New Regulations on Construction Contract in Decree 50/2021/ND-CP

On April 1st, 2021, Decree 50/2021/ND-CP (“Decree 50”) came into force amending specific provisions of Decree 37/2015/NĐ-CP (“Decree 37”) on detailed regulations on construction contract, bringing about broad changes which will considerably affect new projects which utilize state funds (including ODA and PPP projects).

In particular, Decree 50 expands the mandatory scope of application compared with Decree 37, amends and supplements many provisions related to contracts for design, procurement of materials and equipment and engineering procurement and construction (EPC), changes to provision of variation of construction contracts, and introduced a number of newly recognized contract types. The essential contents of Decree 50 are as follows:

1. WIDEN THE SCOPE OF APPLICATION

Previously, the provisions of Decree 37 are mandatory to projects using “state capital, corporate capital from 30% and over or from under 30% to over VND 500 billion of total project investment capital”. Decree 50 massively expanded this scope to now include “projects that use public investment capital, and construction contracts between PPP project enterprises and construction contractors implementing bidding packages of investment projects under the public-private partnership model”. As such, under Decree 50, any projects using state capital, regardless of the percentage, including PPP projects, will be mandatorily subject to the provisions of Decree 37 and 50.

While this change naturally increases the number of projects, parties and contracts which will be subject to mandatory requirements under Decree 50 and 37, perhaps new PPP project enterprises will be the most affected. In practice, the state capital contribution in PPP projects can be less than 30% of the PPP project’s total investment capital, and thus the PPP project would not be a subject under Decree 37. Moreover, the state often made contribution in the form of land use rights or land lease, meaning actual working capital would be contributed by private parties. PPP project enterprises thus often had flexibility to negotiate and handle contentious issues such as variations, claims regarding construction contracts. However with Decree 50, this flexibility has been curbed, and PPP private investors may consider this a negative point.

2. NEW KINDS OF CONSTRUCTION CONTRACTS ARE INTRODUCED

Two new kinds of contracts are introduced by Decree 50: (i) simple and small-scale construction contract, and (ii) fee plus cost-based construction contract.

The simple and small-scale construction contract is a construction contract for the execution of bidding packages and whose value do not exceed the limit of a small-sized bidding package in accordance with the law on bidding. For these contracts, some unnecessary procedures have been removed to optimize the performance of construction contract in small projects.  

The fee plus cost-based construction contract is not a new type of construction contract per se. In fact, this contract is stipulated as one in Article 140 of Construction Law 2014; however, it was not addressed in Decree 37.

It is welcoming that Decree 50 has recognized new construction contract types. We expect this change to create more flexibility for employers who now has more options to decide what’s best to apply to their project. However, it should be noted that Decree 50 has not provided clear guidance on these new types of contracts, and it will remain to Ministry of Construction will be providing detailed guidance on them in the form of new circulars in the future.

3. REVISION TO PROVISIONS REGARDING EPC CONTRACT

Amongst the most significant revisions brought about by Decree 50 are new provisions relating to EPC Contracts. Specifically, Article 4.5 of Decree 50 imposes several key head of terms that parties must agree on before signing the EPC contract, including scope of work; construction place; information about natural conditions; requirements for construction design; technology, equipment plan, interfacing, provision of utilities, applicable standards.

Secondly, Decree 50 now specifies when EPC contracts should be applied. Notably, there’s now a “preference” to use EPC Contract for complex projects, required high demands for technology, and must adhere to consistency from design to equipment supply, construction, technology transfer training.

Employers must now consider far more factors prior to choosing to use the EPC contract form. Before deciding to apply the EPC contract for the project, the employer must organize the assessment of technical and technological requirements, whether there’s shortening the implementation time of the project, the consistency from the design to provision of equipment, the construction to operation step, the transfer of construction to meet the objectives and requirements of the approved project. The employer will also be responsible for ensuring the feasibility of the application of EPC contract compared to other types of contracts.

Decree 50 provides a useful checklist for issues which commonly arise during practice of EPC constructions in Vietnam (interfacing, allocation of responsibility for provisions of utilities, applicable standards…). By requiring Parties to expressly agree on these provisions beforehand, the drafters of Decree 50 perhaps expect to reduce the number of disputes which arise in relation to public-funded construction projects. However, employers are now required to expressly consider many more factors prior to using EPC contracts, which may result in less usage in the future.

4. CHANGE IN THE VARIATION TO CONSTRUCTION CONTRACT AND CONTRACT PRICE

Decree 50 has amended regulation on a variation of unit-price-based construction contracts, particularly. Previously, Decree 37 provides that a change in the quantity of work by 20% can justify a new unit price subject to contracting parties’ agreement. Decree 50 now requires additionally that there must be concurrently a change by 0.25% of the contract value, and over 1% of the specific work’s unit price.

Additionally, even if parties agree on a new unit price due to a change in over 20% of quantity of work, that price will only apply for the work amounts actually performed in excess of 120% of the volume stated in the contract. In effect, any new unit price will apply only in respect of the volume of work no. 121% onwards.

On the flip side, if the actual work volume decreases greater than 20% of the corresponding workload stated in the contract, the new unit price is applied to the entire volume of actual completed work.

Finally, the method of determining contract price variation has been clarified. Decree 50 now specifies a new method of contract price adjustment – the direct settlement method. It has also clarified the price index for the purpose of varying construction contract price to be the construction price index.

Employers and contractors should both keep these requirements in mind for the purpose of cost control and estimation when preparing, submitting bid proposals, and when negotiating construction contracts. Variation and the cost of variation works have always been contentious issue in the practice of construction for Vietnam public works and public infrastructure. With this requirement, employers and contractors are given incentive to accurately calculate the cost and quantity of works as both parties will be more restricted in their ability to vary construction works during the performance.

As for the method of determination of contract price variation, this will be a welcoming clarification, especially with regards to the application of the construction price index for price determination purposes. However, as the Vietnam construction price index may deviate from the market price, contractors should take note of this provision with regards to their cost control, and when analyzing bid document for potential future variations.

‍OTHER LEGAL UPDATES

Several important legal instruments have also recently been promulgated:

  1. Decision 17/2021/QĐ-TTg regulates amounts of vocational training support for employees participating in unemployment insurance. According to this Decision, if employees participating in unemployment insurance meet conditions for vocational training support prescribed in Article 55 in the 2013 Law on Employment, they will receive the amount of support equals to the tuition fees charged by vocational training institutions based on the actual training duration, but not exceeding 4,500,000 dong/student/course (for 3 months’ training courses). With regard to participants in more than 3 months’ training courses, the amount of support will be calculated per month and on the basis of the tuition fees and the actual training duration, but will not be greater than 1,500,000 dong/person/month. The Decision takes effect on 15 May 2021).
  2. Decree 12/2021/NĐ-CP amends Decree 89/2013/NĐ-CP providing instructions on appraisal prescribed in the Law on Prices. According to this document, appraisal enterprises must notify the Ministry of Finance on the changes when enterprises created after corporate division, splitting, merger, amalgamation and ownership transformation. On the occasion of enterprise’s dissolving, bankrupt or suspended from business; of their own free will, terminating their appraisal services; changing shareholders/capital contributing members that are appraisers practicing at enterprises, the enterprise also needs to inform Ministry of Finance on these changes. The Decree is entering into force as of 1 May 2021
  3. Circular 03/2021/TT-NHNN regulates provisions concerning debt rescheduling, interest reduction or exemption or debt non-restructuring for the purpose of supporting customers stricken with Covid-19. Accordingly, credit institutions and foreign bank branches may, at their discretion, decide to grant exemption or reduction of interest or fees prescribed in their internal rules and regulations with respect to outstanding debts incurred from credit facilities before June 10, 2020 (except corporate bond purchase and investment) if: (1) Obligations to repay principal and/or interest are due during the period from January 23, 2020 to December 31, 2021; (2) Customers are incapable of repaying principal and/or interest debts by payment due dates under terms and conditions of lending contracts or agreements due to decreases in their revenue and income caused by the Covid-19 outbreak. Interest and fee exemption or reduction granted to customers under Circular 03 will last until 31 December 2021 (effective on 17 May 2021).
  4. Circular 02/2021/TT-NHNN provides instructions about foreign exchange transactions of credit institutions licensed to provide foreign exchange services (briefly called credit institutions). The Circular stipulates that credit institutions licensed to conduct foreign exchange transactions may conduct spot trading, forward trading, swaps, option transactions with subjects including other authorized credit institutions; economic organizations. Credit institutions may not collect transaction fees for foreign currency transactions. In foreign currency transactions with other credit institutions, credit institutions are not required to present documents proving the foreign currency use purpose. For foreign investors, they must provide documents proving the ownership of Government bonds, ensuring that the value and term of the foreign currency transaction do not exceed the purchase price and the remaining period of that Government bond. The Circular takes effect from 17 May 2021.

‍This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.

Credit institution restructuring in Vietnam

1. Why should a credit institution under special control be restructured?

The Global Financial Crisis caused the collapse of many financial and banking institutions and, without tracing every step in the economic domino theory, adversely affecting the system of Vietnamese credit institutions. By the end of 2011 the Vietnamese market saw stressful liquidity; a large number of credit institutions were unable to pay debts, leading to a high risk of insolvency, damaging the system and destabilizing the financial market; the competition for capital mobilization among credit institutions became intense and unhealthy; the credit ratio on capital mobilization reached as high as 103,07% . In light of such adverse circumstances, an urgent goal was set: the restructure and reorganization of poor performing credit institutions and dealing with bad debts to ensure adequate and safe operation of the whole system.

Under the Credit Institutions Law , a credit institution can be considered under special control if “it is unable to make payments or pay its debts under the regulations of the State Bank; or the accumulated loss of the institution is greater than 50% of the authorized capital and reserve funds recorded in the latest audited financial statement, or it fails to maintain the minimum capital adequacy ratio of 8% or higher as prescribed by the State Bank in each period of 12 months consecutively, or the capital adequacy ratio lower than 4% in six months consecutively; or its ranking has been poor in two years consecutively according to the State Bank’s regulations” . Under special control the credit institution will be directly controlled by the State Bank. Restructuring plans of credit institutions under special control include: recovery plan; plan for merger, consolidation, and transfer of all shares and contributed capital; dissolution plan; compulsory transfer plan; and bankruptcy plan. These restructuring plans are designed to provide security to the credit system and to fix the underlying problems facing the credit institution under special control.

2. Restructuring and investors participation in restructuring

After the review and classification of the State Bank, the number of small and weak credit institutions has gradually decreased since the end of 2011, the number of credit institutions eliminated from the system is about 22 organizations including seven domestic commercial banks, three joint-venture banks, four non-bank credit institutions and eight foreign bank branches . Poor-performing credit institutions continue to exist, however, and they are subject to either compulsory acquisition by the State Bank (3 commercial banks) or special control (1 non-bank credit institution). The rate of bad debts and non-profit assets of these credit institutions is high. The management of overdue debts and the recovery of unprofitable assets have encountered numerous difficulties and have not yet achieved any significant result.  

Article 148b of the Credit Institutions Law provides several measures to implement recovery plans such as selling bad debts with or without collateral to the Asset Management Company Ltd of Vietnam Credit Institutions (VAMC); applying for special loans from the State Bank, Vietnam Deposit Insurance (Professional reserve fund), Vietnam Cooperative Bank (Fund to ensure the safety of people’s credit fund system) and other credit institutions; purchasing and investing in information technology systems that exceed 50% of the charter capital and the charter capital reserve funds, etc.  

According to the State Bank’s assessment , because of the limited budget which is insufficient to reconstruct weak financial institutions, the State Bank and supportive bodies , as directed by the State Bank, will focus on providing short-term capital (though this can be extended) .  

To create options. on July 19, 2017, the Prime Minister issued Decision No. 1058/ QD-TTg  approving the project “Restructuring the system of credit institutions associated with handling bad debts in the 2016 – 2020 period”, a centered solution to encourage the engagement of domestic and foreign investors . Investors cannot grant special loans like the State Bank and other domestic organizations, but they can buy shares and thus contribute capital to the controlled credit institutions. Participation of investors is seen as long-term and includes value-adding participation in the management and administration of credit institutions through representatives at management agencies of the credit institutions such as the General Meeting of Shareholders, Board of Members, Board of Directors, Board of Management, Board of Supervisors. A necessary financial resource like this should be promoted to support the restructuring of credit institutions in Vietnam.

3. Recommendations to complete the law provisions on restructuring

The first issue involves the time of submission of the plan to transfer 100% of shares and contributed capital of the controlled credit institutions with the capital of state-owned enterprises to the Prime Minister. The question is such a plan must be submitted to the Prime Minister for approval before or after the process of auctioning the capital share of state-owned enterprises. Currently, certain controlled credit institutions still retain capital of state-owned enterprises, especially non-bank credit institutions (formerly companies under the State-owned enterprises acting as an investment unit within the parent company such as arranging loans, managing cash resources and cash situation, managing investments of unused amounts for internal subsidiaries ). If the entire charter capital of controlled credit institutions is transferred, the capital share of the State-owned enterprises must remain in compliance with the regulations on state capital management. However, there is no established link between the provisions of the Credit Institutions Law and the Law on Management and Use of State Capital. Therefore, investors taking part in the transfer of capital of controlled credit institutions might not formulate a specific plan for the process of transferring the entire charter capital.

According to Article 149 and Article 149(b) of the Credit Institutions Law, when the credit institutions draft a plan of transferring charter capital, it must identify the expected receivers of the shares and contributed capital. According to Article 29(a) of Decree 32/2018/ND-CP , the public auction must be held when transferring capital at a listed joint-stock company or registering for transactions on the securities market but not for those companies not on stock exchanges yet or unlisted joint-stock companies or limited liability companies. The auctions process does not aim to identify the expected investor. The purpose, in fact, is to officially transfer ownership of shares and capital contributed by state enterprises to winning investors. Before the transfer plan is approved by the Prime Minister, the official transfer is prohibited, which means that state-owned enterprises are not allowed to auction. But if there is no auction, there will be no information about the investor to submit to the Prime Minister in the transfer plan.

These regulations should be more clearly stated in (i) the Credit Institutions Law, namely that after the decision of the Prime Minister to approve the transfer of 100% of the charter capital, shareholders and members who are State enterprises may conduct auctions to select investors to receive transfers; and (ii) Decree 32/2018/ND-CP, where it is necessary to include the provision that after winning the auction but before the plan to transfer all shares and contributed capital of the controlled credit institution is approved by the Prime Minister, the investor is not required to pay for the sale of shares or contributed capital to the State enterprises or will be refunded (including deposit) in case of payment, and the number of shares unpaid or paid but then refunded are still owned by the State enterprises.

The second issue involves what happens to the status of special control of a credit institution after the transfer of 100% of shares and contributed capital, specifically, whether the special control is considered to automatically terminate. Currently, the Credit Institutions Law does not mention automatic termination of special control after the transfer of shares and contributed capital. The law only provides that the plan to improve the situation of controlled credit institutions must be included in the proposal of transferring shares and contributed capital submitted to the Prime Minister.

Under the current regulations, even for charter capital transfers to new investors, the special control imposed on the credit institution will not be removed. Although a transfer transaction has been completed, the risks to investors do not change upon completion of the transfer as the institution is still under special control. This prevents the institution from completing its restructuring and maintains the old structure, thus facing the Biblical difficulty of placing new wine into old bottles.

When 100% of charter capital is transferred, and the legal form is changed, parties of the transfer transaction and the controlled credit institutions are entitled to a period of time before and after submitting the application for approval of the restructure to improve the situation that led to the credit institutions being put into special control. After the transfer of the entire charter capital, the special control should cease to exist, which changes the quality and is consistent with the purpose of the reconstruction. If the credit institution is unable to improve the situation that led to the special control, the transfer will fail.

Therefore, the Credit Institutions Law should include additional mandatory requirements for credit institutions after transferring all shares and contributed capital, the real value of the charter capital must be at least equal to the legal capital. The transfer must ensure safety ratios as regulated and after the transfer, the special control is automatically terminated.

REFERENCES

(1) Summary report on the implementation of the law on handling weak credit institutions and dealing with bad debts (First draft on February 7, 2017).

(2) The difficulty of the State Bank of Viet Nam in dealing with weak credit institutions – Kình Dương ( https://vietnamfinance.vn/cai-kho-cua-nhnn-trong-xu-ly-cac-tctd-yeu-kem-20170213005945978.htm);

(3) Finance Company – then & now – Thanh Thủy (http://ndh.vn/infographic-cong-ty-tai-chinh-ngay-ay-bay-gio-2017050208373325p4c149.news);

(4) A scheme on restructuring the system of credit institutions associated with handling bad debts in the 2016-2020 period, issued together with Decision 1058 / QD-TTg on July 19, 2017;

(5) Report on impact evaluation of the project proposal of the Law on Supporting the Restructuring of Credit Institutions and Bad Debt Settlement (The first draft dated February 8, 2017, by the State Bank).

By Ms. Vu Thanh Minh – Partner

Law on Investment 2020 – Clearer But Stricter Conditions For Foreign Investors

On 17 June 2020, the National Assembly of Vietnam passed the Law on Investment (LOI 2020), five years since the current Law on Investment 2014 (LOI 2014) came into effect.

The LOI 2020 takes effect from 1 January 2021, but many provisions of this new law reflect the policy movements introduced one year earlier in the Politburo’s Resolution 50/NQ-TW dated 20 August 2019 on foreign investment policy towards 2030 (Resolution 50). Resolution 50 is a special effort to help make Vietnam more selective in attracting foreign investments.

Overall, the new law provides significant changes in terms of investment conditions, especially those applicable to foreign investors.

For foreign investors, here are the most notable changes introduced by the LOI 2020.

1. Market entry conditions for foreign investors clearer but potentially subject to quicker changes

The LOI 2020 supplements new provision on market entry conditions for foreign investors. [1] These are defined as the foreign ownership ratio in a company based on the company’s charter capital; investment method; scope of investment/ operation; the investor’s capacity and business partners. [2]

Furthermore, a foreign investor can enjoy investment conditions set out for Vietnamese investors, i.e. not being subject to the said market entry conditions, if the foreign investor’s proposed investment does not fall under both (i) the list of business lines not committed to market opening, and (ii) the list of conditional business lines to foreign investors. [3] The two lists are currently proposed as Appendix III and Appendix IV to the draft decree implementing the LOI 2020, which is expected to be issued in 2020.

Remarkably, under the LOI 2020 the Government is vested with the power to issue decrees on investment conditions for both foreign and Vietnamese investors, in addition to the conditions provided by the laws and resolutions of the National Assembly, ordinances and resolutions of the National Assembly Standing Committee and international treaties to which Vietnam is a member. [4] The procedure to issue a Government’s decree is normally faster than that applicable to a law or an international treaty. So, Vietnam Government would have more flexibility and discretion either in granting more attractive market entries to foreign investors or in revoking them. Foreign investors in areas enjoying market entries more preferential than those under the international treaties should be cautious about this legislative move.

2. Stricter foreign ownership threshold for local investor status

Under the LOI 2014, a foreign invested enterprise (FIE) incorporated in Vietnam must meet the statutory conditions and follow the investment procedures applicable to foreign investors – viz (i) an individual holding foreign nationality, or (ii) an organization incorporated under foreign jurisdiction – if 51% or more of the FIE’s charter capital is held by either:

(a) foreign investor(s); or

(b) an entity 51% or more of its charter capital is held by foreign investor(s); or

(c) both foreign investor(s) and entities described in item (b).

The LOI 2020 now decreases the threshold from “51%” to “50%” only.  [5]

This is a strategic move of Vietnamese law makers, which makes it more difficult for foreign investors to take management control in a joint venture company for the purpose of enjoying investment conditions applicable to local investors.

To be clear, under the LOI 2014, and in line with the Law on Enterprises 2014, a company with a controlling foreign ownership of more than 50% but less than 51% charter capital is still treated as local investor. Now, with the change in threshold, foreign investors can no longer hold a controlling majority of “more than 50%” of charter capital in the investing company (while enjoying the local investor status). The maximum charter capital ratio foreign investors may hold in the investing company is 50%, a threshold that strategically enables the local partners holding the remaining 50% to gain more decision making power in the investing company.

Given this change, more sophisticated structures would be needed so that the investors holding not more than 50% charter capital in a Vietnam-based company may take control of decision-making power in the company, while enjoying the local investor status.

3. Foreign investment facing more restrictions due to national defense and security

Following Resolution 50, the LOI 2020 has tightened the requirements for all investors to ensure national defense and security prior to their investment and maintained throughout the whole investment term, demonstrated by the following new provisions.

Foreign investors or FIE must obtain in-principal approval from the provincial People’s Committee, if their investment projects are to be implemented on the islands, the frontier, seaside and other areas which may affect the country’s security and defense. [6]

Furthermore, foreign investors investing in Vietnam by contributing capitals, acquiring shares or capital contribution of a target company must satisfy the conditions on ensuring national defense and security provided under the LOI 2020. [7] The investors must also meet the conditions set out by the land laws regarding land use right, especially land on island, frontier area or seaside area. [8]

If the target company has a land-use right certificate for a parcel of land on an island, frontier or seaside area, foreign investors must obtain an approval from the licensing authority (commonly known as an M&A approval) prior to the investment, regardless of the foreign ownership ratio in the target company post-acquisition. [9]

Ultimately, as a general policy on investment under the LOI 2020, any local or foreign investor whose investment prejudices the nation’s security and defense will be cancelled, suspended or terminated. [10] The Prime Minister may decide on the suspension, wholly or partially, of an investment project upon the Ministry of Planning and Investment’s request, if the project is deemed harmful to the national security and defense. [11]

4. Nominee arrangements facing highest risk ever

Resolution 50 calls for improvement of the domestic legal system to help tackle shadow investment e.g. those using nominee arrangements, used in areas where foreign investments are restricted. Vietnamese authorities are now vested with the right to terminate an investment project if the investors are deemed to have conducted their activities on the ground of sham transactions under the Civil Code 2015 of Vietnam. [12]

Under the Civil Code 2015, a sham transaction is construed as a transaction established by the parties to conceal another underlying one. [13] Commonly, the so-called nominee arrangement is an investing model in which a nominee conducting the investment activities for the benefits of another undisclosed person, known as the ultimate beneficial owner.

Nevertheless, there remains a fine line between sham transactions in comparison with various forms of investment arrangements, hence it is expected that distinctive characteristics will be circulated in an implementing decree in order to identify circumstances and arrangements which are subject to termination.

In addition, the authority to declare and nullify a sham transaction lies with the court and it is unclear whether the investment licensing agency can directly exercise such authority and consequently terminate the relevant investment project or it can only do so on the ground of the court’s decision on the sham transaction related to the investment project.

5. Ground for termination of investment projects clearer and adjusted

The LOI 2020 clearly differentiates two groups of circumstances for termination of an investment project: those induced by the investors and those decided by the licensing authorities.

For the latter, the LOI 2020 supplements two new circumstances for the licensing authorities to terminate the whole or a part of investment projects. This includes, firstly, projects implemented on the basis of sham transactions (as detailed in Item 4 above). Secondly, investment projects whose investors failed to deposit money or be guaranteed for the deposit can also be terminated, if the projects are subject to compulsory deposit before implementation. [14]

Additionally, the LOI 2020 provides for termination of an investment project if the land on which it is based is revoked due to the investor’s failure to utilize or delay in utilizing such land in accordance with the land laws. [15] Previously, these reasons were not clearly specified, leading to termination of projects involving any type of land revocation. The change under the LOI 2020 may accordingly protect the investors who voluntarily return the land to the authorities (as part of other investment activities), among other reasons for land revocation, from getting their projects terminated.

[1] Article 9, LOI 2020

[2] Article 9.3, LOI 2020

[3] Article 9.1 and 9.2, LOI 2020

[4] Article 7.3 and 9.2, LOI 2020

[5] Article 23, LOI 2020

[6] Article 32.1(d), LOI 2020

[7] Article 24.2(b), LOI 2020

[8] Article 24.2(c), LOI 2020

[9] Article 26.3(c), LOI 2020

[10] Article 5.3, LOI 2020

[11] Article 47.3, LOI 2020

[12] Article 48.2(e), LOI 2020

[13] Article 124.1, Civil Code 2015

[14] Article 48.2(đ), LOI 2020

[15] Article 48.2(d), LOI 2020

This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.

By Mr. Bui Ngoc Hong – Partner

General Department Of Taxation Sheds Light On Tax Implications Of Interest Free Loans

The status quo

Under the applicable legal provisions on corporate financial transactions,[1]  enterprises other than credit institutions are allowed to lend their idle money to other enterprises, provided that this is a sporadic activity and does not form part of the lender’s ordinary business operation.

Taking advantage of these provisions, companies, especially parent companies and its subsidiaries, often use interest-free loans to provide financial support to each other. These loans are not usually subject to interest to ensure that the lending activity does not generate profit and consequently should not be construed as part of the lender’s regular business operations. However, the tax treatment of interest-free loans has not always been crystal clear.

What’s new?

On 10 August 2020, the General Department of Taxation (“GDT”) issued Official Letter No. 3231/TCT-CS (“Official Letter 3231”) to the Tax Department of Nam Dinh province in relation to the tax obligations of Smart Shirts Garments Manufacturing Bao Minh Company Limited (“Smart Shirts Bao Minh”). Specifically, Official Letter 3231 clarifies the tax consequences of interest-free lending between two companies in Vietnam.

Accordingly, the interest-free loan that Smart Shirts Bao Minh granted to another company between 2017 and 2018 shall be taxable at a rate determined by the tax authorities. The rationale for such conclusion by the GDT is that since the interest-free loan did not reflect the market common transaction values, it is a breach of tax regulations and must thus be taxed in accordance with Article 37.1(e) of the Law on Tax Administration 2006. The GDT applied the Law on Tax Administration 2016 in preparing Official Letter 3231 although the legislation had expired on 1 July 2020 as this was the law applicable to the loan granted by Smart Shirts Bao Minh between 2017 and 2018.

However, it should be highlighted that the GDT’s view remains applicable under the current laws since the new Law on Tax Administration 2019 contains similar provisions on the tax authority’s right to levy taxes under similar circumstances. Specifically, Article 50.1(dd) of the Law on Tax Administration 2019 mirrors Article 37.1(e) of the Law on Tax Administration 2006, granting tax authority the right to impose taxes on transactions where the value of goods and services does not reflect the market’s common values. Consequently, the GDT’s view expressed in Official Letter 3231 that interest-free loans are lending activities not in accordance with market values remains applicable, and the extent of tax exposure remains unchanged.

What does this mean to businesses?

As a consequence of Official Letter 3231, the lender of an interest-free loan would be retroactively liable for any unfulfilled tax obligations, such as CIT, arising out of the loan. Pursuant to Articles 49.2 and 50.2 of the Law on Tax Administration 2019, the tax authority can either fix the payable tax amount or the relevant factors to calculate the same on the basis of the followings:

• Database of the tax authority and commercial database;

• The tax amount payable by a comparable entity (in terms of products, industry and scale) in the same locality; otherwise the tax amount payable by a comparable entity in another locality;

• Effective inspection results; and

• The applicable industry tax rate under tax laws.

In light of the above, to mitigate the tax risks associated with interest-free loan, companies should proactively apply interest rates, however minimal, to all of their loans, including those granted to other group member companies.

[1] Article 6 of Decree No. 222/2013/ND-CP dated 31 December 2013; Article 4.8 of Circular 219/2013/TT-BTC dated 31 December 2013; and Articles 3, 4 of Circular 09/2015/TT-BTC dated 29 January 2015

This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.

By Mr. Nguyen Anh Tuan – Partner

Good News – The Government reduces corporate income tax payable in 2020 for SME?

. What is new?

On 25 September 2020, the Government issued Decree no. 114/2020/ND-CP (“Decree no. 114”) guiding implementation of the National Assembly’s Resolution no. 116/2020/QH14 (“Resolution no. 116”) on reduction of corporate income tax (“CIT”) payable in 2020. Accordingly, where a company’s total revenue in 2020 is less than or equal to VND 200 billion, such enterprise is entitled to a 30% reduction in its CIT payable for the financial year 2020 (“Financial Year 2020”). [1]

A company’s total revenue in Financial Year 2020 for the purposes of Decree no. 114 includes proceeds from sales of goods, processing and service provision, subsidies and extra charges to which the company is entitled under the Law on Corporate Income Tax.

For those companies which have operated for less than 12 months in 2020 because they are newly established or recently underwent ownership transfer, conversion, merger, acquisition, division, partial division, dissolution or bankruptcy, the total Financial Year 2020 revenue is calculated as follows: [2]

2. Who is eligible?

Under Decree no. 114, the following CIT payers are eligible for CIT reduction: [3]

a) Companies duly established under the laws of Vietnam;

b) Entities duly established under the Law on Cooperatives;

c) Public service providers duly established under the laws of Vietnam; and

d) Other entities duly established under the laws of Vietnam and earning income from business operation.

3. How to claim the reduction?

According to Decree no. 114, eligible CIT payers must estimate the total revenue in Financial Year 2020 and, in the event the estimated total revenue does not exceed VND 200 billion, the eligible CIT payers may pay 70% of the quarterly payable CIT. At the end of the Financial Year 2020, if the actual total revenue does not exceed VND 200 billion, the eligible CIT payers must declare the CIT reduction when making the annual CIT settlement. In addition, the 30% CIT reduction under Decree no. 114 will only be applied after other CIT incentives granted under the Law on Corporate Income Tax have been deducted from the payable CIT. [4]

Since the Vietnamese economy has been heavily impacted by the COVID-19 pandemic, we find Decree no. 114 a timely and appropriate aid to support the SME community in Vietnam to sail through this difficult time. However, considering that as predicted by WHO the COVID-19 pandemic may continue to spread until the end of 2021, we opine that Decree no. 114 may be amended and supplemented to reduce the CIT payable in 2021 as well. Decree no. 114 comes into force retrospectively and is effective from the date on which Resolution no. 116 came into force which is 03 August 2020 and is effective for the Financial Year 2020.

[1] Article 2.1 Decree no. 114/2020/ND-CP.

[2] Article 2.2 Decree no. 114/2020/ND-CP.

[3] Article 1 Decree no. 114/2020/ND-CP.

[4] Articles 2.3 and 2.4 Decree no. 114/2020/ND-CP.

This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.

By Mr. Tran Thai Binh – Partner

The new Decree 81 to tighten the issuance of corporate bonds

Overview of Vietnam’s corporate bond market

For the past few years, the corporate bond market has experienced a surge in issuance value. This was mainly attributed to Decree 163/2018/ND-CP (“Decree 163”), which was promulgated to encourage corporate bond issuance, hence containing relatively lax requirement for bond issuances. However, such lenient policy has resulted in abuse, with bonds being issued without securitization and on high risk terms in mass numbers.  Companies have turned this instrument into a relatively unregulated new credit channel without being subject to strict lending regulations risking their own financial stability, especially with real estate companies issuing bond volume far exceeding their charter capital (in some cases up to 100 times). This creates a sudden and massive risk to the capital market, especially for bond holders who are too often hold asymmetric information as to the terms of the bond. In response, the Government issued Decree 81/2020/ND-CP to reduce such risks.

Corporate bond market after Decree 81/2020/ND-CP

On 9 July 2020, the Government issued Decree 81/2020/ND-CP (“Decree 81”) to amend Decree 163.

In total, Decree 81 amended and supplemented 14 provisions of Decree 163, aiming at providing strict and prudent control over the private placement of corporate bonds in the wake of an uncontrolled proliferation in the amount and risk of issued corporate bonds over the past two years with the following notable contents:

Firstly, Decree 81 now imposes strict limits on the total outstanding debt on corporate bonds issued through private placement to not exceed 05 times the owner’s equity. Effectively, bond issuers cannot leverage further using bond issuance if their outstanding total bond debt is already too high. This is expected to make further bond placements safer, and potentially reduce risk of defaults as bond issuers are now required to have healthier liquidity.  

Secondly, Decree 81 mandated a minimum gap period of six months between bond issuances – that is, companies can now only issue bonds six months after the completion of the previous issuance. Furthermore, issuances must be completed within 90 days from the date of public issuance.

The main purpose of this policy is to prevent the excessive issuance of high-risk, high-reward short term bonds which have high risk of defaults – as now companies may only make a maximum of two bond issuances per year, it is expected that they will now issue bonds with greater considerations.  The hope is that the excessive issuance of corporate bond will be better controlled and that companies now resort to corporate bond only when they have real need for capital. Cash flow would therefore be directed to production and business activities, avoiding the situation of capital being misused, causing potential risks for this market.

In addition, this rule would now curb the practice of companies who issue bonds with higher coupon rates, and in turn use the amount sold to pay off bank debts or redeem earlier bonds that have reached maturity.

Thirdly, Decree 81 also requires bond issuers to publish and consolidate sufficient information on corporate bonds and report to the Stock Exchange. This is a policy to help the issue of assymentric information between issuers and small, inexperienced investors. Previously, small individual ínvestors are often at the mercy of the issuers, as they lack information as to the bonds which they are buying. This has resulted in abuse, with multiple issuance of high-risk high reward bond seeking to tempt these small investors. This regulation has now injected a dose of transparency into the bond market, hopefully will protect small investors and also provide safeguard to the system. .

Last but not least, bond issuers are now required to enter into consulting contract with a licensed consultant to issue bond dossiers.

The new legal framework took effect on 1 September 2020, and has significantly tightened the requirements on bond issuance. Accordingly, it is advised to be extra careful and due considerations to be taken when issuing new bonds, as the coupon rate and the frequency of issuance have now been restricted.

This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.

By Dr. Le Net – Partner

Foreign investment in manufacturing sectors in Vietnam faces stricter requirements

During the last few months, foreign investors have faced new challenges in applying for the authorities’ approval (M&A Approval) for acquiring share capital in Vietnamese companies operating in the manufacturing sector (Target).

In particular, to obtain an M&A Approval in the manufacturing sector, a foreign investor must now also submit an extensive explanation on the followings for the authorities’ assessment:

(a) Technologies;

(b) Machinery;

(c) Labor uses;

(d) Sources of input materials;

(e) Market(s) for products; and

(f) Environmental protection.

This is a new requirement arising from Vietnam’s new policies which are aimed at making the country more selective in attracting foreign investment. However, in practice, this new requirement is time-consuming and costly, thus likely to become a burden to foreign investors who wish to invest in Vietnam’s manufacturing sector.

Ground for the requirements

The new requirement is rooted in Resolution No. 50/NQ-TW on foreign investment policy towards 2030 issued by the Politburo on 20 August 2019 (Resolution 50). Implementation of Resolution 50 is guided by Plan No. 379-KH/TU, issued on 1 July 2020 by the Standing Committee of the Party Committee (Plan 379).

Under Resolution 50 and Plan 379, provincial licensing authorities (mainly the Department of Planning and Investment – DPI) are instructed not to approve scale-up and extension of any manufacturing projects that are using obsolete technology, potentially causing environmental pollution or natural-resource intensive.

The above policy under Resolution 50 and Plan 379 is subsequently manifested in the new Law on Investment dated 17 June 2020 (LOI 2020). Particularly, Article 44.4(a) of LOI 2020 stipulates that upon expiry of the operational duration of an investment project, generally the investor may ask for a duration extension, except for investment projects which are “using obsolete technology, potentially causing environmental pollution or natural-resource intensive”.

Although legally LOI 2020 is not effective until 1 January 2021, over the last few months DPI has surprisingly taken the new policy into consideration when assessing M&A Approval applications. While the provision only restricts project term extension, in practice the requirements (and possible restrictions) therein have been surprisingly applied to existing projects for the purpose of approving or disapproving foreign investment.

M&A deals in manufacturing sector may face heavy delay or even deal breaker

Previously under Article 46.3(b) of Decree No. 118/2015/ND-CP, obtaining an M&A Approval for a manufacturing project would take 15 days. This timeline would likely be prolonged by the new policy as the DPI would now also conduct a thorough review of, and may even seek consultation from other relevant provincial departments (e.g. Department of Science and Technology, Department of Natural Resources and Environment, etc.) on, the foreign investor’s detailed submission on the abovelisted (a)-(f) criteria in deciding whether or not to approve the investor’s proposed acquisition.

The new policy and LOI 2020 are understood to help screen out or reduce investments, especially foreign investments, into manufacturing projects using outdated technologies, polluting the environment, and resource-intensive projects. There is nothing wrong with the new policy in that it helps the country to be more selective and attract better quality investments. However, when the new policy is implemented in practice, it has somehow become a serious obstacle to foreign investment. In particular, as a result of the new policy, a foreign investor whose proposed acquisition in the manufacturing sector is subject to the M&A Approval requirement shall now also submit an extensive explanation on the above listed (a) to (f) criteria for the licensing authority’s review and approval. Meanwhile, there appears to be a lack of detailed regulations and criteria to assess whether or not a technology is outdated or may pollute the environment, or whether a project is resource-intensive. Given the lack of transparency and predictability, the authorities’ assessment could be very time consuming and, worse, discretionary.

Specific requirements on preparing the explanation to the DPI

To prepare the newly required explanation, reference can be made to Article 16.2 of the Law on Technology Transfer 2017 as the provision stipulates the types of information which arguably can be used to prove that the Target is not “using obsolete technology, potentially causing environmental pollution or natural-resource intensive”. Such information includes:

(a) Name, origin and chart of the technological process; list, status and technical parameters of the machinery and equipment used in the technological line;

(b) Products, standards and product quality;

(c) Ability to supply raw materials, fuel and supplies for the technological line;

(d) Program on training and technical support to operate the technological line; and

(e) Expenses of investment in the technology, machinery and equipment, training and technical assistance.

It would take the relevant departments much time to review the investor’s submitted explanation in order to arrive at a conclusion on these points. It is even more time consuming given that there are not sufficient and clear regulations on these points, especially on the criteria to judge whether a technology is “obsolete”.

Moreover, if environmental protection is of concern, which is quite common for manufacturing projects, Article 18 and Article 29 of the Law on Environmental Protection can be applied to consider whether or not the Target is a project that must:

(a) conduct an environmental impact assessment; or

(b) devise an environmental protection plan.

If the Target’s manufacturing operation is deemed to be one such project, the investor will also be required to submit the environmental protection authority’s approval of the environmental impact assessment or, depending the case, the environmental protection authority’s confirmation on the environmental protection plan. And this takes times and is uncertain as well.

Consequences to be noted for parties to an M&A transaction

With the new policy and the new practice, parties to an M&A deal in the manufacturing sector may have to spend a lot more time and money on preparing the required documents to  obtain the M&A Approval. The closing date could be driven far away from the signing date of transactional documents, increasing the risks for the investor with respect to liabilities arising between the two dates. In the worst case scenario where the authority refuses to issue an M&A Approval due to the new requirement, the refusal becomes a deal breaker beyond the expectation of the transaction parties.

When Vietnam joined the WTO in 2007, market openings and market restrictions became a prerequisite for foreign investment transaction, for which M&A Approvals have been emphasized as a first-thing-first condition precedent in most M&A transactions. With the new policy, this condition precedent attracts the parties’ attention again and needs to be managed with special care.

This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.

Dealing with employees in the time of Corona

he coronavirus outbreak has affected hundreds of thousands of enterprises. As the pandemic continues to expand, many employers in Vietnam may find it hard to maintain healthy working conditions for their employees as well as to finance labor costs. With this in mind we wanted to address how the employment relationship should be dealt with during the coronavirus outbreak.

1. Why it matters

Many employers are seeking different solutions to maintain their business, including narrowing business operation, decreasing employees’ wages and requiring employees to take leave without pay. Employers should take note of some relevant regulations on labor to mitigate risks of non-compliance.

2. Deep dive

On 25 March 2020, the Ministry of Labour, Invalids and Social Affairs issued Official Letter No. 1064/LDTBXH-QHLDTL (Letter 1064) guiding cessation of labour due to the Coronavirus.

a) If an employee is furloughed due to coronavirus she may enjoy wages at a rate agreed with the employer but not less than the minimum area wage. Furloughed workers eligible for such wage agreement include:

• Foreign employees who are not allowed to work per request of the authorities;

• Employees who must cease work due to mandatory quarantine; and

• Employees who cannot work because their employer cannot operate due to other employees being kept in mandatory quarantine or who are not allowed to return to work.

b) Employers who cannot provide sufficient jobs for all of their employees because of Coronavirus may:

• temporarily reassign employees to work not included in their labor contracts;

• suspend labor contract performance if the period of disruption is prolonged enough to affect the employers’ financial capacity; or

• terminate labor contracts in case the employer must narrow their operation.

Suspending performance of a labor contract may be the preferable option as, during the suspension period, no wages or benefits accrue, and the employees can return to work after such period. The difficulty, however, is that suspension requires the agreement of the employee, unless provided for in the labor contract.

Temporarily reassigning employees, though easier to implement as it doesn’t require the agreement of the employee, may be less desirable because reassignment may not exceed a total of 60 work days in any one year, unless the employee so agrees; and the wage for the reassigned role must remain consistent with the previous wage for 30 days, after which it may be decreased but not lower than 85% of the previous wage.

Termination of labor contracts should be the last resort and only used when the employer has to narrow or suspend their operations. In this case, the employer may:

• terminate labor contracts due to economic reasons, applying Article 44 of the Labor Code 2012 – in this case, the employers are required to prepare and implement a labour usage plan;

• terminate labor contracts upon (written) agreement with the employee; or

• unilaterally terminate labor contracts due to force majeure – but this may not be advisable as complicated and time-consuming procedures must be followed.

Of note, when terminating labor contracts, severance payments may be required for working time not covered by unemployment insurance.

c) If the employer decides to decrease employee wages or require employees to take leave without pay, the employer should obtain the agreement of employee in writing. This helps to mitigate the risks of disputes or non-compliance.

d) Finally, the employer should advise employees who are affected to seek enjoyment of their lawful benefits such as:

• Unemployment insurance (in case of termination of employment);

• Sickness insurance, for employees who are in mandatory quarantine;

• Special support from the Government, as the Government has proposed to provide VND 1.8 million per month for employees whose employment is temporarily suspended, VND 1 million per month for those (i) whose labor contracts are terminated but are not entitled to job loss allowance and (ii) do not have labor contracts and lose their jobs for 3 months from April to June.

3. What’s next

The Vietnamese Government has approved an unprecedented Coronavirus aid package of VND 61,580 billion. The draft resolution on the package has been submitted to the National Assembly Standing Committee for their consideration. It is expected that other policies will be issued soon for its implementation. When we know more, we will notify you of relevant provisions and be available to assist you.

COVID-19 and Corporate Governance in Vietnam

While the expansion of COVID-19 in Vietnam has slowed with only two new cases being reported over the weekend (11-12 April) the Government has applied, and may continue to apply various isolation methods for curbing the pandemic including mandatory quarantine of individuals suspected to be infected;  closure of almost all flights between Vietnam and overseas territories;  and social distancing was implemented.   Unfortunately, with the requirements of social distancing limiting meetings to small numbers, many companies face adverse effects to their corporate governance. At the time of writing the general lockdown is scheduled to end on 14 April, it is possible that regional lockdowns may continue and that some form of social distancing that could affect corporate housekeeping will remain in place indefinitely. With that in mind, we address the issue of holding corporate meetings when meetings are prohibited.

1. Convening meetings and passing decisions of General Meeting of Shareholders (GMS), Board of Management (BOM) in shareholding companies and Members’ Council (MC) in limited liability companies

All enterprises incorporated in Vietnam have to comply with relevant provisions under the Law on Enterprises 2014 (LOE 2014) to convene and pass resolutions in meetings of their GMS, BOM, and MC.

During social distancing, it can be difficult, or even impossible in certain circumstances, for enterprises to convene an eligible meeting in compliance with the following requirements set out by LOE 2014:

(i) The meeting location must be within the territory of Vietnam (for GMS meeting),  or at the head office of the company or another place (for BOM meeting  and MC meeting)

A company may be unable to hold the meeting at its head office or other place specified due to COVID-19. For example, the company’s office may be in a quarantined area, blocked or closed following the Government’s direction.

(ii) The minimum number of participants to convene a meeting

If the number of meeting participants is less than the minimum thresholds provided by law (e.g., at least 51% of charter capital represented by attending shareholders for convening the first GMS meeting, at least 65% of charter capital represented by attending MC members for convening a MC meeting, and at least three-forth (3/4) of the total number of BOM members for convening the BOM meeting), the meeting may not be convened.  Due to social distancing, some meeting participants, especially those who live overseas, are unable to directly join the meeting to constitute a quorum for convening the meeting.  

(iii) The vote-counting must be witnessed by the Supervisory Board or of shareholders not holding managerial positions in shareholding company  

Witnessing the vote-counting process and making a vote-counting record will be difficult, if not impossible to implement, even if the GMS meeting is held via online conference, because the Supervisory Board or shareholders not holding managerial positions are required to be present with the BOM’s members at the place of vote-counting.

(iv) A meeting minute must have signatures of the meeting chairman and the meeting secretary  

Due to the effects of social distancing, it is difficult to get the signatures of both the chairman and secretary if one or both of them do not participate in the same place as the meeting.

2. Effects on management activities by the company’s managers

Social distancing leads to absences of many important managers within the territory of Vietnam. There will be more severe consequences if the absent managers are concurrently the legal representatives of the enterprise as LOE 2014 requires that there must always be at least one legal representative residing in Vietnam  to maintain business continuity. The implementation of centralized quarantine or entry suspension prevents managers from entering Vietnam and directly participating in corporate management activities,  specifically:

(i) Joining meetings of BOM, MC, and GMS

This obligation belongs to Chairman of BOM,  Chairman of MC,  members of BOM,  members of MC,  and the Director/General Director in partnerships.   The scheduled meetings may be required to be convened during the managers’ leave or quarantine. Further, either the Chairman of BOM or Chairman of MC is usually required to host these meetings.  

(ii) Signing meeting minutes, resolutions or decisions within their authority

This obligation belongs to Chairman of BOM, Chairman of MC,  members of the MC in state-owned enterprises and partnerships, and the Director/General Director in partnerships.   Without joining any meeting for information obtaining or accessing to sufficient documents, the Chairman and Directors are unable to physically and timely sign necessary approval documents. This is especially difficult for state-owned enterprises and partnerships for which the minutes must be signed by all the participating members.  Even remote attendance does not resolve the necessity for obtaining the signatures of attendees.

(iii) Signing agreements within their authority

This obligation belongs to all individuals holding managerial positions authorized on behalf of the company to sign the company’s transactions, especially the Director/General Director.   In case those managers stay overseas or are quarantined, the signing process cannot go smoothly as there is no representative having competent authority to execute important commercial contracts.

(iv) Reporting and publishing corporate information.  

This obligation belongs to managers being the legal representative or authorized representative in state-owned enterprises  and joint-stock companies.   As required, the managers shall timely provide written reports of the enterprise’s periodic information to the competent authority.   However, the Government’s policy during social distancing limits their movements and access to important information, like financial statements, so it may be difficult to directly collect, evaluate and issue reports in writing.

Failing to fulfil the above-mentioned obligations may lead to dismissal of those managers, especially the positions of Chairman of MC,  and Chairman of BOM.  The Director/General Director and BOM members may also be sued by shareholders for failing to fully and timely execute any BOM’s resolution leading to damages to the company.

3. Possible solutions for facilitating corporate governance operations in social distancing situation

It is possible to hold corporate meetings via teleconferences or by way of collecting written opinions.  In case the meetings are held online, the affected companies also need to develop an information technology system which allows electronic voting (e-voting) for meeting participants and electronic signature (e-signature) for the meeting chairman and the meeting secretary.  The company’s charter and internal corporate governance regulations (in case of a public company)  also may need to be modified to recognize the validity of the online meeting, e-voting, and e-signature system. This may prove difficult as most template charters in Vietnam require their own meetings and voting. However, a good precedent was reported that FPT, a famous technology corporation in Vietnam, has successfully organized its online GMS meeting on 08 April 2020.   Following FPT’s footstep, Sacombank, a big private bank, also decided to place its 2020 GMS meeting on 24 April 2020 in form of online meeting.

Regarding management activities, the managers, who are subject to entry suspension and/or quarantine, may consider using electronic signatures to sign on meeting documents or contracts concerning the enterprises’ business and operation. This may present some difficulties in enforcement, however, as though the law has been in place for years now, some courts in Vietnam still struggle to understand and apply the e-signature rules. Management may also consider authorizing another person in writing to perform all respective rights and obligations during an absence.  This may be done using a power of attorney, which should specify the scope of authorized work and the time limit so as to avoid abuse of power.  In case there is no authorization made by the managers, the BOM or the MC may convene a meeting to appoint one of the remaining members to temporarily implement the rights and obligations of such managers.  This solution is only effective in limited cases where the absent manager is the Chairman of BOM or the Chairman of MC.

While the general solutions for corporate governance dilemmas in this time of social distancing tend to fall to teleconferencing, e-signatures, and remote authorizations the acceptability of these measures may or may not be applicable to any given company. While the law—as of 2014—allows for these solutions to be implemented, if they are not included in the charter and governing documents of the company, they could be subject to court judgments against their validity. There may be other solutions available, but they will have to be determined on a case by case basis with consultation between the managers and legal and considering the individual charter of the company.

This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.

By Mr. Bui Ngoc Hung – Partner

Notable Changes To Enterprise Regulations Effective From 1 January 2021

On 17 June 2020, the National Assembly of Vietnam passed the new Law on Enterprises (“LOE 2020”), which takes effect on 1 January 2021 and replaces the current Law on Enterprises 2014 (“LOE 2014”).

The introduction of the LOE 2020 reflects substantial efforts directed under the Vietnamese Government’s Resolution 02/NQ-CP dated 1 January 2020 on Improving Business Environment and Enhancing National Competitiveness in 2020 and, as remarked by Mr Phan Duc Hieu, Vice President of the Central Institute for Economic Management of Vietnam (CIEM), will boost Vietnam’s standing in the World Bank’s Ease of Doing Business (EoDB) rankings by at least 30 points.[1]  Besides, the LOE 2020 also aims at improving Vietnamese companies’ corporate governance capacity, protecting minority investors, creating a more transparent and simplified licensing process and permits a more efficient operational structure for certain entities.

In this briefing, we highlight major changes that may enthuse companies and investors particularly from the perspective of modernizing the licensing procedure and improving internal corporate governance.

1. Simplifying licensing procedures

Once the LOE 2020 comes into effect, the following procedures shall be removed:

• Notification on usage, change or cancellation of seal specimen

Under the LOE 2020, companies are no longer required to notify the licensing authorities on the usage, change or cancellation of seal specimen. It is also regulated that seals can be made in the form of physical seal or a digital signature in accordance with regulations on e-transactions.[2]  Under the new law, enterprises will also be given the liberty to decide on the number, forms and contents of seals without the interference of the competent authorities. [3]

• Notification on changes of information of the enterprise’s managers

Under the LOE 2020, enterprises are no longer required to notify the licensing authorities upon any changes to members of the Board of Managers, members of the Inspection Committee (“IC”), Inspectors, Directors or General Directors.

• Notification on private placement of joint stock companies

Effectively, the removal of this notification requirement will help shorten the timeline for share issuance and simplify private placement procedure as joint stock companies will no longer be required to notify the licensing authority and wait through the notification period to ensure that there is no objection from the licensing authority before progressing their private placement plans.

2. Changes related to voting rights

• Voting threshold

Under the current LOE 2014, the threshold for passing resolutions of the General Meeting of Shareholders (“GMS”) in respect of general matters and for matters approved in the form of collection of written opinions is “at least 51%” affirmative votes of the attending shareholders.

Under the LOE 2020, this threshold is reduced to “more than 50%” affirmative votes of the attending shareholders.

This change is noteworthy in terms of the consistency with the change under the LOI 2020 which states that an enterprise shall be treated as a foreign investor when “more than 50%” of its charter capital is held by foreign investor(s).[4]  Under the current LOI 2014, this ratio is “at least 51%”.

From the new thresholds specified in the LOE 2020 and LOI 2020 above, it can be interpreted that the two laws continue to set out a trade-off relationship between (i) the controlling right of the foreign investor in an enterprise and (ii) the legal status of that enterprise when making later investments itself. In other words, if the foreign investor would like to obtain a controlling position in an enterprise by simply holding more than 50% of its charter capital, such enterprise shall be treated as a foreign investor under the LOI 2020 and be subject to investment conditions applicable to foreign investors when making investments in other enterprises. For further analysis on the impacts of changes in foreign investment thresholds under the LOI 2020, please refer to our previous publication “Law on Investment 2020 – Clearer But Stricter Conditions For Foreign Investors”. [5]

• Voting rights of preference shareholders

Under the LOE 2020, a GMS resolution which results in adverse changes to the preference shareholders’ rights and obligations requires the approval from the preference shareholders holding at least 75% of the total number of preference shares of the affected share type. [6]

Previously, under the current LOE 2014, there is no specific provision governing the procedure to pass a GMS resolution related to rights and obligations of preference shareholders.

Practically, the LOE 2020 has recognized for the first time the voting right of redeemable preference shareholders and dividend preference shareholders who, in principle, do not have the right to vote, although this voting right is limited to the extent of their rights and obligations.

3. Protecting minority shareholders

Protecting minority shareholders, which is an important objective of corporate governance, has been long regulated in the laws on enterprises. In particular, minority shareholders would have certain rights to protect them against being subordinated by majority shareholders, such as:

(i) The right to nominate candidates to the Board of Management and the Inspection Committee (“IC”);

(ii) The right to request to convene a GMS meeting;

(iii) The right to sight and make extracts of the company’s records;

(iv) The right to request the IC to inspect issues relating to the management and operation of the company.

Under the current LOE 2014, minority shareholders or group of minority shareholders are defined as the shareholders holding at least 10% of the total ordinary shares (or a smaller percentage set out in the charter of the company) for a consecutive period of six months or more. [7]

Under the new LOE 2020, minority shareholders or group of minority shareholders also include the shareholders holding at least 5% of the total ordinary shares (or a smaller percentage set out in the charter of the company), without any requirement on the duration of holding such shares. [8] This change has enlarged the scope of entities/shareholders who are protected under the regulations relating to minority shareholders.

It should be noted, however, that the right to nominate candidates to the Board of Management and the IC is still subject to the possession of at least 10% of the total ordinary shares (or a smaller percentage set out in the charter of the company), without any requirement on the duration of holding such shares. [9]

4. Changes to management structure

• Person to hold the position of President in a single-member limited liability company owned by an individual

The corporate management structure of a single-member limited liability company owned by an individual includes the President and the Director (or General Director).

Under the current LOE 2014, it is unclear on whether the individual owner will himself act as the President of the Company, or he can appoint another person to act in this position. This has resulted in different interpretations of the licensing authority in practice.

This ambiguity has now been addressed under the LOE 2020 that the individual owner shall himself act as the President of the Company. [10]

• Requirement to set up an IC or appoint an Inspector

Currently, under the LOE 2014, a multiple-member limited liability company having more than eleven (11) members must have an IC. [11] Also, in respect of a single-member limited liability company owned by an organization, the appointment of an Inspector is required. [12]

Under the LOE 2020, the requirement to appoint an IC/Inspector is removed from the corporate management structure of both multiple-member and single-member limited liability company. Under the new law, the appointment of an IC/Inspector is only required if the limited liability company is a State-owned enterprise or the subsidiary of a State-owned enterprise. [13]

In practice, many companies set up an IC or appoint an Inspector only for compliance rather than for corporate governance purpose. Thus, from our view, this is a positive change of the LOE 2020 which gives enterprises the freedom and flexibility to organize their own corporate management structure.

[1]https://baodautu.vn/luat-doanh-nghiep-2020-se-giai-bai-toan-doanh-nghiep-kho-lon-d125689.html.

[2] Article 43, LOE 2020.

[3]  Article 43.2, LOE 2020.

[4] Article 23.1, LOI 2020.

[5]https://lntpartners.com/legal-briefing/law-on-investment-2020-clearer-but-stricter-conditions-for-foreign-investors.

[6] Article 148.6, LOE 2020.

[7] Article 114.2, LOE 2014.

[8] Article 115.2, LOE 2020.

[9] Article 115.5, LOE 2020.

[10] Article 85.2, LOE 2020.

[11] Article 55 LOE 2014.

[12] Article 78 LOE 2014.

[13] Article 54 and Article 79, LOE 2020.

This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.

By Mr. Nguyen Anh Tuan – Partner.

Law on Investment 2020 – Clearer But Stricter Conditions For Foreign Investors

Income growth investment business concept. Vector flat cartoon graphic design

On 17 June 2020, the National Assembly of Vietnam passed the Law on Investment (LOI 2020), five years since the current Law on Investment 2014 (LOI 2014) came into effect.

The LOI 2020 takes effect from 1 January 2021, but many provisions of this new law reflect the policy movements introduced one year earlier in the Politburo’s Resolution 50/NQ-TW dated 20 August 2019 on foreign investment policy towards 2030 (Resolution 50). Resolution 50 is a special effort to help make Vietnam more selective in attracting foreign investments.

Overall, the new law provides significant changes in terms of investment conditions, especially those applicable to foreign investors.

For foreign investors, here are the most notable changes introduced by the LOI 2020.

1. Market entry conditions for foreign investors clearer but potentially subject to quicker changes

The LOI 2020 supplements new provision on market entry conditions for foreign investors. [1] These are defined as the foreign ownership ratio in a company based on the company’s charter capital; investment method; scope of investment/ operation; the investor’s capacity and business partners. [2]

Furthermore, a foreign investor can enjoy investment conditions set out for Vietnamese investors, i.e. not being subject to the said market entry conditions, if the foreign investor’s proposed investment does not fall under both (i) the list of business lines not committed to market opening, and (ii) the list of conditional business lines to foreign investors. [3] The two lists are currently proposed as Appendix III and Appendix IV to the draft decree implementing the LOI 2020, which is expected to be issued in 2020.

Remarkably, under the LOI 2020 the Government is vested with the power to issue decrees on investment conditions for both foreign and Vietnamese investors, in addition to the conditions provided by the laws and resolutions of the National Assembly, ordinances and resolutions of the National Assembly Standing Committee and international treaties to which Vietnam is a member. [4] The procedure to issue a Government’s decree is normally faster than that applicable to a law or an international treaty. So, Vietnam Government would have more flexibility and discretion either in granting more attractive market entries to foreign investors or in revoking them. Foreign investors in areas enjoying market entries more preferential than those under the international treaties should be cautious about this legislative move.

2. Stricter foreign ownership threshold for local investor status

Under the LOI 2014, a foreign invested enterprise (FIE) incorporated in Vietnam must meet the statutory conditions and follow the investment procedures applicable to foreign investors – viz (i) an individual holding foreign nationality, or (ii) an organization incorporated under foreign jurisdiction – if 51% or more of the FIE’s charter capital is held by either:

(a) foreign investor(s); or

(b) an entity 51% or more of its charter capital is held by foreign investor(s); or

(c) both foreign investor(s) and entities described in item (b).

The LOI 2020 now decreases the threshold from “51%” to “50%” only.  [5]

This is a strategic move of Vietnamese law makers, which makes it more difficult for foreign investors to take management control in a joint venture company for the purpose of enjoying investment conditions applicable to local investors.

To be clear, under the LOI 2014, and in line with the Law on Enterprises 2014, a company with a controlling foreign ownership of more than 50% but less than 51% charter capital is still treated as local investor. Now, with the change in threshold, foreign investors can no longer hold a controlling majority of “more than 50%” of charter capital in the investing company (while enjoying the local investor status). The maximum charter capital ratio foreign investors may hold in the investing company is 50%, a threshold that strategically enables the local partners holding the remaining 50% to gain more decision making power in the investing company.

Given this change, more sophisticated structures would be needed so that the investors holding not more than 50% charter capital in a Vietnam-based company may take control of decision-making power in the company, while enjoying the local investor status.

3. Foreign investment facing more restrictions due to national defense and security

Following Resolution 50, the LOI 2020 has tightened the requirements for all investors to ensure national defense and security prior to their investment and maintained throughout the whole investment term, demonstrated by the following new provisions.

Foreign investors or FIE must obtain in-principal approval from the provincial People’s Committee, if their investment projects are to be implemented on the islands, the frontier, seaside and other areas which may affect the country’s security and defense. [6]

Furthermore, foreign investors investing in Vietnam by contributing capitals, acquiring shares or capital contribution of a target company must satisfy the conditions on ensuring national defense and security provided under the LOI 2020. [7] The investors must also meet the conditions set out by the land laws regarding land use right, especially land on island, frontier area or seaside area. [8]

If the target company has a land-use right certificate for a parcel of land on an island, frontier or seaside area, foreign investors must obtain an approval from the licensing authority (commonly known as an M&A approval) prior to the investment, regardless of the foreign ownership ratio in the target company post-acquisition. [9]

Ultimately, as a general policy on investment under the LOI 2020, any local or foreign investor whose investment prejudices the nation’s security and defense will be cancelled, suspended or terminated. [10] The Prime Minister may decide on the suspension, wholly or partially, of an investment project upon the Ministry of Planning and Investment’s request, if the project is deemed harmful to the national security and defense. [11]

4. Nominee arrangements facing highest risk ever

Resolution 50 calls for improvement of the domestic legal system to help tackle shadow investment e.g. those using nominee arrangements, used in areas where foreign investments are restricted. Vietnamese authorities are now vested with the right to terminate an investment project if the investors are deemed to have conducted their activities on the ground of sham transactions under the Civil Code 2015 of Vietnam. [12]

Under the Civil Code 2015, a sham transaction is construed as a transaction established by the parties to conceal another underlying one. [13] Commonly, the so-called nominee arrangement is an investing model in which a nominee conducting the investment activities for the benefits of another undisclosed person, known as the ultimate beneficial owner.

Nevertheless, there remains a fine line between sham transactions in comparison with various forms of investment arrangements, hence it is expected that distinctive characteristics will be circulated in an implementing decree in order to identify circumstances and arrangements which are subject to termination.

In addition, the authority to declare and nullify a sham transaction lies with the court and it is unclear whether the investment licensing agency can directly exercise such authority and consequently terminate the relevant investment project or it can only do so on the ground of the court’s decision on the sham transaction related to the investment project.

5. Ground for termination of investment projects clearer and adjusted

The LOI 2020 clearly differentiates two groups of circumstances for termination of an investment project: those induced by the investors and those decided by the licensing authorities.

For the latter, the LOI 2020 supplements two new circumstances for the licensing authorities to terminate the whole or a part of investment projects. This includes, firstly, projects implemented on the basis of sham transactions (as detailed in Item 4 above). Secondly, investment projects whose investors failed to deposit money or be guaranteed for the deposit can also be terminated, if the projects are subject to compulsory deposit before implementation. [14]

Additionally, the LOI 2020 provides for termination of an investment project if the land on which it is based is revoked due to the investor’s failure to utilize or delay in utilizing such land in accordance with the land laws. [15] Previously, these reasons were not clearly specified, leading to termination of projects involving any type of land revocation. The change under the LOI 2020 may accordingly protect the investors who voluntarily return the land to the authorities (as part of other investment activities), among other reasons for land revocation, from getting their projects terminated.

[1] Article 9, LOI 2020

[2] Article 9.3, LOI 2020

[3] Article 9.1 and 9.2, LOI 2020

[4] Article 7.3 and 9.2, LOI 2020

[5] Article 23, LOI 2020

[6] Article 32.1(d), LOI 2020

[7] Article 24.2(b), LOI 2020

[8] Article 24.2(c), LOI 2020

[9] Article 26.3(c), LOI 2020

[10] Article 5.3, LOI 2020

[11] Article 47.3, LOI 2020

[12] Article 48.2(e), LOI 2020

[13] Article 124.1, Civil Code 2015

[14] Article 48.2(đ), LOI 2020

[15] Article 48.2(d), LOI 2020

This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.

By Mr. Bui Ngoc Hong – Partner.

LEGAL BRIEFING – New Regulations on Invoices

Overview

The goods sale and service provision invoices are currently governed by Decree 119/2018/ND-CP prescribing e-invoices for sale and goods and provision of service (“Decree 119”) and Decree 51/2010/ND-CP regulating goods sale and service provision invoices (“Decree 51”). The implementation of such regulations reveals certain inconsistencies and unsuitabilities.

In the context of a lack of consistent regulations prescribing goods sale and service provision invoices, on October 19, 2020, the Government issued Decree 123/2020/ND-CP (“Decree 123”) detailing the management and use of invoices when selling goods and providing services, the management and use of documents when proceeding procedures of tax, fee, and charge; the tasks, powers, and responsibilities of agencies, organizations, and individuals in the management and use of invoices and documents.

Decree 123 will take effect from July 1, 2022, and replace Decree 119 and Decree 51. At the same time, Decree 123 encourages agencies, organizations, and individuals who meet information technology infrastructure requirements to apply the provisions on electronic invoices (“e-invoice”) and documents of Decree 123 before July 1, 2022.

New regulations on issuing invoices

Compared with Decree 119 and Decree 51, Decree 123 tends to provide a schedule to step-by-step implement e-invoices. This Legal Briefing focuses on the contents of Decree 123 which are significantly different from Decree 119 and Decree 51.

Firstly, Decree 123 provides regulations on prohibited acts in the field of invoices and documents, namely:

  • Committing fraudulent acts such as using illegal invoices, illegally use of invoices;
  • Obstructing tax officials from performing their duties;
  • Illegally accessing, falsifying, and destroying information systems of invoices and documents;
  • Conducting bribery or similar activities related to invoices to gain illicit profits with organizations or individuals selling goods/services and individuals with related rights and obligations.

These regulations have not been specified in any provisions of Decree 119 and Decree 51.

Secondly, Decree 123 abolishes the following provision of Decree 119: the organization to implement e-invoices and e-invoices with code of tax authority shall be completed no later than November 1, 2020. Decree 123 encourages agencies, organizations and individuals to organize the application of e-invoices as soon as such agencies, organizations and individuals are able to do so.

Thirdly, for externally printed, internally printed invoices, e-invoices which have been announced to be issued or have been purchased, Decree 123 allows agencies and organizations to continue to use such invoices until the end of June 30, 2022, instead of until October 31, 2020, as specified in Decree 119.

Moreover, other than regulating the time of invoicing for (i) selling goods, (ii) providing services, (iii) delivering multiple times or handing over each item or service, Decree 123 specifies the time for issuing invoices in some specific cases such as:

  • Providing services in large quantity, arising frequently; 
  • Telecommunication services;
  • Construction and installation services;
  • Search, exploration, extraction, and processing of crude oil.

Subject to such regulation, the determination of the time of invoicing depends on the characteristics of goods or services, which makes it easier to determine the time of invoicing in specific cases and helps to reduces violations and disputes.

Last but not least, in addition to the 3 types of invoices specified in Decree 199, including value-added invoices, sales invoices, and other types of invoices (electronic stamps, electronic cards…), Decree 123 supplements 2 types of invoices including e-invoices for selling public assets and e-invoices for selling national reserve.

The new legal framework took effect on 01 July 2022 with detailed provisions on invoices and documents, and give more leeway for the application of e-invoice for the time being. Accordingly, it is advised to be updated with such regulations so that favorable provisions can be applied.

By Nguyen Dieu Quynh – Associate & Ha Thanh An – Traniee Associate

LNT & PARTNERS – LEGAL GUIDEBOOK 2019

Vietnam Investment Guidebook has been prepared to give you an overview of the Vietnamese laws and regulations applicable to foreign investors and foreign invested enterprises.

The Guidebook covers a wide range of issues, from those that are peculiar to certain sectors such as labour and taxation, real estate, infrastructure and pharmaceuticals.

We hope you will enjoy reading the Guidebook as much as we did putting it together. It is intended to be a starting point to your business venture in Vietnam. Should you need detailed advice on any issue, please do not hesitate to get in touch with us.

Please kindly find Vietnam Investment Guidebook as file attached.

By Le Net – Founding Partner.

PPP LAW

Vietnam’s New PPP Law Set to Take Effect January 2021

On June 18, the National Assembly approved the Public-private partnership Law (PPP) with a 92.75% majority. Investment through Public-private partnership (PPP) has in the past been implemented for numerous projects such as transport infrastructure BOT projects, yet it is the first time that a bill has been proposed and submitted to the National Assembly. In comparison to Decree 63 and previous drafts of PPP Law, the approved version has been changed significantly to reflect the expectations of the private sectors. This update will focus on the governing law and dispute resolution provisions in the PPP Law.

1. Governing Law

Under previous drafts of PPP Law, PPP contracts and other relevant documents signed between Vietnamese state agencies and investors are governed by Vietnamese law.  Many foreign investors believe that application of foreign laws will ensure the solvency of the project, as foreign credit institutions tend to decline loans for PPP projects with contracts governed by Vietnamese law. They are also concerned that this provision would be detrimental to them if any disputes arise. However, the State prefers retaining the provision as the application of foreign laws to PPP contracts will put state agencies at a disadvantage because they might not be familiar with the laws of the investor’s home country.

In reponse to foreign investors’ concerns, the drafting team of PPP Law has successfully harmonised the expectations of both sides and eliminated the Governing Law clause. It means that parties are free to choose the governing law for their contract. However, investors should note that since PPP contracts are signed between private investors and a public authority, it is unlikely that the latter will agree to be made subject to a foreign law. Consequently, even if the law is silent on the matter, foreign law could hardly be the governing law of PPP contracts.

2. Resolving Disputes by Arbitration

Similarly to Decree 63, the PPP law allows the dispute between a regulatory agency and an investor/ special purpose entity, or the dispute between a special purpose entity and an economic organization participating in the project, to be resolved by negotiation, mediation, arbitration or at a Vietnamese court. However, while Decree 63 obliges the parties to resolve their disputes through negotiation and mediation prior to resorting to arbitration or litigation, the PPP Law does not impose such requirement [1].  Therefore, parties could select to resolve their disputes via arbitration or litigation without first going through negotiation or mediation.  

For contractual disputes related to PPP projects, in principle regardless of their nationality, the parties should have the freedom to choose the method to settle their disputes. However, in contrast with the principle, previous drafts of PPP Law restricted the right of domestic investors to settle disputes by foreign arbitration or international arbitration. It was suggested that the provision should be amended to allow parties to choose foreign arbitration in all contracts related to PPP projects regardless of the investor’s nationality. Regretfully, the suggestion has been ignored and there is no change in this respect. In particular, Article 97 states that: “Disputes between competent agencies, agencies that sign contracts with domestic investors or PPP project enterprises established by domestic investors; disputes between domestic investors; disputes between domestic investors or PPP project enterprises established by domestic investors with Vietnamese economic organizations shall be settled by Vietnam arbitration or at Vietnamese courts.” [2] The provision could deter domestic investors from participating in PPP projects as it limits their right in choosing the method of dispute settlement.

[1] Article 67.1 Decree 63/ 2018/ND-CP; Article 97.1 PPP Law

[2] Article 97.2 PPP Law

By Ms Minh Vu – Partner

This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.

New chapter on the Development of Pharmaceutical Market in Vietnam

Sanofi, a multinational corporation operating in Vietnam has just obtained the Certificate of Satisfaction of Conditions (CSC) for drug import activities[1]. By this license, Sanofi may do the direct import and sell to the local wholesalers. The local wholesalers will do the distribution activities. This may be considered as the first shot for the foreign invested enterprises to expand their business operations with a greater involvement in pharmaceutical market in Vietnam.

In fact, this movement fits with (i) the policy of the government and Ministry of Health (“MOH”); (ii) the treaties that Vietnam has been participating; and (iii) the provisions of applicable laws of Vietnam.

The governmental policy when granting foreign invested pharmaceutical enterprises (herein after referred to as “FIE”) to implement the right to import drugs is to help patients have access to high quality medical products and services.

On 30 June 2019, Vietnam and European Union officially signed the Free Trade Agreement (referred to as “EVFTA”).  Article 2.1.5 of the EVFTA regulates other trading rights and related rights for pharmaceuticals. Particularly, this Article regulates that “Vietnam shall adopt and maintain appropriate legal instruments allowing foreign pharmaceutical companies to establish foreign-invested enterprises for the purposes of importing pharmaceuticals which have obtained a marketing authorisation from Vietnam’s competent authorities…”. The requirements under Article 2.1.5 of EVFTA, however, were already reflected in Pharmaceutical Law 2016 and its guiding legal documents.

Though Pharmaceutical Law 2005 (effective until 1 January 2017) regulates the drug importer as a type of drug business establishments, this Law does not have any provision to grant the FIE to do the drug importation. Furthermore, Decree No.  102/2016/ND-CP on drug business requirements clearly states that one of conditions for issuance of CSC to a drug exporter, importer is that enterprise has had the CSC for wholesaling (Article 8 of Decree No. 102/2016/ND-CP). This document, however, cannot be provided by FIE since the FIE is not allowed to do the drug wholesale under Pharmaceutical Law 2005 and Vietnam’s WTO Commitments on services[2].  Thus, until 1 Jan 2017, the FIE is not allowed to do the drug importation under the laws of Vietnam.

When Pharmaceutical Law 2016 came into effect from 1 January 2017, the right of the FIE to do the drug importation is recognized. Article 44.1(d) of Pharmaceutical Law 2016 regulates that “…In the event the exporter, importer is not allowed to do the distribution in Vietnam, such exporter, importer has the right to sell the drug, medicine materials imported in accordance with regulations of Ministry of Health.” However, until the effectiveness of Decree No. 54/2017/ND-CP (effective from 1 July 2017) guiding Pharmaceutical Law 2016 (“Decree 54”), Decree No. 155/2018/ND-CP amended Decree 54 (effective from 12 November 2018) (“Decree 155”), and Circular No. 36/2018/TT-BYT on Goods Storage Practice for drug and drug materials (effective from 10 January 2019) (“Circular 36”), there are full legal basis for the FIE to apply for the issuance of CSC for drug import activity.

Particularly, Decree 54 and Decree 155 provide application forms and more detailed guidance for the FIE to apply for getting CSC. Circular 36 regulates the conditions for the warehouse using for goods storage – which are one of significant requirements to apply for CSC of drug import activity. Article 91.10 of Decree 54 clearly provide the FIE to import and sell the imported products to the local wholesalers, the FIE will not have the right to do the distribution activities (wholesale, retail) or any activity in relation to the drug distribution (for example, providing drug/medicinal ingredient transport, developing the plan for supply of drugs and medicinal ingredients of health facilities, providing financial assistance for buyers of drugs/medicinal ingredients to control the distribution of imported drugs and medicinal ingredients). Article 91.12 of Decree 54 also regulates the FIE will notify the MOH in writing before it starts to sell or stops selling drugs to a wholesaler that distributes the imported drugs or medicinal materials.

The chain of trading drug or medicinal materials with the involvement of the FIE may be visualized as below:

It can be seen that the applicable laws of Vietnam already aligned with the requirements under the treaties that Vietnam attended (i.e. EVFTA). By signing the EVFTA and the opening in the provisions of applicable laws, Vietnam is promised to welcome many multinational pharmaceutical companies (especially, corporations from European Union) to invest to Vietnam as form of drug exporter and importer.

The change of governmental policy in pharmaceutical field will affect significantly to the local pharmaceutical market, also from both sides. Looking at the positive side, the grant for FIE to do the importation will help patients to receive drug products and services with good quality and cheaper price. The local wholesalers may have more contracts with the FIE to distribute imported products to hospital, pharmacies and retailers. The local wholesalers also can lease the warehouse to the FIE for them to do the importation activities.

On the other side, the opening for the FIE to do the drug import will put the local pharmaceutical companies (which also do the import, export), the manufacturers in Vietnam (both local company and foreign invested company) in a more competitive environment. The FIE with great financial resources somehow may defeat other local companies with smaller and weaker financial resources. Moreover, Article 2.21 of EVFTA regulates the parties (including Vietnam and EU) will implement their commitments on sector-specific nontariff measures on Pharmaceutical/Medicinal Products and Medical Devices. At that time, the products imported by FIE will have more competitive price and may affect to the products imported or manufactured by local companies.

However, with a very large market with more than 96 million people, there are many chances for both FIE and local partners to perform their business activities in pharmaceutical fields, especially when the local companies has the right to do the distribution, while the FIE cannot do so.

In my opinion, this movement will provide more good effects to the pharmaceutical market rather than negative effects. It is because the involvement of FIE in importation activity will (i) provide a good quality products with a competitive price to consumers; (ii) align with the general development trend of Vietnam when we are attracting more foreign investors to invest into Vietnam; and (iii) form a competitive environment for the companies to maintain and develop their business activities.

The application of CSC for doing drug importation can be conducted through the following steps:

Step 1: Register the investment project at the licensing authority (e.g. Department of Planning and Investment) to obtain the Investment Registration Certificate (IRC) and Enterprise Registration Certificate (ERC), which record the importation right.

Step 2: Prepare dossier and warehouse for applying the CSC and Certificate of “Goods Storage Practice” (GSP).

Step 3: Conduct self-audit, training in GSP, Standard Operating Procedures (SOP) of the company.

Step 4: Submission CSC dossier to Drug Administration of Vietnam (DAV)

Step 5: DAV’s audit (site visit at the warehouse)

Step 6: DAV (i) grant GSP and CSC if the company met all requirements; or (ii) request to remedy pending issues; (iii) reject the CSC dossier in case the company has critical deficiencies

Step 7: If (ii), remedy pending issues after the audit, make the remedy report

Step 8: DAV check the remedy report and grant the GSP, request Minister of MOH to issue CSC


[1] Link: https://tuoitre.vn/sanofi-du-dieu-kien-kinh-doanh-duoc-cho-pham-vi-nhap-khau-thuoc-20190812135353479.htm

[2] Vietnam’s WTO Commitments: “Cigarettes and cigars, books, newspapers and magazines, video records on whatever medium, precious metals and stones, pharmaceutical products and drugs, explosives, processed oil and crude oil, rice, cane and beet sugar are excluded from the commitments.”

By Dr Le Net – Partner and Mr Ngo Thanh Hai – Associate

This article is featured in the August issue of the Vietnam Investment Review.

Disclaimer: This article is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.

The challenges of establishing residential housing projects on mixed-use land areas in Vietnam

Take a brief look at the figures of the residential housing market in Ho Chi Minh City in the last six months of 2019.[1] Compared to the same semester last year, there has been a massive decrease from 19 to 3 residential housing projects for which the developers have been recognized and received approval from both the Department of Construction and the People’s Committee. The number of projects proposed by the Department of Construction also dropped 82.2% from 56 projects in the first semester of 2018 to 10 projects in the same semester this year.

This article shall investigate and analyze some motives which may explain such severe restriction by the bodies. The examination of a few recent letters from the Ministry of Construction answering provincial level People’s Committees indicates the former’s concerns about the origin of the land use rights of the developer over the estate other than “residential purpose”, despite being located in residential areas according to the town planning.

The Law on Housing and Decree 99/2015/ND-CP (Decree 99) were drafted based on the historical background of the regulations on land and town planning over the past decades. However, the more numerous short-term planning changes, the more serious obstructions can be caused. They have induced a mix of different land types in many areas which are also different from the current urban planning in Ho Chi Minh City and its suburbs. It is extremely difficult to demonstrate exactly mixed-use land areas and no mechanism exists to convert them systematically without raising the market price. In practice, we have witnessed many cases where agricultural and commercial land areas have not been converted into residential ones corresponding to its town planning and how the landlord is disadvantageous in respect of the administrative procedure of conversion and the payment for the land using charges and taxes.

The permission for establishing a residential housing development project is granted by tender, auction or recognition of a certain developer, who is also the landlord under Article 22.2(c) of the Law on Housing and Article 18.2 of Decree 99. In the latter case, he must generally fulfil all requirements for a residential housing developer and a legitimate landlord in accordance with Articles 21 and 23.1, 23.4 of the Law on Housing respectively. Accordingly, he must either intrinsically or by way of transfer hold the land use right over the parcel on which a residential housing project may be allowed to be established.  

The landlord legitimately holding the land use rights over the mixed-use land parcel, even though he fulfils all abovementioned requirements for the developer and landlord of a residential housing development project, is still not allowed to retain their rights under Article 22.2(c) of the Law on Housing and Article 18.2 of Decree 99 in order to be recognized as a sole developer. These detailed provisions are likely to be interpreted  in an extremely rigid manner. The land parcel, at the time the landlord registers the land use right originally or receives the entitlement transfer, must have already been legally recognized as residential land. Since there is no administrative procedure of converting land type prior to the recognition of the developer, HoREA has proposed, according to the response from the Ministry of Construction,[2] that the recognition of the developer should a priori be granted if:

  • such land is planned to be a part of the residential areas,
  • the land is permitted to be converted into a residential area, or
  • the residential purpose has been mentioned in the decision on seizure, clearance of land;

and, the landlord satisfies the developer’s requirements in accordance with Article 21 of the Law on Housing without any further conditions.         

In fact, as of the date of this article, the People’s Committee of Ho Chi Minh City has not publicly responded to this proposal from HoREA. As a result, this grey area of the Law on Housing may increase financial risks to the developers since they must wait for the consideration and solution to be given by the People’s Committee of Ho Chi Minh City. The fact still remains that the distinct character of regulations on real estate has formed the basis for the course of history as mentioned above, so this may not be a simple task for the People’s Committee. First, she must determine the mixed-use land areas in the city and its suburbs which have been planned to be residential areas. Second, a simple procedure of land type conversion should be established in order to facilitate the recognition of residential housing project developer.

In respect of the same provisions of the Law on Housing and Decree 99, in case of a residential housing development project where the residential area intersperses with other types of land, over which one or more than one landlord is holding the land use right, the landlord of the residential area might not be recognized as the sole developer of the project due to these following hindrances. First, Article 22.2(c) of the Law on Housing and Article 18.2 of Decree 99 are interpreted in the ideal context where the full area of the project is for residential purposes despite the fact that there exists a lot of surrounding and mixed use land areas which are for agricultural, commercial or manufactural purposes.[3] Even if there is only one landlord holding the entitlement to all the land areas, the Ministry of Construction has not provided  any solution to integrate the pieces with different land types into a major residential one. Second, no administrative procedure has been established in order to allow the developer to register the conversion of such specific agricultural, commercial areas into residential ones like the rest of project area even if it is legitimately corresponding to the town planning. Third, if the entitlement to the other interspersing areas are held by different landlords who have not accepted the reimbursements of clearance and entitlement transfer, the major residential landlord can neither request for recognition as a sole developer nor for a bid in order to acquire the rest of the project areas. Furthermore, in the case of foreign developers, they cannot acquire the land use right directly from the individuals holding the land use right over such interspersing areas.

These are two typical situations in which residential housing developers may find themselves due to the differences between the urban planning and the current status of the land parcel as registered with agencies and bodies. For certain residential housing projects, it is required to carefully study the history of the land use right, land type and the area location in the current town planning. There is no formula for auditing land parcels in any residential housing development project. However, they are the basis for any commercial decisions of the investor in order to avoid the increased and long-term risks of legal costs, reimbursement for clearance and seizure and significant delays of the whole project. We are looking forward to hearing the good news from the People’s Committee in the near future. Her decision shall be the precedent for the other major cities in Vietnam and give us the final solution for the rigidity of Articles 23.1 and 23.4 of Law on Housing. Hopefully, these issues shall be resolved as soon as possible in order to maintain a strong and steady residential housing market in Ho Chi Minh City in the final semester of this year.


[1] Ho Chi Minh City Real Estate Association (HoREA), see https://thanhnien.vn/tai-chinh-kinh-doanh/hon-84-du-an-bat-dong-san-bi-tac-1098924.html

[2] Official Letter of HoREA No. 63/CV-HoREA dated 20 June 2019

[3] Official Letters of Ministry of Construction No. 229/BXD-QLN dated 08 October 2018 and No. 34/BXD-QLN dated 31 January 2019.

By Mr Tran Thai Binh – Managing Partner and Ms Mac Trang Anh

The article is also available on In-house Community.

Disclaimer: This article is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.

Pros of sandbox regulation for fintech

With the development of the Fourth Industrial Revolution, the application of digital technologies for providing financial services has become the key driver in promoting financial inclusion. However, the industry’s growth will not only depend on investments, new technologies, or smartphone penetration, but will also require a robust legal framework. Le Net and Hoang Nhu Quynh from law firm LNT & Partners, listed as innovative lawyers by the Financial Times in 2015, 2016, and 2019, analysed how Vietnam can accelerate the development of companies within the fintech regulatory sandbox.

Financial inclusion with the participation of fintech companies has been one of the key priorities for many developing countries. Fintech is believed to help customers, especially individuals and small- and medium-sized enterprises (SMEs), access banking and financial services at lower costs and with more accessible procedures compared to traditional banking services. Vietnam is one of the developing countries firmly committed to this development, with reliable infrastructure for digital finances (for instance Internet and smartphone) and a young and interested population.

While Vietnam has a high rate of smartphone users, less than half of the country’s population does not have a bank account, according to the State Bank of Vietnam (SBV), which leads to the rapid growth of Vietnamese fintech companies. Last year, the government took note of the rise of fintech and established a steering committee to improve the ecosystem for the sector. All these factors have given rise to a vibrant tech entrepreneurship scene for fintech solutions.

Vietnam currently has 77 fintech companies. Among the three different product segments – digital payment, personal/retail finance, and corporate finance – digital payment solutions lead the service market share at 89 per cent. As of last month, the SBV licensed 30 intermediary payment service providers, of which the majority offer e-wallets. The most popular names that provide e-wallet services in Vietnam are Momo, VnPay, BaoKim, NganLuong, and Zalo Pay. These activities were licensed under the mechanism of non-cash payments regulated in Decree No.101/2012/ND-CP issued by the government in 2012 on non-cash payments.

Another notable activity in Vietnam’s fintech landscape is peer-to-peer lending (P2P) which belongs to the personal/retail finance segment. There are 40 P2P companies providing a platform for money lending between users in the country, such as Mofin, HuyDong, and BaGang. The lending is believed to help customers, especially household businesses and SMEs access banking and finance services at low costs. The development of P2P lending will also create a new capital supply channel instead of the credit system of traditional banks.

In corporate finance, the introduction of new technologies such as blockchain, with its main applications in cryptocurrencies, draw much attention in Vietnam, especially in the context of the globally skyrocketing rise of bitcoin and ethereum. In 2017, the Vietnamese dong was used by 15 per cent of surveyed cryptocurrency payment companies worldwide. Blockchain has opened new doors for data collection and analyses, and risk management as well as treasury management in the country. However, there is only a limited number of startups working in this field, such as cash2vn, Bitcoin Vietnam, fiahub, and Verichains.

The activities of P2P lending and blockchain are currently not governed by any regulations in the Vietnamese legal system. In practice, fintech companies operating P2P lending or blockchain platforms are only obliged to obtain an enterprise registration certificate. On the one hand, when the companies wish to implement new projects, they may diligently submit official letters to competent authorities explaining its product and service plan to obtain approval.

However, due to the lack of a legal framework, the competent authorities are confused with assessing dossiers submitted and allowing new activities in the fintech market. Consequently, the dossiers are usually pending or rejected, which leads to projects not being deployed. On the other hand, the lack of regulations facilitates many companies liberally operating without satisfying any legal requirements. These operations outwith the control from authorities carry too many risks related to high-tech crimes and fraud or financial crimes, such as theft of personal information, tax evasion, money laundering, or unlawful capital mobilisation.

Sandbox application and approval process Source: Author’s synthesis

To serve the urgent demand for a legal framework for fintech, Vietnam can refer to the experience of developed countries in the formulation and development of such frameworks. One enacted pilot mechanism for operations of fintech firms is called the Fintech Regulatory Sandbox (sandbox).

The sandbox concept, which was developed in a time of rapid technological innovation in financial markets, is an attempt to address the frictions between different regulators’ desires to encourage and enable innovation. The first sandbox was launched in the UK in 2015, and many countries have followed suit. In Southeast Asia, four countries have formulated and implemented the sandbox, namely Singapore, Thailand, Malaysia, and Indonesia. A sandbox is a framework set up by a financial sector regulator, typically summarised in writing and published, to allow small scale, live testing of innovations by private firms in a controlled environment (operating under a special exemption, allowance, or other limited, time-bound exception) under the state authorities’ supervision. A sandbox typically works as depicted in the image above.

The process can be explained in four stages. During the initial application stage, the fintech company (sandbox entity) shall submit a sandbox package, including four types of dossiers, as stated in the image. Upon the receipt of the package, the authorised state agencies (ASA) shall review the dossiers and inform the sandbox entity about the potential suitability of its package. This information would help the sandbox entity adjust its business and resource planning.

In the following evaluation stage, the sandbox entity would have discussions with the ASA to set out specific milestones for their project, for example, the time for testing and operation or the time for the completion of the experimentation stage. Meanwhile, the ASA would set out a legal framework that requires the sandbox entity to comply with, then approve the entity to proceed. Depending on the service’s completeness and complexity, the package may be rejected by the ASA. However, the sandbox entity is allowed to re-apply. The rejection shall be written and must contain reasons to assist the entity in re-submitting their package.

Upon approval by the ASA, at experimentation stage, the entity shall operate its service only if it has notified its customers that the service is being tested in a sandbox, then disclose all key risks that customers may encounter while using its service. Simultaneously, the ASA would establish an expert committee, including financial, legal, and technical experts to monitor the operation of the service. After the experimentation stage has ended, the ASA shall make decisions regarding the project, meaning decides to either to extend the experimentation time, discontinue the project, or officially deploy the project.

Once the decision on deploying the project has been made, it lays out the framework for other fintech companies operating similar services. Specifically, those companies would still have to apply for a sandbox process. However, they may be exempted from going through evaluation and experimentation stage if they operate similar services to the sandbox entity that have been approved by the ASA.

Each decision shall be based on careful considerations of the ASA after reviewing the pros and cons of the service and feedback from customers.

Using a regulatory sandbox may affect digital financial inclusion in several ways including new, affordable products, or services that address the needs of the excluded customer segments; distribution channels that reach out to dispersed populations in remote and rural areas; operational efficiencies that allow financial service providers to serve low-margin clients profitably; ways to address compliance and risk management barriers to financial inclusion; and increasing competition that may prompt traditional service providers to focus more attention on unserved segments and improve the procedures to keep their revenues steady.

Although the SBV is preparing and will soon issue pilot regulations on the ­establishment and business ­operations of fintech companies, the Vietnamese law ­system is still lacking regulations which allow the operation of such pilot entities in ­Vietnam. Therefore, it is ­recommended that the government creates a legal framework for the sandbox as pilot regulations which are effectively ­implemented in countries around the globe.

By Dr Net Le – Partner and Ms. Hoang Nhu Quynh – Associate

This article is featured in the July issue of the Vietnam Investment Review.

Disclaimer: This article is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.