The new Law on Investment No. 61/2020/QH14 was passed by the National Assembly of Vietnam on June 17, 2020 and will come into effect from January 1, 2021 (“LOI 2020”).
Through this reform, the National Assembly of Vietnam aims to (i) promote the consistency between the investment laws and other laws, (ii) better attract and manage the foreign investment into Vietnam and at the same time (iii) maintain the national defense and security.
We summarize below the major changes of the LOI 2020.
1. Market Access Conditions for Foreign Investors
A foreign investor when making investment into Vietnam must satisfy two sets of conditions: (i) the market access conditions and (ii) the sectoral regulatory conditions if applicable. However, since there is no consolidated list for such conditions, it has been challenging to determine applicable market access conditions for any specific sectors. In order to address this issue, the LOI 2020 introduces a new approach to the market access conditions for foreign investors to enter the Vietnamese market.
Under the LOI 2020, all sectors with market access restrictions on foreign investors will be consolidated into an official list to be issued by the Government (“List of Restricted Sectors”). The List of Restricted Sectors will be classified into two groups: (i) a group of sectors which are not opened to foreign investors and (ii) another group of sectors in which the market access of foreign investors are subject to conditions. Foreign investors who wish to invest in sectors falling outside of this List of Restricted Sectors will be treated in the same way as the Vietnamese investors are.
2. New Conditions Relating to National Defense and Security
In addition to the market access conditions, LOI 2020 supplements two additional conditions for a foreign investor who wishes to contribute capital or acquire capital/share in a Vietnamese company:
The investment must not compromise national defense and security of Vietnam; and
The investment must comply with the conditions relating to the use of sea-lands, borderlands and coastal lands in accordance with the applicable laws.
The term “national defense and security” is not defined under the LOI 2020 which will give the licensing authorities broad discretion in assessing and approving foreign investment activities in sensitive sectors or locations.
For existing investment projects, the extension of the investment term will not be granted to any project using outdated technology, having any potential negative impact on the environment (e.g., pollution) or involving any overuse of resources.
3. Nominee Arrangement
Nominee arrangements have been discussed as a major loophole of the investment management regime through which foreign investors can invest in the restricted sectors via their Vietnamese nominees.
The LOI 2020 (Article 48.2(e)) addresses this issue by allowing the authorities to terminate an investment project partly or wholly if the investor conducts its investment activities on the basis of a “sham” transaction (i.e., using the Vietnamese nominee to circumvent the restrictions on foreign investors). According to the Civil Code, a “sham” transaction is a transaction established by the parties in order to conceal another (i.e., real) transaction. Although such a transaction will be invalidated under the Civil Code, the LOI 2020 has made it clear that it can be a legal ground for the investment authorities to terminate an investment project.
4. New Foreign Ownership Threshold
Under the current Law on Investment 2014, a foreign-invested company (“FIC”) will be subject to the same investment conditions and procedures applicable to a foreign investor if having 51% or more of such FIC’s charter capital is held by (i) a foreign investor, (ii) an FIC with at least 51% owned by a foreign investor or (iii) a foreign investor and the aforementioned FIC together.
This 51% threshold has been changed to “more than 50%” to be aligned with the current Law on Enterprises. There is no clear guidance under the LOI 2020 as to whether a FIC, established and operating under the current Law on Investment, having less than 51% foreign ownership but more than 50% foreign ownership (e.g., 50.2%) will be subject to investment conditions applicable to a foreign investor or a local investor in its future investments in sectors that are market access conditional to a foreign investor.
5. Merger and Acquisition Approval (“M&A Approval”)
The LOI 2020 further clarifies cases where the M&A Approval is required for the foreign investors in their investment into a Vietnamese company. The ambiguity of the existing regulations has led to inconsistent interpretations and practices at the provincial level authorities. The LOI 2020 requires a foreign investor to obtain an M&A Approval when the proposed transaction leads to:
an increase in foreign ownership in an economic organization engaging in a business belonging to the List of Restricted Sector (i.e., sectors with market access conditions applicable to the foreign investor);
an increase in foreign ownership in an economic organization from below 50% to more than 50% of the charter capital;
an increase in foreign ownership in an economic organization where foreign ownership capital already exceeds 50% of charter capital; or
M&A activities in an economic organization that has the land use right certificate for the land located in sea-islands or border/coastal commune-level areas or other areas which may affect the national defense and security.
The change of foreign ownership thresholds as mentioned in Section 4 above is also reflected in the cases where an M&A Approval is required in this Section 5 (i.e., items ii and iii).
5. Selection of Investor
The LOI 2020 consolidates the investor selection mechanisms that are currently provided under land laws, tendering laws and investment laws. In particular, the investor of an investment project may be selected by using one of the following ways:
an auction of land use right under land laws;
a tender process under tendering laws; or
in limited cases, a decision of the authority in its in-principle investment approval without the involvement of an auction or a tender process (e.g., where the investor has already obtained the legitimate land use right or where the auction and tender regimes are not applicable).
7. Exceptional Investment Incentive Regime for Projects Having Significant Socioeconomic Impact
The exceptional investment incentive is a new regime under the LOI 2020. In particular, the LOI 2020 grants the exceptional investment incentive and investment support to the following projects:
Establishment or expansion of R&D/innovation centers with the total investment capital of at least VND 3 trillion (approximately USD 130 million) with the minimum drawdown of VND 1 trillion (approximately USD 43 million) within three years from the issuance date of the investment registration certificate or the in-principal investment approval; or national innovation centers to be established pursuant to the Prime Minister’s decision; and
Investment projects in business sectors eligible for exceptional investment incentives that have the total investment capital of VND 30 trillion (approximately USD 1.3 billion) or more and the minimum drawdown of VND 10 trillion (approximately USD 434 million) within three years from the issuance date of the investment registration certificate or the in-principal investment approval.
8. Waiver of Investment Conditions for Startups
The requirements to have an investment project and to obtain an investment registration certificate can be waived for a foreign investor if it incorporates a small/medium-sized startup innovative enterprise or an innovative start-up investment fund in accordance with the laws on supporting small and medium-sized enterprises.
9. Public-Private Partnership
The section on public-private partnership contract is removed from the LOI 2020. This investment form will be regulated under the recently promulgated Law on Public-Private Partnership Investment.
10. Prohibition of Debt Collection Business
The LOI 2020 provides some changes to the list of prohibited businesses and the list of businesses subject to conditions. Notably, the debt collect business is now prohibited under the LOI 2020 and all current debt collection services will be suspended from January 1, 2021.