After almost 10 years, legal practice in Vietnam has revealed numerous shortcomings and limitations of the old Law on Enterprises (LOE) and the old Law on Investment (LOI). Both the new LOI and LOE, effective as of July 1st 2015, will address those concerns.
By Dr. Matthias Dühn:
A new “freedom of business” in Vietnam?
They will also introduce a new principle of “freedom of business”, and provide companies with greater flexibility, both in the scope of their permitted activities and their internal organizational structure. Specifically, the new LOE provides a modernized governance framework consistent with international practice, and aims at further simplifying the rules on company formation, business registration and corporate governance, thereby making it easier for both domestic and foreign-owned companies to operate in Vietnam. The new LOI further clarifies for foreign investors, in a legally binding way, the requirements, conditions and limitations for their investment projects in Vietnam.
Under the old LOI, investment approvals were often denied or withheld if a foreign investor’s intended business activity in Vietnam was not explicitly permitted by law. The new LOI takes the opposite approach with the principle now being that investors are allowed to do any business investment that is not explicitly prohibited or conditional. To this end, the new LOI sets out six (6) prohibited business lines instead of the vague, general regulations as before. Those prohibited business lines now include – amongst others – all commercial activities with regards to narcotics, drugs, chemicals; trading in banned minerals, wild or endangered and rare plants and animals; prostitution, human trafficking, human tissues and organs and activities related to human cloning. Appendix 1 of the new LOI also provides a detailed list of the drugs, animals, plants and minerals banned from investment.
Clarity on conditional business lines
More importantly, the new LOI now contains in its Appendix 4 a list of 267 clearly defined conditional business lines. Even though 267 certainly sounds like a lot, the new LOI shows progress in that it now summarizes and defines in its Annex 4 all conditional business lines, with no other additional requirements being set out in other specialized legal documents.
This is a clear improvement compared to the old LOI: Even though under the old LOI, there were only nine (9) conditional business lines listed in the LOI, those business lines were only defined very broadly, such as e.g. investments affecting national defense and state security; social order and security; finance, banking and those impacting public health. Most importantly, one business line under the old LOI included “others areas as prescribed by law”, which had led to numerous additional conditional business lines and unclear requirements for investment approvals in practice.
Under the new LOI, state agencies and licensing authorities from now on will no longer be able to set up conditional business lines on their own by simple decree or circular, unless formally approved by the National Assembly by amending Appendix 4 of the new LOI. Accordingly, with the new comprehensive and final listing of conditional business lines in Appendix 4, foreign investors may now be cautiously optimistic about having early clarity about the conditionality of their intended investment in Vietnam.
Matthias is a German Attorney-at-Law (“Rechtsanwalt”) since 2001, and admitted as a Foreign Lawyer in Vietnam since 2007. He focuses his practice on corporate and commercial law, foreign direct investment (FDI), d complex contract and labor negotiations, corporate governance, risk assessment and compliance. In 2007, Matthias has successfully set-up the German law firm Rödl & Partner in Vietnam, before working as the regional Compliance Officer Asia/Pacific for MAN Truck & Bus Ltd. in Bangkok/Thailand from 2011-2013. In 2014, he set-up Viet Diligence Legal Ltd., and now provides – with his Vietnamese partners – a full range of legal and tax services in Vietnam.
Email: Matthias.Duehn@vietdiligence.com Mobile: +84 914 247 295
Seperation of company formation and ivestment approval
The new LOI clearly separates the (foreign) company’s business registration certificate (BRC) from the foreign company’s investment registration certificate (IRC). Under the new LOE/LOI, the company establishment is governed in all cases – foreign or domestic investors – by the LOE, and only investment projects of foreign investors must have – beyond their BRC – an additional IRC. In this sense, the IRC now only records the information on investment projects. In this context, the new LOI also clarifies that investment approval by way of IRC is only required for foreign investors, who intend to hold 51% or more of the charter capital/shares of the company operating the project. Other projects with foreign investment/capital less than 51% will be treated consistently as domestic investment projects and will not require application for an IRC.
Timelines for investment approval
Under the new LOI, the general timeline for the issuance of the IRC is only 15 working days from the date of receipt of complete application dossier by the licensing authority. The timeline to grant an amended or adjusted IRC has been reduced to 10 working days from the date of receipt of the complete dossier. However, in practice licensing authorities have often delayed approvals with various arguments why the submitted application dossiers were not “complete” and therefore the legally prescribed timelines could not be kept or were not started in the first place. Therefore, even though the formal timelines for granting the IRC have been significantly reduced by the LOI, it remains to be seen in practice whether those tight timelines will be kept by the licensing authorities, or old patterns of delaying will prevail.
The new LOI introduces an investment-friendly spirit of “freedom of business”, and the above simplifications and clarifications of the LOI are a major step forward to attracting more and better foreign investment to Vietnam. However from practical experience, new laws in Vietnam always need a certain phase-in time. It will therefore be crucial that the implementing provisions to the LOI will be similarly clear and easy to understand, and application in practice will be in the LOI’s new spirit of the new “freedom of business”. Therefore, the real success of the new LOI will depend on both the implementing provisions (expected by July 2015) and the way the licensing authorities apply those provisions consistently in practice.
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