Vietnam: Vietnam's Draft New Investment Law and Enterprise Law

In order to continue improving Vietnam's business and investment environment, the Ministry of Planning and Investment is drafting two new laws to replace the current Investment Law and Enterprise Law (respectively, the "Draft Investment Law" and "Draft Enterprise Law"). The Drafts have been submitted to the Standing Committee of the National Assembly in March 2020 for review. The National Assembly is expected to consider and adopt these Drafts in its upcoming meeting, which is presently scheduled to take place in May 2020.

We have highlighted some of the key changes proposed under the two Draft Laws below.

Draft Investment Law

1.1. The definitions of foreign investors and foreign-invested economic organizations remain unchanged

Similarly, there is no change to the list of foreign-invested economic organizations that will be treated as foreign investors when they make subsequent investments into other economic organizations.

1.2. Market access conditions for foreign investors

In order to conduct investment and business activities in Vietnam, foreign investors must be aware of the following two major conditions:

a. Business conditions, which are conditions that any entity engaging in a regulated industry must satisfy (regardless of foreign ownership). Business conditions forms typically include permits, eligibility certificates, practicing licenses and confirmation letters etc.; and

b. Market access conditions applicable to foreign investors ("Market Access Conditions"), which are conditions that foreign investors must satisfy in order to invest in a specific sector. The Draft Investment Law proposes that the Market Access Conditions will include the conditions on (i) foreign ownership limitations, (ii) form of investment, (iii) scope of business and investment activities, (iv) the capability of the investor and business partners joining the investment activity, and (v) other conditions stipulated under Vietnamese laws and international treaties.

The Draft Investment Law provides that the Government will issue a list of sectors in which foreign investors are restricted from accessing (the "List of Restricted Sectors"), which must specify (i) the sectors where market access is not yet allowed and (ii) the sectors where market access is conditional. This list should help create a consistent framework for determining whether foreign investment is allowed in a specific sector as well as the conditions that foreign investors must satisfy before entering the market.

Further, the List of Restricted Sectors will follow the "negative list" approach, which means that foreign investors will be treated as domestic investors for any sectors not included in such List.

1.3. Selection of investors for land-related investment projects

With respect to investment projects using certain land areas, the investor will be selected through one of the following methods:

a. Auction of land use rights in accordance with land laws (applicable to land parcels eligible for auction under the land laws);

b. An in-principle approval granted by the National Assembly, the Government or the provincial People's Committee (depending on the project scale); or

c. Bidding process in accordance with the bidding laws, if the project does not fall into any of the two circumstances described above.

However, the Draft Investment Law limits the cases where an investor may be selected by in-principle approval, in particular:

a. The (selected) investor already has a legitimate land use right (except where the State retrieves the land use right for auction purposes in accordance with land laws);

b. The (selected) investor implements a manufacturing, R&D or innovative project located in an industrial zone, functional area inside an economic zone, high-tech zone or civil airport;

c. In the case of an auction of land use right or a bidding process, when the auction/bidding period has expired, there is only one investor registering to participate in the auction/bidding; or the auction/bidding is not successful; or

d. Other cases where the law does not require an auction of land use rights or bidding process to select an investor.

1.4. Exceptional investment incentive regime for projects having significant socio-economic impact

In addition to the investment support and incentive policy stipulated under the current Investment Law, the Draft Investment Law set forth legal grounds for the Government to provide an exceptional incentive regime for the following projects, which are considered as having significant socio-economic impact:

a. Establishment of new R&D/innovation centers, or expansion of the existing R&D/innovation centers, with the total investment capital of at least VND 6,000 billion (approx. USD 260 million); and

The above projects will enjoy the extraordinary incentives which may exceed (but no more than 50% of) the highest level of the incentive policy stipulated in the then applicable laws. However, the period for enjoying the extraordinary investment incentives must not be any longer than two times of the longest incentive period stipulated in the then applicable laws.

Specific regulations on the exceptional incentive regime for projects having significant socio-economic impact will be issued by the Government from time to time, subject to a prior approval of the Standing Committee of the National Assembly.

1.5. Further clarification on M&A Approval procedures

Under the current Investment Law, a foreign investor is required to obtain approval ("M&A Approval") from a local licensing authority if it intends to contribute capital to, or acquire equity from, an existing company if (i) the target company engages in business lines conditional to foreign investors, or (ii) the capital contribution or the equity acquisition results in 51% or more foreign ownership of the charter capital of the target company. In practice, these regulations are interpreted differently by licensing authorities in different provinces.

To ensure consistent practice across the country, the Draft Investment Law proposes to clarify the specific instances where M&A Approval is required, in particular:

a. An increase of foreign ownership in a target company engaging in business lines named in the Market Access List;

b. An increase of foreign ownership in a target company from less than 51% to 51% or more of the charter capital;

c. An increase of foreign ownership in a target company where foreign ownership of the charter capital is already 51% or more; or

d. The target company is utilizing land located within areas having an effect on national security, such as sea-islands, borderlands and coastal areas etc.

It appears that industry-specific business conditions will no longer subject a foreign investor to obtain M&A Approval.

1.6. Tightening regulations on extending project implementation schedules

• The 24-month extension period will be only be permitted in limited circumstances, such as (i) force majeure events, (ii) delays in land allocation, leases or other administrative procedures by the authorities, (iii) upon the request of a competent authority, (iv) changes to the master plan, or (v) a change in the total investment amount by 20% or more.

• Projects being delayed by 24 months or more compared to the original schedule as stipulated in the investment registration certificate or the in-principle approval will be terminated, unless an extension of the schedule is approved by the competent authority.

Draft Enterprise Law

2.1. Payments for capital transfer transactions

Under the current law, all payments for capital transfer transactions as well as the receipt of dividends by foreign investors must be made through capital accounts opened by the investors at banks in Vietnam, except for payment by assets. As it stands, this regulation is not aligned with the latest forex regulations issued by the State Bank of Vietnam in June 2019, which allow for direct payments between two offshore investors.

The Draft Enterprise Law only requires that payments for capital transfer transactions must be made in accordance with the forex control regulations. This change (if adopted) would help to clear the current misalignment with forex regulations.

2.2. No seal required

Under the Draft Enterprise Law, a company seal is no longer mandatory. Furthermore, if an enterprise decides to have a seal, it can freely decide the seal's number, form and content. The management and use of the seal will be provided for in the Company's charter or other internal policies.

2.3. Further guidance on time-limits for capital contributions in-kind

The Draft Enterprise Law retains the requirement that charter capital must be contributed within 90 days from the date of establishment. However, in case of capital contribution in-kind, the time for transportation, import (i.e. customs clearance) and other administrative procedures for the transfer of ownership of assets will not be included in the 90-day limit.

2.4. Changes to regulations on corporate governance of joint stock companies

The Draft Enterprise Law amends and supplements the following regulations on the corporate governance of joint stock companies:

2.5. Private placement of bonds by non-public companies

According to the current regulations in Decree No. 163/2018/ND-CP, the "private bond placement" means corporate bonds issued to less than 100 investors (excluding professional securities investors). In other words, the current regulations allow professional investors and non-professional investors to hold bonds issued under the private bond placement. However, in an attempt to tighten the regulations on private placement of bonds by non-public companies the Draft Enterprise Law provides that the private placement of bonds means the issuance of bonds in which the bondholders must be professional securities investors.

Under the Draft Enterprise Law, the private placement of bonds by a non-public company must not be made via mass media and has to meet the following conditions:

a. The company has paid all principal and interest of the previously issued bonds or has fully paid all due debts for a period of 3 consecutive years prior to the company's decision on private bond placement (if any), unless the private bond placement is made by an innovative start-up enterprise or otherwise provided by relevant laws;

b. The financial statements of the year preceding the year of the bond issuance have been audited by a qualified auditor, if the company has been established and operating for more than 1 year; and

c. Financial stability for business operations must be ensured.