Articles
Special Alert | Radical Changes Proposed for the Vietnam’s New Investment Law and Enterprise Law

16 - 06 - 2020
 
 
Without doubt, Vietnam’s 2014 Law on Investment and 2014 Law on Enterprise (respectively, the “Current Investment Law” and the “Current Enterprise Law”) are of great importance to investors and companies (including foreign entities) doing business in Vietnam, and bring a more favourable investment and business environment than their predecessors.

With a view to further improve the regulatory framework for investment and business and make Vietnam a more attractive investment destination, the drafts of the new laws replacing the Current Investment Law and the Current Enterprise Law have been prepared and submitted to the National Assembly for discussion and adoption at its 9th session which is taking place in Hanoi from 20 May to 18 June 2020 (respectively, the "New Investment Law" and the “New Enterprise Law”). If passed, both the New Investment Law and the New Enterprise Law, will come into effect on 1 January 2021.

Some remarkable changes proposed under the New Investment Law and the New Enterprise Law are discussed below:

New Investment Law

1. New Approach Introduced for Market Access Conditions

Under the New Investment Law, major investment conditions for foreign investors are separated into two groups, including:

(a) Business investment conditions (“Business Investment Conditions”) which apply to any individuals, entities (regardless of whether such entities are foreign invested enterprises or otherwise) engaging in certain conditional business lines included in a list regulated under an appendix of the New Investment Law (the “List of Conditional Business Lines”). Forms of Business Investment Conditions include requirements for obtaining (i) licenses, (ii) certificates, (iii) practicing / practitioner certificates, (iv) confirmation letter and other statutory conditions to be met; and

(b) Market access conditions (“Market Access Conditions”) which foreign investors must satisfy to invest in certain restricted sectors. Such sectors shall be included in a list to be issued by the Government (the “List of Restricted Sectors”). Market Access Conditions include (i) foreign ownership limits, (ii) statutory investment forms, (iii) scope of investment activities, (iv) capacity of foreign investors and business partners participating in investment activities and other regulatory requirements.

With the List of Restricted Sectors, the New Investment Law proposes a remarkable change by introducing a new approach for the Market Access Conditions, so called, the “negative-list” approach (in Vietnamese: cách tiếp cận “chọn-bỏ”). Particularly, for business sectors which are not included in the List of Restricted Sectors the Market Access Conditions applicable to foreign investors shall be the same as those applicable to domestic investors.

While there has been some confusion under the Current Investment Law (and its guiding regulations) when determining whether foreign investment is fully allowed or otherwise restricted in specific sectors, this “negative-list” approach introduced by the New Investment Law demonstrates efforts made by local authorities that (if adopted) should help resolve the conflicting interpretations and create a consistent legal framework for market entry investment.

2. Update of the List of Conditional Business Lines

As compared to the Current Investment Law, the New Investment Law repeals 12 business lines, amends 19 business lines and supplements 6 new business lines, in which:

(a) Some business lines which are proposed to be repealed include: commercial arbitration, franchising, debt trading services, logistics services, etc.; and

(b) Business lines are proposed to be supplemented are: architectural services, data center services, electronic identification and authentication services, import press distribution services, fishing vessel registry, and training crew members of fishing ships.

3. Two Streams of Opinions Remain for Debt Collection Service

Despite the fact that debt collection service may be added to the list of sectors banned from investment and business, there are still two contrary streams of opinions in this regard. While some argue that legalizing the aforesaid service inadvertently created a loophole for several service providers to commit illegal activities, jeopardizing public order and security, others take the view that debt collection services are still necessary for the market, and must be subject to stricter conditions to be established and regulated by the authorities, but should not be prohibited.

The Standing Committee of the National Assembly decided to submit both options (i.e. to prohibit or not to prohibit debt collection service) to the National Assembly. Although the result is not yet official, a majority of the National Assembly’s members gave their opinions that debt collection services should be prohibited.

4. Relaxation of Investment Conditions for Startups

Under the Current Investment Law, before establishing the economic organization (to be engaged in any sectors), foreign investors must have an investment project and obtain an Investment Registration Certificate. Although this rule remains unchanged, an exception is made under the New Investment Law. Here, a foreign investor who incorporates a small and medium-sized startup innovative enterprise or an innovative startup investment fund, will not need to have an investment project nor obtain an Investment Registration Certificate (“IRC”).

With such a relaxation of investment conditions, this new regulation can be considered as a step in the right direction to attract foreign investments and facilitate the growth of innovative startups in Vietnam.

5. M&A Approval Requirement Clarified

Under the Current Investment Law, a foreign investor must obtain an approval (the “M&A Approval”) from the licensing authority before making capital contribution, or acquiring equity, in an existing economic organization where (a) such (target) economic organization operates in the industries or business lines in which investment is conditional to foreign investors, or (b) capital contribution or equity acquisition results in 51% or more foreign ownership of the economic organization. However, there has been some confusion in terms of interpretation and implementation of this provision, mostly due to different legal points of view taken by licensing authorities in different provinces.

This is expected to be resolved by the New Investment Law by regulating specific instances where M&A Approval is required. Those instances include:

(a) An increase of foreign ownership in the (target) economic organization engaging in business lines listed in the List of Restricted Sectors;

(b) An increase of foreign ownership in the (target) economic organization from less than 51% to being equal to or exceeding 51% of the charter capital;

(c) An increase of foreign ownership in the (target) economic organization where foreign ownership of the charter capital is already equal to or exceeding 51% of the charter capital; or

(d) The (target) economic organization is utilizing land located within areas having an effect on national security, such as sea-islands, borderlands and coastal areas, etc.

6. Investment Policy Approval and Selection of Investors for Implementing Investment Projects

The New Investment Law introduces the mechanism for selection of investors for implementation of certain regulated investment projects / specific cases. In particular:

(a) Investors will be selected via auction of land use rights for cases regulated under and in accordance with the land laws;

(b) Investors will be selected via bidding process for cases regulated under and in accordance with the bidding laws;

(c) Investors may be selected directly by the competent authority, i.e., the National Assembly, the Prime Minister or the Provincial People’s Committee, without going through the process of auction of land use rights or bidding process if:

(i) The investors already have legitimate land use rights, except where the State retrieves the land use rights for auction purposes in accordance with the land laws;
(ii) The investors use lands by way of acquiring, renting the land use rights, receipt of land use rights contributed as capital for production and business;
(iii) The investors implement a manufacturing, research and development (R&D) or innovative project located in an industrial zone, functional area inside an economic zone, high-tech zone, airport or civil airfield; and
(iv) The law does not require an auction of land use rights or bidding process to select investors.

(d) For cases subject to both (i) the investment policy approval and (ii) either auction of land use rights or a bidding process for selection of the investor, the competent authority will issue the investment policy approval and assign other authority to either organize an auction of land use rights or bidding process for selection of the investor.

It is contemplated that the Government will provide detailed regulations on this rule of selection of investors.

7. New Regulations on Investment Support and Incentive Regimes 

Under the Current Investment Law, projects with capital from VND6,000 billion of which at least VND6,000 billion is disbursed in the first three years, are entitled to investment incentives. Such projects, however, are subject to a stricter condition regulated by the New Investment Law. They must have a minimum revenue of VND10,000 billion annually within three years after the first year of revenue generation or have more than 3,000 employees to be entitled to investment incentives.
Furthermore, the New Investment Law provides for additional sectors that will be subject to investment incentives as well as supplementing new regulations on application forms of investment incentives. Particularly:

(a) New sectors to be considered as objects entitled to investment incentives include (i) social housing construction projects, (ii) projects using people with disabilities as employees, (iii) innovative startups projects and (iv) innovation centers aiming to support and facilitate innovative and entrepreneurial ecosystems on the basis of science and technology development; and

(b) Pilot schemes shall be provided by the Government from time to time for new investment incentives application forms, including quick depreciation, increase of taxable income deduction for items of procurement of modern machinery and equipment, expenses for research, and training of highly qualified personnel for investment activities eligible for incentives, and other incentives to help reduce the obligation to pay corporate income tax.

In addition, the New Investment Law stipulates an exceptional incentive regime for the following projects, which are considered as having significant socio-economic impact:

(a) Establishment of new R&D/innovation centers, or expansion of the existing R&D/innovation centers, with the total investment capital of at least VND6,000 billion; innovation centers aiming to support, facilitate innovative and entrepreneurial ecosystems on the basis of science and technology, contributing to innovation of growth model; and

(b) Investment projects in business lines eligible for exceptional investment incentives having a total investment capital of at least VND30,000 billion, and at least VND10,000 billion being disbursed within three years.

With respect to these projects, the Government shall decide, subject to prior approval of the Standing Committee of the National Assembly, the level of the extraordinary incentives and the period for enjoying extraordinary incentives. The extraordinary incentives may not exceed 50% of the highest level of the incentive policy in accordance with the law. Similarly, the period for enjoying such incentives may not exceed 50% of the highest level of the period for enjoying investment incentives in accordance with the law nor exceed the project implementation period. 

8. Amendments and Supplements of Project Termination

The New Investment Law provides amendments to and supplements cases where the operation of investment projects are terminated, including:

(a) Projects being delayed by 24 months or more (while the Current Investment Law provides for a regulatory delayed period of 12 months) compared to the original schedule as stipulated under the investment registration certificate or the investment policy approval, unless an extension of the schedule is approved;

(b) Cases where investors fail to pay or guarantee measures to pay escrow deposits as security for performance of projects in respect of projects for which such deposit is required;

(c) Cases where investors implement the investment projects on the basis of false civil transactions in accordance with the civil code; and

(d) Cases where an investor is forced to terminate the business investment activity as it jeopardizes national defense and security, social order and safety, social morals or the health of the community.

New Enterprise Law

1. Amendments Regarding Corporate Seal

While previous proposals to amend the Current Enterprise Law removed the requirement of the corporate seal, such a “removal provision” does not exist in the New Enterprise Law. 

The New Enterprise Law also supplements the regulation on the use of digital signatures (in accordance with the laws on electronic transactions and digital signatures) as another form of the corporate seal, along with the common seal. This may help facilitate and simplify online civil / commercial transactions among enterprises as well as administrative procedures with State agencies.

2. Removal of Unnecessary Licensing Procedures

With respect to enterprise registration, the New Enterprise Law abolishes unnecessary administrative procedures, as compared to the Current Enterprise Law, including:

(a) Procedures for notification of change on enterprise manager’s information; and
(b) Procedures for registration / notification of corporate seal samples before use.

3. Power of Legal Representatives

The New Enterprise Law requires that rights and obligations of each legal representative of a limited liability company (“LLC”) or a joint stock company / shareholding company (“JSC”) (if the company has more than one legal representative) shall be clearly stipulated in the charter.

Otherwise, if the rights and obligations of each legal representative are not clearly stipulated in the charter, all legal representatives will be considered to have full authority to act on behalf of the company with any third party, and will be jointly liable for damages caused to the company in accordance with the law.

4. Capital Transfer Transaction Payment Flow

Under the Current Enterprise Law, all payments for capital transfer transactions as well as the receipt of dividends by foreign investors must be made through capital accounts opened by the investors at banks in Vietnam, except for payments by assets. This current provision is not in line with the latest foreign exchange control regulation (Circular No. 06/2019/TT-NHNN of the State Bank of Vietnam dated 26 June 2019 guiding foreign exchange control for foreign direct investment (FDI) activities in Vietnam) as it allows payments for capital transfer transactions to be made between two offshore investors.

The New Enterprise Law merely requires that payments for capital transfer transactions must be made in accordance with the forex regulations, except payments by assets or other non-cash payments. This change provided by the New Enterprise Law would help to resolve the current inconsistency.

5. Adjustment and Further Guidance on Time-limits for Capital Contribution

The New Enterprise Law retains the requirement that charter capital must be contributed in full within 90 days from the date of issuance of the Enterprise Registration Certificate (“ERC”).

Further guidance is provided for the case of capital contribution in-kind. For the cases of multiple member enterprises (LLCs and JSCs) the time for transportation, importation and other administrative procedures for the transfer of ownership of assets will not be included in the 90-day limit. The New Enterprise Law remains silent on whether such a provision is applicable to the case of a single member LLC.

With specific regards to the case of a multiple member LLC (“MM-LLC”), if the members fail to contribute in full to the charter capital, the time for carrying out the procedures for adjustment of the charter capital is reduced to 30 days (compared to 60 days under the Current Enterprise Law) from the last date on which the share of capital contribution is required to be fully paid.

6. Removal of Requirement for Inspector in a Single Member LLC (Organization Owner)

Under the Current Enterprise Law, the inspector is a mandatory position to be appointed and included in the corporate governance of a single member LLC (“SM-LLC”) owned by an organization. Under the New Enterprise Law, such a position is no longer mandatory. Only State-owned enterprises (“SOEs”) incorporated as SM-LLCs must establish the Inspection Committee.

7. More Favorable Policy for Minority Shareholders in JSCs

The New Enterprise Law provides for improved protections for minority shareholders in JSCs as follows:

(a) Any shareholder or group of shareholders holding at least 5% of the total ordinary shares, or a smaller percentage stipulated in a company’s charter, will have extra rights with regards to corporate governance, including the right to request the convening of a General Meeting of Shareholders in certain specific circumstances, and the right to request the Inspection Committee to investigate issues relating to the management and administration of the company’s operation. Under the Current Enterprise Law, only a shareholder or a group of shareholders holding at least 10% of the total ordinary shares for a consecutive period of at least 6 months can make such a request; and

(b) Any shareholder or group of shareholders holding at least 10% of total ordinary shares, or a smaller percentage as stipulated in a company’s charter, will have the right to nominate candidates for election of members to the Board of Management (the “BOM”) and/or the Inspection Committee. Such shareholder or group of shareholders would not be required to hold such a percentage of shares for any particular period (the Current Enterprise Law requires the shareholder to have held her shares for a consecutive period of at least 6 months before exercising this nomination right).

8. Remarkable Changes to Corporate Governance in the JSC

Additional provisions of corporate governance in JSCs are introduced under the New Enterprise Law, including:

(a) Extension of the scope of power of the General Meeting of Shareholders, including (i) decision on the budget or total remuneration, reward and other benefits for the BOM and the Inspection Committee; (ii) approval of internal administrative regulations and operation regulations of the BOM and the Inspection Committee; and (iii) approval of the list of independent auditing firms, the independent auditing firm to inspect the company's activities, and the dismissal of the independent auditors;

(b) A resolution of the General Meeting of Shareholders that causes adverse changes to rights and obligations of shareholders holding a specific type of preference shares shall only be passed if approved by either (i) the attending shareholders holding at least 75% of the total number of that type of preference share or (ii) in case of passing the resolution by way of collecting written opinions, by the shareholders holding at least 75% of the total number of that type of preference shares;

(c) A more detailed regulation on the Audit Committee as a professional body of the BOM, with the head of the Audit Committee being an independent BOM member, which is responsible for overseeing reliability of the company's financial statements and disclosures, effectiveness of the company's internal control and risk management systems, etc.; and

(d) The head of the Inspection Committee is only required to possess a university degree in finance, banking, accounting, audit or professions related to and appropriate to business activities of the company (but is not required to be a professional auditor or professional accountant as currently stipulated by the Current Enterprise Law).

9. Tightening Regulations on Private Placement of Corporate Bonds by Non-Public Companies

Under the current applicable regulation (Decree No. 163/2018/ND-CP of the Government dated 4 December 2018 on placement of enterprise bond), both professional securities investors and non-professional securities investors may hold bonds issued under private bond placement.

The New Enterprise Law tightens the regulations on private placement of bonds by non-public companies (including LLCs and JSCs) whereby non-public companies would only be allowed to offer corporate bonds to:

(a) Strategic investors, for private convertible bonds and warrant linked bonds; and

(b) Professional securities investors (such as commercial banks and securities investment funds) for private convertible bonds, warrant linked bonds and other types of private bonds (e.g. non-convertible private bonds and non-warrant linked bonds).

Furthermore, a non-public company must satisfy the following requirements when issuing corporate bonds:

(a) The company has made full payments of both principal and interest of the previously issued bonds or has fully paid all due debts for a period of 3 consecutive years prior to the company's decision on private bond placement (if any), unless the private bond placement is made by an innovative start-up enterprise or otherwise stipulated by relevant laws;

(b) The financial statements of the year preceding the year of the bond issuance have been audited by an auditor if the company has been established and operating for more than 1 year; and

(c) Financial stability ratios and safety ratios for business operation must be ensured as prescribed under applicable laws.

10. Introduction of the Non-voting Depository Receipts

For the first time, the regulation on non-voting depository receipts (the “NVDRs”) has been introduced by the New Enterprise Law. In particular, ordinary shares can be used as underlying assets to issue the NVDRs (so as to raise capital), and accordingly such ordinary shares shall be called the “underlying ordinary shares”. NVDRs shall have economic benefits and obligations corresponding to the underlying ordinary shares. The holders of both the NVDRs and the underlying ordinary shares would not be entitled to voting rights in the JSC, except for the case of passing a resolution that causes adverse effects to rights and obligations of the holder of the underlying ordinary shares. If adopted, the NVDRs may become an additional capital mobilization channel for JSCs in Vietnam.

It is contemplated that the Government will provide more detailed regulations on NVDRs if the New Enterprise Law is adopted.

11. Amended Definition of State-owned Enterprise

According to the Current Enterprise Law, only an enterprise in which the State holds 100% of the charter capital is defined as an SOE. Under the New Enterprise Law, an SOE is defined as an enterprise having more than 50% of the charter capital or voting shares held by the State.

It is expected that the new laws will be adopted by the National Assembly in its current session, and the changes would ease the path forward for investors and enterprises in doing business and in protecting both foreign and domestic capital. If you have any questions regarding the proposed changes before the National Assembly or the process by which such changes may be approved, please feel free to get in touch with your contact here at Indochine Counsel or contact us through our website.

Authors

Dang The Duc
Le Thanh Cong




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