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A touch of clarity

Released at: 23:56, 05/01/2015

A touch of clarity

The newly-amended laws on investment and enterprises, which come into effect on July 1, 2015, will have major impacts on operation and management of foreign invested enterprises in years to come.

Mr. Oliver Massmann, Partner and General Director of Duane Morris Vietnam

2014 Investment Law

The 2014 Investment Law makes a great attempt to reduce the number of prohibited business activities and conditional business activities. In addition, it introduces a new definition of a foreign investor and replaces the term “foreign-invested enterprise” with “economic enterprise with foreign-owned capital”.
It also no longer refers to either “direct investment” or “indirect investment” and certain changes are made to the forms of investment in Vietnam. More importantly, the 2014 Investment Law for the first time includes provisions regulating merger and acquisition (M&A) activities.

New concepts – but clearer?

A foreign investor was previously defined as any foreign entity or individual using capital in order to carry out an investment activity in Vietnam. This definition has created much confusion over the last ten years about whether a foreign individual owning 1 per cent, 49 per cent or 51 per cent is called a foreign investor. However, the 2014 Investment Law introduces a much simpler and clearer definition. A foreign investor is now any foreign individual or entity established in accordance with foreign law.

However, the new concept of “economic entity with foreign-owned capital” - the equivalent of the previous “foreign-invested enterprise” - does not shed light on to the meaning of its predecessor. “Economic entity with foreign-owned capital” is defined as an economic entity that has any member or shareholder that is a foreign investor. It is unclear how much ownership ratio will qualify an enterprise as an “economic entity with foreign-owned capital”.

Meanwhile, under the 2014 Investment Law, the ownership ratio will determine the licensing procedures for investment projects of foreign investors. If this is not detailed in the implementing documents, difficulties during investment application procedures will unavoidably arise.

Prohibited and conditional business activities

Article 6 of the Investment Law narrows down the list of prohibited business activities to six instead of the 51 in the 2005 Investment Law. The number of conditional business activities is also cut, from 386 to 267. Notably, the 2014 Investment Law allows investors to conduct investment and business activities in fields not prohibited by the Law. This is a new methodology compared with the old one, which only allowed investors to conduct business and investment in specifically-allowed fields. Accordingly, there is more transparency and investors have more investment opportunities in Vietnam.

Implementation procedures

Investment in Vietnam is no longer classified into direct or indirect investment, but depends on either of the following forms: (i) establishment of a new entity for an investment project; (ii) investment under public-private partnership (PPP); (iii) investment under a business cooperation contract (BCC); and (iv) capital contribution, purchase of shares, or contributed capital in an economic entity.

New establishments

An interesting point to note is the removal of a requirement to apply for an Investment Registration Certificate (IRC) for investment projects by domestic investors, regardless of the investment capital amount. Moreover, the application procedures no longer involve two steps: investment registration and investment appraisal procedures.

However, for foreign investors with an investment project to establish a new entity in Vietnam, instead of applying for an IRC and such certificate concurrently serves as an Enterprise Registration Certificate (ERC), they are now required to separately apply for two different kinds of certificates: IRC and ERC. This could be more burdensome for foreign investors in terms of time and cost.

Capital contribution, purchase of shares

Under the 2014 Investment Law, capital contribution by foreign investors can be in the following forms: (i) purchase of shares issued for the first time or additionally issued by joint stock companies; (ii) capital contribution to limited liability companies, and partnership companies; or (iii) capital contribution to other economic entities not falling under (i) and (ii).
Foreign investors making investment by contributing capital, purchasing shares or contributed capital must register their investment with the local Department of Industry and Trade if they contribute capital, purchase shares or contributed capital in economic entities in conditional business activities applicable to foreign investors; or if capital contribution, purchase of shares or contributed capital results in 51 per cent or more ownership of charter capital by certain economic entities in the targeted economic entity. 

Economic entities include entities that have a foreign investor holding 51 per cent or more of its charter capital or the majority of its partnership members are foreign individuals (for economic entities being a partnership enterprise); or an economic entity in (i) holding from 51 per cent of its charter capital, or foreign investors and economic entities in (i) holding from 51 per cent of its charter capital.

2014 Enterprise Law

The 2014 Enterprise Law simplifies the procedures for the establishment of enterprises and introduces new provisions regarding company management and clearer regulations on groups of companies. 

Establishment of enterprises

The 2014 Enterprise Law no longer requires the specification of business lines in the ERC. Indeed, enterprises may do any business not prohibited by the law and register their activities with the registration authority. If they do business in conditional sectors, they have to ascertain that they meet all the required conditions. The liabilities rest on the enterprises when the authority inspects their activities and may apply fines if they do not meet the required conditions.

Moreover, under the 2014 Enterprise Law, if there is any member not fully contributing their committed capital after 150 days from the issuance of the ERC, enterprises have to apply for a charter capital adjustment. A single limited liability company is also allowed to reduce its charter capital, which is prohibited under the 2005 Enterprise Law. In terms of capital contribution, the 2014 Enterprise Law consistently applies the 90-day period for capital contribution for both limited liability companies and joint stock companies.

Meanwhile, under the 2005 Enterprise Law, this time limit was 36 months for both types of companies. This is clearly a stricter rule and significantly impacts investment in large-scale projects, for example in infrastructure or construction.

Legal representative

Limited liability companies and joint stock companies may have more than one legal representative depending on their need. The company’s charter will specify the number, management title, rights and obligations of the legal representatives. If the enterprise has only one legal representative, this person must still authorize another person to perform his or her rights and obligations when he or she is out of Vietnam, irrespective of the duration of such absence.

Company structure

A joint stock company can now choose to structure the company in either of the following ways: (i) General Meeting of Shareholders, Board of Management, Control Committee and Director or General Director. In cases where the company has less than eleven shareholders and shareholders that are organizations own less than 50 per cent of total shares of the company, the Control Committee is not required; or (ii) General Meeting of Shareholders, Board of Management, and Director or General Director.

Groups of companies

The 2014 Enterprise Law clearly defines parent-subsidiary companies. A company is called a parent company of another company if it: (i) owns more than 50 per cent of the charter capital or the total normal shares of that company; (ii) has the right to directly or indirectly appoint the majority or all of the members of the Board of Management for the Director or General Director of that company; or (iii) has the right to amend or supplement the charter of that company.

A subsidiary is not permitted to contribute capital or buy shares in its parent company. All subsidies of the same parent company cannot together contribute capital or buy shares to own each other. Further, subsidiaries of the same company with at least 65 per cent State ownership may not together contribute capital to establish a company.

Conclusion

With the adoption of the 2014 Investment Law and Enterprise Law, the investment environment in Vietnam will become more attractive to foreign investors to a certain extent. However, from the investors’ perspective, they need more clarification and better treatment. It is necessary to see the real impact of these new laws when their implementing documents are introduced and in their application.

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