The National Assembly of Vietnam passed a new Law on Investment on June 17, 2020, which has been effective since January 1, 2021, and is now current law. The Investment Law has many regulations governing the investment activities of foreign investors, so it is extremely important for foreign investors to thoroughly understand these new key points.  

 

Therefore, Hong Bang Law would like to share with you some essential information about the new points of Vietnam’s new Investment Law 2020 that clients need to pay attention to:

New encouraged business sectors and projects with special investment incentives and support

The LOI 2020 includes the following new business sectors and projects, which are encouraged for investment or are entitled to investment incentives:

(i) college education;

(ii) manufacture of medical equipment and all pharmaceutical products (previously the LOI 2014 only encouraged investment in certain pharmaceutical products);

(iii) manufacture of products in supporting industries on the list of industries eligible for development promotion provided in Government Decree 111 dated November 3, 2015;

(iv) manufacture of products and provision of services that create or participate in the value chain or associated industries;

(v) social housing projects;

(vi) innovative start-up projects;

(vii) research and development centers;

(viii) small- or medium-sized business incubators; and

(ix) co-working space for small- or medium-sized businesses.

Under the LOI 2020, the Government can decide to apply special incentives and investment support to encourage projects that have material impacts on the socio-economic development falling within the following types:

(i) investment projects of establishing innovative centers, research and development centers with the total investment capital of VND 3,000 billion or more and disbursing at least VND 1,000 billion within three years since the issuance date of the relevant investment registration certificate (IRC) or in-principle approval;

(ii) investment project of establishing the national innovative center under a decision of the Prime Minister; and

(iii) investment projects in the especially encouraged sectors that have the total investment capital of VND 30,000 billion or more, and disburse at least VND 10,000 billion within three years since the issuance date of relevant IRC or in-principle approval.

That said, the LOI 2020 expressly excludes the following cases from the application of special incentives and investment support:

(i) mining projects;

(ii) manufacturing or trading of goods/services liable to excise tax (except manufacturing of car, plane, or boat);

(iii) commercial housing projects; and

(iv) projects having IRCs or in-principle approvals issued before January 1, 2020.

Market entry conditions and restrictions for foreign investors 

In Article 9, Foreign investors will be required to access the market as domestic investors, except some cases stated in business lines restricted from market access for foreign investors as below: 

• Business lines not allowed in market access; 
• Business lines are allowed in the market with conditions. 

For the first time, 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. Regarding market entry conditions, under the LOI 2020, foreign investors are entitled to the same market entry conditions as applicable to domestic investors except for the areas subject to market entry conditions and are to be published by the Government (Market Entry List). This “negative list” approach is one of the applaudable changes in the LOI 2020 and is similar to the approach that Vietnam adopted when it signed the CPTPP in 2018. 

The 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). That said, it is not easy for the Government to review all treaties, laws, and regulations to produce exhaustive and complicated Market Entry Lists applicable to foreign investors from all jurisdictions who may have different treatment levels under relevant bilateral treaties and/or multilateral treaties. Recently, the Ministry of Planning and Investment (MPI) has published a consolidated list of investment conditions applicable to foreign investors in Vietnam. If the Market Entry List is similar to the list published by the MPI, then it could be difficult to determine what belongs to the Market Entry List and what does not.

Moreover, there is no deadline for the Government to issue the Market Entry List. Until the Government produces a clear Market Entry List, the licensing authorities would still keep their practice of seeking 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. In practice, the application of bilateral treaties and multilateral treaties like CPTPP are not straightforward procedures.

Market access conditions applied to foreign investors 

Article 9 stated that market access conditions applied to foreign investors specified in the List of business lines restricted to foreign investors include: 

• Ratio of the foreign investor’s charter capital in a business entity; 
• Investment method; 
• Scope of investment; 
• Capacity of the investor; partners participating in the investment activities; 
• Other conditions specified in the Laws and Resolutions of the National Assembly, Ordinances and Resolutions of the Standing Committee of the National Assembly, Decrees of the Government and international agreements to which the Socialist Republic of Vietnam is a signatory. 

In addition, at point c, clause 1, Article 22, before establishing an economic organization, the foreign investor must have an investment project, carry out the procedures for issuance or modification of the Investment Registration Certificate, except in case of establishing a small and medium-sized creative start-up enterprise and an investment fund for creative startups in accordance with the law on support for small and medium-sized enterprises. 

Change in the ratio of holding charter capital applicable to foreign investors when conducting investment activities 

In clause 1 Article 23, When establishing a business entity, making investment by contributing capital, purchasing shares or purchasing stakes of a business entity or when making investment under a business cooperation contract in one of the following cases, the foreign investor must satisfy the conditions and follow investment procedures applied to foreign investors: 

• Over 50% of its charter capital or more is held by a foreign investor(s) or the majority of the general partners are foreigners if the business entity is a partnership; 
• Over 50% of its charter capital or more is held by a business entity(ies) mentioned in Point a of this Clause; 
• Over 50% of its charter capital or more is held by a foreign investor(s) and a business entity(ies) mentioned in Point a of this Clause. 

(According to current regulations, the above ratio is 51%) 

There are only 4 cases where investors do not have to deposit to ensure the implementation of investment projects 

According to the Law on Investment 2020, remove the case that “investors are non-business units with revenue, hi-tech park development companies are established under decisions of state agencies competent to implement investment projects funded by the State such as: land allocation, land lease for the development of infrastructure of industrial parks, export processing zones, hi-tech parks and functional areas in economic zones “must make a deposit to ensure the implementation of investment projects. 

Clearer guidance on M&A Approval

The wording of Article 26.1 of the LOI 2020 suggests that a transfer of shares/capital among foreign investors or Deemed Foreign Investors, which results in no “increase” in the aggregate foreign ownership in a target company should not be subject to an M&A Approval. If it is the case in practice, it would save time and cost for foreign investors in many deals of transfer of shares among foreign investors.

Under the LOI 2020, foreign investors that are not subject to the compulsory M&A Approval can voluntarily apply for an M&A Approval which is not a new point of the LOI 2020. However, as discussed above, to address the concern about national defense and security conditions, a foreign investor may still voluntarily apply for an M&A Approval.

National Security and Defense Conditions

Under the LOI 2020, an investor’s investment project and business activities will be suspended or terminated if such activities cause damage, or could cause damage to national defense or national security. It is not clear if an investor has no fault in causing damage to national defense or national security, then whether the investor could be compensated for forced suspension or termination of their lawful investment and business activities. This is a valid question for many investors given the territorial dispute between Vietnam and China in the East Sea. The Petroleum Law provides that if petroleum operations are restricted for reasons of national defense or national security, then the Government of Vietnam will compensate for any damage to investors resulting from such restriction.

Moreover, in addition to the market entry conditions, the following conditions must be satisfied by a foreign investor or a Deemed Foreign Investor if they want to purchase/subscribe shares or equity capital in a Vietnamese economic organization (Acquisition):

(i) ensuring the national defense and security in accordance with the LOI 2020; and

(ii) satisfying the land law’s provisions on conditions to receive land use rights of land lots located in islands, border areas or coastal areas.

In addition, an acquisition of a Vietnamese economic organization, which holds land use rights in a border area or the coastal area will be subject to an M&A Approval. These national security and defense conditions could apply to existing Vietnamese companies, which already have foreign investors when these Vietnamese companies raise capital from existing shareholders.

The satisfaction of these conditions would need to be considered by licensing authorities when foreign investors apply for an M&A Approval in either compulsory or voluntary terms. There is no clear criteria for national security and defense. 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.

In addition, it is not clear how a foreign investor, who plans to acquire shares in a Vietnamese economic organization, which is not subject to compulsory M&A Approval, could determine whether the conditions on national defense and security are satisfied. Therefore, a prudent foreign investor may voluntarily apply for an M&A Approval to ensure that its investment does not raise any national defense or security concerns.

If you need more detailed advice and answers as well as how to access this service, please contact directly our Lawyer Nhat Nam via hotline: 0912.35.65.75, 0912.35.53.53 or call the toll free legal consultation hotline 1900.6575 or send a service request via email: lienheluathongbang@gmail.com

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