METHODS FOR FOREIGN INVESTORS TO INVEST IN BUSINESS IN VIETNAM
Article by Legal Specialist at Dai Ha Thanh Law Firm - Mai Thao Nhu - Bachelor of Law from Ton Duc Thang University, Ho Chi Minh City.
Vietnam is one of the most promising and rapidly developing markets globally, attracting increasing interest from foreign investors who are studying and planning to invest in the Vietnamese market. Consequently, regulations on foreign investment in Vietnam are receiving heightened attention from the government to promptly establish appropriate legal frameworks that align with the dynamic changes in the market.
Through this article, DHT provides an overview of investment methods and related procedures for foreign investors interested in the Vietnamese market.
- Overview of the Vietnamese economic market
Vietnam is a potential market with stable annual growth rates of 6-7%. It is a member of many global trade agreements, with a stable political environment, creating a safe and promising investment environment, and providing connections to international markets. Moreover, there are favorable policies for foreign investors who invest large amounts of capital or focus on key sectors and trades.
Based on the advantages of the Vietnamese market, Article 21 of the Law on Investment 2020 outlines five forms of investment for foreign investors:
- Investment to capital contribution or purchase of shares or stakes;
- Investment to establish economic organizations;
- Execution of an investment project;
- Investment in the form of a BCC;
- New forms of investment and new types of economic organizations according to regulations of the Government.
- Investment methods
2.1 Investment to capital contribution, purchase of shares or stakes
This is the simplest and fastest form of indirect investment among all investment forms in Vietnam. In this form, foreign investors do not participate in the management of the enterprise.
2.1.1 Forms
Foreign investors invest under the provisions of Article 25 of the Law on Investment 2020:
- Contributing capital to a company raising capital or establishing a new company;
- Purchasing shares or stakes in companies already operating in the market.
This investment method allows foreign investors to quickly enter the Vietnamese market without incurring excessive costs or facing the risks associated with other methods. Moreover, foreign investors can leverage the existing advantages of the Vietnamese enterprise in which they invest to learn and gain deeper access to the Vietnamese market, thereby developing long-term growth plans.
However, foreign investors also need to pay attention to legal issues related to the business sectors of the companies they invest in, national security, the environment, or whether special permits, as regulated by Vietnamese law and the international agreements of which Vietnam is a member. In particular, regarding the percentage of foreign investors' capital contribution, this issue may lead to situations where investors may be obligated to carry out relevant legal procedures.
2.1.2 Implementation process
Foreign investors must register capital contributions or purchase of shares or stakes, if belong to outlined in Article 26 of the Law on Investment 2020:
- Increase the foreign investor’s ownership ratio in case the economic organization operates in a sector or trade in which foreign investors are subject to conditional market access;
- Foreign investors hold over 50% of the charter capital of the concerned economic organization;
- When foreign investors invest in an economic organization with a Certificate of the right to use land in regions that affect national defense or security.
If they do not fall into the above cases, foreign investors only need to follow the procedure for changing shareholders or members under relevant laws when contributing capital, purchasing shares, or stakes in the economic organization.
The economic organization with foreign investment must submit one set of the dossier according to the provisions of clause 2 Article 66 of Decree 31/2021/ND-CP to the investment registration agency where the organization is their head office:
- A document registering the capital contribution or purchase of shares or stakes;
- A copy of the legal documents of the foreign investor and the economic organization with foreign investment;
- A document of principle agreement on capital contribution or purchase of shares or stakes between the foreign investor and the economic organization, shareholders, or members of the organization;
- A copy of the Certificate of the right to use the land of the economic organization with foreign investment (in cases specified in Clause 4, Article 65 of Decree 31/2021/ND-CP).
The investment registration authority will consider the satisfaction of the conditions for capital contribution or purchase of shares or stakes and notify the investor within 15 days of receiving a complete and valid application. However, in cases where the economic organization holds the Certificate of the right to use land in islands, border communes, districts, coastal areas, or regions affecting national defense or security, the time may extend to 30 days.
2.2 Investment to establish economic organizations
Foreign investors often choose this form of investment to participate in the Vietnamese market because it offers the foreign investor complete control over the new enterprise.
2.2.1 Forms
Foreign investors establish economic organizations in accordance with the regulations applicable to domestic investors (clause 1, Article 9 of the Law on Investment 2020). The types of enterprises under the 2020 Law on Enterprises include: Sole proprietorships, partnerships, single-member limited liability company, multi-member limited liability company, and joint-stock companies. Or, if it is on the List of sectors and trades in which foreign investors are subject to market access restrictions (Clause 2, Article 9 of the Law on Investment 2020), the provisions of the relevant laws shall apply.
If not falling within the sectors and trades from market access restrictions, foreign investors often choose to establish sole proprietorships or single-member limited liability company when forming new enterprises, as this gives complete control during the business building process. Especially for large enterprises, this model helps protect trade secrets, ensure quality and reputation, and avoid the risks of partnering with unsuitable partners.
Conversely, if foreign investors invest in sectors and trades conditional market access in Section B of Annex I of Decree 31/2021/ND-CP, they are required to form joint ventures with Vietnamese enterprises to establish new businesses. Although the joint venture will reduce the foreign investor's control over the company, it also offers several advantages, such as the ability to leverage the resources and market knowledge, as well as the legal expertise of the Vietnamese business, allowing for easier and faster access to the market.
Besides, foreign investors cannot establish new economic organizations if they fall within sectors and trades market access are not yet permitted, as stipulated in point a clause 2, Article 9 of the Law on 2020 Investment 2020 and Section A of Annex I of Decree 31/2021/ND-CP.
2.2.2 Investment procedures
Before establishing a business organization, foreign investors must have an investment project and carry out procedures for granting and modificating the Investment Registration Certificate (IRC). However, small and medium-sized innovative start-ups and venture capital funds are exempt from these requirements. They only need to follow the procedures applicable to domestic investors under the Law on Enterprises (Article 67 of Decree 31/2021/ND-CP).
For certain projects that require investment policy approval and the issuance of an IRC for new investment projects, foreign investors should refer to the provisions from Article 29 to Article 41 of the Law on Investment 2020. Other cases will be governed by Clause 2, Article 63 of Decree 31/2021/ND-CP regarding the dossiers, procedures, and authority for investment policy approval.
Regarding the establishment of an economic organization in the cases specified in Article 23 of the Law on Investment 2020, where foreign ownership exceeds 50% of the charter capital of a newly established economic organization, the organization must carry out investment procedures for foreign investors. Additionally, if engaging in industries or business sectors with conditions specified in Appendix IV of the Law on Investment 2020, foreign investors must apply for special permits. Notably, for the retail sector, foreign investors must conduct an Economic Needs Test (ENT) to apply for a retail establishment certificate. The cases requiring an Economic Needs Test and the criteria for conducting this process are regulated in Articles 22 and 23 of Decree 09/2018/ND-CP.
2.3 Execution of an investment project
2.3.1 Forms
This is a form where foreign investors invest in individual projects, and there are three types of investment projects:
- Expansion projects means an investment project to develop an operating investment project by expanding its scope, raising its capacity, renewing technologies, reducing pollution, or improving the environment;
- New investment projects mean an investment project that is implemented for the first time or an investment project that is independent of operating business investment projects;
- An innovative startup investment project means an investment project to realize an idea based on exploiting new intellectual assets, technologies, or business models and is capable of growing fast.
One of the popular projects chosen by foreign investors is investment projects under the Public-Private Partnership (PPP) method. Depending on the type of project, the purpose of the foreign investor, and the State, the PPP contract can be carried out in various forms, such as BOT or other types as regulated in Article 45 of the Law on Public-Private Partnerships Investment 2020.
Regarding the investment period, foreign investors invest medium- or long-term capital in specific projects within a defined geographic area and time frame. These projects are often in construction, energy, or technology fields. According to Article 44 of the Law on Investment 2020, the operation period of an investment project is 70 years for projects in economic zones and 50 years for projects outside economic zones. Some specific projects, such as oil and gas and minerals exploitation have a maximum operation period of 30 years (Article 31 of the Law on Petroleum 2022, Article 54 of the Law on Mineral 2010).
Regarding investment incentives, Vietnam is implementing many investment incentives policies such as administrative and legal support, tax and land incentives, market access through international treaties to which Vietnam is a contracting party. One of the large enterprises that has enjoyed many incentives from Vietnam's policies is the Samsung Group of Korea. Samsung has invested more than 17 billion USD to build electronics factories in Bac Ninh and Thai Nguyen, and has enjoyed a preferential tax rate of 10% throughout its operation, along with many other supports recorded in Official Dispatch 15790/BTC-CST.
Foreign investors may encounter risks in implementing a project, such as delays and cost overruns (e.g., the Cat Linh - Ha Dong Urban Railway Project), risks related to changes in legal regulations during the project’s operation (e.g., the Hau Giang Cement Project), and other risks such as environmental, political, and social risks; and weak management and organization.
2.3.2 Investment procedures
The types of incentives, forms, and procedures to receive incentives are stipulated in the Law on Investment 2020, Decree 31/2021/ND-CP, the Law on Public-Private Partnership Investment 2020, and the Law on Public Investment 2019.
The tasks that investors need to perform include:
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2.4 Investment in the form of a BCC
2.4.1 Form
A BCC, also known as a Business Cooperation Contract, is an agreement signed between investors to cooperate in business; profit sharing or distribute products according to the law without the need to establish a business organization. Instead, a coordinating board is formed to execute the BCC.
This is considered the most optimal form of investment, thanks to its flexible investment method and cost-saving. The parties involved in a BCC can freely negotiate the content and requirements based on the goals they set. Notable projects include the Telecommunications Cooperation Project – a partnership between VNPT and Comvik (Sweden), where Comvik provides capital, technology, and human resources training, while VNPT manages operations, with profits divided according to the agreed ratio in the contract. This project has been very successful. Another example is the BCC cooperation project between ONGC (India), BP (UK), Statoil (Norway), and PetroVietnam (South Con Son gas pipeline project).
However, foreign investors may encounter certain obstacles regarding the repatriation of their profits out of Vietnam due to stringent regulations on foreign exchange management concerning foreign direct investment in Vietnam, as stipulated in Circular 06/2019/TT-NHNN.
2.4.2 Investment procedures
BCC involving foreign investors must be drafted in writing and follow the investment registration procedures and the procedure for issuing an IRC as prescribed in Article 38 of the Law on Investment 2020. If the project is subject to approval of the investment policy, the investor is required to undertake the investment verification procedures as per the current regulations (clause 6 Article 34 of the Law on Investment 2020).
When implementing a BCC, the content must comply with the requirements outlined in Article 28 of the Law on Investment 2020:
- Information on the representatives of the parties involved in the contract; the transaction address or location where the execution of an investment project;
- The goals and scope of the investment business activities;
- Contributions and the distribution of the results of business activities between the parties;
- The schedule and duration of the contract;
- Rights and obligations of the parties involved in the contract;
- Amendments, transfers, or termination of the contract;
- Responsibilities for contract violations and methods of resolving disputes.
Depending on the project, the foreign investor may also need to carry out additional procedures such as allocating, leasing land, permitting change of land use purposes, or the procedure for obtaining a construction permit.
Specially: When implementing a BCC contract, the parties independently and in their name during the operation.
2.5 New forms of investment and new types of economic organizations according to regulations of the Government.
This is an open and proactive regulation, demonstrating that the Vietnamese government is ready to embrace new investment trends and quickly adapt to new investment forms and types of economy in response to the continuous development of the global economy, reflecting a proactive, open approach that is no longer rigid or restrictive as in the past.
3. Key considerations for foreign investors
In addition to the regulations of Vietnamese law, foreign investors should also pay attention to the regulations of international treaties to which Vietnam is a contracting party;
- Fulfill periodic investment reporting obligations to regulatory authorities;
- Certain sectors may be inaccessible to foreign investors or only available under specific conditions;
- Not all sectors can be invested in through all forms of investment;
- Some sectors impose restrictions on the foreign investor's equity share and the scope of the business's operations;
- Legal procedures regarding capital;
- For certain conditional business sectors, the Vietnamese partner must possess a business license.
The above is the latest update from DHT Law Firm on the 2024 legal regulations related to methods for foreign investors to invest in business in Vietnam. We, Dai Ha Thanh Law Company Limited, with our team of professionally trained Lawyers and Legal Advisors both domestically and internationally, are committed to providing professional legal services to our esteemed clients. If you need detailed advice, please contact us to receive professional and effective legal advisory services.
