In brief
On 17 June 2020, the new Law on Investment (“New Investment Law”) was passed by the National Assembly of Vietnam. This will take effect on 1 January 2021.
The government has also released the draft decree guiding the implementation of the New Investment Law (“Draft Decree”), which is expected to be effective from 1 January 2021 and replace Decree 118/2015/ND-CP (“Decree 118”).
In general, the New Investment Law contains notable changes that will impact investment activities in Vietnam. Meanwhile, the Draft Decree, at this stage, has not been fully built up and will be subject to further development from the Ministry of Planning and Investment and the government.
1. New Investment Law
1.1 Market access conditions for foreign investors
The most notable change in the New Investment Law is the introduction of the “negative list” approach, according to which foreign investors will be entitled to market access conditions applicable to domestic investors for any sectors not included in the list of sectors in which foreign investors are restricted from accessing ("List of Restricted Sectors").
The government will issue a List of Restricted Sectors, which must specify: (i) the sectors where market access is not yet allowed; and (ii) the sectors where market access is conditional. Specifically, market access conditions applicable to foreign investors ("Market Access Conditions") will include the conditions on: (i) foreign ownership limitations; (ii) form of investment; (iii) scope of business and investment activities; (iv) the capability of the investor and business partners joining the investment activity; and (v) other conditions stipulated under international treaties and Vietnamese laws.
In addition to Market Access Conditions, foreign investors, or more specifically their foreign invested companies, must also satisfy the relevant business conditions, which are conditions that any entity engaging in a regulated industry must satisfy (regardless of foreign ownership). Business conditions forms typically include permits, eligibility certificates, practicing licenses, and confirmation letters etc.
1.2 New definition of foreign invested economic organizations
The New Investment Law has amended the nature of foreign-invested economic organizations that will be treated as foreign investors when they make investments in other economic organizations. In particular, the below economic organizations must be subject to investment procedures applicable to foreign investors if it has:
- more than 50% of its charter capital held by foreign investor(s) (“Foreign Majority Company”); or
- more than 50% of its charter capital held by the Foreign Majority Company(ies); or
- more than 50% of its charter capital held by both foreign investor(s) and the Foreign Majority Company(ies).
Compared to the current Investment Law, the New Investment Law has decreased the threshold for being considered as a Foreign Majority Company (i.e., from 51% or more charter capital to more than 50% charter capital). That means, there will be more foreign-invested economic organizations captured by this amendment under New Investment Law.
1.3. Clarification on M&A Approval procedures
Under the current Investment Law, a foreign investor is required to obtain preliminary approval ("M&A Approval") from the local investment licensing authority if it intends to contribute capital to, or acquire equity from, an existing company if: (i) the target company engages in business lines conditional to foreign investors; or (ii) the capital contribution or the equity acquisition results in 51% or more foreign ownership of the charter capital of the target company. In practice, these regulations are interpreted differently by licensing authorities in different provinces.
The New Investment Law has clarified the instances where M&A Approval procedure is required, specifically as below:
- an increase of foreign ownership ratio in a target company engaging in business lines included in the List of Restricted Sectors;
- an increase of foreign ownership ratio in a target company from 50% or less than 50% to more than 50% of the charter capital;
- an increase of foreign ownership ratio in a target company where foreign ownership of the charter capital is already more than 50%; or
- a capital contribution or capital acquisition of a target company, which has already obtained land use right certificates for the lands located within areas having an effect on national security, such as sea-islands, borderlands and coastal areas, etc.
1.4. Investment incentives regime
With an aim to boost the growth of start-ups, tech companies and other innovative sectors, the New Investment Law has supplemented the sectors that are entitled to investment incentives. These sectors include, among others, high-tech enterprises, scientific and technology enterprises, small and medium-sized start-up innovative enterprises, R&D centers, and investment in technical facilities for small and medium-sized enterprises.
In addition, the New Investment Law has new provisions on exceptional investment incentive regime for the below projects, which are considered as having significant socio-economic impact:
- establishment of new R&D/innovation centers, or expansion of the existing R&D/innovation centers, with the total investment capital of at least VND 3,000 billion (approx. USD 130 million), and at least VND 1,000 billion (approx. USD 43.4 million) being disbursed within three years; and
- investment projects in business lines eligible for exceptional investment incentives having total investment capital of at least VND 30,000 billion (approx. USD 1.3 billion), and at least VND 10,000 billion (approx. USD 434 million) being disbursed within three years.
Projects having significant socio-economic impact may be entitled to the exceptional tax and land incentives pursuant to approval from the National Assembly based on a proposal from the Prime Minister.
1.5. New instances for termination of investment projects by the authorities
Besides the cases where the State authorities can terminate the investment projects as regulated by the current Investment Law, the New Investment Law has provided three new instances below.
- Investment projects become subject to land reclamation because the land is not being used or there is a delay in its use in accordance with the land law;
- Investors do not make a deposit or provide a guarantee of deposit obligations as security when implementing investment projects if it is required to do so by laws; and
- Investors implement such project based on forged transactions pursuant to civil laws.
1.6. Changes to list of prohibited business and conditional business
Under the New Investment Law, debt collection service is a prohibited business. The New Investment Law further stipulates that the collection agreements signed before 1 January 2020 (i.e., the effective date of the New Investment Law) must be terminated as from 1 January 2020.
In addition, the New Investment Law has amended the list of conditional businesses. In particular, it has removed, among others, commercial arbitration, franchising and logistics services from the list of conditional businesses. Meanwhile, several sectors such as electronic identification and authentication services, data center, payment service not through customer’s bank account, fishing vessel registration business, have been added to the list of conditional businesses.
1.7. Investment deposit for securing the implementation of the investment project
Under the New Investment Law, for investment projects which are to be allocated land, or leased land by the State, or for which the land use purpose will be changed, the investors must make a deposit or provide a bank guarantee for the deposit obligation as a security to implement the investment projects. However, this requirement does not apply to the following cases:
- The investor wins the auction of land use rights to implement the investment project and the relevant land is allocated by the State with land use fees or the relevant land is leased from the State with one-off rental payment;
- The investor wins the bidding to implement the investment project using land;
- The investor is allocated or leases the land from the State on the basis of receiving the transfer of an investment project that the previous investor(s) has already made deposits on or has completed its contribution of capital or mobilization of capital in accordance with the approved schedule; and
- The investor is allocated or leases the land from the State to implement the projects on the basis of receiving the transfer of land use right or assets attached to land from other land users.
The New Investment Law further provides that the deposit ratio is from 1% to 3% of the investment capital and will vary depending on the scale, features and schedule of the investment projects.
2. Draft Decree Guiding the New Investment Law
2.1 List of Restricted Sectors
The Draft Decree guiding the implementation of the New Investment Law has provided the List of Restricted Sectors detailing: (i) the sectors where market access is not yet allowed; and (ii) the sectors where market access is conditional. The List of Restricted Sectors is attached in the appendix of this client alert.
2.2. New regulation on division, consolidation and merger of investment project
The Draft Decree has added a new provision on the division, consolidation and merger of investment project(s). In particular, under the Draft Decree, investors are allowed to divide a project into different projects or merge several projects with the same objectives into one project. In such case, the foreign investor may be required to carry out relevant procedures on the amendment to investment registration certificates or in-principle approval. However, the Draft Decree has yet to provide the comprehensive procedures for these cases.
2.3. New provision on extension of investment project
The Draft Decree has included a new provision on the extension of term of investment project, which has not been clearly addressed under Decree 118. However, the specific regulation on the procedures and timelines for such extension has not been provided.
2.4. New provision on the process of change the investor
The Draft Decree has added an article on the change of investor, which sets out four circumstances for changing the investor as below.
- transfer of part or the entirety of the investment project;
- the investor contributes the property of the project or the project as a contribution in-kind in a new economic organization;
- reorganization of the enterprises; and
- as required by the decision of court or arbitration.
List of Restricted Sectors
A. List of sectors where market access is not yet allowed
- Trading in goods and services that fall under the list of goods and services subject to state monopoly;
- Press activities and activities on gathering news, broadcasting and television in any form;
- Fishing;
- Investigation and security services;
- Judicial administrative services, including judicial verification services, bailiff services, property auction services, notarization services and asset management services;
- Services of sending workers abroad;
- Business in cemeteries and cemetery parks;
- Public opinion polling services (opinion polls) (CPC 86402);
- Blasting service;
- Testing and certification services for transportation vehicles;
- Importing and dismantling used ships.
B. Sectors where market access is conditional
- Production and distribution of cultural products, including video records;
- Production, distribution and projection of television programs and cinematographic works;
- Insurance, banking, brokerage, securities trading, monetary and other related services;
- Telecommunication services;
- Advertising services;
- Print service, publication distribution service;
- Land surveying and mapping;
- Educational services;
- Exploration, exploitation and processing of natural resources, minerals, oil and gas)
- Hydroelectric and nuclear energy;
- Passenger transportation and freight transportation by railroad, airway, road, river, sea and pipeline;
- Aquaculture;
- Forestry and hunting;
- Betting and gambling;
- Services related to industrial property;
- Security services;
- Manufacture of military materials or equipment;
- Operation and management of river ports, seaports and airports;
- Real estate business;
- Legal services;
- Veterinary services;
- Distribution service;
- Technical inspection and analysis services;
- Travel services;
- Health and social services;
- Sporting and recreational services;
- Manufacture of paper;
- Manufacture of transportation vehicles having more than 29 seats;
- Development and operation of traditional markets;
- Commodity trading exchange;
- Service of collecting inland retail goods;
- Auditing, accounting, bookkeeping and tax services;
- Valuation services, consulting services of valuating enterprises for equitization;
- Services related to agriculture, forestry and fishery;
- Manufacture of aircraft;
- Manufacture of locomotives and railroad carriages;
- Manufacture of cigarettes;
- New business lines that do not exist in the territory of Vietnam at the time the regulation is effective (business that does not fall under the economic business system under Decision 27/2018/QD/TTg);
- [The Government is choosing one of these two options]
Option 1: Other sectors in which Vietnam has not committed national treatment with foreign investors according to Vietnam's Schedule of Commitments under the GATS-WTO Agreement and the Vietnamese laws provide conditions for market access applicable exclusively to foreign investors;
Option 2: Other sectors in which Vietnam has not committed to national treatment with foreign investors according to Vietnam's Schedule of Commitments under the GATS-WTO Agreement, [except for some business sectors].
