New Investment and Enterprise Laws -Meaning Reform or Minor Fiddling?
1. New Investment and Enterprise Laws -
Meaning Reform or Minor Fiddling?
Oliver Massmann
Partner and General Director Duane Morris Vietnam LLC
On 26 November 2014, the National Assembly of Vietnam passed Law No. 67/2014/QH13 on
Investment (“2014 Investment Law”) and Law No. 68/2014/QH13 on Enterprises (“2014
Enterprise Law”), both will replace the Investment Law and Enterprise Law in 2005 by 01
July 2015. Major changes of these laws to the past laws and their impacts on the investment
environment in Vietnam are discussed in details below.
1. 2014 Investment Law
The 2014 Investment Law makes a great attempt to reduce the number of prohibited business
activities and conditional business activities. In addition, it introduces new definition of a
foreign investor and replaces the term “foreign-invested enterprise” with “economic enterprise
with foreign-owned capital”. It also no longer refers to either “direct investment” or “indirect
investment” and certain changes are made to forms of investment in Vietnam. More
importantly, the 2014 Investment law for the first time includes provisions regulating M&A
activities.
New concepts – but clearer?
A foreign investor was defined as any foreign entity or individual using capital in order to carry
out an investment activity in Vietnam. This definition has created much confusion about
whether a foreign individual owning 1%, 49% or 51% is called a foreign investor in the past
ten years. However, the 2014 Investment Law introduces a much more simpler and clearer
definition. A foreign investor is now any foreign individual or entity established in accordance
with the foreign law.
However, the new concept of “economic entity with foreign-owned capital” – an equivalent
term of “foreign-invested enterprise”– does not shed light to the meaning of its predecessor.
“Economic entity with foreign-owned capital” is defined as an economic entity which has any
member or shareholder which is a foreign investor. It is unclear how much ownership ratio will
qualify an enterprise an economic entity with foreign owned capital. Meanwhile, under the
2. 2014 Investment Law, the ownership ratio will decide the licensing procedures for investment
projects of foreign investors. If this is not detailed in the implementing documents, difficulties
during investment application procedures will unavoidably arise.
Reduced number of prohibited business activities and conditional business activities
Article 6 of the Investment Law narrows down the list of prohibited business activities to six
activities instead of 51 activities in the 2005 Investment Law. The number of conditional
business activities also decreases from 386 to 267 activities. Notably, the 2014 Investment Law
takes an initiative approach that it allows investors to do investment and business activities in
fields not prohibited by the 2014 Investment Law. This is a new methodology compared with
the old one, which only allows investors to do businesses specifically allowed. Accordingly,
there is more transparency and investors have more investment opportunities in Vietnam.
Procedures for implementation different types of investment project
Investment in Vietnam is no longer classified into direct or indirect investment, but depends on
either of the following forms:
Establishment of a new entity for an investment project;
Investment under Public-Private Partnership;
Investment under Business Cooperation Contract;
Capital contribution, purchase of shares or contributed capital in an economic entity.
i. Establishment of a new entity for an investment project;
An interesting point to note is the removal of a requirement to apply for an Investment
Registration Certificate (“IRC”) of investment projects by domestic investors, regardless of the
investment capital amount. Moreover, the application procedures no longer involves 2 steps:
investment registration and investment appraisal procedures. However, for foreign investors
with an investment project to establish a new entity in Vietnam, instead of applying for an IRC
and such certificate concurrently serves as an Enterprise Registration Certificate (“ERC”), they
are now required to separately apply for two different kinds of certificates: IRC and ERC. This
could be more burdensome for foreign investors in terms of time and cost.
ii. Capital contribution, purchase of shares or contributed capital in an economic
entity.
Under the 2014 Investment Law, capital contribution of foreign investors can be in the
following forms:
(1) purchase of shares issued for the first time or additionally issued of joint stock
companies;
(2) capital contribution to limited liability company, partnership companies; or
3. (3) capital contribution to other economic entities not falling under (1) and (2).
Foreign investors making investment by contributing capital, purchasing shares or contributed
capital must register their investment with the local Department of Industry and Trade if (1)
Foreign investors contribute capital, purchase shares or contributed capital in economic entities
in conditional business activities applicable for foreign investors; or (2) capital contribution,
purchase of shares or contributed capital results in 51% or more ownership of charter capital of
certain economic entities in the targeted economic entities. Certain economic entities include
entities which have (1) a foreign investor holding from 51% of its charter capital or the
majority of its partnership members are foreign individuals (for economic entity being a
partnership enterprise); or (2) an economic entity in (1) holding from 51% of its charter capital;
or (3) foreign investors and economic entity in (1) holding from 51% of its charter capital.
2. 2014 Enterprise Law
The 2014 Enterprise Law simplifies the procedures for establishment of enterprises, introduces
new provisions regarding company management and clearer regulations on Group of
Companies. Establishment of enterprises
The 2014 Enterprise Law no longer requires the specification of business lines in the ERC.
Indeed, enterprises may do any business not prohibited by the law and register their activities
with the registration authority. If they do business in conditional sectors, they have to ascertain
that they meet all the required conditions. The liabilities rest on the enterprises when the
authority inspect their activities and may apply fines if they do not meet the required
conditions. Moreover, under the 2014 Enterprise Law, if there is any member not fully
contributing their committed capital after 150 days from the issuance of the ERC, enterprises
have to apply for charter capital adjustment. Moreover, a single limited liability company is
also allowed to reduced its charter capital, which is prohibited under the 2005 Enterprise Law.
In terms of capital contribution, the 2014 Enterprise Law consistently applies the 90-day
period for capital contribution for both limited liability companies and joint stock companies.
Meanwhile, under the 2005 Enterprise Law, this time limit is 36 months for both types of
companies. This is clearly a stricter rule and significantly impacts investment in large scale
projects, for example, infrastructure or construction projects.
Company management
i. Legal representative
Limited liability companies and joint stock companies may have more than one legal
representatives depending on the need of the companies. The company’s charter will specify
4. the number, management title, rights and obligations of the legal representatives. If the
enterprise has only one legal representative, this person must still authorize another person to
perform his or her rights and obligations when he or she is out of Vietnam, irrespective of the
absence duration.
ii. Structure of a joint stock company
A joint stock company can now choose to structure the company in either of the following
ways: (i) General Meeting of Shareholders, Board of Management, Control Committee and
Director or General Director. In case the company has less than 11 shareholders and
shareholders which are organizations own less than 50% of total shares of the company, the
Control Committee is not required; or (ii) General Meeting of Shareholders, Board of
Management, and Director or General Director.
Group of Companies
The 2014 Enterprise Law clearly defines parent-subsidiary companies. A company is called a
parent company of another company if it: (i) owns more than 50% of the charter capital or the
total normal shares of that company; (ii) has the right to directly or indirectly appoint the
majority or all of the members of the Board of Management, Director, General Director of that
company; or (iii) has the right to amend or supplement the charter of that company.
A subsidiary is not permitted to contribute capital or buy shares in its parent company. All
subsidies of the same parent company cannot together contribute capital or buy shares to own
each other. Further, subsidiaries of the same company with at least 65% state ownership may
not together contribute capital to establish a company.
Conclusion
With the adoption of the 2014 Investment Law and Enterprise Law, the investment
environment in Vietnam now becomes more attractive to foreign investors to a certain extent.
However, from investors’ perspective, they need more clarifications and better treatment. We
will need to see the real impact of these new laws when their implementing documents are
introduced in the upcoming time and their application.
Should you have any questions, please contact Oliver Massmann
under 0TUomassmann@duanemorris.comU0T;