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.  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. 
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.  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.  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. 
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. 
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.  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. 
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. 
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.  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. 
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. 
Under the Civil Code 2015, a sham transaction is construed as a transaction established by the parties to conceal another underlying one.  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. 
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.  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.
 Article 9, LOI 2020
 Article 9.3, LOI 2020
 Article 9.1 and 9.2, LOI 2020
 Article 7.3 and 9.2, LOI 2020
 Article 23, LOI 2020
 Article 32.1(d), LOI 2020
 Article 24.2(b), LOI 2020
 Article 24.2(c), LOI 2020
 Article 26.3(c), LOI 2020
 Article 5.3, LOI 2020
 Article 47.3, LOI 2020
 Article 48.2(e), LOI 2020
 Article 124.1, Civil Code 2015
 Article 48.2(đ), LOI 2020
 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