to perform the transaction of capital contribution or share purchase. Would Vietnamese lawmakers consider and promulgate uniform and common legal regulations on opening the specialized capital account and the capital account, which would apply to both the subsidiary and the Vietnamese enterprise respectively?

Purchase of shares in listed public companies engaging in services restricted to foreign investors

There are various services restricted to opening the market to foreign investors, such as sound recording, secondary education services and leasing services[4] under the WTO Commitments of Vietnam. Vietnam may also open the market in some service sectors subject to certain conditions. For instance, a foreign investor is, in principle, provided access to the market to implement its right to distribute various products, such as cosmetics, steel, iron and clothes. However, the foreign investor may implement its distribution right together with the right to establish one retail sales outlet. The foreign investor will be subject to the application of economic need tests (ENTs) when opening more than one retail sales outlet, while the ENTs do not apply to domestic investors.

Recently, the regulations on restriction of the Vietnamese market have also applied where foreign investors purchase shares in a listed public company. The Vietnamese pharmaceutical enterprise (Mekophar) typically exemplifies application of the law. The enterprise was prohibited from engaging in the distribution of pharmaceuticals because it has foreign shareholders with an approximately 4% shareholding, while the distribution of pharmaceuticals has not been made available to foreign investors according to the WTO Commitments of Vietnam.[5] Nevertheless, the practical application of the restriction on opening the market appears not to be so strict. For instance, foreign investors are likely to be permitted to purchase shares in listed public companies for now regardless of whether those listed companies might have more than one retail sales outlet. When foreign investors become shareholders, those listed companies have not had ENTs imposed on retail sales outlets beyond the first one.

Should restrictions on opening the market to foreign investors commonly apply to all listed public companies to ensure equality among listed public companies as well as enforcing Vietnamese laws?

Registration of project site arising from asset purchase of other enterprises with foreign-owned capital which have not been dissolved, made bankrupt, or had their IC revoked

Under the Land Law, a foreign-invested enterprise may mortgage its office building and factory (assets attached to land) to borrow loans from credit institutions licensed to operate in Vietnam. Practically, the office building and assets attached to land are usually of a high value, while the enterprise may need to borrow capital in order to meet business demands. Therefore, the enterprise usually mortgages its office building and factory with credit institutions licensed to operate in Vietnam. Where the enterprise fails to repay debt, the mortgaged assets may be acquired and possibly sold to a third party.

There are many cases in which foreign investors (either through their enterprises to be established or those that have been established in Vietnam) purchase office buildings and factories of foreign-invested enterprises within industrial parks through auction procedures when credit institutions realize their mortgaged assets because the enterprises fail to repay debts when due. Under the Land Law, the purchase of the office building and factory is legal, and the foreign investor is permitted to continue leasing the land after purchasing assets attached to such land. Unless the enterprise that originally owned the office building and factory is relocated, declared bankrupt, dissolved or has its IC revoked, the foreign investor who purchased the office building and factory would unlikely register those assets for its investment project due to the licensing authority’s refusal. Among other things, this is because that same site cannot be registered for the implementation of two investment projects (i.e., appearing on two ICs) concurrently.

On the one hand, the laws of Vietnam allow the foreign investor to purchase the office building and factory owned by another enterprise so as to register its own investment project. On the other hand, the foreign investor cannot complete the procedures for registration of the purchased office building and factory for its own investment in reality. Should the laws of Vietnam have new regulations to resolve this situation to protect the foreign investor’s legitimate interests?

Implementation of distribution right

As mentioned above, Vietnam has opened up the market to foreign investors to participate in distribution and retailing. Furthermore, the establishment of retail sales outlets beyond the first one will be considered based on the ENTs.

The prevailing regulations on foreign investors’ implementing distribution rights include the WTO Commitments of Vietnam, Decree No. 23/2007/ND-CP dated February 12, 2007, implementing the Commercial Law regarding trading and distribution activities by foreign-invested enterprises in Vietnam (Decree 23), and their guiding documents. Until now, the regulations have revealed various shortcomings, which are as follows:

First, retailing is understood to be the activity of selling goods directly to the final consumer under Decree No. 23. Accordingly, the final consumer can be subsequently understood to include individuals and enterprises that purchase goods to use for their business activities. This regulation is not in line with the regulation on retailing that is globally accepted. This is because the purchase of goods to be used for an enterprise’s business activities should be regarded as wholesaling rather than retailing.

Second, the laws of Vietnam cover regulations on wholesaling but do not include those on enterprises establishing wholesale outlets with foreign-owned capital. According to opinions of the Ministry of Industry and Trade, foreign-invested enterprises are unlikely to be permitted to set up wholesale outlets, except where establishing wholesale outlets is agreed to observe the regulations that currently apply to establishing retail sales outlets. This means that a foreign-invested enterprise would need approval for establishing wholesale outlets beyond the first one based on the ENTs.

Third, in practice, foreign investors’ contribution of capital to and purchase of shares in non-public Vietnamese enterprises with more than one retail sales outlet will be restricted based on the ENTs, while foreign investors’ purchase of shares in listed public companies with more than one retail sales outlet appears not to have to undertake the ENTs.

Fourth, a foreign-invested enterprise installing automatic retail machines in different places can be deemed to establish several retail sales outlets. It is therefore subject to being considered, based on the ENTs, for the second automatic retail machine and thereafter, under the prevailing regulations of Vietnamese law. However, where the enterprise conducts retail by telephone, TV home shopping, internet or catalogs possibly resulting in actual large amounts of retailing throughout Vietnam, it will not be subject to the application of the ENTs.

Presently, the Ministry of Industry and Trade is drafting a new circular replacing the current one guiding the implementation of Decree No. 23, and a new government decree governing retailing activities in Vietnam may soon be issued. The above-mentioned matters are expected to be resolved by the forthcoming Vietnamese legal regulations.

Investment in service sectors which Vietnam has not yet committed to open up to foreign investors

When acceding to the WTO, Vietnam has reserved or has not committed to making available various service sectors in addition to opening up the market to foreign investors. In principle, foreign investors will be permitted to invest in Vietnam in service sectors that Vietnam has committed to open up. However, the remaining service sectors may be considered for grant of ICs on a case-by-case basis.

In reality, various service sectors are not committed to by Vietnam in its WTO Commitments, such as job introduction services. However, licensing authorities have already granted ICs to various foreign investors. This is because for a service sector not committed to by Vietnam, licensing authorities may accept or refuse the grant of an IC on a case-by-case basis at its sole discretion. This might result in one foreign investor being evaluated more highly without being granted an IC, while another foreign investor is evaluated much lower and yet still granted one. To ensure equality and transparency in granting ICs in service sectors which Vietnam has not yet committed to opening up, should one proclaim that criteria regarding granting ICs be stated in the laws of Vietnam in that case?.-