The legal framework for the real estate sector in Vietnam is set with the Law on Real Estate Business 2014 (LREB), the Law on Residential Housing 2014 (LRH) (both effective since 1st July 2015). The LREB is guided by Decree No. 76/2015/ND-CP, the LRH respectively is guided by Decree No. 99/2015/ND-CP. In addition, long-awaited Decree No. 01/2017/ND-CP was released on 6 January 2017 and is amending three decrees guiding the law on land 2013 (Land Law).
The provisions of the mentioned regulations have brought more investment in the real estate market to Vietnam. They have reduced barriers for investment and widened accessibility to properties in Vietnam.
However, not every issue is solved yet.
1. Delay in issuance of land use right certificate (LURC) for foreign investors
The issuance of the land use right certificate to foreigners is one essential requirement for developing projects on purchased land. Article 75 of Decree 95/2015 provides the obligation for the Department of Construction on issuing the “Foreign Ownership Prohibited Projects List”. However, the list is not released yet. As result of that, the Department of Natural Resources and Environment is refraining from issuing LURCs to foreigners.
As conclusion, the Foreign Ownership Prohibited Projects List should be issued as soon as possible so that foreigners purchasing land in Vietnam can obtain the LURC and are able to develop their projects.
2. What are ‘’foreign invested enterprises”?
The LREB, the Land Law and the Law on investment 2014 (LOI) rule about “foreign invested enterprise”. There remain uncertainties about this term.
The LREB is not providing any definition for foreign invested enterprises. Furthermore, the Land Law is providing that joint ventures enterprises, 100% foreign invested enterprises and Vietnamese enterprises of which foreigners are buying shares, merche with and acquire are included as foreign invested enterprises without any given guidance about percentage of ownership. Under the LOI an economic organization with foreign investors being member or shareholder shall be a foreign invested enterprise if part of ownership of the foreigner in the economic organization is 51% or more. On the other hand, organizations with foreign members or shareholders holding less than 51% are not classified as domestic enterprises under the LOI.
However, this issue is crucial due to different treatment of foreign invested and domestic enterprises. For example, domestic enterprises are able to transfer land use rights in form of division whereas this is prohibited to foreign invested enterprises.
Further, the Document No. 386/BXD-QLN (28 February 2017) issued by the Ministry of Construction states that the LREB does not need to provide provisions relating to foreign invested enterprise as the LOI has already did. However, Document 386 does not state that LREB can adopt the same definition of foreign invested enterprise the term remains ambiguous under the LREB.
3. Restrictions on sources of capital
Due to limiting the sources of capital for residential housing by the LRH, foreign developers cannot obtain loans from offshore credit institutions and non-credit institutions anymore. This measure is reducing the ability and opportunity to raise capital effectively and the competitiveness for foreign developers. Even though, there is no necessity for limiting opportunities to raise capital from legitimate sources.
4. Change of land user rights in case of acquisition of shares/ capital contribution
Article 2.27 of Decree 01/2017 provides the obligation for enterprises on assigning for land use rights or registering changes in the land and assets attached to the land when there is any change in the land user in case of acquisition shares or contribution of capital with land use rights included. In case of acquiring land, the land still remains with the same enterprise. Furthermore, the assigning process can impose financial obligations. This issue can lead to difficulties for investors when they acquire shares or contribute capital in enterprises.
5. Investment Approvals
The main approval for residential developments is either an investment in-principle decision (IID) or investment in-principle approval (IAA). In addition, an investor wishing to establish a company in Vietnam needs an investment registration certificate (IRC).
a. Circumstances requiring an IID:
Article 32 of the LOI is ruling the requirement of the IID that is only applying to projects where developers receive land use rights from State directly by way of allocation or lease of land without auction, tendering or transfer. Furthermore, the Land Law states the only way developers can receive land from State is either by way of allocation or lease of land. As a result, it is uncertain in which way developer can receive land by transfer.
b. Investment approval for capital contribution by way of land use rights:
Under a joint venture between a domestic and foreign investor to develop residential housing projects, the domestic investor will contribute capital by way of land use rights. In such case the IID is required only in cases of allocation or lease of land by the State without auction tendering or transfer. It is uncertain if the IIA will be required in cases of tendering or transfer.
Under the Law of Construction 2014 the developer has to obtain the construction permit before he can commence the project. It is not clear if the IIA is required to obtain the construction permit. This requirement could lead to lack of ability on proceeding the project in cases where obtaining the IIA failed.
On the other hand, if the IID is required, the developer will have more assurance because of the possibility to obtain the IID before the land use right is contributed.
c. Overlapping investment approvals
As mentioned above, the LOI provides the requirement of the IRC apart from the IID and IAA. For projects which require the IID, the IRC will be issued automatically after 5 working days from the Issuance of the IID. The content of the IID is similar to the IRC and no additional documents are necessary for issuance of the IRC. As a result, the IRC is not necessary when the IID is issued.
For projects requiring the IIA, the developer shall obtain the IRC first, then set up the company before obtaining the IIA. As mentioned above, the developer is unable to develop the project without IIA in cases of failing to obtain the IIA. Furthermore, the IIA and IRC are dealing with authorities and their approvals and the IIA is issued based on the 1/500 planning approval so that the necessity of the IRC is not given.
6. Capital contribution in the form of land use right
The Land Law and the Law on Enterprises 2014 provide possibility of contribution land use rights by individuals of a peace of land as capital to an enterprise for a certain time period.
Under Article 80 of Decree No. 43/2014/ND-CP (15 May 2014) on guiding the Land Law, capital contribution in form of land use rights shall terminate if the individual capital contributor passes away. As a result, if the capital contributor is passing away the capital contribution agreement will be terminated which will cause affection of the enterprise’s LURC and its land use rights. On the other hand, the Law on Enterprise 2014 stipulates that if an individual contributes land as capital the enterprise will have the right over the land.
Therefore, Article 80 of Decree No. 43/2014/ND-CP has caused confusion and uncertainty for developers in case to consider receiving land use rights from individuals.
7. Conducting real estate business on land contributed as capital
Under the Land Law, domestic and foreign invested enterprises are entitled to receive capital contribution by way of land use rights. However, there is no provision in the LREB regarding contributions as capital for organizations and individuals. As a result, organizations are not entitled to receive capital contribution by way of land use rights for developing real estate projects. This is causing inequalities and an unfair competition in the real estate sector.
C. OUTLOOK ON MAJOR TRADE AGREEMENTS TPP 11 AND EUVNFTA
In January 2017, US President Donald Trump decided to withdraw from the US’ participation in the TPP. In November 2017, the remaining TPP members met at the APEC meetings and concluded about pushing forward the now called CPTPP (TPP 11) without the USA. The agreement shall be signed by all member states by the first quarter of 2018. After that, it has to be ratified in each member state before taking effect.
The effects of the TPP 11 promising great benefits for the real estate sector in Vietnam. The TPP 11 is targeting to eliminate tariff lines and custom duties among member states on certain goods and commodities to 100%. This will make the Vietnamese market more attractive and could cause motivation for foreign enterprises to settle to Vietnam for building warehouses, offices, setting up plants or even for investing in the real estate sector because the market is becoming more dynamic with the TPP.
One another notable major trade agreement is the EUVNFTA between the European Union and Vietnam. The EUVNFTA offers great opportunity to access new markets for both the EU and Vietnam. It will help to bring more capital into Vietnam. In addition, the EUVNFTA will boost the most economic sectors in Vietnam. Establishments in other economic sectors in Vietnam will have impact on the real estate sector due to its association with these sectors such as healthcare, technology or education.
Furthermore, the Investor State Dispute Settlement (ISDS) will ensure highest standards of legal certainty and enforceability and protection for investors. We alert investors to make use of these standards! We can advise how to best do that! It is going to be applied under the TPP 11 and the EUVNFTA. Under that provision, for investment related disputes, the investors have the right to bring claims to the host country by means of international arbitration. The arbitration proceedings shall be made public as a matter of transparency in conflict cases. In relation to the TPP, the scope of the ISDS was reduced by removing references to “investment agreements” and “investment authorization” as result of the discussion about the TPP’s future on the APEC meetings on 10th and 11th November 2017.
Further securities come with the Government Procurement Agreement (GPA) which is going to be part of the TPP 11 and the EUVNFTA.
The GPA in both agreements, mainly deals with the requirement to treat bidders or domestic bidders with investment capital and Vietnamese bidders equally when a government buys goods or requests for a service worth over the specified threshold. Vietnam undertakes to timely publish information on tender, allow sufficient time for bidders to prepare for and submit bids, maintain confidentiality of tenders. The GPA in both agreements also requires its Parties assess bids based on fair and objective principles, evaluate and award bids only based on criteria set out in notices and tender documentation, create an effective regime for complaints and settling disputes, etc.
This instrument will ensure a fair competition and projects of quality and efficient developing processes.
The mentioned issues are affecting the competitiveness in the real estate sector. The given restrictions, additional obligations for foreign investors, the lack of clear guidelines on implementing regulations are hurdles for investors seeking to invest in this sector in Vietnam. In view of the government’s commitments to ensure growth and the issues mentioned above, it is necessary to create clear guidelines for eliminating confusion to the investors and real estate buyers. Furthermore, the upcoming major trade agreements will have a great impact on the development of the real estate sector in Vietnam. On the other hand, the Vietnamese government still has to make further improvements on the legal environment for ensuring the implementation of the agreements.
If you have any question on the above, please do not hesitate to contact Dr. Oliver Massmann under email@example.com . Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.
Thank you very much!