Monthly Legal Update – January, 2015

Significant new points of law on investment 2014

Ha Thi Hai – Associate
Nguyen Thi Thu Trang – Attorney at Law
Phan Van Huy – Legal Assistant

26 November 2014, the National Assembly of Vietnam passed the new Law on Investment (“LOI”) with majority of votes in favor. The new LOI is expected to perfect the mechanisms and policies for the purpose of forming an open, favorable and transparent environment of investment to attract investment from all economic sectors under orientation of The strategy of economic – social development during 2011-2020, and simultaneously contribute to perform the policy of restructuring the overall economy in general and restructuring investment in particular. Hereunder are some significant changes of the new LOI.

Basic change on investment policies

The LOI 2014 basically changes the policies on investment to confirm the new policy that investors shall be permitted to invest in all sectors which are not prohibited by LOI. Accordingly, the new LOI specifically regulates 6 banned investment and business lines and 267 conditional investment and business lines. These detailed provisions will facilitate investors in reference while conducting business and investment activities instead of referring to several specialized laws as currently.

The concept “Investor” and new classification

The new LOI classifies “Investor” into three groups: Domestic investor, Foreign investor and Economic organization with foreign investment capital. In which, “Foreign investor means individuals having foreign nationality, organizations establishing under foreign laws which conduct investment activities in Vietnam” and “Domestic investor means individuals having Vietnamese nationality, economic organizations without members or shareholders being foreign investors”. However, if an individual having two or more nationalities including Vietnamese nationality then how will this individual be classified?

The LOI 2014 changes the concept of Enterprise with foreign investment capital into Economic organization with foreign investment capital. Under this new concept, economic organization with foreign investment capital is construed as organization established and operating under Vietnamese laws and having members or shareholders who are foreign investors. The new LOI does not limit the ratio of foreign investor’s capital in an economic organization to be considered as an economic organization with foreign investment capital.

In respect of policies of business and investment conditions applied to economic organization with foreign investment capital, while currently enterprises with foreign investors holding 49% charter capital or less shall be applied the same business and investment conditions as domestic investors, and enterprises with foreign investors holding more than 49% charter capital shall be applied the same business and investment conditions as foreign investor, new LOI still remains similar policy by requiring the economic organizations (establishing in Vietnam) with foreign investor holding from 51% charter capital or more must satisfy the conditions and procedures applied to foreign investor when investing by establishing economic organization or contributing capital, purchasing shares of other economic organization. Besides, the new LOI furthermore imposes the same conditions as foreign investor to (i) economic organizations having 51% charter capital or more owned by an economic organizations with foreign investors holding from 51% charter capital or more; and (ii) economic organizations having 51% charter capital or more owned by foreign investor and economic organizations with foreign investor holding from 51% charter capital or more.

Changes on Forms of investment

While the current LOI provides for two basic forms of investment which are direct investment and indirect investment by using the criteria whether investors participate in the management of the investment activity or not, the new LOI completely abandons these forms. In fact, applying LOI 2005 leads to several difficulties on discrimination of the boundary between direct investment and indirect investment and the difficulty on clear and coherent demarcation which causes troubles to not only investors but also competent authorities in determining the procedure applied to each form of investment. In recovering these difficulties, instead of 7 direct investment forms and 3 indirect investment forms under the current LOI, the new LOI narrows to only 4 investment forms: to establish an economic organization; to contribute capital, purchasing shares or capital contribution of an economic organization; to invest under a business co-operation contract (BCC) or public-private partnership contract (PPP).

In respect of investment under contracts, BOT, BTO, BT (as provided under current LOI) are the specific forms of PPP contract. In order to complete the policy of investment under contracts in consistent with international practices, the new LOI replaces all of the BTO, BOT, BT contract with the new form of public-private partnership contract (PPP). Accordingly, investors sign PPP contract with competent authorities to build, renovate, upgrade, extend, manage and operate infrastructure works or provide public services.

New process on establishing economic organization and contributing capital, purchasing shares

Under current LOI, Investment certificate (“IC”) granted to foreign investor which concurrently is business registration certificate. During the past, implementation of above-mentioned provision met many difficulties due to the combination of two certificates which are different in legal nature. Therefore, the new LOI suppresses the requirement that foreign investors investing in Vietnam for the first time must perform the application for IC which also is the business registration certificate. The new Investment registration certificate (“IRC”) under new LOI only contains investment project contents and excludes business registration contents. Regarding to procedure, foreign investor, after having investment project and application for IRC shall apply for enterprise registration certificate to establish the enterprise.

Likewise, presently procedures for foreign investor to contribute capital to, purchase shares of Vietnamese enterprises are different among provinces. There are different opinions of the necessity of granting IC for these cases and the investment conditions, procedures of examining the investment conditions for foreign investor contributing capital to, purchasing shares of Vietnamese enterprises. In some big cities and provinces such as Hanoi city, Ho Chi Minh City, enterprises having foreign investors’ capital contribution shall perform both procedures to change the enterprise registration certificate and application for IC. In each procedure, licensing authorities examine investment conditions of foreign investor and even perform the evaluation process to ask for opinions of relevant bodies, which causes very complicated administrative procedures, waste of time, as well as, efforts and expenses of investors and enterprises. The new LOI solves this drawback by regulating a new procedure of registration of capital contribution or share purchase by foreign investors to Vietnamese enterprises, without application for IRC. The result of this registration procedure is a written notice by the Department of Planning and Investment within 15 days from the date of valid dossier in order for the investors subsequently to perform procedures to change shareholders, members under applicable laws. However, the provisions still do not specify that investors must register first or in fact finish the actual capital contribution or share purchase first. This controversial problem includes potential risks arising from disputes between investors and economic organization or assignor, especially in the case of rejection of licensing authorities. Although, this in a significant step coming to the new policy of facilitating the development of mergers and acquisitions activities in Vietnam.
Another remarkable new point under the new LOI regarding the procedure of capital contribution or share purchase by foreign investors in Vietnamese entities is that not all foreign investors investing under the form of capital contribution or share purchase in Vietnamese entities are subject to registration procedure with the Department of Planning and Investment but only foreign investors investing in Vietnamese entities operating in conditional investment and business lines applicable to foreign investors, or capital contribution or share purchase leading to ownership of 51% or more of Vietnamese entities by foreign investors are subject to registration procedure. However, although the new LOI provides for 267 conditional investment and business lines (which is understood to be applied to all investors) but none of regulations provides for conditional investment and business lines applicable to foreign investors.

On the procedure of Investment registration certificate (“IRC”)

Firstly, the new LOI significantly narrows the projects required IRC: Projects of foreign investor; Projects of economic organization in case (a) having foreign investors holding from 51% charter capital or more or majority partnership members being foreign individuals regarding partnerships; or (b) having economic organization under point (a) holding from 51% charter capital or more; or (c) having foreign investors and economic organizations under point (a) holding from 51% charter capital or more. Investment by capital contribution or share purchase is only required the registration procedure for capital contribution or share purchase without investment registration procedure. Projects of domestic investors are not required to perform investment registration procedure.

The second important improvement of this matter is, except for project requiring decision on investment policy, other projects shall only perform investment registration procedure with the IRC issued within 15 days, with no investment project evaluation procedure anymore. This change reduces the complicated, non-transparency administrative procedures, shortens the time of administrative procedures. Projects required decision on investment policy of the National Assembly, the Prime Minister or provincial People’s Committee shall perform the procedure of application for decision on investment policy before performing investment registration procedure.

Investment Guarantees – Investment Incentives

Regulations on investment guarantees under current LOI is basically appropriate with international practices and international commitments of Vietnam at the time of issuing LOI 2005. New LOI remains such guarantees on: the ownership of assets; the business investment activities; the transfer of investors’ assets overseas; Government guarantees for a number of important projects; guarantee on business investment in the event of changes of laws. In case of changes of laws, investors shall enjoy the higher incentives for the remaining incentive time of the project, except the case the changes of law are made for the reason of national defense, national securities, social order and safe, social moral, community health, environmental protection. If the investors are not entitled to keep enjoying incentives in above cases, investors shall be considered to receive supports if they require in writing within 3 years after the validity of new law.
Relating to investment incentives, new LOI further adds three subjects entitled to investment incentives, including: Investment project with capital from VND6,000billion and above, drawdown of minimum of VND6,000billion within 3 years from the date of issuing IRC or decision on investment policy; Investment project in agricultural areas using from 500 workers and above; high-tech enterprises, scientific and technology enterprises, scientific and technology organizations. Besides, new LOI increases the incentive business lines from 8 to 13 business lines.

Principle of application

Ensuring the unification of investment legal system for the purpose of specifying the relationship and application principle of LOI, relevant laws and international treaties to which Vietnam is a party, new LOI details the application of laws in case of conflict. Accordingly, if there is any conflict between international treaties and LOI, such treaties shall prevail. Besides, in case the provisions of new LOI are different from other laws relating to domains prohibited from trading, and investment and business lines with special conditions, order, procedures, instead of applying specific laws as current regulations, new LOI provides that the regulations of new LOI shall prevail, except otherwise prescribed in Law on Securities, Law on Credit Institutions, Law on Insurance Business and Law on Petroleum. This new point creates a clear and united legal system and expresses the nature of LOI as the leader of investment legal system.

Dispute Settlement

For the purpose of making a safe, trustful, attractive and competitive invesment environment, new LOI continues to dignify the principle of free agreement by investors. Accordingly, disputes between investors in which at lease one party is foreign investor or economic organization with major foreign capital shall be settled by agency/organization chosen by parties through agreement. Disputes between foreign investors and competent authorities relating to investment and business activities in the territory of Vietnam shall be settled by Vietnamese arbitration or Vietnamese court, except otherwise provided by contract between parties or internation treaty to which Vietnam is a party. Such provision once again emphasizes the right of investors on selecting the dispute settlement body and the preference on application of international treaty.

New regulation on assurance of investment project implementation

In fact, it is not a new regulation in Vietnamese legal system as there were some provincial regulations requiring a deposit for assurance of implementation of land-used investment projects in Bacninh, Laocai, Thainguyen, etc. New LOI brings such regulation in order to assure the legal system’s unification and intensify responsibility of investors. Accordingly, investors of investment projects for which the Government allocates, gives lease of land or authorises to change land-used purposes must make a deposit equipvalent to 1 percent to 3 percent of investment capital of project. Such deposit is treated as investor’s commitment on the implementation of project, restricts situations where investor was allocated or leased land but afterward fails to implement or catch the committed progress of project implementation and leaves the land unused for a long time. Such deposit shall be returned to investor in accordance with the project implementation progress, except the case of no return.

New regulation on authorized competent authority

Another big difference from the LOI 2005 is that the competence on issuing IC is transferred from provincial People’s Committee to Management Authority in case of investment projects in industrial zone, export processing zone, high-tech zone, economic zone and provincial Department on Planning and Investment in case of other investment projects.
Besides, investment projects conducting in various provinces and cities under the centre government or inside and outside the industrial zone, export processing zone, high-tech zone, economic zone are also governed by the new LOI. Back to the present LOI, IC is issued in each area and if a project is conducted in several provinces and cities, the investors must apply for each IC of each province or city. The new LOI allows the understading that in such case investors only have to apply for one IRC at the province or city where the investors locate their head office or managing office. It is maybe an advantages in reducing the administrative procedures, time and cost for enterprise. However, from the view of government management, while currently the provincial People’s Committee conducts state management function to investment projects within such province, under the new LOI, in case an investment project is issued with IRC by the Department of Planning and Investment where the headoffice is locates and such project is also conducted in other provinces and cities, the state mangement competence over the parts of project located in the other provinces and cities shall belong to which authority and what responsibilities of investors to competent authorities in such other provinces and cities will be important issues that need to be clear and specified.

Transitional Clause

In order to maintain the stability of investment projects/enterprises which have been executed before the effective date of new LOI, investment projects/enterprises are operating under the LOI 2005 and Law on Foreign Invesment are allowed to continue implementing under issued IC/Invesment License. Investors may apply for changing into IRC stipulated by the new LOI if having demand.

The new LOI together with new Law on Enterpise which was passed by National Assembly shall take effect from 1st July 2015. Basically, new LOI has remedied many shortcomings of current LOI and is expected to create a investment legal framework which apply to foreign and local investors in all economic sectors, as well as provide a safe and competitive invesment environment in order to highly attract foreign investment capital.