The Vietnam Government has undertaken a significant reform program to attract more foreign investments to the country that might change the investment and business landscape. Indeed,a new investment law and a new enterprise law have been adopted on the 26th of November of 2014 ( will be called in this report, “the new law”, or ‘’ new LOI’’) and will take effect from the 1th of July 2015 on. Until then, the Law on investment and the law on enterprises of 2005 (will be called in this report “Current law” or “former law”) stay applicable.
In the past, Vietnam had different legal mechanisms applicable for domestic and foreign investors. However, in 2006, The legal framework for doing business in Vietnam, changed significantly. Indeed all investment activities in Vietnam are currently regulated by the Law on Enterprise (LOE) and the Law on investment (LOI) both passed by the National Assembly dated 29 November 2005. Both laws became effective on 1 July 2006. In this article, we will focus on the Law on Investment (the « New law », or NLOI), that is the law dealing exclusively with investment. The new Law on Investment makes provisions on procedures to carry out investment activities, including the rights and obligations of investors, state management of investment in Vietnam, investment incentives, and the registration and evaluation of investment projects.
Thus, the question has to be raised as how will this new law change the investment environment in Vietnam, and increase the attractiveness of Vietnam as an investment destination?
On the one hand, we're going to talk about the modifications in general (I), on the other hand the procedures of implementation will be discussed (II).
I-Governing scope and applicable entities of the amended investment law
· New definition of a foreign investor :
Regarding to the article 3 of the current Law on Investment, foreign investor was defined as any foreign entity or individual using capital in order to carry out an investment activity in Vietnam.
Meanwhile, the new Law, in its article 3.14 introduces a simpler and clearer definition : « Foreign investor means any individual with a foreign nationality or organization established in accordance with foreign law conducting business investment activities in Vietnam. »
The new definition appears to be clearer, since, in the former definition, it was unclear whether the term «using capital to carry out investment» covered only significant investments, or if a foreign individual or entity using a very small amount of capital to carry out an investment could also be qualified of foreign investor.
·New concept of « economic organization with foreign-owned capital » :
This can be understood as an equivalent of the current « foreign investor» (art 3 of the current LOI) : « Foreign investor means any foreign organization or individual using capital in order to carry out an investment activity in Vietnam. »
The new LOI, in its article 3, introduce the new concept of Economic organization with foreign investment capital, that « means an economic organization with a foreign investor being a member or shareholder. »
This new definition bring some problems. Indeed, it becomes unclear how much foreign ownership ratio will be needed to qualify an organization as an economic entity with foreign owned capital. It is a big issue because under the new Law on Investment, the ownership ratio will decide the licensing procedures for investment projects of foreign investors.
·Decrease of the prohibited and conditional business lines :
The article 6 of the new LOI narrows down the list of prohibited business activities to six activities instead of 51 activities in the current LOI[i].
The new LOI sets out 267 conditional sectors. Investment in these sectors is subject to specific requirements. But other than in these 267 conditional sectors, there should not be any other conditions/ operational license requirements imposed by other government authorities.
As for the prohibited business lines, in the 2014th law, the conditionnal business lines are, in the amended law, more detailed ( since it’s defined in terms of activities, not sectors).
Besides, the news activities in which investments are forbidden seem legitimate in order to preserve public
peace and order. Business environment has been widened for private investors, thanks to this negative approch of the prohibited sectors (now, prohibited sectors become the exception while authorised sectors become the principle). It’s important to know that the adoption of this law follows constitutional revisions in , which established that people have the right to do business in all areas not explicitly prohibited, which could explain this change of approach adopted by the new investment law.
However, it remains to be seen whether those lists won’t be, in the future, extended by governement decrees.
·Abolition of the distinction between direct investments and indirect investments :
According to the current LOI[ii], there is a distinction between indirect investments and direct investments . A direct investment project have to carry out special investment procedures (chapter VI),while indirect investments are not regulated by this law, but by the Law on security of 2006, that is the law regulating domestic investment.
Thus, we understand that the qualification of an investment as a direct or indirect investment is quite important, as the legal regime applicable won’t be the same at all depending on the nature of the
investment. Indeed, investments qualified as direct investment will be subject to a stricter and more
complicated procedure to establish business( including procedure for registration, evaluation and conduct of investment activities) since it will have not only to comply with the Law on Enterprise as domestic enterprises do, but also with the Law on investments, and more accurately, its chapter 6 ( that appears to only apply to Direct Investments according to the wording of its heading), what won’t be the case for indirect investments, which will only be “implemented in accordance with the law on securities”( cf article 26).
It appears that the criterion [iii]used to distinguish direct and indirect investment is whether or not the investor participate directly in the management of the investment activity.
Unfortunately the Investment Law provides no guidance as to what level of control of the relevant company constitutes “participating directly in the management of the investment activity”. Indeed, there isn’t any objective criterion to distinguish direct from indirect investment, and that is really problematic for foreign investors, since they are not really sure about cases in which they have to apply the investment law. Indeed, since the difference between direct and indirect investment is not clearly defined, leading to confusion and inconsistencies in determining whether certain favorable investment treatments could be applied to companies with small percentage of foreign ownership, since the terme are really vagues and imprecises, the judgment of these elements is entirely left to the sovereign appraisal of the Administration.
However, the new LOI, in its article 23. 1, no longer uses distinction between direct investments and indirect investments in order to decide which investment project needs an IRC. Now, a direct investment with less than 51% of the chapter capital held by a foreign investor doesn't need an IRC, it must carry out domestic investment procedures (investment procedures in accordance with regulations applicable to domestic investors). Thus, one of the key changes introduced by the new Law on Investment is to replace the former distinction between indirect and direct investment, by a more reliable criterion, based on the level of foreign ownership, for distinguishing, foreign-invested companies considered as foreign investors, and foreign-invested companies assimilated to domestic companies
This is an important principle, if a foreign invested enterprise is treated as a domestic investor, then it would enjoy national treatment as a domestic enterprise would enjoy. Thus, that new definition opens to the possibility that foreign investor may use the foreign invested enterprise to become a holding company of many domestic companies, if it has less than 51% foreign ownership.
II- The new procedures of implementation :
·Decrease of the number of business subject to investment certificate and and fast-track IRC issuance
Under the current LOI, Domestic and Foreign invested enterprises operate under different licensing regimes. While all the foreign investors are subject to the same procedure and have to obtain Investment Certificates, regarless of the capital contribution that has been put in the project (cf article 46 and above), the procedure of incorporation that domestically invested companies must follow actually depends on the amount of invested capital.
The new LOI Consecrates the abolition of Investment Registration Certificates (IRC, formerly called investment certificate : IC) for many foreign invested enterprises, and for all domestic enterprises according to its article 36. Indeed, concerning the domestic investors, it’s important to notice the removal of the requirement to apply for an IRC of investment projects by domestic investors, regardless of the investment capital amount.
Concerning the foreign investors, the restated Law on Investment, in its article 37, will only require IRC for conditional investment projects. Other projects may proceed without an IRC. That means foreign investors may establish a company in Vietnam by registering its enterprise and obtaining a Business Registration Certificate (BRC) in the same manner as Vietnamese investors. Thus, under the 2014 Law on investment, all corporate entities will be required to applied for a business registration certificate. They are now required to separately apply for two different kinds of certificates: Investment registration certificate and BRC. This could be more obnoxious for foreign investors in terms of time and cost. But this disadvantage must be balanced, since the procedure to amend an IRC certificate is heavier and takes longer than the procedure to amend BRC, the need for foreign investors whose business is considered ascondional to get both IRC and BRC could actually be benefical to them, because, when will need to change an information about the company, they won’t have to follow the procedure to amend the IRC, but the procedure to amend BRC.
In the end, we can assume that the possibility of establishing a company without needing a project would promote the concept of a holding company, which has not really been recognised in Vietnam.
Besides, concerning the business that still have to get an IC, the time frame for the administration to issue it has been shortened to 5 days from the date of submission.
But even though this will, in theory, shorten the delay for business to be able to start operating, it remains to be seen if, in practise, this shortened timeframe will be respected. Indeed, the problem is that, although the law already provides a timeframe for authorities to consider an application and issue an IC, they often do not respect this timeframe and it goes unsanctioned. So that could have been a good idea to impose a requirement that if the licensing authority requests an opinion from a central ministry, and no reply is provided within 14 days, the licensing authority may assume the ministry has no objections.
For the entreprises subject to the regulations of LOI, the enterprise registration procedures shall be separated from the investment procedures.
·The new procedures of implementation in itself
Currently, the procedure of implementation to be followed depends on the distinction between direct and indirect investment.Under the new law, there is a new qualification depends on either of the following forms :
-For investment activities in establishment of business organizations:
Prior to registering for establishment of business organizations in Vietnam, foreign investors must have investment projects and must conduct the investment procedures as follows :
§Obtaining the Investment In-Principle Approvals from the provincial People’s Committees, Prime Minister or National Assembly in respect of large investment projects or ones with significant economic-social impacts which are defined under the new LOE. The statutory timeframe for issuing the Investment In-Principle Approvals by the provincial People’s Committees is 35 days ; and/or
§Obtaining the Investment Registration Certificates (IRC) from the provincial Departments of Planning and Investment (instead of provincial People’s Committees) in respect of investment projects located outside the special-purpose zones (i.e. industrial zones, export processing zones, hi-tech zones and economic zones) or the Management boards of the special-purpose zones in respect of investment projects located inside the special purpose zones. The statutory timeframe for issuing the Investment Registration Certificates is 5 working days for investment projects already granted with the Investment In-Principle Approvals or 15 days for other cases.
After obtaining the Investment Registration Certificates, foreign investors must also obtain the Enterprise Registration Certificates. The statutory timeframe for obtaining the Enterprise Registration Certificates is 3 working days.
-For investment activities in contribution of capital or acquisition of shares or capital contribution in business organizations (“Acquisition”) :
Foreign investors must register the Acquisition with the provincial Departments of Planning and Investment in the following cases prior to conducting the procedures for change of shareholders/members:
§The Acquisition is implemented in the business organizations operating in conditional business sectors applicable to foreign investors; or
§As a result of the Acquisition, the business organizations are treated as “foreign investors” as mentioned above (the foreign investor holds 51% or more of the charter capital).
If the Acquisition does not belong to the above cases, foreign investors shall conduct the procedures for change of shareholders/members only.
The statutory timeframe for the provincial Departments of Planning and Investment to notify their approvals to the Acquisition is 15 days.
-For investment in the form of PPP and BCCs :
Provisions on the establishment and termination of operation of the project management offices of foreign investors in BCCs are now detailed in the Law.
A BCC contract signed by a foreign investor (a foreign investor and a domestic investor or 2 foreign investors), shall require the procedures for issuance of an IRC.
Furthermore, it must be noted that the new LOI has created new form or cooperation contracts.
-New specifications of investment registration certificates for Mergers and Acquisitions (M&A) investments :
Under current Art 25 of the LOI, when a foreign investor or a foreign invested enterprise conducts an M&A into a conditional investment projects or holds more than 51% equity of a target, then such M&A must be registered with the local department of planning and investment where the target is located. Otherwise, the M&A activity may be conducted solely under the EL. As such, the requirement to obtain an IRC to close an M&A is abolished.
Even when a Registration is required, the process of registration is simple and straightforward within 15 days from submission.
For the first time, the laws present a pro-investor approach, compatible with the concepts of Holding and M&A, and which will hopefully create a new wave of foreign investment into Vietnam. Such a reform will probably be warmly welcomed by investors. However, it’s to be seen how this reform will help this potential asian tiger to roar.
[i] Article 30
[ii] Article 26
[iii] Article 3.2 and article 21.5, article 3.3 and article 26