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Legal Update

Vietnamese Investment Law - Further Benefits For Foreign And Local Investors (Especially In Real Estate)

4 October 2007
Mayer Brown JSM Legal Update


In the past several years culminating in its accession to WTO on 11 January 2007, Vietnam has taken active steps to revamp its entire legal framework for doing business and for investing in Vietnam. The changes are largely favourable to both foreign and local investors. 

Some of the significant laws include: the Investment Law, which regulates how an investment in Vietnam may be approved and Law on Enterprises, which sets out the types of corporate vehicles investors may establish to carry out their investment projects. These laws both became valid only over one year ago on 1 July 2006. 

In addition to these laws, Vietnam has also issued new laws on contracts (Commercial and Civil Codes), on dispute resolution (Code of Civil Procedures), on intellectual property (Intellectual Property Law), on anti-corruption (Anti-corruption Law), on the stock market (Securities Law) and on foreign exchange (Foreign Exchange Law).

In respect of real estate investments, there is a new Land Law, Housing Law and Law on Real Estate Business (which became valid on 1 January 2007).

These new laws in general create a much more favourable and clearer legal framework for doing business for local and foreign businesses alike and form an excellent backbone for the future development of Vietnam. 

These laws contain many "firsts". For example, the Law on Enterprises abolishes the distinction between a local and a foreign company and between both of these and a State-owned company. All types of companies must now operate by the same corporate governance rules. This should create a level-playing field for doing business, since the failure to comply will these corporate rules will lead to personal liability for directors, officers of a company, regardless of whether the company is foreign-owned, Vietnamese-owned or State-owned. 

The Investment Law also now applies to both local and foreign investors. 

In terms of real estate investments, for the first time the Land Law allows foreign investors the right to build homes and condominiums for sale and transfer the right to use land associated with such premises on a "long-term" use or freehold basis to qualified purchasers. In addition, a new law (Decree 84/ND-CP), which became valid only recently on 1 July 2007, allows real estate developers of residential properties for sale and/or for lease the right to carry out their projects for 70 (previously 50) years with multiple extensions of the land use without any further payment of land rental if they pay land rental equal to the land use fee (i.e. market value). In addition, purchasers and/or lessees of properties from these foreign developers will not have to make any further land rental or land use fee payment. Further, in respect of those purchasers that are permitted by law to purchaser properties they will have the right to use the land on a long-term (i.e. freehold) basis. Under the same Decree, residential foreign developers are also permitted (for the first time) to participate in land auctions.

Full Update

This Article summarises one of the most important pieces of legislation affecting foreign investment, the Investment Law.

A.  Investment Law

1.  "Direct" and "Indirect" Investment

Whether a foreign investor invests "directly" or "indirectly" in Vietnam, the applicable law is the Investment Law, which applies to both local and foreign investors in Vietnam. It is significant in that it contains a significant number of investment guarantees [See Note below].

"Direct" investment is defined to include the following:

  • Establishing companies owned 100% by local or foreign capital ("WFOE")
  • Establishing joint ventures between local and foreign investor(s) ("JV")
  • Investing pursuant to a contract: business cooperation contract ("BCC"), Build-Operate, Build-Transfer-Operate or Build-Operate-Transfer or Build-Transfer Contract
  • Investing in developing a business (to expand the size or improve capacity of a project or change to new technologies, increase quality of products or reduce pollution to the environment)
  • Purchasing shares of or contributing capital to companies, branches in Vietnam to participate in management
  • Investing in a merger or acquisition of a company or branch
  • Other forms of direct investment

"Indirect" investment is defined to include the following:

  • Purchasing of shares, bonds and other valuable papers
  • Investing through securities investment funds
  • Investing through other intermediary financial institutions

Investing in a real estate project to develop and build the same would be considered as a direct investment. 

The Investment Law requires an investor who invests "directly" to obtain approval for a relevant project and approval is given via the issuance of an Investment Certificate. In respect of "indirect" investment, the Investment Law states that the investor needs to comply with the Securities Law and other relevant laws.

2.  Common Forms of Direct Investment

The most common forms of direct investment by a foreign investor or investors to carry out a project are: to incorporate a wholly foreign-owned company ("WFOE") or a joint venture company with one or more Vietnamese parties ("JV") or to enter into a contractual arrangement with one or more partners ("BCC"). 

A WFOE and JV are both Vietnamese corporate legal entities and therefore in each case a Vietnamese corporate vehicle to carry out investment in these forms must be established under the Law on Enterprises as discussed below.

In a BCC, no legal entity is formed. The parties to such arrangements may agree to share profits and losses or share in the products of the cooperation, in much the same way as a partnership; it is, in effect, a contractual joint venture.

3.  How a "Direct" Investment Project is Licensed

In respect of foreign direct investment, whether it is in the form of a WFOE or JV or BCC or any other permitted form, an Investment Certificate must be obtained from the relevant licence issuing body.

To receive an Investment Certificate a project will either go through: a registration or an evaluation procedure based on size of project and type of projects:

Registration applies to projects:

(a)  Under 300 million VND (approximately US$ 18.75 million)
(b)  Not on list of "conditional" sectors

The time limit for issuance of an Investment Certificate: 15 business days.

Evaluation applies to:

(a)  Projects over or under 300 million VND
(b)  On the list of "conditional" sectors

Time limit: 43 business days (or 45 business days in special cases).

"Conditional" is defined to mean investment in sectors impacting:

  • national defence and security, social order and safety
  • banking and finance
  • public health
  • culture, information, press and publishing
  • entertainment services
  • real estate business
  • survey, prospecting, exploration and mining of natural resources, environment ecological
  • development of education and training
  • other sectors as set out by law

Decree 108/2006/ND-CP dated 22 September 2006 ("Decree 108") which guides the Investment Law delegates the authority to issue Investment Certificates to the local People's Committees for most types of projects (including real estate) regardless of size. 

This "de-centralisation" of licensing authority is generally seen as favourable step. Local People's Committees are much more familiar with projects in their localities than the central licensing authority in Hanoi (the Ministry of Planning and Investment ("MPI")). Previously, since MPI had to approve projects over US 10 million in HCMC or Hanoi and over US 5 million in other cities and provinces, this generally caused delay, as MPI may not be familiar with local requirements or lacked sufficient manpower to deal with applications. This new change, therefore, should reduce delays in approving projects. 

3.1  "Real Estate" Business as a "Conditional" Type of Investment

Under the Investment Law, "real estate business" is a conditional sector which means that a foreign investor must meet certain conditions set by the Government including the conditions regarding forms of investment, the conditions applicable to establishment of economic organisations and conditions on market access. To date, none have been issued.

Under the Law on Real Estate Business which became valid on 1 January 2007, "real estate business" is defined as "the investment to create, purchase, receive by way of an assignment, lease, hire purchase real estate to sell, assign, lease, and sublease for profit-making purposes." Given the wide definition, all kind of real estate projects would fall within this definition. 

Until guidelines are issued, it remains unclear what conditions will be imposed.  In the meantime, each locality is imposing its own requirements.

3.2  How a Conditional Project is Evaluated

Approval of project on the list of conditional sectors will be based on evaluation of the following factors:

(a) compliance with master planning/zoning for technical infrastructure, master planning/zoning for land use, master planning for construction, master planning for utilisation of minerals and other natural resources;

(b) land use requirements;

(c) project implementation schedule;

(d) environmental solutions.

For these reasons, in practice licensing of a real estate project can take up to 6 months or more.

B.  Law on Enterprises (LOE)

As discussed above, to carry out a business or an investment project in the WFOE or JV form, investors would have to set up a Vietnamese legal entity. This is governed by the Law on Enterprises which is the new company law that sets out the types of corporate vehicles available to investors. It became valid on 1 July 2006.

In respect of foreign investors carrying out a first project in Vietnam, the incorporation of the Vietnamese company takes place simultaneously with the licensing of their first project. This means that a foreign investor cannot incorporate a company without a project. However, subsequent to the first project, they have the option to carry out additional projects using the established corporate vehicle or set up new corporate vehicles. 

A foreign investor (just like a local investor) can select the following Vietnamese corporate vehicles to carry out a project:

(a)  A limited liability company ("LLC") which is essentially a private company with a minimum of two shareholders and a maximum of 50;
(b)  A shareholding or joint stock company ("JSC") which is a public company with at least 3 shareholders but no maximum and which can issue shares and list on the Vietnam Securities Trading Centre;
(c)  A one-member LLC which is a LLC with only one shareholder;
(d)  A partnership which are made up of individual partners;
(e)  A private enterprise (akin to a sole proprietor).

Previously, foreign investors can only establish LLCs although on a trial basis the MPI had permitted a dozen or so investors to convert their LLCs into JSCs. Under the new law, all foreign investors now have this option (and thus the change to list on Vietnam's stock exchange).

As discussed, the above pieces of legislation create an excellent legal framework for investment in Vietnam, whether the investor is foreign or local.

The challenge will be how all these laws will be implemented, whether they will be implemented uniformly across the country and in a transparent manner and whether the Government will have capacity to ensure they are so implemented. In our view, however, this is simply a matter of time and Vietnam's recent WTO accession means that the implementation of these laws (some of which only became valid only recently) will be accelerated even further.


Note:  Specifically, the Investment Law:

  • Allows investors to invest in all sectors, all industries not prohibited by law and guarantees autonomy in investments (can select sector, form of investment, location and scale, partner, etc.)
  • Guarantees right to register for business in one or more industries
  • Guarantees protection against nationalisation unless for security and national defence in which case investors will be paid at market price and in respect of foreign investors in freely convertible currency
  • Contains commitments on market access
  • Removes previous impediments requiring investors to localise or meet certain import/export ratios or giving preference to domestic goods/services
  • Guarantees uniform application of price rates for goods and services controlled by the State
  • Contains investment guarantees in case of change in law (if new law is favourable, investors are entitled to benefit of new law; if new law is unfavourable, investors shall retain incentives or may adjust scope of business or deduct losses from taxable income or may be compensated)
  • Guarantees right to resources, import/export, advertise, purchase foreign currencies
  • Abolishes requirement that a minimum amount of equity (30% of total project cost) be contributed

For further information, please contact:

Name: Dao Nguyen
Phone: +84 8 822 8860
Fax: +84 8 822 8864

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