Political strategies

Vietnam Investment Strategies for Foreign Companies

Vietnam has long been an attractive investment destination for foreign investors, thanks to its strategic location, socio-political stability, and inexpensive yet skilled labor force. Despite the difficulties posed by the pandemic, Vietnam has proven that it can effectively manage the crisis and get its economy back on track after the pandemic.

Dang Anh
Senior partner
VILAF in Hanoi
Such. : +84 24 3934 8530, 912 518 818
Email: anh@vilaf.com.vn

As reported by the Foreign Investment Department of the Ministry of Planning and Investment, Vietnam has seen a decrease in the number of newly registered projects and M&A deals by foreign investors in 2021 due to months-long lockdown that prevented experts from entering the country to carry out investigations and prepare new projects. Yet, compared to 2020, the total amount of newly registered and adjusted capital and the total value of stock purchases increased by 9.2%. This shows a positive sign for foreign investment activities in Vietnam in the coming times, as the pandemic is expected to slow down in the second half of 2022.

Sector-wise, manufacturing and processing attracted the most foreign direct investment (FDI) capital with over $18.1 billion, or 58.2% of total FDI capital in 2021, followed by power generation and distribution, real estate, and wholesale and retail trade. retail. In terms of M&A activity, foreign investors are most active in manufacturing and processing, wholesale and retail trade, and science and technology. At the national level, Singapore ranked first in terms of the number of newly registered and adjusted projects and the amount of registered capital, ahead of South Korea and Japan, respectively.

POLICY CHANGES

Vietnam has been determined to create a better investment environment for foreign investors in recent years. Recently, the National Assembly passed the New Law No. 03/2022/QH15 (the New Law No. 3) of January 11, 2022, which will enter into force on March 1, 2022. The new law amends a number of related legislations to foreign investments. , including Investment Law 2020, Enterprise Law 2020, Securities Law 2019, Electricity Law 2004, Labor Code 2019 and Environmental Protection Law 2020 , among others. Several pieces of legislation have been proposed for change, the most notable of which is the 2013 land law.

With the introduction of the 2020 Investment Law replacing the 2014 law, Vietnam has adopted the “negative list” approach to market entry requirements applied to foreign investors. Accordingly, all business lines not on the list subject to market entry conditions under Decree 31/2021, including those that Vietnam has not engaged under international treaties, are open to foreign investors under the same conditions as national investors.

Compared to the previous “positive list” approach under which state agencies had discretion to decide market entry conditions applied to business sectors that Vietnam did not engage under international treaties, the new approach ensures transparency and saves a lot of time in administrative licensing procedures.

Under the Investment Act 2020, the Prime Minister was empowered to grant approval in principle to real estate projects of at least 50 hectares or less of land but with a population of at least 15,000 people in the urban area , and real estate projects using at least 100 hectares or less of land with a population of at least 10,000 people in the rural area. Provincial people’s committees were authorized to grant approvals in principle for the remaining building projects.

With the new Law No. 3, the Prime Minister’s authority is reduced to real estate projects using at least 300 hectares of land or having a population of at least 50,000 people. The authority of the Provincial People’s Committee is extended to real estate projects using less than 300 hectares of land and having a population of up to 50,000 people. This will shorten the time to obtain approvals in principle for certain real estate projects.

Given the surge in renewable energy projects and the long-standing demand to privatize the development and operation of the national electricity transmission system, the new law removed the state monopoly by allowing private enterprises, including enterprises with foreign capital, to invest and operate electricity transmission networks. This will open up new opportunities for foreign investors in the power generation and transmission sectors, helping investors ensure grid connectivity of their energy projects.

Vietnam has pledged to support business recovery. In 2021, companies with a turnover of less than 200 billion VND (8.7 million USD) and whose turnover was down compared to 2019 were entitled to a 30% reduction in tax on companies. In 2022, certain groups of goods and services are entitled to a reduction in the rate of value added tax, from 10% to 8%. In addition, companies that participated in the unemployment insurance fund before October 1, 2021 are entitled to a reduction in the contribution to this fund from 1% to 0% until September 30, 2022.

PRACTICAL ADVICE

Foreign investors investing in Vietnam through M&A activities has remained a consistent trend over the past decade. However, buying shares or capital contributions from existing shareholders or members of a local company is legally risky if the foreign investor is not well aware of the “health legal” of the target before the merger and acquisition transaction, for example, if the target is duly incorporated, has sufficient licenses or is legally authorized to implement the project concerned.

Many local targets are not organized and operated in full compliance with applicable laws, partly due to lack of awareness and also the complication of applicable regulations. Therefore, carrying out due diligence before the transaction is practically a must for any foreign investor. Alternatively, the target should be required to establish and then transfer the relevant project to a greenfield special purpose entity to be acquired by the foreign investor. However, the transfer of the project would be subject to several legal conditions in order to be carried out.

In share acquisitions and newly established joint ventures, an investor holding 75% or more of the capital contribution in a limited liability company or holding 65% or more of the shares of a joint stock company may, under the Vietnamese laws, decide all issues. An investor holding less than said percentage can still take control of material matters by including a list of “reserved matters” with higher approval thresholds under the company’s charter. However, SOE charters must follow the model prescribed by regulators, and the regime of “reserved questions” and “veto” power would be unlikely to be permitted, in which case this approach grants the minority investor a implicit right of “veto”.

Investors should be more mindful of the applicable foreign ownership limit if the target is a public company. Under Vietnamese securities laws, foreign ownership ratio in business sectors subject to market entry requirements under Decree 31/2020, but no specific foreign ownership limit is set under Vietnamese laws and international treaties, would be capped at 50% in the relevant public company. Additionally, investors should be mindful of regulations relating to stock trading and public disclosure.

Filing merger applications has become more common in M&A activity, given the new and clearer filing thresholds under Decree 35/2020. With the adoption of the new effects-based approach under the Competition Act 2018, completion of filings may take longer than under the previous regime. Investors should complete the filing as soon as possible after the transaction structure is finalized to avoid any delays in the transaction, noting that filings only require draft agreements and/or memorandums of understanding ( accompanied by a market share report and other supporting documents).

Large projects usually require massive land for the construction and implementation of the project. However, land acquisition is a complex matter under Vietnamese laws. To obtain land, an investor can usually either receive the transfer of land from existing land users or request the state to reclaim it from existing users for allocation to the investor. In each of these options, investors should expect it to take months to successfully secure the desired land. Notable challenges that need to be handled with care include, among otherszoning and land use planning, land clearing and clearing, land use conversion and obtaining a certificate of land use rights.

Investors should be aware that for projects in certain sectors (eg real estate and construction), local authorities are required to open tenders to select investors. Even for a project originally proposed by a specific investor, the investor still has to join the bid, which is not well regulated by laws, leading to confusion for local authorities and investors in many cases. A number of major projects have been significantly delayed due to complications in the bidding process. Many local authorities impose tight deadlines on potential investors to submit bids. Therefore, at the beginning of project formulation, an investor should first check whether his project is subject to an investor selection tender, and if so, the investor should familiarize himself carefully with the bidding procedure and applicable documents.

Vietnamese International Law Firm (VILAF)

6/F, HCO Building

44B Ly Thuong Kiet Street, Hoan Kiem District
Ha Noi, Vietnam

Tel: +84 24 3934 8530

www.vilaf.com.vn

Law.asia Subscription Announcement Red 2022