Vietnam investment regulations – Direct investment v.s. indirect investment

Under the Investment Law, direct investment means a form of investment whereby the investor invests its invested capital and participates in the management of the investment activity. On the other hand, indirect investment means a form of investment through the purchase of shares, share certificates, other valuable papers or a securities investment fund and through other intermediary financial institutions and whereby the investor does not participate directly in the management of the investment activity.

The confusing point here is what “participating in the management” of investment activity. If having purchased shares of a listed company in Vietnam, a foreign investor attends the shareholders meeting of such company and exercises its voting rights then arguably the investor has “participated in the management” of the company in Vietnam. A more relevant example is a foreign investor purchases a minority stake in a domestic joint stock company and nominates its personnel to hold position in the Board of Directors of such company. In such case, it is not clear if the investor could be deemed to have “participated in the management” of the company in Vietnam.

The consequences of being treated as a direct investment and an indirect investment may be material. If an investment is an indirect investment then the parties may not need to obtain an Investment Certificate and must settle the transaction in Vietnamese Dong through a VND capital contribution account.  If an investment is a direct investment then the parties may need to obtain an Investment Certificate and could settle the transaction in foreign currency.

It would have been clearer if the Investment Law replaces the concept of “participating in the management” with “control”. In such case, an investor will be deemed to make a direct investment if it has “control” of the investment activity. In other cases, the investor will be deemed to make an indirect investment. 

Vietnam Business Law Blog

Decree 40/2019 amending four separate decrees on environment protection takes effect from 1 July 2019. Below are some of the key amendments introduced by Decree 40/2019:

·        The term “Industrial zones” is expanded to include all kinds of zones, such as export processing zones, high-tech zones, or industrial areas.

·        “Main works or items of a project” is the main project component specified in the feasibility study of the project.

·        List of projects subject to environmental impact assessment (EIA) is adjusted. For example, investment in a golf course is now subject to EIA. Certain projects which do not have wastewater treatment work or waste treatment work are exempted from post-construction examination. Only residential projects with capacity of 2000 (instead of 500) or more inhabitants are subject to EIA. Only hotel projects with capacity of 200 rooms (instead of 50) are subject to EIA.

·        Industrial manufacturing is classified in various sectors with different level of risks to the environment. Development of manufacturing projects with very high risks to the environment is subject to consultancy with environmental experts and scientists, and appraisal of EIA reports of these projects must be conducted by an appraisal panel.

Various provisions of the Enterprise Law 2014 can now allow parties to an M&A deal in Vietnam to have more flexibility in designing a closing mechanics. In particular,

·        Multiple legal representatives In a M&A deal involving a change of control, the buyer would want to control the legal representative position on the closing date. But this involves registration with the Business Registration Authority. Many sellers are reluctant to change the legal representative position before closing without receiving payment of the purchase price.

 In the past, a company can only have one legal representative. However, under the Enterprise Law 2014, a company can have two or more legal representatives. As such, the parties can agree that the target company will have two legal representatives appointed by the seller and the buyer. The legal representative appointed by the seller will continue to run the target company up until closing and will resign on closing. The legal representative of the buyer will assume control on closing. And after closing, the target company will deregister the legal representative appointed by the seller.

Unclear definition of 51% FIE

Under Circular 6/2019, enterprises with foreign direct investment (FIEs), which must open DICA include (1) enterprises which are established by foreign investors (with or without local partners) (Incorporated FIEs); and (2) enterprises which do not fall under (1) but 51% of which are owned by foreign investors (51% FIEs). Normally, one would expect that a 51% FIE must be a FIE, 51% of which is actually owned by foreign investors (Actual 51% FIEs). However, Circular 6/2019 provides that a 51% FIE include enterprises which have foreign investors making capital contribution or purchasing shares resulting in  foreign investors’ owning 51% of the FIE. The use of the words “resulting in” suggests that a 51% FIE could be a 100% locally-owned company, which has potential foreign investors who may acquire 51% or more of its charter capital (Future 51% FIEs). 

A closer look at Circular 6/2019 of the State Bank of Vietnam (SBV) reveals that it could create more problems than it solves. The key issue under Circular 6/2019 is the broader use of the “direct investment capital account” (normally referred to as DICA).

To understand the issue, one would need to know how DICA works. Under the foreign exchange regulations, DICA must be opened by a company in Vietnam, which has “foreign direct investment” (the FIE). Foreign investor/shareholders of an FIE will contribute capital to the FIE by transferring monies to DICA. Foreign investors/shareholders will get their monies back from Vietnam also by transferring monies from DICA to their own bank accounts (even in case the foreign investor/shareholder sells its investment to another investor). This simple arrangement works well for simple foreign direct investment activities in the 1990s where there is limited M&A activities and foreign investors are mostly foreign manufacturers who do not plan to sell their investment down the road.

On 8 July 2019, the State Bank of Vietnam (SBV) expresses its view and recommendation to credit institutions in Vietnam (CIs) on peer-to-peer lending activities (P2P Lending). The SBV’s view is as follows:

·       P2P Lending is built on a digital platform which connects borrowers and lenders without having to go through financial intermediaries (such as CIs). All lending activities will be recorded on the platform.

·       The SBV acknowledges that P2P Lending is not specifically regulated by current regulations.

·       Besides its potential to create additional way to mobilize capital, P2P Lending can give rise to the following risks: (1) misleading information provided by P2P Lenders about the product’s safety, (2) the lack of oversight on P2P Lending’s platform in terms of cybersecurity, (3) P2P Lenders’ using customer information for predatory lending activities, and (4) P2P Lending being considered as activities of CI.    

Since the end of 2018, the Commission for the Management of State Capital at Enterprises (CMSC) will become the new Owner Representative Agency (Cơ quan đại diện chủ sở hữu) of 19 large SOEs including State Capital Investment Corporation (SCIC), Petro Vietnam (PVN), Vietnam Electricity (EVN), Vietnam National Petroleum Group (Petrolimex). This change causes some SOEs to have CMSC as the common Owner Representative Agency, which may cause these SOEs to become related persons according to the Enterprise Law 2014, because:

The Ministry of Finance has recently released draft amendment to the current regulations on duty-free goods under Decree 167/2016. We discussed below some proposed amendments:

·        The definition of “goods temporarily imported to Vietnam” is amended to include goods temporarily imported from “non-tariff zones and bonded warehouses”. Under existing regulations, it is not clear whether or not goods from non-tariff zones and bonded warehouses can be sold in duty-free stores.

·        Bags, packaging for the purpose of carrying duty-free goods are now also considered duty-free goods.