Lawyer in Vietnam Oliver Massmann – New Investment and Enterprise Laws – Meaning Reform or Minor Fiddling?

On 26 November 2014, the National Assembly of Vietnam passed Law No. 67/2014/QH13 on Investment (“2014 Investment Law”) and Law No. 68/2014/QH13 on Enterprises (“2014 Enterprise Law”), both will replace the Investment Law and Enterprise Law in 2005 by 01 July 2015. Major changes of these laws to the past laws and their impacts on the investment environment in Vietnam are discussed in details below.

1. 2014 Investment Law
The 2014 Investment Law makes a great attempt to reduce the number of prohibited business activities and conditional business activities. In addition, it introduces new definition of a foreign investor and replaces the term “foreign-invested enterprise” with “economic enterprise with foreign-owned capital”. It also no longer refers to either “direct investment” or “indirect investment” and certain changes are made to forms of investment in Vietnam. More importantly, the 2014 Investment law for the first time includes provisions regulating M&A activities.
New concepts – but clearer?
A foreign investor was defined as any foreign entity or individual using capital in order to carry out an investment activity in Vietnam. This definition has created much confusion about whether a foreign individual owning 1%, 49% or 51% is called a foreign investor in the past ten years. However, the 2014 Investment Law introduces a much more simpler and clearer definition. A foreign investor is now any foreign individual or entity established in accordance with the foreign law.
However, the new concept of “economic entity with foreign-owned capital” – an equivalent term of “foreign-invested enterprise”– does not shed light to the meaning of its predecessor. “Economic entity with foreign-owned capital” is defined as an economic entity which has any member or shareholder which is a foreign investor. It is unclear how much ownership ratio will qualify an enterprise an economic entity with foreign owned capital. Meanwhile, under the 2014 Investment Law, the ownership ratio will decide the licensing procedures for investment projects of foreign investors. If this is not detailed in the implementing documents, difficulties during investment application procedures will unavoidably arise.
Reduced number of prohibited business activities and conditional business activities
Article 6 of the Investment Law narrows down the list of prohibited business activities to six activities instead of 51 activities in the 2005 Investment Law. The number of conditional business activities also decreases from 386 to 267 activities. Notably, the 2014 Investment Law takes an initiative approach that it allows investors to do investment and business activities in fields not prohibited by the 2014 Investment Law. This is a new methodology compared with the old one, which only allows investors to do businesses specifically allowed. Accordingly, there is more transparency and investors have more investment opportunities in Vietnam.
Procedures for implementation different types of investment project
Investment in Vietnam is no longer classified into direct or indirect investment, but depends on either of the following forms:
 Establishment of a new entity for an investment project;
 Investment under Public-Private Partnership;
 Investment under Business Cooperation Contract;
 Capital contribution, purchase of shares or contributed capital in an economic entity.
i. Establishment of a new entity for an investment project;
An interesting point to note is the removal of a requirement to apply for an Investment Registration Certificate (“IRC”) of investment projects by domestic investors, regardless of the investment capital amount. Moreover, the application procedures no longer involves 2 steps: investment registration and investment appraisal procedures. However, for foreign investors with an investment project to establish a new entity in Vietnam, instead of applying for an IRC and such certificate concurrently serves as an Enterprise Registration Certificate (“ERC”), they are now required to separately apply for two different kinds of certificates: IRC and ERC. This could be more burdensome for foreign investors in terms of time and cost.
ii. Capital contribution, purchase of shares or contributed capital in an economic entity.
Under the 2014 Investment Law, capital contribution of foreign investors can be in the following forms:
(1) purchase of shares issued for the first time or additionally issued of joint stock companies;
(2) capital contribution to limited liability company, partnership companies; or
(3) capital contribution to other economic entities not falling under (1) and (2).
Foreign investors making investment by contributing capital, purchasing shares or contributed capital must register their investment with the local Department of Industry and Trade if (1) Foreign investors contribute capital, purchase shares or contributed capital in economic entities in conditional business activities applicable for foreign investors; or (2) capital contribution, purchase of shares or contributed capital results in 51% or more ownership of charter capital of certain economic entities in the targeted economic entities. Certain economic entities include entities which have (1) a foreign investor holding from 51% of its charter capital or the majority of its partnership members are foreign individuals (for economic entity being a partnership enterprise); or (2) an economic entity in (1) holding from 51% of its charter capital; or (3) foreign investors and economic entity in (1) holding from 51% of its charter capital.

2. 2014 Enterprise Law
The 2014 Enterprise Law simplifies the procedures for establishment of enterprises, introduces new provisions regarding company management and clearer regulations on Group of Companies. Establishment of enterprises
The 2014 Enterprise Law no longer requires the specification of business lines in the ERC. Indeed, enterprises may do any business not prohibited by the law and register their activities with the registration authority. If they do business in conditional sectors, they have to ascertain that they meet all the required conditions. The liabilities rest on the enterprises when the authority inspect their activities and may apply fines if they do not meet the required conditions. Moreover, under the 2014 Enterprise Law, if there is any member not fully contributing their committed capital after 150 days from the issuance of the ERC, enterprises have to apply for charter capital adjustment. Moreover, a single limited liability company is also allowed to reduced its charter capital, which is prohibited under the 2005 Enterprise Law. In terms of capital contribution, the 2014 Enterprise Law consistently applies the 90-day period for capital contribution for both limited liability companies and joint stock companies. Meanwhile, under the 2005 Enterprise Law, this time limit is 36 months for both types of companies. This is clearly a stricter rule and significantly impacts investment in large scale projects, for example, infrastructure or construction projects.
Company management
i. Legal representative
Limited liability companies and joint stock companies may have more than one legal representatives depending on the need of the companies. The company’s charter will specify the number, management title, rights and obligations of the legal representatives. If the enterprise has only one legal representative, this person must still authorize another person to perform his or her rights and obligations when he or she is out of Vietnam, irrespective of the absence duration.
ii. Structure of a joint stock company
A joint stock company can now choose to structure the company in either of the following ways: (i) General Meeting of Shareholders, Board of Management, Control Committee and Director or General Director. In case the company has less than 11 shareholders and shareholders which are organizations own less than 50% of total shares of the company, the Control Committee is not required; or (ii) General Meeting of Shareholders, Board of Management, and Director or General Director.
Group of Companies
The 2014 Enterprise Law clearly defines parent-subsidiary companies. A company is called a parent company of another company if it: (i) owns more than 50% of the charter capital or the total normal shares of that company; (ii) has the right to directly or indirectly appoint the majority or all of the members of the Board of Management, Director, General Director of that company; or (iii) has the right to amend or supplement the charter of that company.
A subsidiary is not permitted to contribute capital or buy shares in its parent company. All subsidies of the same parent company cannot together contribute capital or buy shares to own each other. Further, subsidiaries of the same company with at least 65% state ownership may not together contribute capital to establish a company.
With the adoption of the 2014 Investment Law and Enterprise Law, the investment environment in Vietnam now becomes more attractive to foreign investors to a certain extent. However, from investors’ perspective, they need more clarifications and better treatment. We will need to see the real impact of these new laws when their implementing documents are introduced in the upcoming time and their application.

Should you have any questions, please contact Oliver Massmann under; Oliver Massmann is the General Director of Duane Morris Vietnam LLC. Thank you!

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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