Dear Clients,
On 17th June 2020, the National Assembly of Vietnam officially approved the new Law on Investment No. 61/2020/QH14 (LOI 2020) and will come into effect on 01 January 2021. It will replace Law No. 67/2014/QH13 (“LOI 2014”), which has been in force since 2014.
The LOI 2020 will be accompanied by implementing regulations, which are currently being developed by the Ministry of Planning and Investment, providing additional guidance as to conditions for investment in certain sectors, procedures for obtaining project approvals, and other key details.
The following article provides a brief overview of some of the key changes from the old legal framework.
A.New 50% foreign ownership threshold:
Lowering “foreign investor” threshold from 51% equity to 50%. Under the LOI 2014, enterprises 51% or more foreign-owned were treated as “foreign investors” for the purposes of investment activities. Thus, a company more than 50% owned by a foreign entity could still receive the benefits afforded to domestic enterprises. The LOI 2020 changes this, lowering the “foreign investor” threshold to 50%.
The New Labor Code provides the below significant changes:
B.Market access conditions applicable to foreign investors:
The LOI 2020 distinguishes between (1) market entry conditions that apply to foreign investors or deemed Foreign Investors, and (2) investment conditions that apply to all investors.
Market access conditions applied to foreign investors are the same as those applied to domestic investors, except for the case specified in the List of business lines restricted to foreign investors, which will be issued by the Government.
The list of business lines restricted to foreign investors or deemed Foreign Investors including:
a) Business lines not allowed in market access.
b) Business lines allowed in market but under certain conditions.
This new approach, if implemented correctly, could save time for both foreign investors and licensing authorities in determining and appraising investment proposals and applications for registration of merger and acquisition activities (M&A Approvals).
In fact, under the LOI 2014 and Decree 118/2015/ND-CP, the licensing authority will seek opinions of relevant authorities if foreign investors propose investments in business lines that are not clearly opened to foreign investors under the WTO Commitments on Services of Vietnam.
Upon the issuance of the list of business lines restricted to foreign investors by the Government, the foreign investors and licensing authorities just need to base such list for determining the foreign investor’s possibility for market entry. However, the importance is when and how the Government will publish the promising list of business lines restricted to foreign investors under the LOI 2020.
C.Supplementing and Amending the List of Conditional Business Lines:
The LOI 2020 abolishes several conditional business lines currently included in the LOI 2014. Notable abolished business lines are as follows:
(a) Service activities of commercial arbitration organisations;
(b) Franchise services;
(c) Logistic services;
(d) Service of ship agents;
(e) Services of training and retraining knowledge on real estate brokerage, operating real estate trading floors;
(f) Cosmetic surgery services;
But the LOI 2020 also supplements some business lines which will be considered “conditional”:
(a) Services of voluntary drug rehabilitation, smoking cessation, HIV / AIDS treatment, caring for the elderly, people with disabilities and children;
(b) Supplying clean water (daily-life water);
(c) Architectural services;
(d) Services of imported press release;
(e) Services of training seafarers, organising the recruitment and supply of seafarers.
Debt collection services have been categorised as a business in which investment is prohibited.
D. Clearer guidance on when an M&A approval is required
Foreign investors shall follow procedures for M&A Approval when contributing capital or purchasing share if they are in one of the following cases:
(a) Increasing the ownership ratios of foreign investors in economic organizations conducting business lines of conditional market access for foreign investors;
(b) Resulting in foreign investors for holding over 50% of charter capital and increasing the percentage of ownership of charter capital by foreign investors when they already hold over 50% of charter capital;
(c) Upon contributing capital, purchasing shares or contributed capital of economic organizations which have land use right certificate in island and border or coastal communes, wards and towns; other areas affecting national defense and security.
Based on this regulation of the LOI 2020, it is not required to conduct investment procedures upon transferring contributed capital or shares between foreign investors but not increasing the ownership percentage of foreign investors.
However, the LOI 2020 has not clarified the following points:
– What does it mean by “prejudicing or causing prejudice to national defense and security”?
– What about “other areas affecting national defense and security”?
Therefore, in many (if not all) cases, the licensing authority may need to seek opinions from the Ministry of National Defense, the Ministry of Public Security and/or the Ministry of Foreign Affairs. This could substantially delay the investment process.
E.Relaxation of investment conditions for startups: exemption from IRC for Certain Projects:
Under the new LOI, a foreign investor who incorporates a small or medium sized startup, innovative enterprise or an innovative startup and investment fund is neither required to have an investment project nor obtain an investment registration certificate. This relaxation of investment conditions is aimed at attracting foreign investment in this sector and facilitating the growth of innovative startups in Vietnam.
F. Investment incentives:
The new LOI adds several new projects and business sectors to the list of those entitled to investment incentives, such as:
(a)High-tech sectors, including software development, clean energy technologies, and information and communications technology-related products;
(b)Recycling;
(c) Public transportation;
(d) Microfinance;
(e)Education;
(f)Pharmaceuticals and other health industries; and
(g) Investment projects for creative startups.
G.Directly amended Law on Real Estate Business No. 66/2014/QH13 and other relevant laws:
The LOI 2020 has supplemented some provisions on amendments and additions to Real Estate law 2014 other relevant laws related to business investment, as the Law on Housing No. 65/2014/QH13; Law on Environmental Protection No. 55/2014/QH13…
The Law on Real Estate Business No. 66/2014/QH13 is amended as follows:
– Clause 1 of Article 10 is amended as follows:”Any organization or individual engaged in real estate business must establish an enterprise or cooperative (hereinafter referred to as “the enterprise”), except for the cases mentioned in Clause 2 of this Article.”;
It can be understood that the LOI 2020 abolished the condition on legal capital (i.e. VND20 billion) for any organization or individual engaged in real estate business in Vietnam form 01 January 2020.
H.Forced termination of projects due to sham transaction:
The LOI 2020 allows the investment registration authority to terminate an investment project if the investor conducted the investment activities on the basis of a sham civil transaction in accordance with the civil law.
Under the Civil Law 2015, a sham civil transaction is understood as a transaction established by the parties to conceal another underlying transaction. For example, a nominee arrangement, where the nominee conducts investment activities for the benefits of another person could be regarded as a sham transaction. The Civil Code 2015 provides that the court has the jurisdiction to declare whether a transaction is a sham transaction and invalidate such transaction.
However, the LOI 2020 has not clarified the following points:
– Criteria for identifying a sham transaction?
– Competence for determining a sham civil transaction? By a decision of the investment registration authority or by the valid judgement of the competence court?
I. Supplementing Provisions on Special Investment Incentives and Support:
The LOI 2020 supplements provisions on special investment incentives and support. Particularly, a number of investment projects which have great socio-economic impact will be given special investment incentives and supports as follows:
(a) Investment projects on establishment or expansion of innovation centres or R&D centres with a total investment capital of VND 3,000 billion or more and which disburses at least VND 1,000 billion within a period of 03 years from the date of being granted the Investment Registration Certificate or Investment Policy Approval; or national innovation centres established under the decision of the Prime Minister
(b) Investment projects in industries and trades eligible for special investment incentives with an investment capital of VND 30,000 billion or more and which disburses at least VND 10,000 billion within a period of 03 years from the date of being granted the Investment Registration Certificate or Investment Policy Approval.
The level and duration of the special investment incentives would comply with the provisions of the Law on Enterprise Income Tax and the laws on land.
J.Streamlined process for selection of investors:
The Amended LOI consolidates and streamlines the mechanisms for selecting investors under different regimes prescribed by the land laws, tendering laws and investment laws. Specifically, an investor may be selected via one of the following methods:
(a) an auction of land use rights if required by land laws;
(b) a tender process if required under tendering regulations; or
(c) selection by the licensing authority responsible for the investment in-principle approval without going through an auction of land use rights or a tender process in certain cases (eg if the investor already has legitimate land use rights or acquires such land use rights via capital contribution).
The Amended LOI clarifies that for an investment project which is subject to both requirements of obtaining an investment in-principle approval and going through either an auction of land use rights or a tender process for selection of the investor, the licensing authority will first issue the investment in-principle approval under the Amended LOI and then assign the relevant authorities to organize the auction or tender as required by law.
K.The authority to approve investment policy:
The Prime Minister’s authority to approve investment proposal (Article 31):
(a) The Prime Minister’s approval is no longer required for investment project having VND 5,000 billion and above of capital, or project of oil and gas exploration and exploitation.
(b) The Law also supplements the Prime Minister’s authority to approve an investment project that is concurrently subject to approval from two (02) provincial People’s Committees or more.
(c) Additional and detailed guidance on certain types of investment project subject to the Prime Minister’s approval is also provided, such as new construction investment projects related to airports and ports; housing investment projects (for sale, lease, lease purchase), urban area projects.
The provincial People’s Committee authority to approve investment proposal (Article 32):
(a) Provincial-level People’s Committee is mandated to approve investment proposal for golf project, housing investment projects (for sale, for rent, for lease-purchase), urban area projects which are not under the Prime Minister’s authorization.
ACTIONS YOU CAN TAKE NOW:
Whether you’re an existing company, growing internationally or simply starting a new venture, we can help you understand, identify and manage potential risks to protect your business.
If you would like to obtain further information or want to discuss issues in relation to the New Investment Law in further detail and the impact of the changes on your business, please do not hesitate to contact us.
TO FIND OUT HOW WE CAN HELP YOUR BUSINESS, CONTACT US:
Alejandro DOMÍNGUEZ HERRERA
Partner at FIDAL ASIATTORNEYS VIETNAM.
Honorary Consul of Spain in HCMC
Saigon Trade Center Tower, 21 Floor, Suites 2101-02, 37 Ton Duc Thang, District 1 Ho Chi Minh City – VIETNAM.
Tel: +84 (0) 8 39 10 22 84
Email: dominguez@asiattorneys.com
LUONG THUY NHI PHUONG
Senior Associate at FIDAL ASIATTORNEYS VIETNAM.
Attorney at Law, HCMC’s Bar Association.
Saigon Trade Center Tower, 21 Floor, Suites 2101-02, 37 Ton Duc Thang, District 1 Ho Chi Minh City – VIETNAM.
Tel: +84 (0) 8 39 10 22 84
Email: luong.phuong@asiattorneys.com
#This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice.
