1. Overview
Against the backdrop of global supply chain shocks, border closures and lockdowns during the COVID-19 pandemic in countries like China, Vietnam has emerged into the spotlight as a favoured investment geographical location in Asia. Even though China has re-opened its borders since then, this trend continues.
According to the Foreign Investment Agency under the Ministry of Planning and Investment of Vietnam, Vietnam has attracted more than US$2.36 billion in foreign direct investments as of 20 January 2024, an increase of 40.2% over the same period in 2023.1 Of the 21 national economic sectors, the real estate sector attracted the most investment with more than US$1.27 billion, followed by the processing and manufacturing industry with about US$926 million and the science and technology sector with about $65.2 million.2
Generally, a foreign investor who wishes to enter the Vietnam market by way of acquisition must satisfy all market access conditions applicable to foreign investors.3 These market access conditions are dependent on business sectors, governed by local regulations and international treaties to which Vietnam is a party.4 Foreign investors and domestic investors are subject to market access conditions, save for cases where the investment field falls into prohibited business lines, or restricted business lines.5
2. Regulatory conditions for investment
Governmental approvals are required for share and equity acquisitions in Vietnam entities across sectors, and these considerations affect transaction structuring and deal timelines.
a. M&A Approval
Foreign investors are required to register their capital contribution or purchase of shares or capital in a Vietnam entity with the Department of Planning and Investment (DPI) (M&A Approval) in any one of the following scenarios:6
- acquisition of equity interest or capital contribution resulting in the foreign investor increasing their shareholding in the target company from less than or equal to 50% to over 50% of the charter capital, or, if they already held over 50% of the charter capital, their shareholding has continued to increase;
- acquisition of equity interest in respect of a target company with conditional market access business lines, leading to an increase in the foreign ownership ratio of the target company; or
- acquisition of equity interest in respect of a target company which holds a land use right on an island, a border or coastal commune, or another area that affects national defense and security.
The M&A Approval application aims to assess the investor's capacity, experience, and a review of the investment conditions applicable to such investor. Foreign investors must justify their satisfaction of the applicable market access conditions.
Even in a situation where M&A Approval is technically not required, for example, where there is no increase in the foreign ownership ratio of the Vietnam company, parties should still consider obtaining M&A Approval for commercial purposes. In practice, foreign investors need DPI approval for reasons incidental to the transaction, including applying for amendment of the IRC and ERC (see below) due to a change in the owner of the target entity and owner's particulars. The DPI may ask for the M&A Approval when it processes the application for the amendment of the IRC and ERC, which occurs after closing when the seller has stepped away from the transaction.
b. Merger filing
If a transaction breaches certain competition thresholds, notification of economic concentration (or merger filing) must be made by the target entity to the Vietnam Competition Commission.7 This applies to transactions which are categorised as economic concentrations, which include the following:8
- merger of enterprises;
- consolidation of enterprises;
- acquisition of enterprises;
- joint venture between or among enterprises or
- others as deemed by the authorities,
and which possesses any of the following features:9
- total assets of the enterprises engaging in the transaction on the Vietnam market is worth VND 3,000 billion or more;
- total sales or purchase volume of the enterprises engaging in the transaction on the Vietnam market is worth VND 3,000 billion or more;
- the transaction value of the economic concentration is worth at least VND 1,000 billion; or
- the combined market share of enterprises engaging in the transaction accounts for at least 20% of the total share of the relevant market.
The merger review process is a two-step process comprising a preliminary review and an official review. The preliminary review is to be completed within 30 days from the receipt of the merger filing dossier (which needs to be sufficient for merger filing purposes), and the official review is to be completed within 90 days from the date that the authority decides that the transaction must be subject to an official review.10 In practice, the reviews take longer as there is a passage of time between the date of the filing of the merger filing dossier and the time the authority confirms its sufficiency as oftentimes, the authorities may request for further information and documents from the applicant during this process.11
c. Investment registration certificate and enterprise registration certificate
According to the Law on Investment 2020, foreign investors who wish to set up a foreign owned entity (FIE) in Vietnam must apply for an investment registration certificate (IRC) which certifies the investor and the investment project in Vietnam; and an enterprise registration certificate (ERC) which certifies incorporation of the foreign owned entity. Foreign investors contributing charter capital or acquiring charter capital in a Vietnamese entity will need to update the IRC and ERC of the Vietnam entity to reflect the change of ownership.
The IRC application comprises the submission of an application dossier containing information of the investor (including its financial standing) and the investment project to the DPI, or, for certain foreign investment projects within industrial parks, to their respective industrial park authority.12 The regulatory timeline for application is 15 days13, though this in practice can take up to 6 months. The IRC may be issued by the DPI subject to certain conditions to be fulfilled by the investor for the IRC to remain valid, on pain of revocation. The duration of the IRC is one such condition. This would not exceed 70 years if the investment is inside an economic zone, and 50 years if the investment project is outside an economic zone.14 Such duration may be renewed based on objective, scale, location, and operational requirements of the project.15
One condition commonly imposed is for the FIE to transfer all its fixed assets without compensation to the State of Vietnam at the end of the term of the investment project (asset reversion). While the Law on Investment 2020 provides for the option to extend the duration of the investment project, this option is not generally available for IRCs where the asset reversion requirement was imposed.16 At the date of this article, most investment projects with such conditions have not expired, and how this requirement is to be enforced by the government remains to be seen.
The ERC application is an online submission filed with the local business registration office comprising the submission of the particulars of the FIE including the name, address, particulars of the legal representative and the members of the FIE.17 The regulatory timeline for application is 3 days18, though again in practice, this may take longer.
The amendment application to amend the IRC and ERC of the target Vietnam entity can only be made after closing and this may affect deal structuring, particularly if the FIE is reluctant to part with the purchase price without this step being completed19.
3. Tax considerations
Capital assignment profits tax or capital gains tax (CGT) is levied on gains derived from the sale of interest in a Vietnam company. CGT can be a bone of contention in commercial negotiations.
Whether the seller is tax resident, whether the seller is an individual or a corporate entity, and whether the subject matter of the sale is equity interest in a limited liability company (LLC) or shares in a joint stock company (JSC) will affect the amount of tax payable. Tax resident corporate sellers are generally subject to 20% corporate income tax on gains derived from sale of interest in an LLC or JSC but if the resident seller is an individual and the sale is of his interest in a JSC, he will be subject to personal income tax of 0.1% on the sale proceeds.20
As taxable gain is determined by the excess of the sale proceeds less historical cost (or initial value of the contributed charter capital for the first transfer) less transfer expenses, complexities may arise where a previous share transfer has occurred resulting in a different cost base value for the current owner.
It is worth noting that where the seller is not Vietnam tax resident, the legal obligation to report and pay capital gains tax on the transaction on behalf of the non-resident seller falls on the Vietnam company.21 Any shortfall in tax payable identified during periodic audits conducted by tax authorities may be subject to a penalty at 20% of the primary tax not paid plus late payment interest of 0.03% per day (subject to the statute of limitations of 10 years).22 In cases of fraud or evasion, a tax penalty of between 100% to 300% may be imposed. A voluntary disclosure of underpaid tax will likely only attract late payment interest.23
The buyer has every incentive to ensure that obligations to pay tax (including those arising from past sales of the equity interest) have been or will be, by or shortly after closing of the transaction, properly discharged. CGT is typically not covered by basic warranty and indemnity insurance (W&I), and if there is no agreement by the seller to pay CGT, parties may have to settle for alternative mechanisms of risk sharing. Common examples are to take a specific indemnity from the seller for the tax lookback period or put in place an escrow arrangement to apply some part of the sale proceeds for payment of the tax. The buyer would naturally wish to zeroise risk, and compel the seller to bite the bullet to pay CGT at closing.
4. Concluding remarks
Alongside the tremendous opportunities available, investing in Vietnam carries its fair share of regulatory challenges. The issues to navigate in practice often are more complex, and care should be taken by investors to seek advice from legal and tax specialists familiar with the workings and unwritten policies of the local regulators, to reach a win-win result.
Dentons acted for SGX-listed Thomson Medical Group in the acquisition of Vietnam's biggest healthcare group, FV Hospital and primary and specialist clinics. The transaction closed in December 2023 and is the largest healthcare deal in the healthcare sector in South-east Asia.
The remarks in this article are drawn from experiences of the legal team and from advice given by lawyers, auditors, financial advisers, and other practitioners in Vietnam. No legal advice is given or intended to be given in this article on Vietnam law, or otherwise, and the reader is advised to obtain specific deal advice from experienced advisers.
Footnotes
2. Ibid.
3. Article 24.2(a) and Article 25.2(b) of the Law of Investment 2020 of Vietnam
4. Article 9.2 and Article 9.3 of the Law of Investment 2020 of Vietnam
5. Law on Investment 2020 of Vietnam read with Decree 31/2021/ND-CP
6. Article 26 of Law on Investment 2020 of Vietnam
7. Article 30 of Law on Competition 2018 of Vietnam
8. Ibid.
9. Article 13 of Decree No. 35/2020/ND-CP read with Law on Competition 2018 of Vietnam
10. Article 36 and Article 37 of the Law on Competition 2018 of Vietnam
11. Ibid.
12. Article 34 of Decree 31/2021/ND-CP
13. Article 38 of the Law on Investment 2020 of Vietnam
14. Article 44 of the Law on Investment 2020 of Vietnam
15. Ibid.
16. Article 44 of the Law on Investment 2020 of Vietnam states that upon expiry of the duration of an investment project, if the investor wishes to keep executing the investment project and satisfies the conditions as prescribed by law, the duration of the investment project may be extended but shall not exceed the maximum prescribed in Clauses 1 and 2 of Article No.44, except for the following investment projects:
- Investment projects using obsolete technology, potentially causing environmental pollution or natural-resource intensive projects;
- Investment projects in which the investor must transfer assets without refund to the State of Vietnam or the Vietnamese side.
17. Article 21, Article 22 and Article 23 of the Law on Enterprises 2020 of Vietnam
18. Article 26 of the Law on Enterprises 2020 of Vietnam
19. Article 30 of the Law on Enterprises 2020 of Vietnam
20. According to information from articles published in the public domain.
21. Ibid.
22. Ibid.
23. Ibid.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
