Written by Chi Ha.
Have there been any recent changes to the Foreign Investment rules in Vietnam?
The National Assembly of Vietnam passed an amended and restated Law on Investment (Amended LOI) in June 2020 which represents a major shift in Vietnamese foreign investment policy since the law was last revised in 2014. The Amended LOI will take effect from 1 January 2021, at the same time with an amended Law on Enterprises 2020 and a new Law on Public Private Partnership 2020. The overhaul of these key laws that underpin investment activities in Vietnam is widely seen as a strategic effort by the Vietnamese government to continue to attract the influx of FDI capital, which reached a record-breaking growth rate in 2019 (US$38.2 billion).
If yes, please provide a brief summary of the changes
The Amended LOI introduces various measures which will further streamline the process of foreign investment in Vietnam. We set out below some of the key changes.
Adoption of a "negative list" approach to identify, on an exception basis, all business sectors and lines to which market access are limited or excluded for foreign investors
This is a major development to foster transparency and liberalise market access to foreign investors as any business sectors and lines that are not specifically included in the lists will be open to foreign investors under the same market access conditions as Vietnamese investors. When the Amended LOI is in force, foreign investors will only be required to check that their target business operations are not included in either of the two lists for (a) restricted access and (b) conditional access, each of which will be prepared based on domestic laws and international treaties for which Vietnam is a member. Market access conditions for foreign investors may include:
- foreign ownership cap;
- form of foreign investment'
- scope of investment activities;
- capacity / identity of foreign investors; and
- other conditions as prescribed by the relevant regulators.
Review and consolidating the list of sectors and business lines that are subject to investment and business conditions
Such changes will apply to both domestic and foreign investors. Some 11 sectors that are currently subject to such conditions have been removed from the conditional list, including franchising, logistics and freight transport agency services although the actual impact in these sectors will need to be further assessed once the negative market access lists are released. A few sectors have been added to the conditional list including clean water production and supply, while "debt collection" has now become prohibited such that it is no longer possible for a private entity to carry out this business due to concern arising from criminal activities associated with enforcing and collecting the debts.
Introduction of two new control criteria on M&A activities by foreign investors
These will give Vietnamese regulator(s) a broad discretion to disallow or withhold approval for certain M&A transactions based on a "national defence and security" ground or for "[non] compliance with land law on the use of sea islands, borderlands and coastal lands". While it is expected that such power will be used in exceptional circumstances rather than as the norm, this reflects an underlying current in Vietnam's approach to securing national interests.
Closing of a current loophole since 2014 which has allowed entities with more than 50% foreign ownership to operate as if they were Vietnamese investors
This loophole could be exploited if the proportion of foreign ownership could be structured to be less than 51% of their charter capital. Under the Amended LOI, the relevant threshold has been reduced to "more than 50%" which is now consistent with the definition of "control" under the Law on Enterprises.
Clarifications in the circumstances where prior approvals of foreign investment authorities are required on M&A activities by foreign investors
Under the Amended LOI, M&A approval must be obtained for:
- any increase in foreign ownership in a target entity which operates in a business sector or line that is specified in the "conditional market access" list for foreign investors as mentioned above;
- any transaction resulting in an increase of foreign ownership from less than 50% to more than 50%; and
- any subsequent increase in foreign ownership, regardless of size, where foreign investors have already owned more than 50% of the target's charter capital.
Incentivising foreign investment in venture capital and start-ups in Vietnam
This is achieved through a (first time) exemption from regulatory requirements such that small and medium foreign invested enterprises are not required to have an investment project or obtain an investment registration certificate.
What was the rationale for the changes?
The changes in foreign investment rules reflect a major shift in the Vietnamese government's strategic approach, which seeks to increase quality and effectiveness of foreign investment activities in Vietnam. There is an increasing recognition in the highest governing levels in Vietnam that the government should proactively attract and select investment projects of high quality, with an emphasis on advanced, clean technology and environmental protection. There is also a growing recognition that Vietnam needs to diversify both source and form of foreign capital and increase synergy between foreign investment activities with the remaining domestic market to ensure the self-sufficiency and independence of the national economy. Such an approach was set out in the 10 year foreign investment strategy until 2030 in Resolution 50 of the Political Bureau in August 2019 and is expected to become even more relevant in the post-COVID-19 landscape.
Are these changes temporary and if yes, when are they likely to be reviewed again? If not, are they part of a bigger reform (ie have there been any other recent developments, and are you expecting any further changes)?
In general, such a major legal reform as the Amended LOI may take place in Vietnam every 5 or 10 years, depending on the national policy and strategy on foreign investment as well as in response to issues raised by investors. We are not aware of any plan for the next round of reform on foreign investment rules and do not expect the measures introduced by the Amended LOI to be changed in the foreseeable future.
Are there any particular sectors that are affected the most?
As mentioned above, the Amended LOI has introduced a new "negative-list" approach to market access and it has been delegated to the Government to issue two lists of business sectors where market entry is either restricted or conditional to foreign investors. It will be important to monitor the development of these lists – these are currently under preparation by the Government.
Foreign owned companies currently doing business in Vietnam in certain conditional sectors such as education, logistics, e-commerce, and pharmaceutical distribution commonly use a less than 51% holding structure to enjoy the flexibility and benefits of operating as a local company. These entities would be negatively affected by the change in the Amended LOI which would require them to reduce the proportion of foreign ownership to 50% of the company's charter capital if they wish to continue to operate as a Vietnamese company. This is expected to raise practical legal and accounting issues for foreign investors and may require specific work-arounds to retain majority control of the Vietnamese subsidiaries.
What is the outlook for foreign investment in Vietnam?
Vietnam has attracted robust foreign investment flow over the last 3 decades with a continuous and fast economic growth rate. In recent years, it has further accelerated into a regional hub for foreign direct investment activities particularly in the industrial and manufacturing sector which has directly benefited from the trend to move some Chinese production bases to a lower labour cost jurisdiction and to an extent, indirectly from the US-China trade tension. A lion's share of foreign investment capital into Vietnam has come from other Asian countries and is expected to continue being so, with Japan (US$8.59bn in 2018) and South Korea ($US7.9bn in 2019) historically alternating to be the top investor, followed by Singapore (US$5bn in 2018) but most recently in 2019, the largest pledged FDI also came from Hong Kong (US$7.8bn) which has acted as a gateway for China outbound investments and into Vietnam. Vietnam is a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and most recently, has entered into a comprehensive trade agreement with the EU which will provide more significant opportunities for foreign capital inflow and exports.
The Vietnamese government continues to commit to raising national competitiveness and using FDI as an integral part of the domestic economy. Given its track record, and a positive consensus built on the Vietnamese government's early success in containing the spread of COVID-19 pandemic, it is expected that Vietnam will continue to be a bright spot for foreign investment in the region for a foreseeable future, with activities in manufacturing and processing, real estate, as well as retail and wholesale continuing to be the top three sectors.
What it is your advice to foreign investors in Vietnam?
The new market access lists will greatly benefit foreign investment activities and streamline the process for foreign investors which historically has been hindered by the complexities of overlapping legislations and regulations commonly observed in Vietnam. An increasing focus on quality and effective investment activities in Vietnam will lead to more selective investment projects and a preference for foreign capital which invests in value-added, high-tech production and training up the local workforce. Foreign investors should watch out for the detailed implementing regulations for the Amended LOI. Foreign investors should also bear in mind the practical challenges and complexities are likely to remain for foreign investors looking to navigate Vietnam's legal system, conduct proper due diligence and ultimately execute successful investments.
Where possible, investors looking to invest in Vietnam could seek to prioritise and focus their investments in sectors that are unconditional or unconstrained to foreign investors to avoid the complexity of investment procedure for conditional market access and any changes in the "negative list" to market access, as well as a possible tightening of State management in sensitive, conditional sectors.
Does Vietnam's FDI organisation coordinate with other government agencies, including the antitrust regulator?
As part of the Amended LOI measures to simplify administrative procedures for investment processes, all Ministries and lower-level authorities are prohibited from issuing regulations on investment conditions, so we expect that interaction between the FDI organisation and other government agencies would reduce significantly. However, it is still a requirement under the Amended LOI for local licensing authority to seek opinions from the appropriate FDI organisation and other competent authorities in relation to conditional sectors prior to issuing investment registration certificates. In the event that the opinions granted by other government authorities are unclear, the FDI authority has the power to issue a final decision.
With respect to antitrust issues, investors must separately comply with requirements of the new Vietnamese merger control regime under the Law on Competition 2018. In particular, while a merger clearance is not required as part of the licensing process under the Amended LOI (and amended Law on Enterprises), a separate approval may be compulsory for all transactions satisfying the new notification thresholds recently stipulated in Decree No. 35/2020/ND-CP which took effect on 15 May 2020.
This publication is intended to provide a high level overview of FDI trends and regulation in the Vietnam. It is provided for general informational purposes only and should not be construed as legal advice. King & Wood Mallesons does not practice Vietnamese law, and works closely with local lawyers to support our clients' needs in Vietnam. We are grateful to LNT & Partners for their co-operation on this publication.