While controlling the waves of the Covid-19 pandemic, Vietnam continues to position itself as an attractive investment destination in the Asia-Pacific region despite the ongoing US-China trade war. As a promising proposition for foreign investors, Vietnamese lawmakers have recently introduced several major changes to its investment-related legislation with the new Law on Investment (LOI) 2020 and Law on Enterprises (LOE) 2020, which will officially come into effect on 1 January 2021.
Investment and business in Vietnam: the roadmap
Vietnam’s investment law has changed and improved since its first introduction in the 1990s. The Law on Investment and Law on Enterprise 2014 played an important role in forming a comprehensive business environment in Vietnam. Lawmakers continued to reflect rapid changes by passing the LOI and LOE 2020. The latest revision may not make significant changes compared to the existing law; however, the new rules are in favour of foreign investors.
The prerequisites for foreign investors to establish a business in Vietnam now appear in the LOI 2020, which explains how to implement investment registration procedures with the authorities. Specifically, foreign investors must submit a proposal that describes the investment project. More importantly, some projects explicitly require investors to obtain an investment policy approval from local authorities, the Prime Minister, or even the National Assembly (depending on the capital value or the area of land used for the projects) before proceeding with the company formation. The new Law on Investment enhances transparency from the public authority as well as presenting a quicker, clearer, and simpler procedure for decision making. Local authorities retain the prerogative to make the final decision. Practically, this limits arbitrary decision making and strengthens the accountability of local authorities –favourable conditions for foreign investors.
With the exception of business co-operation contracts, the investor is required to establish an enterprise to carry out a project when the investment registration certificate (IRC) is granted, as per the Law on Investment 2014. More importantly, investors can choose the business type they would like to operate. According to surveys, the most common ones are limited liability companies and joint-stock companies.
In addition, the law also opens the doors to M&A investment projects. There are no specific requirements to form a new project for this type of investment; however, the investor must obtain the approval of the public authority for the acquisition of capital or shares in an existing company.
Each project comes with a definite term of operation; however, an extension is available under certain circumstances. The term –even after being extended –can not exceed 50 years; except in some special cases where it cannot pass 70 years in total. When it comes to the end of the term, the investment project will be terminated automatically. Importantly, Vietnamese law is committed to respecting the ownership of investors and allowing them to transfer assets abroad during the project’s operation and after the investment has ended.
The LOI 2020 and business from 2021 –notable changes
Market entry conditions
One of the encouraging things about the LOI 2020 is its reduction of barriers to foreign investors, which makes them equal to domestic investors when carrying out investment in sectors which are not prohibited. There are several exceptions to this principle. However, these have been systematically listed and newly introduced as the ‘list of market access conditions for foreign investors’ by the government, which categorises in detail business activities with market access. As a result, lawmakers expect to improve the quality and efficiency of foreign investment in Vietnam.
The new law has added more types of investment incentive in an effort to create a favourable legal mechanism for foreign investors in a broad range of special projects. Several sectors are eligible for investment incentives, such as creative startup projects, university education, manufacture of medical equipment, social housing plans, etc. The government is prioritising sustainable development, hence these sectors receiving special support. On the other hand, the LOI 2020 explicitly states that there are no incentives to projects relating to mineral exploitation, commercial housing development, or the trading of prohibited goods and services, such as tobacco, wine and beer, gasoline, casino services, etc.
The LOE 2020 also adds benefits for foreign shareholders, with a change in their rights and obligations in joint-stock companies, a popular type of business to foreign investors in Vietnam. In contrast to the current law, shareholders now have the right to give opinions and vote at the general meeting for any adverse changes to their own rights and obligations. Additionally, the LOE 2020 removes the seniority requirement for shareholders to participate in the business operation. This newly introduced change gives foreign shareholders the immediate ability to intervene in the company’s business after being registered as the company’s shareholders instead of delaying that for at least six months, as is the case under the current law.
Capital contribution time limit
Capital contribution in the form of assets is a critical point for foreign investors regarding company establishment. Under the current law, foreign investors are face difficulties in committing to a 90-day period in capital contributions due to time constraints in transportation, import, and property ownership procedures. Understanding the obstacles, the LOE 2020 states that the limitation to perform these procedures shall not be calculated into the 90-day period.
In an attempt to ‘clear the nest and welcome the eagle’, the Vietnamese government has aimed to have a positive impact on attracting a new wave of foreign direct investment. Eventually, it is expected to bring new momentum to Vietnam’s economic growth.