Vietnam: Changes Of The Foreign Investment Law In Vietnam

Despite the impact of the regional economic crisis and declining foreign investment, Vietnam has attached positive achievements during the year 2000. The country has posted a GDP growth rate of 7.6% against the target of 5.5-6% for the last year. It also recorded a rise of 15.5% in industrial production from the goal of between 10.5-11%. In the foreign direct investment (FDI) field, as released by the Ministry of Planning and Investment (MPI), there have been 344 new foreign invested projects licensed in 2000 with total registered capital of US$1.973 billion, an increase of 26% against the figure of 1999. In addition, US$475 million is the increased capital of 153 current projects. It is noted that, FDI in the industrial sector accounts for 91% of the registered capital with US$1.795 billion.

The positive achievements are attributed to a series of policies and measures conducted by the Government to push up the economy and improve the investment environment. Among others, the most noted one to foreign investors is the amendments to the Law on Foreign Investment (LFI) issued under the Law on the Amendments of and Additions to a number of articles of the 1996 LFI adopted by the National Assembly on 16 May 2000, which comes into force as of 1 July 2000. With 23 articles, the amended LFI contain supplements of or additions to the existing provisions. They also codify some provisions existing under the Government regulations such as the Decree No. 12/ND-CP guiding the 1996 LFI and Decree No. 10/1998/ND-CP of the Government or Decision 53/1999/QD-TTg of the Prime Minister providing measures for guarantee and encouragement of FDI in Vietnam. To guide the amended LFI, the Government issued Decree No. 24/2000/ND-CP on 31 July 2000 and then the MPI issued Circular No. 12/2000/TT-BKH dated 15 September 2000.

This article examines the major changes under the amended LFI and their impact on foreign invested projects in Vietnam. In general, though the amendments approved are fewer than those proposed by the Government, they help improve the investment environment in Vietnam and clarify those issues unclear under the previous regulations.

Under the new Article 21a, if a change in laws adversely affects the interests of foreign invested enterprises ("FIEs") and parties to business co-operation contracts ("BCC"), they will be entitled to continue to apply the incentives or favorable conditions stipulated in their investment licences and the LFI or may be entitled to: (i) change the objectives of the project, (ii) exemption and reduction of taxes according to laws, (iii) deduction of damages from taxable income, and (iv) proper compensation in cases of necessity.

On the other hand, more favourable new regulations issued after the investment licences are granted shall be applied to foreign invested projects. In addition, the amended LFI also provides that all foreign investors (and not only BOT projects) may seek to obtain specific guarantees and/or commitments from the Government of Vietnam in relation to their projects.

Article 19a provides that FIEs or parties to business cooperation contracts ("BCC") may change their investment forms or divide, separate, consolidate and merge with other enterprises. That means a 100% foreign invested enterprise can convert into a joint venture and vice-versa. This is to respond to the business restructuring requirement which may occur during operation. In practice, during the past few years, there has been a trend that more and more joint ventures have turned into 100% foreign owned enterprises. Unfortunately, the amendment does not allow for the establishment of foreign invested shareholding companies, as previously proposed by during the drafting process.

The amended Article 14.1 reduces the number of issues that require unanimous decision of the board of management of a joint venture. Unanimous decisions of the board of management of a joint venture shall only be required for (i) appointment/removal of the general director and first deputy general director; and (ii) amendments of the joint venture charter. It is open to the parties to set out in the charter other issues which need to be decided by unanimous consent.

Under the amendment to Article 41, during their operations, FIEs are no longer required to maintain mandatory reserve funds of up to 10% of their legal capital as formerly stipulated, and shall now be free to decide on the part of their profits they intend to keep under reserves. This amendment allows for greater flexibility for establishing reserve funds of FIEs.

Previous regulations require that most FIEs and parties to BCC must balance their own foreign currency needs. Now the amended Article 33 removes this requirement by providing that FIEs and parties to BCC are entitled to purchase foreign currencies from commercial banks to meet the requirements for their current transactions and other permitted transactions in accordance with foreign exchange control rules. This Article also provides that the Government of Vietnam will provide guarantees of access to foreign currencies for investment projects of special importance under Governmental programs and provide assistance in balancing their foreign currency requirements to infrastructure development projects and other important projects. These amendments are significant for FIEs since the unavailability of foreign currency is the most critical issue to them.

The amended Article 35.2 states that FIEs may open accounts abroad subject to the approval of the State Bank of Vietnam. The old rule allowed FIEs to open offshore bank accounts for the purpose of foreign loans only, i.e. loan account. The amendment to Article 35.2 has broadened the purposes of offshore bank accounts, such as for receipt of foreign revenue.

Along with the process of streamlining the investment approval process and decentralization of the authority to approve investment projects, the amended Article 60 has reduced the length of time for issuing investment licences for those projects subject to approval to 45 days from 60 days as previously regulated. This article also introduces the process of "investment registration" in place of approval for certain projects, and the period of time for registration is 30 days.

With a view to assisting foreign investors in leasing land in Vietnam, the new Article 46.2 makes it clear that the Vietnamese party (where it contributes capital in the form of land use rights) or the State (where FIEs lease land from the State) shall be responsible for land compensation, site clearance and fulfillment of necessary procedures for the issuance of the land use right certificate. Furthermore, in the event of an early liquidation of a joint venture where the Vietnamese party used the land-use right as capital contribution, the residual value of the land use right will be included in the joint venture’s assets to be liquidated (which was not previously the case). This amendment would facilitate the land compensation and clearance which always take a very long time and be the major concern to foreign investors.

The new Article 46.3 now allows that a FIE may mortgage land use rights and assets associated with the land at a financial institution permitted to operate in Vietnam. Though the Government will provide further regulations for this, this change opens the way for foreign bank branches in Vietnam to take mortgages over land use rights and the buildings attached to the land. Under the present banking regulations, only Vietnamese banks can take mortgages.

The amended FIL offers more favourable profit remittance tax rates, namely 3%, 5% and 7% subject to the amount of the contributed capital (previous rates were 5%, 7% and 10% respectively).

Furthermore, under the amended Article 44, overseas Vietnamese investors will be entitled to the lowest rate of remittance tax of 3%, and a 20% reduction in the applicable corporate income tax (except cases where the applicable tax rate is 10%).

Regarding the import duty, exemptions provided under the amended LFI are substantially the same as regulated by the former Government regulations, i.e. the goods exempted from import duties are those related to (i) the capital construction of a foreign invested business, and (ii) the expansion of the project or the replacement or renovation of the technology. The amended FIL provides further that the especially encouraged investment projects and projects implemented in areas which are considered as especially difficult socio-economic conditions will be exempt from import duties on raw materials, materials and components imported for production purposes for a period of five years after the commencement of production.

According to the amendment to Article 34, the assignment of capital no longer needs the approval from the licensing authority. This will save much time and effort for the relevant parties. However, the assignment shall be subject to registration with the licensing authority. In addition, a 100% FIE is not required to offer pre-emption rights to Vietnamese entities when transferring its capital to another foreign investor. That means foreign investors may restructure their investment in Vietnam while remaining 100% foreign owned.

The amended Article 52 now allows the parties to an FIE to agree the reasons for termination and eliminates the right of a party to seek approval from the licensing authority to unilaterally terminate the FIE. The reasons provided under the amendment for termination include: (i) upon expiry of the investment licence; (ii) as per the terms and conditions of the joint venture contract and/or FIE charter or as agreed by the parties; (iii) subject to decision of the competent authority due to a serious breach of the laws; and (iv) bankruptcy declared by the court.

The amendment to Article 53 expressly states that the Law on Bankruptcy shall be applicable when liquidating FIEs. It goes on to state that in case of liquidation or bankruptcy of a joint venture, if the Vietnamese party contributed land use rights as its legal capital contribution, the remaining value of the land shall be considered as part of the assets to be liquidated.

Though stressing the priority of application of Vietnamese laws, the amended Article 62

recognizes that foreign laws may be referred to under contracts between the parties for those issues not covered by the Vietnamese laws, provided such reference is not contrary to the basic principles of the Vietnamese laws of Vietnam. This amendment is mainly to address the concern of foreign investors in BOT infrastructure projects of application of foreign laws.

To avoid arbitrary inspections by various State authorities of FIEs and reduce corruption associated with the inspections, the amended LFI clarifies that regular State inspection of FIEs’ financial matters shall be limited once a year for each FIE. Extraordinary inspections may be only taken in case of evidence of breach of laws. However, it would take to see whether this amendment is implemented in practice.

Though the amendments to the LFI do not go far as expected by foreign investors, they have been welcomed and viewed positively by foreign investors, especially those currently operating in Vietnam. The amendments show the efforts of the Government of Vietnam create a more favorable condition to foreign investment and to make the legal system more transparent and more predictable for doing business in Vietnam.