In an effort to more closely align banking regulations on foreign direct investment with the 2014 Investment Law, and to resolve ambiguities as to when foreign direct investment accounts are required, the State Bank of Vietnam (SBV) promulgated Circular No. 06/2019/TT-NHNN (Circular 06) on 26 June 2019. Circular 06 takes effect from 6 September 2019 and replaces Circular No. 19/2014/TT-NHNN dated 11 August 2018 (Circular 19) on foreign exchange management for foreign direct investment in Vietnam. 

Circular 06 contains a number of improvements over its predecessor:

  • Circular 06 provides clearer guidance on when a foreign-invested entity is required to open − and close − a direct investment capital account (DICA). In particular, Circular 06 states that Vietnamese companies which become majority foreign-owned through M&A transactions are required to open and maintain a DICA. The regulations on DICA are therefore not solely relevant for traditional foreign direct investors in Vietnam − such as manufacturers and outsourcing businesses − but also private equity houses and strategic corporate investors. 
  • Circular 06 also provides welcome comfort for foreign investors on the age-old question of how to remit money out of Vietnam legally with increased clarity on converting pre-incorporation and development costs (Development Costs) to capital contributions or shareholder loans, and eliminating the tight thirty (30) day window under previous legislation to repatriate excess funds.

Despite some positive steps forward, Circular 06 also raises some unanswered questions. Particularly, Circular 06 is unclear as to the timing for opening the DICA where Vietnamese companies become majority foreign-owned through M&A transactions. Circular 06 remains silent on how to define Development Costs eligible for conversion into debt or equity after investment approval has been obtained, leaving the local regulators with significant discretion. 

Opening, maintaining and closing a DICA

a. Requirement for opening the DICA

Vietnamese companies with foreign direct investment (FDI Companies) and foreign investors who do not establish or form a legal entity but who invest in Vietnam through business cooperation contracts (BCC) and public private partnerships (PPP) are required to open and maintain a DICA at one licensed bank during operations. Opening multiple DICAs is permitted, provided, however, that only one DICA is permitted for each currency. Foreign investors participating in multiple BCCs or PPP projects must open a separate DICA for each BCC/PPP project. 

b. What is an FDI Company?

Under Circular 06, we now have an answer. FDI Companies are defined in detail for consistency with the 2014 Investment Law. The following entities must open and maintain a DICA:

(a) a foreign invested company required to have an Investment Registration Certificate (IRC) under the 2014 Investment Law;

(b) a foreign invested company not subject to the IRC requirement (despite having obtained an IRC or not) but whose foreign ownership is at least 51% or more of the charter capital in the following cases:

(i) a company (regardless of whether it operates in conditional sectors or not) having foreign investment through M&A transactions;
(ii) a company formed after reorganization; 
(iii) a newly established company under specialized laws; and

(c) a project company established by a foreign investor in order to implement PPP projects. 

Circular 06 has eliminated the confusion existing under prior legislation with respect to requirements for opening a DICA for companies which have become majority foreign owned through M&A activities. The law now clearly defines these entities as FDI Companies and therefore they are required to operate and maintain a DICA. Circular 06 is silent as to the timing for opening the DICA, however, though the DICA must be opened before the foreign investor transfers funds to Vietnam in the M&A transaction (as the funds must be credited to the DICA). 

c. Close of DICA

FDI Companies described in paragraph (b) and (c) must close the DICA if:

(a) foreign ownership has been reduced to less than 51% upon transfer of shares, capital contribution or issuance of new shares; or 

(b) it becomes a listed company.

In these cases, each foreign investor in these companies must open an indirect investment capital account (IDICA) for subsequent investment transactions pursuant to Circular No. 05/2014/TT-NHHH (Circular 05). 

Circular 06 is unclear on the statutory timeline for closing the DICA, as well as for opening the IDICA by the foreign investor. However, under Circular 05, the IDICA must be opened prior to the foreign investor performing any transactions in relation to its indirect investment in Vietnam.

Converting Development Costs to Debt or Equity

Prior to issuance of the IRC or approval for a capital contribution or share acquisition from the relevant department of planning and investment (M&A Approval), foreign investors are permitted to transfer money to Vietnam either directly from an offshore account or its onshore payment account to pay for Development Costs. This offers flexibility to foreign investors during the preparation stage of a project and avoids administrative tasks, such as opening an onshore account for paying pre-investment costs.

Upon obtaining the IRC or M&A Approval, funds transferred to Vietnam for Development Costs may be converted in whole or in part into a capital contribution or foreign loans (or returned to the foreign investor after deducting the pre-investment costs incurred). If Vietnamese authorities refuse to issue the IRC or the M&A approval, the foreign investor is entitled to remit these amounts offshore plus interest (if any) after deducting the expenses. 

Under Circular 19, investors were given a tight thirty (30) day window from the time of converting funds from Vietnam Dong to foreign currency to repatriate these excess funds. Circular 06 has eliminated this timeline providing investors increased flexibility to remit funds offshore. 

Unfortunately, Circular 06 remains silent regarding determination of what constitutes pre-investment expenses and costs. Currently in practice, the precise nature of which expenses and costs constitute "pre-investment costs" remains subject to the discretion of local regulators.

Remittance of profits offshore

The DICA is the sole vehicle for remittance offshore of profits, other lawful incomes and capital (in case of reduction of investment capital, transfer of the project, or termination of the project), as well as repayment of foreign loans, interest and borrowing expenses. 

In a similar fashion to removing time limits on returning funds used for Development Costs, Circular 06 has also removed the timeline of 30 business days for remittance of profits offshore as of the time of conversion from Vietnam Dong into foreign currency. 

Payment for M&A transactions

Circular 06 clarifies that payment for M&A transactions must be made through the DICA only if such transfer is between a foreign investor and a domestic investor. In addition, payment for the transfer of a PPP or BCC project must also be made through the DICA if the transfer is between foreign investors or between foreign investors and domestic investors. The FDI Company is responsible for processing these payments to the transferor. 

The transfer price can be documented and paid in foreign currency provided that such transfer is between foreign investors. Otherwise, the transfer price must be determined and paid in Vietnam Dong. 

Circular 06 also amends some articles of Circular 05 on use of the IDICA. In particular, foreign investors are not required to open an IDICA in case of investing in the form of capital contribution or share acquisition if the FDI Company that is the target of the M&A transaction is required to maintain a DICA under Circular 06. 

Application of Circular 06

Circular 06 provides FDI Companies a 12-month period for compliance to open a DICA if required to do so. On the other hand, a company that uses a DICA but is required to close the DICA or not subject to opening a DICA under this Circular, must do so within twelve (12) months and foreign investors of that company must open an IDICA pursuant to Circular 05.