I. Investment and Doing Business in Vietnam - What are the
current issues?
REGARDING FOREIGN INVESTMENT
1. Uncertain requirement to amend Investment Registration
Certificate ('IRC') to conduct on-the-spot
importation
Under Article 3.3 of Decree 09/2018/ND-CP and interpretation of the
Ministry of Industry and Trade ('MOIT'), foreign invested
enterprises ('FIE') cannot conduct on-spot import
activities. Also, the regulation on on-spot export and import under
Circular 04/2007/TT-BTM has expired and no further guidance on this
has been issued so far. Thus, it is currently impossible for FIE to
import on the spot.
We recommend the Government to issue guidance allowing FIEs with
trading activities to conduct on-spot importation right.
2. Granting investment incentives
Some competent authorities were hesitant about granting incentives
to foreign investors due to concern about their fulfillment of the
conditions to enjoy the applicable incentives. There are also cases
that the incentives granted have been adversely affected by the
revision of laws and regulations, such as setting higher criteria
for enterprises.
We recommend that: (i) the laws and regulations must clearly
describe the conditions to be eligible for incentives; and (ii)
investors shall continue to enjoy the granted incentives during
their operation term or the period provided by the law when there
are changes in laws and regulations or policies after the
grant.
3. Market entry conditions applicable to foreign investors
Annex I to Decree 31/2021/ND-CP lists out conditional investment
sectors applicable to foreign investors. Other than the listed
sectors, foreign investors should enjoy the same market conditions
as domestic investors. However, under specialized documents,
foreign investment in unlisted sectors has faced certain
restrictions on market access, which is a clear conflict with the
mentioned rule in Article 17.1 of Decree 31/2021/ND-CP.
We suggest to carefully identify business sectors prohibited under
specialized regulations and to update Decree 31/2021/ND-CP
accordingly, as well as to open the market to foreign investors,
especially in sectors where Vietnam has not committed to impose any
restrictions in international treaties.
4. Requirement for obtaining the IRC for business locations,
branches of FIEs
The current laws on enterprise and investment do not set out a
proper guidance for FIEs to establish business locations or
branches. This leads to inconsistencies in implementation among
provinces in terms of whether a separate IRC is required for each
branch or business location.
We recommend that new legislations should be adopted soon to
address this issue and we suggest that the investors/companies
should have the right to decide whether to amend the investment
capital shown on the issued IRC, or to apply for a new IRC for each
new location.
5. Inconsistency in regulating FIEs
Currently, an FIE is established via green-field investment or via
an M&A. Whether an FIE is established under green-field
investment or via an M&A, there should be no difference between
these FIEs as to investment term and limitation on loan
capital.
6. Government guarantee under the Investment Law
Many investors tend to obtain the permits for large-scale
infrastructure projects under the scheme of the Investment Law
instead of in the form of a PPP project due to the prolonged
investment process under the PPP regulations.
The government guarantee of ensuring bankability to ensure the
loans from international financial institutions for large-scale
projects under the Investment Law should also be granted for the
eligible investors in PPP projects.
7. Continuous use of land after the expiry of land lease by
industrial zone developers
There is no clear guidance on the rights and obligations of FIEs in
the form of joint venture operating within industrial zones whose
land lease agreement with the State is going to expire.
We recommend the Government to extend the terms of foreign
investment projects in these industrial zones, including continuous
use of their land use rights and the factories after the expiry of
the term of the joint ventures.
8. All FIEs are required to submit report on investment while the
reporting obligation is only required for certain types of
companies
Under the Investment Law, an FIE must file the quarterly and annual
reports on the National Portal on Business Registration. For
amendment of the IRC, only reports per Form A.I. 12 is required.
However, in practice, during the application for IRC amendment, the
local DPIs have required to complete other reports for all kinds of
investment projects (even small-scaled projects) other than reports
under Form A.I. 12. This has caused certain delay in the IRC
amendment process.
REGARDING LICENSING PROCEDURE
1. Legalized document in corporate licensing
In practice, foreign investors must prepare and submit many
legalized copies of one type of document in one transaction. Local
authorities have had different request on the validity term of
these legalized copies, ranging from 3- 6 months.
We propose that (i) the local authorities should accept certified
true copies instead of requesting the original legalized document;
and (ii) the local authorities should not impose a strict
limitation on validity term of legalized and certified documents as
long as their contents remain unchanged.
2. Licensing authority's request for documents not required
under laws
The current regulations (i.e., Article 9.2 of Decree 01/2021/ND-CP
and Article 6.1(b) of Decree 31/2021/ND-CP) prohibit local
authorities from requesting additional documents for licensing
purpose other than those prescribed by laws. In practice, it is
contrary.
We recommend a direction to be issued to require licensing
authorities not to ask for any additional documents other than
those prescribed by law and such direction should be published on
the website of the Ministry of Planning and Investment.
3. Guidance on "other contents" of enterprise and
investment registration documents to be notified to local
authorities
Article 31.1 of the Enterprise Law and Article 63.2 of the
Investment Law set out circumstances where changes to IRC and ERC
application dossiers require notification to the licensing
authorities. However, given the broad interpretation of "other
contents" in these Articles, foreign investors are confused
about whether the unlisted changes to contents of their IRC and ERC
application dossiers are not subject to notification to the
licensing authorities.
We recommend further guidance on Article 31.1(c) of the Enterprise
Law and Article 63.2 of the Investment Law in this regard.
4. Inconsistency in licensing procedure regarding capital/ share
transfer
In the applications for (a) ERC amendment of multi-member limited
liability company on changes of capital contributing members due to
capital transfer and (b) notification on the changes of foreign
shareholders of joint stock company, one of the required items is
"transfer agreement or documents evidencing the completion of
the transfer". However, in practice, some DPIs further
requires "documents evidencing the completion of the
transfer" even though the transfer agreement has already been
submitted.
We recommend a detailed guidance on what "documents evidencing
the completion of the transfer" should include and consistent
implementation by DPIs.
5. Amending certain details of the ERC
Article 30.1 of the Enterprise Law requires registration of changes
to the ERC be made within 10 days from the change. However, in
certain cases such as changes to information of foreign investors,
due to the licensing process abroad as well as the legalization
process, foreign investors cannot meet the above timeline.
Therefore, we recommend the licensing authorities allow more
flexibility for foreign investors in case of material changes to
the ERC.
6. Necessity of information of chief accountant/person in-charge of
accounting when establishing a new company online
According to the prescribed forms (e.g., Appendices 1-2, 1-3 and
1-4) for establishment of a new company under Circular
01/2021/TT-BKHDT, information regarding chief accountant or person
in-charge of accounting is optional. However, in practice, when
submitting the application dossier online, such information is
mandatory. We suggest MPI should remove such requirement from the
current online registration system and instruct the DPI to follow
the same.
7. Time of entitlement of members'/shareholders' rights and
obligations
Based on the current regulations, foreign investors are uncertain
about when they can officially be considered as the
members/shareholders of the target company, whether it is upon
completion of procedures for changing members/shareholders under
Article 66.5 of Decree 31/2021/ND-CP or when its information is
fully recorded in the registry under Articles 28.3, 30.1, 47.5,
52.2, 124.4 and 127.6 of the Enterprise Law.
We suggest MPI revise Article 66.5 of Decree 31/2021/ND-CP to make
it consistent with the relevant provisions in the Enterprise Law in
relation to a joint stock company.
8. Charter capital shown on the ERC
There should be explicit regulations to distinguish between charter
capital shown on the ERC and contributed capital for implementation
of the investment project shown on the IRC.
In case an FIE has multiple investment projects, it is not clear
whether it must include the contributed capital of all such
projects as the total charter capital of the FIE.
Contributed capital can be either (a) additionally contributed by
the investor/ owner, or (b) generated from the retained profit of
the company. It is unclear whether case b) considered as additional
charter capital of the company.
9. Non-acceptance of application to amend Construction Operation
License of foreign contractor
Currently, there is no detailed procedure to amend the construction
operation license of foreign contractors under Decree No.
15/2021/ND-CP. The Draft Decree amending Decree 15 is still pending
for issuance.
We recommend the Government finalize and issue the Decree amending
the Decree 15 soon so that there is a clear procedure to amend the
construction operation license of foreign contractors.
10. Prolonged MOIT's approval for retail outlet licenses due to
internal restructuring
Under Decree 96/2022/ND-CP, MOIT's prior Department of Planning
and Department of Finance and Enterprise Innovation has been merged
into one new Department of Planning and Finance. Due to the merge,
the previous retail outlet license in-charge Department of Planning
now no longer has the authority to grant retail outlet licenses and
it is still unclear now who is in charge. This has significantly
delayed the process for retail outlet license application beyond
the statutory limit of 23 workings days.
We request the MOIT (i) take necessary and urgent action to solve
the issue, and (ii) comprehensively review the regulatory framework
for retail outlet licenses for foreign investors.
11. Unclear definition and inconsistent understanding of M&A
Approval Process
Apart from circumstanced listed in Article 26 of the Investment
Law, an M&A Approval will not be required. However, (i) in
practice, an M&A Approval is still required in case of change
in the nationality of foreign investors (but no change in foreign
ownership ratio); (ii) the definition of "security
areas'' is too broad and normally the state secret; (iii)
it is unclear who is in charge of applying for an M&A Approval
due to the inconsistency between Article 26 of the Investment Law
and Article 66 of Decree 31/2021/ND-CP.
Thus, we request that an M&A Approval be not required in (i)
above and further clarifications to cases (ii) and (iii).
12. Lengthy procedure for M&A Approval issuance as responsible
local authorities lack consistency
Pursuant to the Investment Law 2020, with respect to companies
located in industrial zones, export processing zones, high-tech
zones, or economic zones, the Management Authorities of such zones
have the power to issue the M&A Approval. However, there are
cases that the Management Authority of an industrial zone requested
the local DPI to give opinions on the application for an M&A
Approval, which has caused delay for the approval process.
ISSUES ON LAND, HOUSING AND REAL ESTATE
1. Confusion due to the issuance of the new Law on Investment
According to the new Law on Investment, there are provisions on
approval and investor selection whereby different level of
authorities (e.g. National Assembly, the Prime Minister, and the
Provincial People's Committee) are authorized to grant the
approval for different level of projects involving land use. At the
same time, the Law on land provides regulations on land allocation,
land lease and alteration of land use purpose whereby different
level of authorities are also mentioned for specific use or change
of land use. As a result, confusion for investors existed since
these provisions can both directly regulate their investments even
though such provisions regulated different aspects of land use and
investment.
With respect to the Law on Real Estate Business, the newly issued
Decree 02/2022/ND-CP failed to provide clarity on the mix-up
between the Law on Real Estate Business and the Law on Investment.
According to Article 9 of the said Decree, there are two cases
where investment regulations prevail over real estate regulations
being (i) Real estate projects in which the investor has been
approved under [Article 29] of the 2020 Law on Investment; and (ii)
Real estate projects in which the investor has received the
Investment Registration Certificate in accordance with the 2020
Investment Law. This provision created confusion for developers
with real estate project approved under the previous law (i.e. the
Law on Investment 2014 or before). As a side note, the draft
(amended) Law on Real Estate Business, as published, did not much
more guidance on this issue.
2. Foreign-invested-enterprise (FIE) under relevant laws
Since the relevant regulations on land, housing and real estate
business do not explicitly provide any definition for
"foreign-invested-enterprise", it is generally understood
that a company with any portion of foreign investment under any
form will be treated as a FIE with imposed restrictions. As a
result, as a way to avoid being treated as a FIE, it is observed
that enterprises often set up multiple layer of ownership to
mitigate this uncertainty.
Further, according to the most updated draft of the Law on Real
Estate Business, the right for a FIE to implement its business of
construction of properties for real estate business (e.g.
logistics, warehouse leasing) within industrial zones, industrial
clusters and hi-tech zones is no longer provided. As a large number
of FIE is currently implementing this business in different
industrial zones, the new provision, should it be officially
issued, will create legal uncertainties on the investment into the
real estate sector of Vietnam.
3. Access to land
As regulated under relevant regulations on land, it is widely
understood that, outside of industrial parks, FIEs are only
permitted to lease land directly from the State or use land under
the form of contribution of capital from a Vietnamese enterprise.
These methods, as a whole, do not meet the requirements for most of
the FIEs since they usually do not fit commercial purpose. Under
Article 153.3 of the Law on Land, FIEs are allowed to lease
commercial land and non-agricultural production land from economic
organization. However, in practice, there has been no clear case
whereby a FIE is permitted to lease the land from a local land
owner as a basis for an investment project. The most common and
feasible option for FIEs to be approved with investment projects
are lease of assets attached to the land (i.e. office, factory
etc.).
Further, as a practical issue, international investors in the
industrial and logistics sectors often find it hard to access land
in Vietnam due to high prices from local vendors since it is
believed that a number of local enterprises in Vietnam are indeed
land speculators. Currently, the government appears to have little
regulations and tools to control these local vendors/speculators.
There are now draft suggestions to limit independent property
brokers by requiring them to work for a firm and subjecting them to
more difficult certification examinations. This may raise the bar
for brokerage and discourage speculation, but it just forms a
portion of the whole. If local businesses postpone their timelines
and schedules for implementing land use projects, there should be
more explicit and forceful actions used to ensure that the property
is returned to the State. When assessing the qualifications of
investors, local governments themselves should adopt a more
skeptical stance.
On a side note, as Vietnamese entities are not allowed to mortgage
their land use right and attached assets (i.e. factory) to foreign
lenders. Vietnamese entities often find it hard to get offshore
financing resources.
Relevant procedures
(i) Proposal on land use:
For an investor to apply for its investment project with land use
and allocation/lease of land from the competent authorities, such
investor is required to submit the (i) proposal for investment
project to competent investment authority with contents on land use
demand and (ii) land use demand document to be prepared on the
basis of land allocation and land lease dossier which comes after
the investment policy is approved to competent land authority.
Thus, principally, relevant authorities would be required to
appraise the land use proposals of the investor twice.
(ii) Extension of project's duration and land use term:
According to the Law on Investment and the Law on Land, an investor
must extend the land use term and the duration of its investment
project at least 6 months before their expiring date. However, the
term to be extended first between the two remains unclear.
According to the guidance document of the Law on Land, in case the
investment project must be extended, the investor must apply for
the extension at least 6 months before the expiring date and must
first obtain the competent investment authorities' approval
regarding the extension of the project duration. At the same time,
according to the guidance document of the Law on Investment, the
investor must apply to extend the project's duration (again) at
least 6 months before its expiring date. As a result, in case the
investor applies to extend the project's duration at least 6
months before its expiry, then there would not enough time to
extend the land use term. As a practical issue, the authorities do
not allow either procedure to be carried out too soon. There were
also cases where the investment authority requires that the
investor obtain an approval to extend the land use term. However,
by law, it is impossible to extend the land use term prior to
extending the project's duration.
(iii) Land compensation and clearance
According to the Law on Land, the land will be handed to the
designated company after all of the payment for compensation,
support and re-settlement are done. However, as the procedure for
land compensation and clearance is conducted by the land
authorities. The investors, in such case, are not in the driving
seat and, in most cases, the investors are required to deal with
the applicable households first before the land can be recovered.
With respect to this issue, foreign investors face many
difficulties in implementation of their projects in Vietnam due to
(i) lack of experience in dealing with local households; and (ii)
other options (i.e. leasing the land directly from households) are
not available, by law, for foreign investors.
4. Second-home market
It is widely believed that a legal framework on second home built
on non-residential land should be developed for further investment
into the sector to address the following issues:
(i) Pink Book: To provide a definition understanding on the Pink
Book regarding the term (i.e. 50 years) and the possibility for
foreign owners to receive 50-year Pink Books.
(ii) Business line: To provide proper requirement on whether
companies established under the law of Vietnam must be licensed
with the appropriate real estate business lines when engaging in
long-term lease or sub-lease of non-residential units, or
participating in the rental pool program under the Law on Real
Estate Business.
(iii) Management of second-homes: For second-homes to be built on
branded residence projects implemented on residential land, it is
important that the legal framework clarifies whether such
second-homes can be leased out on a daily basis for at least 10 -
20 years without contravening the Law on Housing.
Main issues of the new Draft Law on Land and Draft Law on Real
Estate Business
(i) Land user under the current Draft Law on Land: Although
"foreign-invested economic organizations" and
"foreign organizations with diplomatic functions" are
defined as land user in the Draft Law on Land, it remains unclear
whether foreigners are allowed to use land in Vietnam. It is also
worth noting that, under the Law on Housing, foreigners are allowed
to own houses in Vietnam whereby the purchase/sale of houses must
be associated with land use rights. Thus, the Draft Law on Land,
without defining foreigners as land users, might cause difficulties
for foreigners to exercise their rights in Vietnam in relation to
their ownership of houses. Further, a more consistent legal
framework will attract foreign individuals to trade and own new
types of real estate such as condotels, tourism villas, resort
villas, bungalows, officetels, shophouses. To increase the
consistency between the regulations on housing and regulations on
land, it is suggested that "foreigner" be added as a
group of land user into the new Law on Land.
Compared to the current Law on Land, the Draft Law on Land purely
provides that foreign-invested economic organization is a group of
land user without any explanations in detail as in the current Law
on Land. This causes the legal uncertainty regarding the definition
of "foreign-invested economic organization" as there
remains no clear definition for such group since the issuance of
the current Law on Land. It is recommended that further
elaborations are made to the definition of "foreign-invested
economic organization" to solidify the consistency with the
regulations on housing/investment/real estate business.
(ii) One-off rental payment for land lease: According to the Draft
Law on Land, two cases are provided whereby one-off rental payment
is allowed being (ii1) Agricultural production, forestry,
aquaculture or salt-making projects; and (ii2) Land in industrial
zone, industrial clusters, processing zones, and hi-tech zones. For
all other cases, annually payment is applicable for rental payment.
Thus, for one to be able to mortgage the land use right, such
transaction is only permitted in the two cases as mentioned above.
For this reason, the new projects not entitled for one-off rental
payment will face financial difficulties since they are not able to
mortgage their land use right and/or transfer of land use right.
Additionally, this clause conflicts with the proposed amendment to
the Law on Real Estate Business, which states that among other
requirements, a developer must be leasing land from the State with
one-off land rental payment in order to sell properties (such as
condotels, officetels, etc.) that will be formed in the
future.
(iii) Relevant right of foreign-invested enterprises: According to
the Draft Law on Real Estate Business, a foreign-invested
enterprise is no longer permitted to make investment to sub-lease
land inside of IPs, industrial clusters, hi-tech zones and economic
zones. From the issuance of the Law on Real Estate Business, such
right given to foreign-invested enterprises was the basis for
investment in projects for the lease of warehouses, factories, etc.
Thus, the removal of such right will immensely impact the business.
At the same time, for current and active investors, Draft Law on
Real Estate Business does not contain any explicit transitional
provisions. Moreover, the removal of subleasing right also
conflicts with the right to "lease assets under their
ownership attached to land" provided to foreign investors
under the Draft Law on Land.
TAX ISSUE
1. VAT treatment for exported services
The definition for services being used outside of Vietnam is not
specifically stated in the law and is thus ambiguous. When
taxpayers assert their right to apply 0% VAT for exported services,
this causes the tax authorities to interpret the law at their
discretion. The way tax authorities now interpret the law
discourages taxpayers from applying 0% VAT on exported services,
which eventually reduces Vietnamese service providers' price
competitiveness on the global market if they are forced to apply
10% VAT instead of 0% VAT. It is advised that the MOF update the
rules to provide a precise description of exported services. For
simpler tax administration, exported services should instead be
based on the status of the overseas client and the foreign source
of the service price.
II. How the Comprehensive and Progressive Trans-Pacific Partnership
('CPTPP') Foreign Direct Investment Chapter and the EU -
Vietnam Investment Protection Agreement ('EVFTA') and the
EU - Vietnam Investment Protection Agreement ('EVIPA') Can
Support Legal Certainty and Bankability of Your Projects?
For any investment-related dispute (i.e. expropriation without
compensation, investment discrimination), an investor of a party is
allowed to bring such dispute against the Government of the other
party to the Investment Court for settlement. In case either of the
disputing parties disagrees with the decision of the Tribunal, it
can appeal it to the Appeal Tribunal. While this is different from
the common arbitration proceeding, it is quite similar to the
2-level dispute settlement mechanism in the WTO (Panel and
Appellate Body). We believe that this mechanism could save time and
cost for the whole proceedings. The final arbitration award is
binding and enforceable without the local courts' review of its
validity. The Government of Vietnam has to fully implement this
commitment within five years from the entry into force of the
EVIPA. For your information, as of February 2023, there have been
11 out of 27 EU members having ratified the EVIPA. It means we need
to wait until the remaining 16 EU members have ratified the
agreement for it to take effect and trigger the deadline for direct
enforcement of arbitral award by the Government of Vietnam.
While the CPTPP allows the same mechanism for an investor of a
party to challenge the Government of the other party, it does not
include the 5-year transitional period as in the EVIPA. In other
words, the enforcement of arbitral award under the CPTPP would
follow the NYC rules. However, we believe that the Government of
Vietnam will soon revise the current local arbitration regulations
to ensure its commitment under the EVIPA. Investors under the CPTPP
could then take advantage of such improvement.
We believe that the investor-to-state dispute settlement
("ISDS") under both the EVIPA and the CPTPP brings the
highest level of enforceability and bankability when they are well
designed in commercial contracts in Vietnam.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.