Foreign Investment under Decree 118 detailing the Law on Investment

Law on investment 2014 has taken effect since 01 July 2015 with significant changes in the investment policies and procedures. Being struggle with a completely new platform, both investors and executive agencies were craving for a detailing decree, which has just been issued on 12 November 2015, after 4 months as of the effective date of the LOI. Decree 118/2015/ND-CP detailing and guiding a number of provisions of the Law on Investment (Decree 118), which is expected to facilitate the investment environment for foreign investors in Vietnam shall enter into effect on 27 December 2015.

The most striking feature of the Decree 118 is the simplification of investment procedure regarding the purchase of shares, capital, and contribution of capital. In particular, foreign investors are not required to obtain Investment Registration Certificate if the investment is conducted via purchase of share, capital, and contribution of capital. In this case, Decree 118 only obligates the economic organization whom foreign investor invested into to adjust the list of members, shareholders at the competent authority, except for the two following circumstances where the purchase of shares, capital, contribution of capital need to be registered by the investors: (i) the target company is operating in a conditional business line for foreign investors; and (ii) the investment result in a consequence that the foreign investor holds at least 51% of the economic organization’s charter capital.

In addition, regarding the obtainment procedure of Investment Registration Certificate and Enterprise Registration Certificate, Decree 118 provides a co-ordination mechanism for the investment registration authority and business registration authority. Under Article 24 Decree 118, foreign investors shall be able to submit both investment registration and business registration dossier to one agency – investment registration authority, who shall afterwards transfer the business registration dossier to the competent authority.  Moreover, the registration authorities are allowed to notify to the investors regarding the shortcomings of the whole dossier once only. The provision potentially prevents the practice that the investors have to amend the dossier over and over.

On the other hand, Decree 118 requires the Ministry of Planning and Investment to co-operate with other Ministries and agencies to publicize the conditional business lines applicable to foreign investors, along with its legal basis and details of the conditions on the national portal. A consolidated list of conditional business lines is estimated to bring convenience and efficiency to the foreign investors in making their investment decision.

To sum up, after 4 months waiting, issuance of the Decree 118 is tagged along with a considerable expectation in clarification of policies and procedures in foreign investment. Although it has not been effective, one cannot deny is that it would help to tidy up the mess left by the gap between the LOI 2005 and the LOI 2014.

By Vietnam Law Insight

Disclaimer: 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 more information, please contact us at info@LNTpartners.com or our website http://www.LNTpartners.com.

New Rules on Remittances of Profits Overseas

Regulations restricting remittances of profit overseas are of considerable concern to foreign investors. Which makes it surprising that no new regulations have been issued to govern this topic since the approval of the Law on Investment back in 2005 – leading to a situation of “new law, old guidance”.

Until now, the Ministry of Finance issued Circular No 186/2010/TT-BTC on November 18 providing guidelines on remittance of profit overseas by foreign organisations and individuals deriving profit from direct investment in Viet Nam. It finally replaces Circular No. 124/2004/TT-BTC issued under the old Law on Foreign Investment back in 2004.

The new circular governs remittances of profits from different forms of direct investment, namely investment in an enterprise, under a contract, to develop a business, or make a capital contribution to an enterprise.

Profits are defined in the circular as lawful profits derived from direct investments under the Law on Investment after fulfilling tax and other financial obligations to the State of Viet Nam in accordance with regulations (Article 2.1). Profits can be annual profits or profits realized upon termination of direct investments in Viet Nam.

Annual profits are defined as profits distributed to or received for the fiscal year based on audited financial statements and income tax declarations, plus or minus other profits and expenses. This distribution is conducted at the end of fiscal year after the enterprise has fully discharged its financial obligations to the State, lodged audited financial statements, and made a corporate income tax declaration for the fiscal year to the tax office with jurisdiction over the enterprise (Articles 3.1 and 4.1).

The total amount of profit received by the foreign investor during the process of its direct investment in Viet Nam, less profits used for re-investment, profits already remitted overseas and profits used to pay other disbursements in Viet Nam, is used to determine the amount of profits to be remitted overseas at the termination of investments in Viet Nam (Article 3.2). The investor must also have fully discharged its obligations under the Law on Tax Management.

In cases in which, based on financial statements of an enterprise in which the foreign investor has invested, accumulated losses remain after carrying forward losses in accordance with the Law on Corporate Income Tax, the foreign investor shall not be allowed to remit profits overseas. This is new point of the circular aimed at restricting some foreign investors from preparing a fraudulent report on losses when remitting profits to a parent company.

Lastly, the new circular provides the standard form which the foreign investor must submit to the tax office at least seven days prior to the intended date of remittance of profits overseas.

The new regulation takes place 45 days after its promulgation and is expected to establish a solid legal framework for the regulation of remittance of profits abroad by foreign investors.

By Vietnam Law Insight, LNT & Partners.

Disclaimer: 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 more information, please contact us or visit the website: Http://LNTpartners.com

What is the Solution for M&A Procedures of Foreign Investors in Domestic Companies?

The Government has recently finalised its long-anticipated considerations to amending Decree No.108/2006/ND-CP which was promulgated almost six years ago in September 2006 in a bid to further clarify provisions under the Law on Investment. Most of these amendments have already been submitted to the Government by the Ministry of Planning and Investment (“MPI”), with only three unconfirmed matters remaining, awaiting the scrutiny of the Government.

However, this is no call for celebration yet. Stormy waters still lie ahead for foreign investors and domestic companies as one of these three matters may pave the way to tighter controls and stricter management over foreign capital and share transfers in domestic companies.

The relevant governing laws

The procedures for these transfers (or “acquisitions”) had been touched upon by numerous legal instruments including the Law on Enterprises, Law on Investment, Decree No. 108/2006/ND-CP and Decision No. 88/2009/QD-TTg.

However, in the past, no detailed, uniform procedures for such acquisitions have been comprehensively covered by any legal instrument. At some point in time, there existed numerous guidelines from various licensing authorities within Vietnam, thereby creating difficulties for any investors wishing to engage in these acquisitions.

The most recent Government regulation overseeing the acquisitions, Decree No. 102/2010/ND-CP (“Decree 102”), was issued with a view to regulate and offer a uniform approach to the procedures. On the face of the law, it seems to be a victory for foreign investors and domestic companies alike as an interpretation of this decree reveals an absence of any requirement on part of the domestic company to obtain an investment certificate following the acquisitions. In fact, we were recently presented with an opportunity to view official dispatches of the MPI (the “Report”), which confirmed this absence.

The reality in the application of Decree 102

However, numerous commentators have observed a potential conflict in the wording of Decree 102 and the Law on Investment. As a result of this lack of textual clarity in Decree 102, licensing authorities are, again, divided on the correct procedural requirements of carrying out the transfer. Foreign investors and domestic companies are, again, left in the dark as to what is precisely required in executing the procedures for these acquisitions.

This conflict has yet to be resolved, with different licensing authorities still continuing to act upon different interpretations of the law. For example:

  • The licensing authorities in Ho Chi Minh City require domestic companies to obtain an investment certificate after the acquisition such that the company will operate under two licenses – the enterprise registration certificate and the investment certificate.
  • The licensing authorities in Hanoi require all members or shareholders of the domestic company (including foreign investors) to engage in procedures to obtain an investment certificate. In doing so, the members or shareholders of the company will be granted an investment certificate while having their enterprise registration certificate revoked.
  • The licensing authorities in Ba Ria–Vung Tau Province and Binh Duong Province abolish the need for an investment certificate for domestic companies altogether if the transferred capital or shares do not exceed 49% of the domestic company’s charter capital.

The basis for this requirement

In its Report, the MPI highlighted the need for an investment certificate, citing that such requirements lay consistent with international customs on selected industries such as banking, insurance and real estate. Furthermore, it will ensure that there exist a codified set of procedures which would ultimately save the day on the face issues arising through a lack of specified guidelines.

However, it is debatable that perhaps the MPI should have given further foresight in providing its reasons. Particularly, the face of the Report seemed to overlook numerous key considerations:

  • First, the laws in countries of developed economies such as Singapore, Australia, USA and UK do not generally provide for any requirement to obtain an investment certificate of the kind potentially required in Vietnam. Particularly, Singapore provides no specific provisions for foreign investors in establishing a new company or purchasing shares of a private Singaporean company.
  • Second, the conformity to international customs that the MPI highlights apply to selected industries which are traditionally regulated to a high degree. Therefore, it is not necessarily appropriate to apply them universally to all industries.
  • Third, it seems that the requirement does not draw advantages for the transferring parties, not the State of Vietnam. In fact, both the parties and the licensing authorities fall victim to an increased burden and administrative workload as a result of its requirement.
  • Fourth, Decree 102 does not provide for this requirement so its removal will abolish any potential legal conflicts now and in the future.

What is the solution?

Without a doubt, investors aim to seek the simplest, shortest and cheapest way possible in order to carry out and maximise their investment. As such, one can only expect disappointment from foreign investors and domestic companies alike if the amendments of Decree 108/2006/ND-CP continue to implement this investment certificate requirement.

Therefore, now is a crucial time for the Government to reconsider its position, particularly given Vietnam’s national policy in promoting foreign investment into the country. Otherwise, consistency in the laws will need to be maintained in order to create a clear and systematic process for the transferring parties and licensing authorities.

At the moment, however, potential foreign investors can only wait in anticipation that the Government opts to takes one step forward in the right direction without the two steps back.

(Please note that the scope of this article covers only transfers between foreign investors and domestic companies established and operating in ordinary domains and sectors)

By Vietnam Law Insight, LNT & Partners.

Disclaimer: 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 more information, please contact us or visit the website: Http://LNTpartners.com

 

Foreign Distributors Face Hurdles

On January 1, 2009, the restrictions on foreign investment in retail distribution were lifted pursuant to Viet Nam’s commitments to the World Trade Organization. In reality, however, there remain a number of obstacles to foreigners seeking to invest in this sector.

The Law on Investment and Decree No 139/2007/ND-CP provide that a joint venture with 49 per cent or less foreign capital is treated as a domestic enterprise and is established in accordance with investment procedures applicable to such enterprises.

But, on March 18, 2009, the Ministry of Planning issued Official Letter No 1752/BKH-PC which stated that a joint venture with 49 per cent or less foreign capital must obtain an investment certificate, i.e., it is subject to foreign investment procedures.

In theory, the provisions of the Law on Investment should prevail, since Official Letter No 1752 is a document of inferior legal effect. In practice, however, licensing authorities will rely on Official Letter No 1752 when deciding whether to issue investment licenses to joint ventures. Therefore, a distribution company with even 1 per cent foreign capital must be established in accordance with foreign investment procedures, including a requirement that the opinion of the Ministry of Industry and Trade be obtained. The upshot is that it would take up to twice as long to establish a foreign-invested distribution company as it would to establish a similar domestic company.

With respect to the distribution products, a foreign-invested distributor must also have a harmonised system code (HS Code) as listed in the nation’s import tax laws. This requirement can be problematic as HS Codes are limited in scope and do not cover all products which a foreign investor might intend to import and distribute. A foreign investor seeking to distribute a product which does not fall within one of the HS Codes must seek an opinion in writing from the customs department, another costly and time-consuming process.

Financial capacity and experience of the foreign investor are also carefully considered by the licensing authority. One local licensing authority has informally confirmed that it will only approve investment certificates for distributors with charter capital of at least US$200,000.

The ability of the foreign investor to demonstrate experience in distribution services can also be problematic, creating significant obstacles to foreigners seeking to invest in distribution in Viet Nam.

Under Vietnamese law, distribution enterprises are established with the intent to conduct retail activities. Circular No 09/2007/TT-BTM provides that the application for a single retail outlet can be considered and approved by the licensing authority alongside the establishment dossier. However if the investor would like to establish additional retail sales outlets, a separate dossier must be submitted to the licensing authorities.

Under WTO commitments, the establishment of additional retail outlets shall be allowed on the basis of an economic needs test. However, there are currently no detailed regulations as to how the test is defined, what the necessary requirements are to establish economic need, and who the competent authority is. In practice, it’s difficult for investors to meet the ENT condition unless they can locate the additional retail outlet in a business centre. This is because such centres will have already been deemed to have met the ENT requirement when their original establishment license was granted. Otherwise foreign investors have to use franchising or establish many branches to circumvent this obstacle.

A final obstacle is that foreign-invested enterprises are licensed for a duration of only five years. This is a very short term for the investor to recover its investment and discourages long-term investment in Viet Nam.

By Vietnam Law Insight, LNT & Partners.

Disclaimer: 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 more information, please contact us or visit the website: Http://LNTpartners.com