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Official Gazette

Monday, September 26, 2022

Re-registration of enterprises under the new enterprise and investment laws

Updated: 16:45’ - 24/10/2006

Lawyers of VILAF - Hong Duc1

Recently, the Government issued the eagerly anticipated Decree No. 101/2006/ND-CP on re-registration and conversion of foreign-invested enterprises and business co-operation contracts pursuant to the Law on Enterprises and the Law on Investment (“Decree No. 101”).

Decree No. 101 governs the re-registration and conversion of (i) joint venture companies; (ii) wholly foreign-invested companies; and (iii) foreign-invested shareholding companies that were licensed under the old Law on Foreign Investment (“LFI”). The LFI was repealed and replaced by the new Common Investment Law (“CIL”) and uniform Enterprise Law (“UEL”) on July 1, 2006.

For projects in the form of business co-operation contracts (“BCCs”), Decree No. 101 provides for the changing of existing “investment licenses” (issued under the LFI) into “investment certificates” (issued under the CIL). Decree No. 101 also sets out the rights and obligations of foreign-invested enterprises that elect not to re-register within the two-year deadline.

The Government has spent considerable time consulting with stakeholders in preparing Decree No. 101, and the final product incorporates some positive changes as compared with previous drafts. The final version is more business friendly and should enable most existing enterprises to smoothly change over into the new system, should they so choose.

Scope of new decree

Decree No. 101 only applies to foreign-invested enterprises and BCCs “which have been issued with investment licenses pursuant to the Law on Foreign Investment in Vietnam”. Hence, companies such as joint-venture banks, education institutions and insurance companies are outside the scope of Decree No. 101 as they are licensed under specific legislation (the Law on Credit Institutions, Regulations on Education and the Law on Insurance Business), rather than under the LFI.

Re-registration

“Re-registration” means that a foreign-invested enterprise established under the LFI applies to replace its investment license with an investment certificate issued under the CIL, and to update its charter and business form in line with the UEL.

Under the standard process of re-registration, a wholly foreign-invested enterprise with one owner re-registers as a one-member limited liability company (“LLC”) under the UEL. Foreign-owned enterprises with multiple owners and joint-venture companies re-register as multi-member LLCs. The small number of existing foreign-invested shareholding companies established under the LFI pilot scheme would re-register as joint-stock companies (“JSCs”).

The documentation required for re-registration has been kept to a minimum. Investors must submit (i) an application for re-registration of the company; (ii) a draft revised charter of the company that complies with the UEL; and (iii) a valid copy of the existing investment license. The licensing body (the Provincial People’s Committee in most cases, or the Management Board of investment zones, high-tech zones etc for projects in such zones) is prohibited from requiring further documentation, unless the investor wishes to apply for some other amendment to the project or business registration along with re-registration. The licensing body should issue a new investment certificate within 15 working days of receiving the valid file.

The re-registered company operates in accordance with the newly-issued investment certificate, CIL and UEL. It inherits the legal rights and obligations of the re-registering enterprise and may continue to use its registered name, seal, bank accounts, tax and customs codes. Re-registration should be a largely seamless process.

Conversion

Pleasingly, Decree No. 101 also allows investors to “convert” between one-member LLC, multi-member LLC and JSC forms at the same time as re-registration. This gives investors flexibility to choose their desired corporate structure, rather than being restricted to the company form designated under simple re-registration.

The application dossier for conversion is more involved than for re-registration. In addition to the documents required for re-registration, the applicant must supply a resolution of the enterprise providing for the conversion of assets, capital and shares of the enterprise, a plan for workforce employment and a time limit for conversion. The licensing body is given 30 working days to consider the application and issue an investment certificate upon receipt of a valid file.

Decree No. 101 states that a converting enterprise will continue to enjoy existing investment incentives as provided in its investment license as long as foreign investors hold at least 30% of the charter capital following conversion. The legal basis for this requirement, however, is unclear.

Business Cooperation Contracts

Parties to BCCs may apply for a change from the existing “investment license” issued under the LFI into an “investment certificate” under the CIL. This procedure is very straightforward, as there are no significant changes to the operation of BCCs under the new laws compared to the LFI. The dossier simply consists of a written application form and a copy of the existing investment license. The licensing body should issue the updated investment certificate within seven working days.

Carry-over of investment incentives

Decree No. 101 does not specifically address the question of whether investment incentives contained in the existing investment licenses of re-registering enterprises will be automatically carried over into the newly issued investment certificate. This is puzzling given that such provision existed in earlier drafts and, as mentioned above, converting enterprises will continue to enjoy their investment incentives as long as 30% foreign ownership is retained following conversion.

However, even without express provision in Decree No. 101, enterprises should be able to rely on Article 11 of the CIL which provides that investors can continue to enjoy existing investment incentives upon a change in law.

Choosing not to re-register

Decree No. 101 also sets down the rights and obligations of enterprises that elect not to re-register.

Decree No. 101 defines “enterprises that do not re-register” as companies which have not re-registered within two years from the effective date of the UEL, i.e. before July 1, 2008. It is unclear whether this means that all enterprises are considered “enterprises that do not re-register” until they complete re-registration, or whether the term only refers to enterprises that have not re-registered as of July 1, 2008. We await further guidance from MPI on this point.

Enterprises that do not re-register, and BCCs that do not change to investment certificates, may continue to operate in accordance with their investment license and charter or contract. They may retain their registered name, seal, bank accounts and tax identification numbers. They must also comply with the UEL and CIL.

Presumably, the existing charter or contract will prevail over provisions of the UEL and CIL in case of inconsistency. However, it is unfortunate that Decree No. 101 does not expressly clarify this point. It is also unclear how charters that incorporate provisions from the LFI by reference will be regarded (for example, “the Board shall have powers as stipulated under the Law on Foreign Investment”). For the avoidance of doubt, all enterprises in this situation should promptly take steps to re-register.

Importantly, enterprises that do not re-register may not apply to amend their investment license in respect of business lines or duration of operation. Other amendments to the license are permitted in accordance with the procedures in the Decree implementing the CIL.

The way forward

Most enterprises should seriously consider re-registration or conversion to align themselves with current legislation. The authorities can be expected to become more familiar with administering the UEL/CIL as a body of practice builds to guide their implementation. Hence, dealings with authorities may be simpler for re-registered enterprises. Furthermore, in case of dispute between joint-venture parties, arbitrators may refer to business practices as reflected in current legislation. Re-registered enterprises will already be operating in line with such practices which reduces the possibility of an unsatisfactory or inappropriate arbitral outcome. Perhaps most importantly, only re-registered FIEs may apply for amendment of the investment certificate to change business sectors or extend the project duration. Enterprises that do not re-register may find themselves frozen out of future business growth.

The re-registration process is not particularly onerous but investors need to carefully consider how to re-draft the proposed charter in accordance with the UEL. Corporate governance provisions in the UEL differ significantly from those in the old LFI, and this may affect the balance of power as between joint owners of the re-registering enterprise. Since re-registration involves an amendment to the charter, approval of all parties will generally be required. Hence, time should be set aside for negotiation between the parties to achieve an acceptable outcome within the two-year deadline on re-registration and conversion. In practice, enterprises cannot apply for re-registration until the Ministry of Planning and Investment issues an implementing circular containing the relevant application forms. However, it would be prudent to begin the negotiation process as soon as possible.-

Footnotes

1 * VILAF was one of the first business law firms formed after Vietnam opened its doors to foreign investment in the early 1990s.  With 28 lawyers and legal experts in both Hanoi and Ho Chi Minh City, VILAF owns the largest and strongest team of local lawyers in Vietnam – www.vilaf.com.  

* VILAF

Ho Chi Minh City Office: The Metropolitan, Suite 901, 235 Dong Khoi, Dist 1, Ho Chi Minh City, Vietnam

Tel: (84-8) 8277300, Fax: (84-8) 8277303

Email:vilaf-hongduc@hcm.vnn.vn .-

VNL_KH1 

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