Vietnamlawmagazine

Lawyer Vu Le Bang

HoChiMinh City Bar

The Law on Enterprises and the Law on Investment, which were promulgated on November 29, 2005 and came into effect on July 1, 2006, are the fundamental legal sources currently 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 sector is a common business service, 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 investment activities will be governed by the Law on Real Estate Business and the Law on Land.

During the celebrations held in connection with the publication of the Annual Report on Vietnamese Enterprises in 2010, which took place in Hanoi on March 28, 2011, it was disclosed by the Vietnam Chamber of Commerce and Industry (VCCI) that Vietnam’s business environment had substantially improved. Specifically, certain reforms of Vietnam’s business environment carried out in 2010 resulted in Vietnam moving up 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 that have undergone the most positive restructuring regarding their business environment.[1]

It is evident that a country’s laws on business and investment are an important part of creating a common business environment. A legal system that is fully equipped, 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 serving to promote the development of the national economy.

VCCI has recently been holding seminars as a means to gain insight into expert opinions to perfect its draft reports on review of a number of 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, the Law on Real Estate Business and other specialized laws, with a view to boosting and further clarifying Vietnam’s business environment. A number of seminars have been held to date that have attracted the interest of a wide variety of legal experts, lawyers, law professors, enterprises and investment management government bodies (“Licensing Authorities”) both in Hanoi and in HoChiMinh City. A whole range of opinions on bettering the laws on business and investment in Vietnam have been aired in those seminars and by means of mass media. On the ground that the Law on Enterprises and specialized laws could govern all subject matter currently governed by the Law on Investment, some legal experts have even proposed an expedient that “the Law on Investment should be absolutely omitted”. Within the scope of this article, the writer would like to propose a number of recommendations to better the laws on business and investment that are mainly applied to foreign investors in Vietnam.

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

Investors must obtain an in-principle approval before conducting the procedures for investment registration or investment evaluation in order to be issued an investment certificate to the extent applicable to important national investment projects, a number of large investment projects, and/or important investment sectors under the Law on Investment and its guidance documents. In addition, there appear to be a number of specialized laws such as the Law on Residential Housing, the Law on Telecommunications, and the Law on Technology and Science requiring investors investing in some investment projects respectively governed by those specialized laws to carry out the procedures for in-principle approval before officially being approved to implement the investment projects.

Under Vietnamese laws, therefore, there are only a certain number of investment projects that will be required to obtain an in-principle approval before conducting the procedures to obtain the official approval on investment (i.e., obtaining an investment certificate). Nevertheless, in practice, the in-principle approval seems to be required for all investment projects of foreign investors located outside industrial zones, import and export processing zones, economic zones or high-tech zones by the Licensing Authorities throughout Vietnam (except for some large cities, such as Hanoi and HoChiMinh City).

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-door policy. At the same time, it is the difference between the practical application of law and the provisions of law that may lead to disadvantages for investors. For instance, in an actual case, a foreign investor had to obtain an in-principle approval for its proposed investment project at the request of the Licensing Authority and had been granted an in-principle approval. Unfortunately, the Licensing Authority thereafter granted another investor the in-principle approval on the same site and for the same investment project as that of the foreign investor. In such a case, the foreign investor that was first granted the in-principle approval was in a somewhat difficult position to provide sound legal argument that they would solely have the right to implement the investment project, particularly if it were not required to obtain an in-principle approval in accordance with the law for the investment project.

Accordingly, the Licensing Authorities of Vietnam should consider reviewing investment projects and only impose procedures for in-principle approval on the investment projects as specifically required by law. In the interest of time and costs, foreign investors should be permitted to conduct procedures to obtain official approval of their investment project directly (particularly for those that are small and unconditional). Concurrently, such permission would probably help reassure foreign investors that they can enjoy a straightforward business environment and simplified administrative procedures in Vietnam.

2. Request for investment certificate upon purchase of capital contribution or shareholding in Vietnamese enterprises by foreign investors

In parallel with distinguishing the types of company into limited liability companies and unlimited liability companies, Vietnamese laws distinguish between public companies and non-public companies. Specifically, the Law on Securities regulates that a public company is a shareholding company falling into one of the following three categories:[2]

- A company that has made a public offering of shares;

- A company that has shares listed on the Stock Exchange or Securities Trading Centre;

- A company that has shares owned by at least 100 investors excluding professional securities investors, and which has paid-up charter capital of VND 10,000,000,000 or more.

The public company can be practically clarified as a listed public company (i.e., a public company that has shares listed on the Stock Exchange or Securities Trading Centre) 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 the Licensing Authority for investment in order to be issued an investment certificate.[3] It is being interpreted and applied by the Licensing Authority (at least to the extent applicable in Hanoi City and HoChiMinh City) that if a foreign investor purchases capital contribution or shareholding in a Vietnamese enterprise (the first time in each enterprise), then the Vietnamese enterprise will be subject to obtaining the investment certificate in addition to amendment of its business registration certificate or other relevant documents to prove the foreign investor’s ownership right of capital contribution or shareholding 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 trigger the requirement to obtain the investment certificate.

Between the practical application and the law, it is currently unclear whether an unlisted public company of which the shares are purchased by foreign investors may trigger the requirement to obtain the investment certificate. Assuming that the regulations of the Law on Investment with respect to the requirement that a foreign investor investing in Vietnam for the first time will have an investment project and be subject to the requirement to obtain an investment certificate is strictly applied, the unlisted public company would trigger the requirement to obtain the investment certificate upon foreign investors purchasing shares. However, foreign investors unfortunately have not received the same responses in such a case from the Licensing Authorities of which they made inquiry. In fact, most unlisted public companies do not perform the procedures to obtain the investment certificate upon foreign investors purchasing shares even though one of the company’s genuine concerns is that they may trigger to the requirement to obtain the investment certificate.

At present, there are some 450 unlisted public companies according to the State Securities Commission (this number could be much larger in practice as many public companies are known to fail to register with the State Securities Commission). In the context that domestic investors mostly lack capital sources (as the interest rates for mobilization of capital within the country are currently 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 the Licensing Authorities applying the law differently, Vietnamese laws should explicitly regulate the request to obtain the investment certificate upon foreign investors’ share purchase in Vietnamese enterprises being listed as public companies. At the same time, should Vietnamese laws consider that the request to obtain the investment certificate be entirely dismissed to create a more straightforward business environment and to encourage foreign capital sources to the maximum extent possible by way of share purchase in listed public companies?

3. Request to open a capital account for capital contribution or share purchase by the foreign investor

Vietnamese laws specify two types of capital account in relation to 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 (“Subsidiary”) in Vietnam to implement an investment project, and the Subsidiary will be obliged to open a specialized capital account (“Specialized Capital Account”) in a foreign currency with a bank licensed to trade in foreign exchange in order that the foreign investor be able to perform the transfer and withdrawal of capital contribution, profits, medium- and long-term foreign loans and a number of 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 participates in capital contribution or share purchase in a Vietnamese enterprise (“Vietnamese Enterprise”) that was duly incorporated by 100% domestic investor(s) will be obliged to open a capital account for capital contribution or share purchase (“Capital Account”) in Vietnamese Dong with a commercial bank licensed to operate in Vietnam under its own name so as to purchase capital contribution or shareholding 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.

As a matter of fact, if the foreign investor sells its capital contribution or shareholding in Case 2 to another foreign investor, then the other foreign investor will be obliged to open the Capital Account to perform the transaction on purchasing capital contribution or shareholding. However, if the foreign investor sells its capital contribution or shareholding in Case 1 to another foreign investor, then the purchaser being another foreign investor will not trigger the requirement to open the Capital Account to perform the transaction on purchasing the capital contribution or shareholding. The parties to the transaction that are all foreign investors regarding purchase of capital contribution or shareholding in the Subsidiary in Case 1 may even effect the payment through their bank accounts opened overseas.

Legally, when the foreign investor has purchased capital contribution or shareholding in the Vietnamese Enterprise in Case 2, the Vietnamese Enterprise is deemed an enterprise with foreign-owned capital (upon becoming the member or shareholder as stated in the Law on Investment and the Law on Enterprises). As analyzed in Section 2 above, the Vietnamese Enterprise is obliged to obtain the investment certificate except if it is a listed company. This means that the Vietnamese Enterprise in Case 2 is quite similar to the Subsidiary in Case 1 (i.e., both being an enterprise with foreign-owned capital). Unlike the Subsidiary in Case 1 that is required to open the Specialized Capital Account, the Vietnamese Enterprise in Case 2 is not required to open the Specialized Capital Account. At the same time, a new foreign investor who purchases capital contribution or shareholding in the Subsidiary in Case 1 is fortunately exempted from opening the Capital Account to perform the transaction on purchase of capital contribution or shareholding. Meanwhile, the new foreign investor who purchases the capital contribution or shareholding in the Vietnamese Enterprise in Case 2 will trigger the requirement to open the Capital Account in Vietnam to perform the transaction on purchase of capital contribution or shareholding. Would Vietnamese lawmakers consider and promulgate uniform and common legal regulations on opening the Specialized Capital Account and the Capital Account respectively, which would be applied to both Case 1 and Case 2?

4. Purchase of shares in listed public company engaging in services restricted to opening the market to foreign investors

There are a number of services restricted to opening the market to foreign investors including distribution of a number of products (e.g., pharmaceuticals, oil and gasoline, and so on), sound recording, secondary education services and leasing services without operators relating to other machinery and equipment under the WTO Commitments of Vietnam. Vietnam may also open the market in some service sectors subject to meeting certain conditions. For instance, a foreign investor is, in principle, provided access to the market to implement the right to distribute a number of products, such as cosmetics, steel, iron, and clothes. However, the foreign investor may implement such distribution right associated 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 are not applied to domestic investors.

Recently, the regulations on restriction of the Vietnamese market have been also applied where foreign investors purchase shares in a listed public company. The Vietnamese pharmaceutical enterprise (Mekophar) provides a typical example of the application of the law. The enterprise was prohibited from engaging in distribution of pharmaceuticals because it has foreign investor shareholders who have approximately a 4% shareholding, while the distribution of pharmaceuticals has not been made available to foreign investors according to the WTO Commitments of Vietnam.[4] 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 the time being 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 the ENTs imposed on retail sales outlets beyond the first one.

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

5. Definition of enterprise with foreign-owned capital and foreign investor

It should be noted that the definition of an enterprise with foreign-owned capital has been the subject-matter of discussions by lawyers, law professors, and other legal experts. An enterprise that has 1% of its shareholding directly owned by a foreign investor is deemed an enterprise with foreign-owned capital. The laws of Vietnam do not yet explicitly regulate the indirect ownership of foreign investors in Vietnamese enterprises.

For instance, if a foreign investor co-operates with a Vietnamese partner to set up a joint venture company (“JVC”) and has the foreign investor owning up to 49% of the charter capital only; thereafter, the JVC sets up a new company or purchases capital contribution or shareholding in Vietnamese enterprises (“Other Enterprise”), is the JVC deemed a foreign investor in the Other Enterprise? In reality, if the Other Enterprise is a public company, the JVC is not deemed a foreign investor under Decision No. 55/2009/QD-TTg of the Prime Minister dated April 15, 2009, on percentage participation of foreign investors in the Vietnamese securities market. When purchasing shares in public companies, the JVC is not required to open the Capital Account as well as apply for a securities trading code. However, this is unclear where the JVC sets up a new company or invests in the Other Company that is not a public company. It is somewhat questionable if the JVC is deemed a foreign investor or domestic one in such a case, though it appears from the Decree No. 102/2010/ND-CP of the Government dated October 1, 2010, detailing and guiding the implementation of a number of Articles of the Law on Enterprises that a company that has its charter capital owned by a foreign investor not exceeding 49% may be deemed a domestic enterprise. It is a fact that the JVC would likely be subject to conducting the procedures for registration investment or evaluation investment in order to be granted the investment certificate like a foreign investor. In addition, a Vietnamese enterprise (being a non-public company) that has its capital contribution or shareholding purchased by the JVC is still likely to trigger the requirement to obtain the investment certificate.

Another case is where a foreign investor purchases capital contribution or shareholding accounting for 49% or less of the charter capital in a Vietnamese enterprise (being a non-public company), the Vietnamese enterprise is somewhat deemed a domestic investor by the Licensing Authorities throughout Vietnam when establishing a new company or purchasing capital contribution or shareholding. Accordingly, a new legal entity that is established by the Vietnamese enterprise would likely be created according to the procedures for business registration. In addition, another Vietnamese enterprise that has the capital contribution or shareholding purchased by the Vietnamese entity is unlikely to trigger the requirement to obtain the investment certificate.

The legal regime applied to enterprises with foreign-owned capital is different from that which is applied to domestic enterprises. The legal regime applied to domestic investors is also different from that which applied to foreign investors. To avoid ambiguity in the distinction between enterprises with foreign-owned capital and domestic enterprises, and between foreign investors and domestic investors, Vietnamese laws should clearly furnish criteria to define a foreign investor in the case of indirect ownership by foreign investors in Vietnamese enterprises. For example, if an enterprise that has foreign investors were to own 49% or less of the charter capital (regardless of whether it is first established by the foreign investor or a Vietnamese enterprise in which the foreign investor purchases capital contribution or shareholding), then such an enterprise should be considered a domestic investor when purchasing capital contribution or shareholding in another enterprise. In particular, Vietnamese laws should address the case whereby an enterprise with foreign-owned capital sets up daughter companies and then the daughter companies set up granddaughter companies. How should one define the foreign element in those daughter companies, granddaughter companies, and possibly great-granddaughter companies (where the granddaughter companies set up great-granddaughter companies)?

6. Legal regulations on issuance of bonds

Issuance of bonds by enterprises are currently governed by the Law on Enterprises, the Decree No. 52/2006/ND-CP of the Government dated May 19, 2006 on issuance of enterprise bonds and the Decree No. 53/2009/ND-CP of the Government dated June 4, 2009 on issuance of international bonds. Under the Law on Enterprises, a shareholding company will not have the right to issue bonds in the following cases (except where the laws on securities provide otherwise):[5]

- Payment has not been made in full for the principal and interest of issued bonds, payment has not been made or has not been made in full for due debts for three consecutive preceding years;

- The average after-tax profit rate for the three consecutive preceding years is not higher than the interest rate intended to be paid for the bonds to be issued.

Despite the above, the issue of bonds to creditors being selected as financial institutions is not restricted.

There also appears to be no definition of selected financial institutions as provided for in the Law on Enterprises and its guidance documents. The question is whether the so-called selected financial institutions may include foreign investment funds, foreign investment fund management companies, or foreign securities companies? Additionally, how does one calculate the average after-tax profit rate? Would this be the average after-tax profit in comparison with net income or the average after-tax profit in comparison with the owners’ capital? Therefore, either the Law on Enterprises or its guidance documents should clarify the aforementioned terms so that investors may mobilize capital by smooth issuance of bonds without any obstacles due to ambiguous legal regulations.

7. Amendment of site for implementation of investment project where purchasing the office building and factory of other enterprises with foreign-owned capital, which have not been dissolved, bankrupted or had their investment certificate revoked

An enterprise with foreign-owned capital is entitled to mortgage their office building and factory (assets attached to land) to borrow loans from credit institutions licensed to operate in Vietnam under the Law on Land. 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 activity demands. Therefore, the enterprise usually mortgages their office building and factory with credit institutions licensed to operate in Vietnam. In the case of failure to repay debt, the mortgaged assets may be realized and possibly sold out to a third party.

There appear to be many cases whereby foreign investors (through their enterprises to be established in Vietnam or those that have been established in Vietnam) purchase the office building and factory of other enterprises with foreign-owned capital within industrial zones through auction procedures when credit institutions realize the mortgaged assets due to the enterprise’s failure to repay debt when due. Under the Law on Land, the purchase of the office building and factory is deemed legal, and the foreign investor will be permitted to continue leasing the land when purchasing assets attached to land. Unless the enterprise that originally owned assets being the office building and factory is relocated to another site, declared to be bankrupted, dissolved or has its investment certificate revoked, the foreign investor who purchased the office building and factory would unlikely register those assets for their investment project due to the Licensing Authority’s refusals. Among other things, this is because that one same site could not be registered for the implementation of two investment projects (i.e., appearing on two investment certificates) at the same time.

On the one hand, the laws of Vietnam allow the foreign investor to purchase the office building and factory owned by the other enterprise so as to register its own investment project. On the other hand, the foreign investor could not 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?

8. Legal regulations on implementation of distribution right by foreign investors

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

The prevailing regulations on implementation of distribution right by foreign investors include the WTO Commitments of Vietnam, the Decree No. 23/2007/ND-CP dated February 12, 2007 implementing the Commercial Law regarding trading and distribution activities by enterprises with foreign-owned capital in Vietnam (“Decree 23”), the Circular No. 09/2007/TT-BTM of the Ministry of Trade (now Ministry of Industry and Trade) dated July 17, 2007 guiding implementation of the Decree 23 (“Circular 09”), the Circular No. 05/2008/TT-BTC of the Ministry of Industry and Trade dated April 14, 2008 supplementing and amending the Circular 09 (“Circular 05”), and the Decision No. 10 /2007/QD-BTM of the Ministry of Trade (now Ministry of Industry and Trade) dated May 21, 2007 announcing the schedule for implementation of trading and distribution activities. Up until now, the regulations appear to have a number of shortcomings, which are as follows:

First, retailing is understood to be the activity of selling goods directly to the final consumer under the Decree 23. In practice, 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 widely accepted globally. The reason is that the purchase of goods to be used for an enterprise’s business activities should be deemed to constitute wholesaling rather than retailing.

Second, the laws of Vietnam cover regulations on wholesaling but do not include those on establishment of wholesale outlets by enterprises with foreign-owned capital. It appears from opinions by the ministry of the specialized industry that enterprises with foreign-owned capital are unlikely to be permitted to set up wholesale outlets, except that the establishment of wholesale outlets is agreed to observe the regulations that are currently applied to the establishment of retail sales outlets. This means that the enterprise with foreign-owned capital would be considered to establish wholesale outlets beyond the first one based on the ENTs.

Third, in practice, by foreign investors’ purchase of capital contribution and shareholding in Vietnamese enterprises that are not public companies but have more than one retail sales outlet will be considered to be restricted based on the ENTs, while foreign investors’ purchasing shares in listed public companies that have more than one retail sales outlet appear not to be required to undertake the ENTs.

Fourth, an enterprise with foreign-owned capital engaging in the automatic retail machine business that installs automatic retail machines in different places can be deemed to establish several retail sales outlets, and is therefore subject to being considered, based on the ENTs for the second automatic retail machine upwards under the prevailing regulations of Vietnamese law. However, where the enterprise with foreign-owned capital conducts retail by telephone, TV home shopping, internet or catalogues that may result in actual large amounts of retailing, it will conduct the procedures for registration of the implementation of its retailing right as normal without application of the ENTs.

Presently, the Ministry of Industry and Trade has co-ordinated to draft a circular replacing the Circulars 09 and 05 and a new decree issued by the Government governing retailing activities in Vietnam may soon be issued. It is expected that the abovementioned matters will be perfected in the forthcoming Vietnamese legal regulations.

9. Investment into service sectors where Vietnam has not yet committed to opening up the market to foreign investors

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

In reality, a number of service sectors are not unbound by Vietnam in the WTO Commitments of Vietnam such as job introduction services but the Licensing Authorities of Vietnam have already granted the investment certificates to a number of foreign investors. The issue is due to the fact that the service sector that has not been committed to by Vietnam’s Licensing Authority may accept or refuse the grant of the investment certificate on a case-by-case basis at its sole discretion. This may lead to a situation where one foreign investor who is evaluated more highly without being granted the investment certificate, while another foreign investor who is evaluated much lower may be still granted the investment certificate. To ensure the equality and transparency in granting the investment certificate in service sectors that Vietnam has not committed to open up yet, should one set out that criteria regarding the granting of the investment certificate be stated in the laws of Vietnam in such case?