TABLE OF CONTENTS. 1. A quick history of FIEs Key concepts relating to an FIE... 21

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2 TABLE OF CONTENTS PREFACE... 5 ABOUT THE AUTHOR... 6 LIST OF ABBREVIATIONS... 7 LIST OF LEGISLATIONS A quick history of FIEs Key concepts relating to an FIE Classification of investors under the Investment Law Deemed Foreign Investors Investment projects defined Investors of an investment project Investment projects for Incorporated FIEs No investment project for Acquired FIEs Types of Investment Certificates Differences between FIEs and domestic enterprises Additional applicable regulations Investment conditions for FIEs Invesment licensing authorities Foreign exchange control Governing law Dispute resolution Foreign ownership limits General rules Non-Public Cos Equitised SOEs Public JSCs Potential workarounds Non-Public Cos Potential workarounds Public JSCs Newly Incorporated FIEs Before Investment Certificate New project or existing project Master plans In-principle approval Requirement In-principle approval Procedures

3 Opinions from relevant authorities Incorporated FIEs Investment Certificate Investment Certificate Investment Deposit Incorporation procedures Incorporated FIEs Post-incorporation Deemed Foreign Investor s status Project Implementation Changes to project Enterprise Law issues Project transfer New investment project Incorporated FIEs before 1 July No conversion Conversion without change Conversion with change After conversion Acquired FIEs General principles Types of target companies Types of sellers Other factors affecting an Acquired FIE Acquisition Registration Acquisition Registration vs. In-principle Approval Types of acquisition Offshore transfer Acquired FIEs Non-Public Cos Acquisition of less than 51% of a Non-Public Co having no Investment Certificate and no FIE Condition Acquisition of 51% or more of a Non-Public Co having no Investment Certificate and no FIE Condition Acquisition of any percentage of a Non-Public Co having FIE Condition and no Investment Certificate Acquisition of less than 51% of a Non-Public Co having an Investment Certificate and no FIE Condition Acquisition of 51% or more of a Non-Public Co having an Investment Certificate and no FIE Condition Acquisition of any percentage of a Non-Public Co having an Investment Certificate and FIE Condition Acquired FIEs Public JSCs

4 Scope of application - Circular 123/ Securities Trading Code Other requirements for foreign investors Procedures Acquired FIEs - Post-acquisition Acquired FIEs under the Investment Law Acquired FIEs before 1 July

5 PREFACE What you are reading is a working draft of a chapter on foreign-invested enterprises (FIEs) in Vietnam. This is a part of a larger book on companies in Vietnam that I am working on. So please look for my new book when it is published later this year. Because this is still a draft and is a part of a larger book, there are missing cross-references and mistakes in this chapter. Please use this with care. In the chapter, I try to capture and discuss in detail the legal framework applicable to companies which have foreign investment in Vietnam. This is not an easy task because: There are many types of FIEs as a result of constant changes in the investment regulations; The investment regulations and the enterprise regulations are not always consistent; The policies regarding market access and investment conditions for FIEs are not only regulated by Vietnamese law but also by numerous international treaties; and Foreign investors can invest in FIE by incorporating a new FIE (Incorporated FIE) or acquiring ownership interest in an existing company (Acquired FIE). If an Acquired FIE is a public joint stock company then the securities regulations will also apply. That said, I hope after reading this you will find the subject matter less complicated and can use this as a starting point when you have any questions about FIEs in Vietnam. In preparting this chapter, I have received helpful research support and comments from Vo Thanh Thuy, a legal trainee at Vietnam International Law Firm (VILAF) and Ha Thi Dung, a lawyer at Mori Hamada & Matsumoto. Many of the issues discussed in here arise from my discussion with many lawyers at VILAF. The law referenced in this chapter are current as of 1 July 2016 September 2016 Nguyen Quang Vu 5

6 ABOUT THE AUTHOR Nguyen Quang Vu (Vu) is a practicing business lawyer in Vietnam. Vu is recommended as a leading lawyer by IFLR 1000 (2014) and (2015), and Asialaw Leading lawyer (2014) and as a recommended lawyer by the Asia Pacific Legal 500 (2015). Since 2000, Vu has been advising foreign strategic investors, project developers and international financial institutions in large infrastructure projects, in the privatisation (equitisation) of State-owned enterprises and investment restructuring. Vu has eight years of experience with Freshfields Bruckhaus Deringer, and 6 years of experience with VILAF, a leading local law firm. In September 2016, Vu left VILAF as a partner to set up Venture North Law Limited, a boutique professional law firm focusing on corporate, commercial and M&A practices in Vietnam. Vu can be contacted at: VENTURE NORTH LAW LIMITED Geleximco Building, 11 th Floor, 36 Hoang Cau Street Dong Da District, Hanoi, Vietnam. Phone: vu.nq@vnlaw.com.vn 6

7 Abbreviation Description LIST OF ABBREVIATIONS 1% Shareholder A shareholder or a group of shareholders of a JSC owning at least 1% of the number of ordinary shares for six consecutive months 100% FOE Wholly Foreign-Owned Enterprise (công ty 100% vốn nước ngoài) 2005 Investment Investment Certificate (giấy chứng nhận đầu tư) issued to both local Certificate companies and FIEs incorporated after 1 July 2006 and before 1 July 2015 under the Investment Law FIEs FIEs incorporated after 1 July 2006 and before 1 July Existing Project an investment project licensed under the Investment Law 2014 Acquired FIEs Acquisition Registration Authorised Representative Board Sale Authorisation BOT CIEM Convicted Member DR Local Procedures DRs EIN Enterprise Certificate Enterprise Registration Record companies which are acquired by foreign investors procedures for a foreign investor (or Deemed Foreign Investor) to register its investment by way of acquiring ownership interest in target companies being a Vietnam EO The revised provisions on shareholders/members authorised representatives an approval by the Board of a JSC on sale of shares Build-Operate-Transfer The Central Institute for Economic Management a member of a Multiple LLC being an individual is temporarily detained or serving an imprisonment sentence or has his or her right of professional practice forfeited by a court as stipulated by the Penal Code The onshore procedures for a DR Company and a DR Bank to set up a DR program supported by Underlying Shares of the DR Company depository receipts (DRs) Enterprise Indentification Number (mã số doanh nghiệp) Enterprise Certificate Certificate (Giấy chứng nhận đăng ký doanh nghiệp) or Business Registration Certificate (Giấy chứng nhận đăng ký kinh doanh) All documents and information submitted to the Business Registration Authority at the time of incorporation of a company Enterprise Representative ESOP FDI Portal an Institutional Representative being an enterprise employee share option plan the National portal on foreign investment (Hệ thống thông tin quốc gia về đầu tư nước ngoài 7

8 Abbreviation FIE Conditions First 90-day Period General Director Government Representative Group SOEs HNX Holding SOE HSX Independent SOE Individual Representatives Individual Representatives Institutional Representatives Institutional Shareholder Investor Identification Document IPO issuing country JSC Description investment conditions for foreign investors (Điều kiện đầu tư đối với nhà đầu tư nước ngoài) the period commencing on the date of incorporation and ending on the date that is 90 days after the date of incorporation of the company the Director or General Director the Institutional Representative is a Government authority (a Provincial PC or a Ministry) State Economic Groups (tập đoàn kinh tế nhà nước) Hanoi Stock Exchange a State Holding Corporation (Tổng công ty nhà nước) The Ho Chi Minh City Stock Exchange an independent Wholly SOE (công ty trách nhiệm hữu hạn một thành viên độc lập) The individuals which have the authorities to exercise State Owner Authorities in an Wholly SOE The individuals which have the authorities to exercise State Owner Authorities in an Wholly SOE The legal entities which have the authorities to exercise the rights and obligations of the State as owner (State Owner Authorities) in an Wholly SOE copy of the people's identity card, ID card or passport in the case of investors being an individual; copy of the incorporation certificate or other equivalent document certifying the legal status in the case of investors being an organisation Initial public offerings the country where the issuance takes place (issuing country) Joint Stock Company (Công ty cổ phần) JSC Chairman Large Public JSCs Listed JSC LLC MC Chairman Chairman of The Board Of Directors Of A Joint Stock Company a Public JSC which has a paid-up charter capital of VND 120 billion or more based on the latest audited annual financial statements (công ty đại chúng quy mô lớn) where a joint stock company whose shares are listed on a stock exchange Limited Liability Company (công ty trách nhiệm hữu hạn) Chairman of The Members Council Of A Limited Liability Company 8

9 Abbreviation Description MC Member Member of The Members Council Of A Limited Liability Company MOF Ministry of Finance MPI The Ministry of Planning and Investment Multiple LLC Limited Liability Company with Two Members or More (công ty trách nhiệm hữu hạn hai thành viên trở lên) National Database national enterprise registration database National Portal national business registration information portal New Co s Assets New Cos will own a portion of the Original Assets New Co s Equity the charter capital of each New Co New Co s Liabilities the total liabilities of each New Co Notice of Right The notice which the Private JSC must send via registered courier to all existing shareholders at their permanent residential addresses or contact addresses as recorded in the Shareholder Register. Original Assets all of the assets originally held by Original Co Original Equity the charter capital of the Original Co Original Liabilities the liabilities of the Original Co Owner Restructuring a resolution approving the splitting of the Original Co Decision PetroVietnam Vietnam Oil and Gas Corporation Placement Notice Private JSC must send a notice to the Business Registration Authority about a proposed private placement of shares Pre-2006 FIE Projects a specific investment project incorporated before 1 July 2006 Pre-2006 FIEs FIEs incorporated before 1 July 2006 Pre-2015 Existing Project Pre-2015 Local Project IC Project Proposal Project/Company IC Provincial DPI Provincial PCs Provincial PCs Public JSC Public JSC Model Charter an investment project licensed under the Investment Law 2005, Foreign Investment Law 1996 or Domestic Investment Law 1998 a Certificate of Investment Incentives only records details of the investment project that a local company developss The investment project proposal the business registration certificate of the FIE and evidence of the rights of the FIE to develop a specific investment project the provincial Department of Planning and Investment the provincial People s Committees the provincial People s Committees Public Joint Stock Company The Model Charter Applicable to a Public JSC 9

10 Abbreviation Public JSC Model Charter Quoted JSCs RPT SAE Subs SBV SCIC Single LLC SOE SOE Group Companies SOE Owner SOE Representative SOE Restructuring Plan Special Zones SSC State Capital Regulations State Capital Regulations State Owner Authorities State-affiliated Enterprise State-owned JSC State-owned LLC the Board the DR Bank the SRV State Top-level FIE Description the model charter applicable to a Public JSC shares of a Public JSC are listed or registered for trading on a stock exchange including UPCoM [HKA: lack of definition] Related party transactions [HKA: lack of definition] companies which are owned wholly or partly by a State-affiliated Enterprise are not subject to State Capital Regulations the State Capital Investment Corporation Single Member Limited Liability Company (công ty trách nhiệm hữu hạn một thành viên) State-Owned Enterprise (doanh nghiệp nhà nước) a group of State-affiliated Enterprises The owner of a Wholly SOE the Institutional Representative is a Wholly SOE The master plan for restructuring and renovation of enterprise (đề án tổng thể sắp xếp, đổi mới doanh nghiệp) an industrial zone, high-tech zone, export-processing zone or economic zone State Securities Commission The legislations governing Wholly SOEs and other enterprises which have State capital The legislations governing Wholly SOEs and other enterprises which have State capital the rights and obligations of the State as owner an enterprise (other than a Wholly SOE), which is subject to State Capital Regulations a JSC, which has State capital a Multiple LLC, which has State capital The Board of Directors (Hội đồng quản trị) Of A Joint Stock Company The depository bank of the DR program the State of the Socialist Republic of Vietnam (Nhà nước Cộng Hòa Xã Hội Chủ Nghĩa Việt Nam) A foreign-invested economic organisation (tổ chức kinh tế có vốn đầu tư nước ngoài) 10

11 Abbreviation Transferring LLC Member Underlying Shares Unpaid Member UPCoM JSCs Vietnam EO Vinafoods Vinalines Vinashin VN Air VN Rail VSD Wholly SOE Wholly SOE Chairman WTO Commitments Description a member of a Multiple LLC transfers its capital contribution portion The shares underlying the DRs issued by the DR Bank any existing member of a LLC who has not paid up its charter capital contribution Unlisted Public Company Market whereby shares of Public JSCs which are unlisted or have been delisted are traded. Economic organisations (tổ chức kinh tế) are organisations incorporated in Vietnam including enterprises, co-operatives and other organisation doing business Vietnam Southern Food Corporation, Vietnam Northern Food Corporation Vietnam National Shipping Lines Vietnam Shipbuilding Industry Group Vietnam Airlines Corporation Vietnam Railway Corporation Vietnam Securities Depository Chairman of the Wholly SOE The commitments of Vietnam to the World Trade Organisation are contained in WTO document number WT/ACC/VNM/48 dated 27 October 2006 LIST OF LEGISLATIONS No. Short description Full Description I. Law 1 Law on Press 1989 Law on Press of the National Assembly dated 28 December 1989, as amended 2 Law on Private Enterprises 1990 Law on Private Enterprises of the National Assembly dated 21 December Law on Companies 1990 (or Company Law on Companies of the National Assembly dated 21 December 1990 Law in 1990) 4 Enterprise Law 1999 (or EL 1999) Law on Enterprises of the National Assembly dated 12 June Penal Code 1999 the Penal Code of the National Assembly dated 21 December 1999, as amended 11

12 No. Short description Full Description 6 Law on Insurance Business 2000 Law on Insurance Business of the National Assembly dated 9 December 2000, as amended 7 Law on Government Organisation Law on Government Organisation of the National Assembly dated 25 December Civil Procedures Code 2004 The Civil Procedures Code of the National Assembly dated 15 June 2004 (as amended) 9 Civil Code 2005 Civil Code of the National Assembly dated 14 June Commercial Law Commercial Law of the National Assembly dated 14 June Law on International Treaties 2005 Law on the conclusion, accession to and implementation of International Treaties of the National Assembly dated 14 June Enterprise Law 2005 (or the Enterprise Law on Enterprises of the National Assembly dated 29 November 2005 Law 2005) 13 Foreign Exchange Ordinance 2005 (or Ordinance on Ordinance on Foreign Exchange Control of the Standing Committee of the National Assembly dated 13 December 2005, as amended Foreign Exchange 2005) 14 Law on Lawyers 2006 Law on Lawyers of the National Assembly dated 29 June 2006, as amended 15 Securities Law 2006 Law on Securities of the National Assembly dated 29 June 2006, as amended 16 Law on Lawyers 2006 Law on Lawyers of the National Assembly dated 29 June 2006, as amended 17 law on gender equality Law on Gender Equality of the National Assembly dated 29 November Domestic Investment Law 1998 Law on Domestic Investment of the National Assembly dated 20 May Law on Laws Law on the promulgation of legal documents of the National Assembly dated 30 June Law on Public Debts 2009 Law on Management of Public Debts of the National Assembly dated 17 June Law on Telecom 2009 Law on Telecommunication of the National Assembly dated 23 November Law on Credit Institutions 2010 Law on Credit Institutions of the National Assembly dated 16 June

13 No. Short description Full Description 23 Law on Commercial Arbitration 2010 Law on Commercial Arbitration of the National Assembly dated 17 June Pricing Law Law on Pricing of the National Assembly dated 20 June Tendering Law 2013 Law on Tendering of the National Assembly dated 26 November Construction Law 2014 The Law on Construction of the National Assembly dated 18 June Bankruptcy Law 2014 The Law on Bankruptcy of the National Assembly dated 19 June the Enterprise Law 2014 (or EL2014) Law on Enterprises of the National Assembly dated 26 November Investment Law 2014 Law on Investment of the National Assembly dated 26 November Law on State Capital 2014 Law on Management and Use of State Capital Invested in Enterprises for Production and Business Activities of the National Assembly dated 26 November Law on State Capital 2014 Law on Management and Use of State Capital Invested in Enterprises for Production and Business Activities of the National Assembly dated 26 November 2014 II. Decree 1 Decree 58/2001 Decree 58 of the Government dated 24 August 2001 on seal management 2 Decree 38/2003 Decree 38 of the Government dated 15 April 2003 on a pilot plan to convert foreign invested enterprises into joint stock companies 3 Decree 144/2003 Decree 144 of the Government dated 28 November 2003 on securities and securities market 4 Decree 109/2004 Decree 109 of the Government dated 2 April 2004 on Business Registration 5 Decree 110/2004 Decree 110 of the Government dated 8 April 2004 on documents management 6 Decree 180/2004 Decree 180/2004 of the Government dated 28 October 2004 on establishment, reorganisation, and liquidation of State owned enterprises 7 Decree 163/2006 Decree 163 of the Government dated 29 December 2006 on secured transactions, as amended 8 Decree 85/2009 Decree 85 of the Government dated 15 October 2009 implementing the Tendering Law

14 No. Short description Full Description 9 Decree 01/2010 Decree 01 of the Government dated 04 Jan 2010 on private placement of shares 10 Decree 43/2010 Decree 43 of the Government dated 15 April 2010 on business registration, as amended 11 Decree 102/2010 Decree 102 of the Government dated 1 October 2010 implementing the Enterprise Law Decree 59/2011 Decree 59 of the Government dated 18 July 2011 on conversion of wholly State-owned enterprises into joint stock companies 13 Decree 90/2011 Decree 90 of the Government dated 14 October 2011 on Corporate Bonds 14 Decree 95/2012 Decree 95 of the Government dated 12 November 2012 on the authorities of the Ministry of Industry and Trade 15 Decree 99/2012 Decree 99 of the Government dated 15 November 2012 on assignment and decentralisation for the implementation of rights, duties and obligations of state owner applicable to state enterprises and state capital invested into enterprises 16 Decree 101/2012 Decree 101/2012 of the Government dated 22 November 2012 on cashless payment 17 Decree 51/2013 Decree 51 of the Government dated 14 May 2013 on the salaries, remunerations and bonuses of the Member s Council, the Chairman, the Inspector, the General Director, the Deputy General Director, the Chief Accountant of state-owned onemember limited liability companies 18 Decree 61/2013 Decree 61 of the Government dated 25 June 2013 on financial supervision and evaluation of operative efficiency, and disclosure of financial information applicable to State-owned enterprises and enterprises with state capital 19 Decree 71/2013 Decree 71 of the Government dated 11 July 2013 regulating State investment into enterprises and financial management applicable to 100% state owned enterprises 20 Decree 108/2013 Decree 108 of the Government dated 23 September 2013 on administrative penalties in securities area 21 Decree 149/2013 Decree 149 of the Government dated 31 October 2013 issuing Charter of PetroVietnam 22 Decree 151/2013 Decree 151 of the Government dated 1 November 2013 on the functions and authorities of SCIC 23 Decree 172/2013 Decree 172 of the Government dated 13 November 2013 on 14

15 No. Short description Full Description the establishment, restructuring and dissolution of stateowned one-member LLC and its subsidiary being onemember LLC 24 Decree 206/2013 Decree 206 of the Government dated 9 December 2013 on management of debts of wholly State-owned enterprises 25 Decree 219/2013 Decree 219 of the Government dated 26 December 2013 on foreign loans 26 Decree 19/2014 Decree 19 of the Government dated 14 March 2014 issuing the model charter of state-owned single member limited liability companies 27 Decree 43/2014 Decree 43 of the Government dated 15 May 2014 implementing the Land Law 28 Decree 49/2014 Decree 49 of the Government dated 20 May 2014 on supervision, examination and inspection of State owned enterprises regarding compliance with laws and the owner s decisions 29 Decree 57/2014 Decree 57 of the Government dated 16 June 2014 on Charter on the organisation and operation of the State Capital Investment Corporation 30 Decree 69/2014 Decree 69 of the Government dated 15 July 2014 on State economic groups and State general corporations 31 Decree 70/2014 Decree 70 of the Government dated 17 July 2014 implementing the Ordinance on Foreign Exchange 32 Decree 115/2014 Decree 115 of the Government dated 3 December 2014 on management and monitoring of the performance and implementation of plans, strategies and objectives of State owned enterprises 33 Decree 128/2014 Decree 128 of the Government dated 31 December 2014 on sale, transfer and hand-over of wholly State-owned enterprises 34 Decree 15/2015 Decree 15 of the Government dated 14 February 2015 on public private partnership 35 Decree 42/2015 Decree 42 of the Government dated 5 May 2015 on Derivative Securities 36 Decree 78/2015 Decree 78 of the Government dated 14 September 2015 on Enterprise Registration 37 Decree 118/2015 Decree 118 of the Government dated 12 November 2015 on guidelines for some articles of the law on investment III. Other kinds of legislation 15

16 No. Short description Full Description 17 Circular 19/2003 Circular 19 of the MOF dated 20 March 2003 on charter captal and treasury shares of joint stock 18 Circular 71/2011 Circular 71 of the Ministry of Finance dated 1 June 2011 on securities trading 19 Circular 52/2012 Circular 52 of the Ministry of Finance dated 5 April 2012 on public disclosures 20 Circular 21/2012 Circular 21 of the Ministry of Police dated 13 April 2012 implementing Decree 58/ Circular 121/2012 Circular 121 of the Ministry of Finance dated 26 July 2012 on corporate governance of public companies 22 Circular 130/2012 Circular 130 of the Ministry of Finance dated 10 August 2012 on shares buy back and other cases for issuance of new shares by Public JSCs 23 Circular 204/2012 Circular 204 of the Ministry of Finance dated 19 November 2012 on guilding the dossier and procedure for public offering of securities 24 Circular 211/2012 Circular 211 of the Ministry of Finance dated 05 December 2012 on guiding implementation a number of articles of the government's decree No. 90/2011/ND-CP 25 Circular 171/2013 Article 8 of Circular 171 of the Ministry of Finance dated 20 November 2013 implementing Decree 61/ Circular 32/2013 Circular 32 of the SBV dated 26 December 2013 on limitation of use of foreign exchange in Vietnam 27 Circular 5/2014 Circular 5 of the SBV dated 12 March 2014 on opening and use of indirect investment capital accounts for indirect investment activities 28 Circular 16/2014 Circular 16 of the SBV dated 1 August 2014 on use of foreign currency accounts and Vietnamese Dong accounts of residents and non-residents 29 Circular 19/2014 Circular 19 of the SBV dated 11 August 2014 on foreign exchange control of foreign direct investment in Vietnam 30 Circular 118/2014 Circular 118 of the MOF dated 21 August 2014 on transfer of rights of State owner representatives to SCIC 31 Circular 10/2014 Circular 10 of the Ministry of Culture, Sport and Tourism dated 1 October 2014 on companies naming 32 Circular 5/2015 Circular 5 of the Ministry of Finance dated 15 January 2015 on registration, custody, and settlement of securities trading 34 Circular 5/2015 Circular 5 of the Ministry of Finance dated 15 January 2015 on 16

17 No. Short description Full Description registration and custody of securities 35 Circular 9/2015 Circular 9/2015 of the Ministry of Finance dated 29 January 2015 on financial transactions by companies in Vietnam 36 Circular 123/2015 Circular 123 of the MOF dated 19 August 2015 on foreign investment activities in Vietnam securities market 37 Decision 91/1994 Decision 91 of the Prime Minister dated 7 March 1994 on pilot establishment of business groups 38 Decision 151/2005 Decision 151 of the Prime Minister dated 20 June 2005 on establishment of State Capital Investment Corporation, as amended 17 Decision 12/2007 Decision 12 of the Ministry of Finance dated 13 March 2007 on corporate governance rules applicable to listed companies 18 Decision 1428/2012 Decision 1428 of the Prime Minister dated 2 October 2012 on termination of the pilot establishment of the Vietnam Industry and Construction Group and the Vietnam Rural and Housing Development Group 19 Decision 895/2012 Decision 895 of the SSC dated 29 October 2012 on model regulations on public auction of shares in a stock exchange 20 Decision 345/2013 Decision 345 of HNX dated 24 July 2013 on trading regulations on the HNX 21 Decision 3287/2013 Decision 3287 of the Ministry of Transport dated 21 October 2013 on the establishment of Shipbuilding Industry Corporation 22 Decision 2344/2013 Decision 2344 of the Prime Minister dated 2 December 2013 on the restructuring plan of SCIC 23 Decision 37/2014 Decision 37 of the Prime Minister dated 18 June 2014 on the criteria and classification of State owned enterprises 24 Decision 314/2014 Decision 314 of HSX dated 25 August 2014 on trading regulations on HSX 25 Decision 22/2015 Decision 22 of VSD dated 13 March 2015 on Registration of Securities 26 Decision 23/2015 Decision 23 of VSD dated 13 March 2015 on procedures for exercising rights of securities holders 27 Decision 28/2015 Decision 28 of the VSD dated 13 March 2015 on settlement and payment of securities trading on stock exchanges 28 Directive 854/2009 Directive 854 of the Prime Minister dated 19 June 2009 on the implementation of the Politburo on pilot establishment of Group SOEs 17

18 No. Short description Full Description 29 Resolution 3/2005 Resolution 3 of the Judges Council of Supreme People s Court dated 28 April 2005 guiding the implementation of a number of provisions of the Law on Bankruptcy 30 Resolution 71/2006 Resolution 71 of the National Assembly dated 29 November 2006 approving Vietnam s WTO Commitments 18

19 1. A QUICK HISTORY OF FIES 1.1. Foreign-invested enterprises (doanh nghiệp có vốn đầu tư nước ngoài) (FIEs) are not legal definition in the Investment Law In this book, the term FIE refers to any company in Vietnam, which is owned directly or indirectly by foreign investor regardless the level of foreign ownership Vietnam started opening its doors to foreign investors in 1987 with the issuance of the Foreign Investment Law Since then the number of FIEs and the amount of foreign capital entering Vietnam have been increasing steadily. It is estimated that there have been nearly 20,000 FIEs with a total invested capital of about US$ 124 billion since In 2014, FIEs account for nearly two thirds of Vietnam s export From 1987 until July 2006, Vietnam maintained a separate foreign investment law, which governs both investment activities by foreign investors and corporate governance of FIEs being the permissible investment vehicles of foreign investors investing in Vietnam. During this period, FIEs mostly consist of enterprises which are first established by foreign investors (with or without domestic investors) (such FIEs, Incorporated FIEs) and are classified into joint venture enterprises or wholly foreignowned enterprises. An Incorporated FIE was mostly regulated by the investment licensing authority which changes from time to time among the MPI, the People s Committee or the management board of industrial zones (IZ Board). Having a separate legal framework and separate licensing authority makes the operation of an Incorporated FIE simple and easy to understand. This was suitable for single-project company. However, the framework does not accommodate more complicated operation (e.g. multiple project companies). In addition, during this period, a few foreign investors are allowed to acquire minority ownership interests in domestic companies but generally these domestic companies with minority foreign ownership are still considered as domestic companies and are not subject to the foreign investment law The Investment Law 2005 repealed the Foreign Investment Law 1996 and the Domestic Investment Law From July 2006, the Investment Law 2005 governs investment activities by both foreign investors and domestic investors. Corporate governance of both FIEs and domestic companies are subject to the Enterprise Law Having the same corporate governance structure for both FIEs and domestic enterprises encourage more M&A activities between FIEs and domestic enterprises 1 Law on Domestic Investment of the National Assembly dated 20 May 2008 (Domestic Investment Law 1998) 19

20 because of better compatibility. FIEs incorporated before July 2006 were given the option to re-register to convert into one of the permitted corporate form under the Enterprise Law 2005 by July 2008 which was then extended twice. 2 However, many FIEs incorporated before July 2006 especially joint venture companies chose not to reregister to avoid re-negotiating or re-opening issues which have long been agreed. Although the Enterprise Law 2005 applies to Incorporated FIEs, many corporate matters of an Incorporated FIE are still subject to the Investment Law This is because the key corporate document of an Incorporated FIE is the Investment Certificate issued under Investment Law 2005 as in the case of the Foreign Investment Law This approach allows simple licensing procedures for Incorporated FIE. However, this approach also caused a lot of confusion in the case of existing companies, which are acquired by foreign investors (Acquired FIEs) The Investment Law 2005 also opens the oppoturnities for foreign investors to acquire both minority and, subject to more qualifications and requirements, controlling ownership interests in domestic companies. In addition, under Vietnam s commitments to the World Trade Organisation (WTO Commitments), foreign investors are also permitted to acquire ownership interests in domestic companies. Therefore, the number of Acquired FIEs is increasing sharply after July However, the Investment Law 2005 and the Enterprise Law 2005 are not always clear about how an acquisition of a domestic company should be conducted and the legal treatment of an Acquired FIE after the acquisition is complete. For example, it is usually not clear whether an Acquired FIE will need to exchange its Enterprise Certificate for an Investment Certificate after being acquired by a foreign investor. In fact, the Provincial DPI in Hanoi once has proposed to the MPI to cease processing all applications relating Acquired FIEs until the situation is clarified by the MPI The Investment Law 2014 and the Enterprise Law 2014 are intended to further separate investment activities from corporate activities of an FIE by separating the Enterprise Certificate from the Investment Registration Certificate (Investment Certificate) of an FIE. The Investment Law 2014 also introduces a separate licensing procedure for acquisition of existing companies by foreign investors. The Investment Law 2014 also tries to clarify various unclear concepts under Investment Law However, the changes introduced by the Investment Law 2014 are quite radical comparing 2 Article of Enterprise Law Official Letter 1612 of the Provincial DPI of Hanoi dated 14 May

21 with the Investment Law 2005, which make the Investment Law 2014 be less compatible with other existing laws and regulations (e.g. regulations on trading activities of FIEs). Also some changes seem to have not been well thought out which result in more duplication and confusion in practice. It is more likely than not that the Investment Law 2014 will need to be either further amended by another law or clarified by another Decree. 2. KEY CONCEPTS RELATING TO AN FIE Classification of investors under the Investment Law The Investment Law 2014 introduces a brand new system to classify entities with foreign capital into different concepts and groups. Under the Investment Law 2014: A foreign investor (nhà đầu tư nước ngoài) is a foreign individual or a foreign organisation incorporated in a foreign country. 4 Technically, an FIE is not a foreign investor because an FIE is incorporated in Vietnam not in a foreign country; Economic organisations (tổ chức kinh tế) are organisations incorporated in Vietnam including enterprises, co-operatives and other organisation doing business (Vietnam EO). 5 An FIE is a Vietnam EO because an FIE is an organistion incorporated in Vietnam; A foreign-invested economic organisation (tổ chức kinh tế có vốn đầu tư nước ngoài) (Top-level FIE) is a Vietnam EO which has at least one shareholder/member being foreign investors. 6 A Top-level FIE is an FIE; A domestic investor (nhà đầu tư trong nước) is a Vietnamese individual or a Vietnam EO, which has no shareholder or member being foreign investors. 7 An FIE, which has at least one foreign investor being shareholder or member, is not a domestic investor under Investment Law However, a domestic investor can be owned by an FIE (unless such FIE qualifies as a Deemed Foreign Investor (see 2.2) since an FIE is not a foreign investor; and An investor (nhà đầu tư) includes foreign investors, domestic investors and Top- 4 Article 3.14 of Investment Law Article 3.16 of Investment Law Article 3.17 of Investment Law Article 3.15 of Investment Law

22 level FIE. 8 Deemed Foreign Investors 2.2. Under Article 23.1 of the Investment Law 2014, a Vietnam EO must satisfy the investment conditions and comply with investment procedures applicable to a foreign investor when participating in the incorporation of another Vietnam EO or acquiring ownership interest in an existing Vietnam EO if 51% or more of charter capital of the first mentioned Vietnam EO is held by: foreign investors only (in that case, the Vietnam EO is considered as a 51% Toplevel FIEs); or % Top-level FIEs only; or foreign investors and 51% Top-level FIEs jointly. The Vietnam EOs described at are FIEs and are defined in this book as Deemed Foreign Investors. The diagram below demonstrates the types of FIEs, which are regarded as Deemed Foreign Investors: 8 Article 3.13 of Investment Law

23 2.3. The following issues may arise from the classification of FIEs into Deemed Foreign Investors: the concept of Deemed Foreign Investors only applies to 51% Top-level FIEs or subsidiaries directly controlled by 51% Top-level FIEs. Accordingly, a subsidiary indirectly controlled by a 51% Top-level FIE does not have Deemed Foreign Investor s status and is technically not required to comply with investment conditions and procedurers applicable to a foreign investor. While this conclusion is technically correct, it does not reflect the commercial logic that subsidiaries of a foreign investor should be treated in the same manner regardless whether such subsidiary is a direct or indirect subsidiary; 23

24 an FIE which is not a Deemed Foreign Investor may still be subject to investment conditions and procedures when conducting the types of investment activities, which are not incorporating a new company or acquiring ownership interest in another company. So an FIE, which is not a Deemed Foregin Investor investing in an investment project or conducting business in a sector, which has investment conditions for FIEs (e.g. trading and distribution activities) (see ) may still need to comply with investment conditions for foreign investors and FIEs; and regarding an FIE, the status of a Deemed Foreign Investor is decided by the ownership structure of such FIE. However, in many cases, an FIE has no control or limited control over the ownership structure of such FIE since a member or a shareholder usually has the right to decide to sell its ownership interest to others including foreign investors without having to obtain approvals from the FIE. If the FIE is a Quoted JSC, whose shares are managed and monitored by the VSD then an FIE may not even know about a transfer of ownership interest until the transfer is complete. Therefore, there may be cases, where an FIE could become a Deemed Foreign Investor and be subject to investment conditions of a foreign investor unexpectedly. In practice, various, Quoted JSCs are reluctant to raise their foreign ownership because of this reason The second point described at is quite different from the Investment Law Under Article 29.4 of the Investment Law 2005, the same investment conditions which are applicable to domestic investors will be applied to foreign investors where Vietnamese investors hold more than 51% of the charter capital of an enterprise. The definitions of foreign investors and domestic investors under the Investment Law 2005 are unclear. 10 It is also not clear which enterprises are subject to Article 29.4 of the Investment Law However, it is quite clear under Article 29.4 of the Investment Law 2005 applies to all types of investment activities not just incorporating a new company or acquiring another company. Therefore, it is arguable that under the Investment Law 2005, an FIE which has no more than 49% foreign ownership may be treated as a domestic investor in all respects. Now, this argument is no longer available under the Investment Law Investment projects defined 2.5. For a foreign investor or an FIE, it is important to understand the concept of

25 investment project (dự án đầu tư). This is because, in many circumstances, the procedures or licence that a foreign investor or an FIE may need to follow depend on whether such foreign investor or FIE has an investment project and which investment conditions apply to such investment project. For example, an investment project is required to set up an Incorporated FIE; an investment project of a Deemed Foreign Investor or foreign investor must have an Investment Certificate; transfer of an investment project needs to follow procedures for transfer of an investment project; 13 and there are different tax treatments for an expanded investment project or a new investment project. 14 Unforetunately, in many circumstances, it is quite difficult to determine whether a foreign investor or FIE has an investment project and which investment conditions apply to such investment project An investment project is vaguely defined as a collection of proposals for the expenditure of medium and long-term capital in order to carry out an business investment activity in a specific geographical area and for a specified duration. 15 There are various uncertainties from the definition of an investment project : The definition is partly circular since it refers to business investment activity ( hoạt động đầu tư kinh doanh). Business investment activity 16 is in turn defined to mean the expenditure of investment capital by an investor to conduct business activities (see 2.7); By using the word proposal, the law seems to suggest that an investment project is a plan on paper not a physical thing. However, the definition does not make clear to whom and by whom the proposal should be made and how the proposal will be implemented or adjusted; 11 Article 22.1 of the Investment Law Article 36.1 of the Investment Law Article 37.1 of Decree 118/ Articles 15 and 16 of Decree 218 of the Government dated 26 December 2013 on corporate income tax, as amended (Decree 218/2013). 15 Article 3.2 of the Investment Law Article 3.5 of the Investment Law

26 It is not clear if a reference to project location at law is a reference to the geographical area in the definition of investment project or a reference to locations of the head-quarter, branches or other offices of the project company; When the law refers to transfer of an investment project then it is not clear whether this means the transfer of the proposal or transfer of the underlying assets of such projects; and The term capital could broadly include loan capital or equity capital. However, if the term capital includes loan capital then this would require all loan transactions to be subject to investment procedures under Vietnamese law which is an unlikely interpretation The definition of an investment project under Investment Law 2014 is the same as that under the Investment Law However, the term is used in the Investment Law 2014 much differently. A major difference between the Investment Law 2014 and the Investment Law 2005 is that an investment activity under the Investment Law 2014 does not need to be in the form of an investment project. In particular, it appears from the definition of business investment (đầu tư kinh doanh) that investment activities by a foreign investor may include other activities instead of just implementing an investment project. Business investment is defined to mean the expenditure of capital by an investor to conduct business activities via establishment of an economic organisation; investment by capital contribution, purchase of a portion of capital contribution or shares in an economic organization; to conduct investment on the basis of a contract; or implement an investment project. 18 Article 22.2 of the Investment Law 2014 seems to confirm the same. On the other hand, under the Investment Law 2005, an investment activity must be associated with an investment project. 19 Investors of an investment project 17 Article 3.8 of the Investment Law Article 3.4 of Investment Law Article 3.7 of Investment Law

27 2.8. The difficulty of determining an investment project is further compounded by the difficulty in matching an investment project with an investor(s). It is important to determine who is an investor of an investment project. This is because the investor(s) of an investment project has the primary legal responsibility to: conduct necessary licensing procedures for the investment project; implement the investment project; 21 and comply with the terms of the Investment Certificate 22 and take liabilities arising from the investment project Again unfortunately, determining who is the investor of an investment project is not an easy task especially in the context of an Incorporated FIE. For example, if two foreign investors (Investors A and B) apply to set up an Incorporated FIE (Company C) in order to build a power plant (Project P). The Investment Certificate issued by the investment licensing authority will record details of Investor A and Investor B as the investors of the Project P. 23 However, after Company C is incorporated by Investor A and Investor B (see [ ]), Company C is the legal entity which actually owns the assets and liabilities of the investment project. Under the Investment Law 2005, the situation was even more confusing because the Investment Certificate of an Incorporated FIE under the Investment Law 2005 also records details of Company C so that Company C is also an investor of Project P Decree 118/2015 seems to clarify the situation by providing that in case of Incorporated FIEs, after the Incorporated FIE is established, the Incorporated FIE will be the investor implementing the investment project described in the Investment Certificate. 24 This is also consistent with the MPI s guidance on how to complete various application forms relating to an investment project. 25 So under this approach, Company C will be regarded as investor of Project P. However, this approach may cause additional confusion since Decree 118/2015 is silent about the role of the foreign investors who apply for the Investment Certificate after the Incorporated FIE is established. 20 For example, Article 22.1 of Investment Law Article 26.2 of Decree 118/ Article 47.2(dd) of Investment Law Form II.2 of Circular 16 of the MPI dated 18 November 2015 on forms and templates to be used in investment activities in Vietnam (Circular 16/2015). 24 Article 45.1 of Decree 118/ Official Letter 4326 of the MPI dated 30 June 2015 and Article 3.4(a) of Circular 16/

28 Investment projects for Incorporated FIEs Under the Investment Law 2014, 26 when applying to set up a new Incorporated FIE, a foreign investor or a Deemed Foreign Investor must have an investment project (dự án đầu tư) and must obtain an Investment Certificate. 27 In addition, a foreign investor implementing an investment project must do so through an Incorporated FIE unless the foreign investor invest in an Acquired FIE or invest via a contract. 28 This is different from an enterprise set up by domestic investors which do not need an investment project and Investment Certificate during the incorporation process (see [ ]). It is not clear under the Investment Law 2014, whether one Investment Certificate can only be used for incorporating one Incorporated FIE, or one Investment Certificate can be used for incorporating more than one Incorporated FIE in case the Investment Certificate covers more than one investment project If an Incorporated FIE is set up by more than one foreign investor then the Investment Law 2014 is not clear whether: each foreign investor will be issued a separate Investment Certificate; or all foreign investors will be issued the same Investment Certificate. However, the templates for an application of an Investment Certificate and an Investment Certificate under Circular 16/2015 suggest that all foreign investors will sign on the same application for an Investment Certificate and the same Investment Certificate will be issued to all foreign investors. 29 In practice, licensing authorities seem to adopt this approach The Investment Law 2014 is also not clear if an Incorporated FIE has both domestic and foreign investors then: both the foreign investor and domestic investor will need to sign the application for the Investment Certificate; and the Investment Certificate issued to foreign investors will also cover details of 26 Article 22.1 of the Investment Law Article 36.1 of the Investment Law Article 22.2 of Investment Law Form I.1 and II.2 of Circular 16/

29 local investors. Clarifying this point is important because under the Enterprise Law 2014, a change to the application for a Enterprise Certificate including changes to the Investment Certificate will need to be approved by the Business Registration Authority (see [ ]). Again the templates for an application of an Investment Certificate and an Investment Certificate under Circular 16/2015 suggest that both domestic and foreign investors will sign on the same application for an Investment Certificate and the same Investment Certificate will be issued to all investors. 30 No investment project for Acquired FIEs Under the Investment Law 2014 and Decree 118/2015, it appears that a foreign investor investing by way of purchasing ownership interest in an Acquired FIE does not need an investment project and an Investment Certificate. This is because the Investment Law 2014 and Decree 118/2015 contemplate a separate investment procedures for a foreign investor investing in an Acquired FIE (see ) and does not require the issuance of an Investment Certificate This is different from Investment Law 2005 and the Enterprise Law The common understanding under the Investment Law 2005 and the Enterprise Law 2005 is that any foreign investor investing in Vietnam must have an investment project and must obtain an Investment Certificate unless otherwise exempted by Vietnamese law. 32 So under the Investment Law 2005, foreign investors investing in an Acquired FIE may need an Investment Certificate unless such foreign investors can successfully invoke Article 29.4 of the Investment Law 2005 (see 2.4) or other exemptions. 33 Types of Investment Certificates In addition to the Investment Registration Certificate (giấy chứng nhận đăng ký đầu tư) (defined as the Investment Certificate in this book) issued under the Investment Law 2014, the following documents also have the same legal validity as an Investment Certificate: Investment Licence (giấy phép đầu tư) issued to FIEs incorporated before 1 July 30 Form I.1 and II.2 of Circular 16/ Article 36.2(c) of Investment Law 2014 and Article 46.1 of Decree 118/ Article 50.1 of the Investment Law See further discussion about investing in an Acquired FIE under Investment Law 2005 at 34 Article 59.2 of Decree 118/

30 (Pre-2006 FIEs) to develop a specific investment project (Pre-2006 FIE Projects) under the Foreign Investment Law An Investment Licence not only provides the relevant investors of the rights to develop a specific investment project but also serves as the business registration certificate of the relevant Pre-2006 FIE. Therefore, an Investment Licence could be defined as a Project/Company IC; Certificate of Investment Incentives (giấy chứng nhận ưu đãi đầu tư) issued to local companies before 1 July 2006 under the old Domestic Investment Law Normally, a Certificate of Investment Incentives only records details of the investment project that a local company develops (Pre-2015 Local Project IC). And the local company has a separate business registration certificate under the Law on Companies 1990 or the Law on Private Enterprises 1990; Investment Certificate (giấy chứng nhận đầu tư) issued to both local companies and FIEs incorporated after 1 July 2006 and before 1 July 2015 ( FIEs) under the Investment Law 2005 (2005 Investment Certificate). An 2005 Investment Certificate issued to a local company only records details of the investment project that a local company develops (Pre-2015 Local Project IC). And the local company has a separate business registration certificate (or enterprise registration certificate) under the Enterprise Law An 2005 Investment Certificate issued to a FIE could either serve as: (a) (b) the business registration certificate of the FIE and evidence of the rights of the FIE to develop a specific investment project (Project/Company IC); or evidence of the rights of the FIE to develop a specific investment project only ( FIE Project IC). And the FIE has another separate Project/Company IC to serve as its business registration certificate Under the Investment Law 2014, a local company is not required to obtain an Investment Certificate for its investment project unless the local company voluntarily requests for an Investment Certificate. 38 Therefore, technically, Pre-2015 Local Project ICs should not be applicable after 1 July Under Decree 118/2015, the investor of a 35 The effective date of Investment Law Article 60 of the Foreign Investment Law Articles 36 and 37 of the Domestic Investment Law Articles 36.2(a) and 36.4 of the Investment Law

31 Pre-2015 Local Project IC has the option: to return the Pre-2015 Local Project IC to the investment licensing authority and continue to implement the investment project; 39 or to convert the Pre-2015 Local Project IC to a new Investment Certificate under the Investment Law 2014 without any change. 40 By returning the Pre-2015 Local Project IC, the investor is no longer required to comply with the terms of the Pre-2015 Local Project IC. 41 This gives the investor more flexibility to operate the investment project. On the other hand, without an Investment Certificate, there is no official acknowledgement of the rights of the investor regarding the relevant investment project. 3. DIFFERENCES BETWEEN FIES AND DOMESTIC ENTERPRISES 3.1. From a corporate law perspective, FIEs and domestic enterprises are subject to the same legal framework (i.e. the Enterprise Law 2014 and its implementing regulations). Therefore, most of the discussion in this book will apply to an FIE in the same manner as a domestic enterprise. However, there are certain material differences between FIEs and domestic enterprises in terms of legal treatment under Vietnamese investment and other special law. In the following sections, we will discuss some of the material differences between the legal framework applicable to an FIE and that of a domestic enterprise. Additional applicable regulations 3.2. An FIE may be subject to more applicable regulations than those applicable to a domestic enterprise. These regulations include both Vietnamese law and international treaties to which Vietnam is a party. Set out below are some of the material regulations which may apply to an FIE: Investment Law 2014 Despite the change that an Investment Certificate no longer serves as the Enterprise Certificate of an FIE, the Investment Law 2014 still applies to the operation of an FIE in various areas. For example, before setting up an Incorporated FIE, a foreign investor must obtain an Investment Certificate (see 5) Article 40.3 of Decree 118/ Article 61 of Decree 118/ Article 47.2(dd) of Investment Law Article 22.1 of Investment Law 2014 and Article 22.4(c) of Enterprise Law

32 Before acquiring ownership interest in an existing enterprise in Vietnam, a foreign investor may have to obtain an Acquisition Registration (see ). On the other hand, a domestic investor may voluntarily apply for an Investment Certificate for an investment project of such domestic investor. 43 A domestic investor, who has voluntarily obtained an Investment Certificate, also has the option to return the Investment Certificate in the future 44 if the domestic investor does not wish to bear the burden of complying with the terms of the Investment Certificate; WTO Commitments and TPP - Vietnam s economy (especially service sectors) is not fully open to the world. Therefore, a foreign investor doing business in Vietnam will need to rely on various market access commitments of Vietnam under international treaties to which Vietnam is a party. One of the most important treaties is WTO Commitments 46 which took effect from January Vietnam has also conducted negotiation of the Trans Pacific Partnership Agreement (TPP) with various countries around the Pacific Ocean including the United States, Japan, Australia, Canada, Singapore, Malaysia and New Zealand. If approved by all signatories to TPP, TPP may play an important role for foreign investors and FIEs in Vietnam, especially those coming from TPP countries. The scope of WTO Commitment as well as TPP cover many areas. But provisions which are more frequently used by lawyers in Vietnam, are those relating to market access commitments regarding service sectors. A quick summary and comparison between WTO Commitments and TPP regarding market access to service sectors in Vietnam can be found at the author s blog here. 47 In addition, national treatment and most favoured nation treatment principles play an important role in expanding the rights of foreign investors or FIEs in Vietnam; and Other bilateral investment treaties - Vietnam has entered into or concluded negotiation various bilateral investment treaties or free trade agreement with many important economies including Japan, 48 Korea 49 and EU Article 36.4 of Investment Law Article 40.3 of Decree 118/ This may sound odd but in practice, sometimes a domestic investor will need an Investment Certificate to demonstrate the legality of the investor s project to a third party (e.g. a prospective buyer). But having an Investment Certificate also means that having an obligation to comply with the terms of the Investment Ceritificate which may increase time and costs for the domestic investor thereafter and

33 3.3. When studying an international treaty, one should note the following: an international treaty can only be directly applied in Vietnam if the provisions of the relevant treaty are specific and clear enough and the Vietnamese Government decides to apply those provisions directly. 51 Accordingly, until there is a special law issued to implement an international treaty, Vietnamese authorities may decide not to apply an international treaty on the basis that such provisions are not specific and clear enough. In this regards, the more popular an international treaty in the knowledge of the investment licensing authority, the better for investors having benefits from such an international treaty; and if the provisions of an international treaty and the provisions of a domestic law (other than the Constitution) are different on the same issue, the international treaty will prevail. 52 It is not clear what constitutes a difference between an international treaty and a domestic law. In addition, the recent exclusion of the Constitution from being prevailed by an international treaty may weaken the enforceability of an international treaty in Vietnam given the broad and general nature of the Constitution. In the past, Decree 108/2006 allows an investor to select to follow domestic regulations if the domestic regulations are more favourable than those under international treaties. 53 However, such provision was not provided in the Investment Law 2014 and Decree 118/ Usually, an international treaty is intended to provide for the minimum rights and benefits that Vietnam needs to provide to a foreign investor. Therefore, Vietnam should be free to issue a law, which contains better or broader rights and benefits. However, in some cases where domestic laws contain better and broader rights and benefits, the authority may still refuse to apply the domestic laws on the ground that they are different from the provisions of the relevant international treaty. Investment conditions for FIEs 3.5. Under the Investment Law 2014, 54 a foreign investor investing in an Incorporated FIE or an Acquired FIE must satisfy, among other things: 51 Article 6.3 of the Law on International Treaties of the National Assembly dated 14 June 2005 (Law on International Treaties 2005) and Article of the Law on Laws of the National Assembly dated 22 June 2015 (Law on Laws 2015). 52 Article 6.1 of the Law on International Treaties Article 3.1 of Decree 108/ Articles 22.1 and 25.3 of the Investment Law

34 the level of foreign ownership in the charter capital of the Incorporated FIE or Acquired FIE; and conditions regarding form of investment, scope of business, qualifications of Vietnamese counterparties and other conditions provided in international treaty that Vietnam is a party (see 3.2) 3.6. Decree 118/2015 seems to include the conditions at and under the concept of investment conditions for foreign investors (Điều kiện đầu tư đối với nhà đầu tư nước ngoài) (FIE Conditions). Under Decree 118/2015, FIE Conditions are separate from general investment and business conditions under Article 2.7 and Schedule 4 of Investment Law In particular Article 2.6 of Decree 118/2015 provides that FIE Conditions are investment conditions that a foreign investor must comply with when conducting investment activities in industries or business lines which are subject to investment conditions for foreign investors as provided in Vietnamese law or investment international treaties. The investment activities by a foreign investor includes: investing in an Incorporated FIE; investing in an Acquired FIE; investing in a Business Cooperation Contract; purchasing an investment project or otherwise taking over an investment project (see 2.6.2); or amending the business lines of an FIE An FIE Condition can exist in one of the following forms, among other things: the percentage of charter capital in an FIE owned by foreign investors; form of the investment; scope of investment activities; and conditions applicable the domestic investor who conduct investment activities together with the foreign investors One difficulty of establishing and maintaining a list of FIE Conditions is due to the 55 Articles 2.6(a) (dd) of Decree 118/

35 numerous sources of FIE Conditions. General investment or business conditions applicable to domestic companies are mostly provided in Vietnamese legal instruments which despite many shortcomings are still under the same structure and hierarchy. However, FIE Conditions can come from many other international treaties which have different scope of application. In addition, various international treaties are related to each other either directly or indirectly by virtue of Most Favoured Nation treatment princinple. For example, the Vietnam-Japan BIT only applies to investors from Japan not those from other countries while a law of Vietnam will apply to all investors in Vietnam. In addition, some international treaties are written in English and use terms which are not consistent with Vietnamese legal framework. For example, the WTO Committments, which were first negotiated before the Enterprise Law 2005, use the terms joint venture companies which no longer exist after the Enterprise Law 2005 was issued Decree 118/2015 is trying to give clarity as to how FIE Conditions should be applied by providing the following principles, among other things: a foreign investor operating in multiple industries or business lines must satisfy all FIE Conditions applicable to these industries or business lines; a foreign investor subject to multiple international treaties on the same industry or business line then the foreign investor is entitled to select one of the applicable international treaty to follow. 57 And if the foreign investor has selected to follow one international treaty then the investor will need to comply the provisions of such international treaty. In other words, under Decree 118/2015, a foreign investor may not be able to cherry pick the most favourable provisions of different international treaties in its favour (see ); If a service industry or a business line in service sectors, (a) which is included in an international treaty but Vietnam does not provide any market access commmittment in such treaty and, therefore, is entitled to impose FIE Conditions at its own discretion, 58 or (b) which is not included in any international treaty (Uncommitted Sectors), is subject to FIE Conditions provided under Vietnamese law then the FIE 56 Article 10.2(a) of Decree 118/ Article 10.2(b) of Decree 118/ E.g. service sectors marked as Unbound in the WTO Committments. 35

36 Conditions provided under Vietnamese law will apply; Any foreign investor is subject the FIE Conditions provided in WTO Commitments unless otherwise provided by Vietnamese law or other international treaties; 60 and If Vietnamese law has no FIE Condition for an Uncommitted Sector then a foreign investor may invest in such Uncommitted Sector (a) if approvals from the MPI and other ministries are obtained; 61 or (b) if there has been other foreign investors permitted to invest in the same Uncommitted Sector and such Uncommitted Sector has been published in the National Portal. 62 However, this principle seems to go against the advertised principle of Investment Law 2014 that an investor is entitled to invest in any sector that is not prohibited by law. 63 On the other hand, it appears that an foreign investor in a manufacturing sector, which is not subject to a specific FIE Condition under both Vietnamese law or international treaties, will not be subject to approvals from the MPI or other ministries. The principles laid out by Decree 118/2015 as described above would be important to determine, among other things, the foreign ownership limit applicable to an FIE in a service sector (see 4) The requirement that a foreign investor must select an international treaty to follow under Decree 118/2015 (see 3.9.2) makes it more difficult for a foreign investor to make an investment decision in Vietnam. For example, a Japanese investor may be entitled to various investment treaties with Vietnam including Vietnam-Japan BIT, the Agreement For An Economic Partnership between Vietnam and Japan (VJ Partnership); WTO Commitments, ASEAN-Japan Free Trade Agreement, and, potentially, the Trans Pacific Partnership Agreement. However, under Decree 118/2015, the Japanese investor must select one of these treaties to follow. At the first brush, this could mean that if a Japanese investor has relied on the Vietnam-Japan BIT for market access then the investor may not rely on the dispute settlement mechanism under the TPP in the future. However, by relying on the VJ Partnership, a Japanese investor may in fact claim for most of benefits provided in other treaties. This is because Article 9 of the VJ 59 Article 10.2(c) of Decree 118/ Article 10.2(d) of Decree 118/ Article 10.2(dd) of Decree 118/ Article 10.2(e) of Decree 118/ Article 5.1 of Investment Law

37 Partnership provides that: Vietnam and Japan reaffirm their rights and obligations under the WTO Agreement or any other agreements (which should include the ASEAN-Japan Partnership) to which both Parties are parties; and the VJ Partnership is incorporated into and form part of the VJ Partnership. As such by selecting the VJ Partnership, a Japanese investor would effectively preserve all of its rights under the WTO Commitments, VJ BIT and ASEAN-Japan Partnership The requirement that a foreign investor must select an applicable international treaty may be contrary to the term of the investment treaties that Vietnam has entered into. It is not clear how such restriction can be enforced as there is no mechanism for a foreign investor to notify the licensing authorities of its selection. It is also not clear whether a foreign investor may decide to change its selection if the selected treaty becomes undesirable or there is a new and better treaty coming into force The Government is trying to establish and maintain a list of FIE Conditions for publication on the MPI s website. 64 In December 2015, the MPI published a consolidated list of investment conditions applicable to foreign investors in Vietnam (FIE Condition List) 65 as of 27 December 2015 in its website. 66 The FIE Condition List represents a major effort of the MPI to help foreign investors to navigate a mirage of domestic laws and investment treaties which may apply to a foreign investor in Vietnam. That said, when relying on the FIE Condition List, one should take note of the following: The FIE Condition List is updated as at 27 December 2015 only. As such, at least one still needs to do research for regulations issued after 27 December Updating the FIE Condition List may take substantial time and effort since it requires MPI to request and obtain responses from all other ministries (about 20 in total). Therefore, it is not clear how frequently the MPI could keep the FIE Condition List updated (e.g. when the EU-Vietnam FTA and TPP are approved); The FIE Condition List only specifically covers 12 international treaties including WTO, Vietnam-Japan BIT, Vietnam-Korea FTA, Vietnam US BTA, Vietnam 64 Article 13 of Decree 118/ For easy reference, a consolidated list based on the information published on MPI s website can be downloaded from and

38 Japan EPA, ASEAN Japan EP. Therefore, commitments under other international treaties are not covered; The FIE Condition List does not cover sectors, (1) which is not included in the 12 international treaties or which are included in 12 international treaties but Vietnam is not required to have any market opening commitment for such sectors and (2) which is not subject to any specific investment conditions under Vietnamese domestic law. For these sectors, a foreign investor will need to seek approval from the relevant ministries; The MPI seems to step back from the principle under Decree 118/2015 that if there has been a foreign investor who has been licensed in an Uncommitted Sector and the Uncommitted Sector is included in the FIE Condition List then other foreign investors may be allowed to invest in such Uncommitted Sector; and The FIE Condition List still includes sectors which have no investment condition or the investment conditions applicable to them are no longer valid. It is not clear by these sectors are still considered as a conditional investment sector or unconditional investment sector. In a follow up Official Letter, the MPI seems to take the view that these sectors are regarded as unconditional investment sector for foreign investors. 67 Under the MPI s Official Letter if foreign investors acquire the ownership interest in Vietnam EO doing business, services which do not need to comply with investment conditions under the WTO Commitments or which the investment conditions applicable to them are no longer valid, the foreign investors do not need to do the Acquisition Registration (see ). In this case, only procedure to register the change of shareholders or members of the target companies is required. Invesment licensing authorities Under the Investment Law 2014, an Investment Certificate will be issued or amended by either of the following investment licensing authorities: the IZ Board of the relevant province in case the investment project is located in an industrial zone, an export-processing zone, a high-tech zone or an economic zone unless otherwise provided in ; 68 or the Provincial DPI in the following cases: 67 Official Letter 3524 of the MPI dated 11 May 2016 sent to the Provincial DPI of Ho Chi Minh City. 68 Article 38.1 of the Investment Law

39 (a) (b) the investment project is located outside of an industrial zone, an exportprocessing zone, a high-tech zone or an economic zone; 69 and the investment project is located both inside and outside an industrial zone, an export-processing zone, a high-tech zone or an economic zone The investment licensing authority is technically different from the business registration authority under the Enterprise Law However, both authorities are under the management of the Provincial PC and the MPI. Therefore, in practice, to complete procedures under the Investment Law 2014 and the Enterprise Law 2014, investors may have to deal with the same or similar authorities for several times. Foreign exchange control A foreign investor investing in Vietnam will most likely need to bring its capital into Vietnam and repatriate investment capital and (hopefully) profit out of Vietnam. Inevitably, the foreign investor and the FIE, which receive foreign investment will have to navigate complicated foreign exchange regulations 71 governing the remittance of foreign capital into and out of Vietnam and conversion of Vietnamese Dong into foreign currencies. It is beyond the scope of this book to examine these regulations in details. That said, the following paragraphs discuss some key salient points of the foreign exchange regulations applicable to an FIE in Vietnam Residents vs. Non-residents: Under Vietnamese foreign exchange regulations, an organisation is classified either as a resident (người cư trú) or a non-resident (người không cư trú). An organisation will be considered as a resident if it is incorporated in Vietnam. 72 An organisation, which is not a resident under the foreign exchange regulations will be considered as a non-resident. 73 Accordingly, an FIE being a company incorporated in Vietnam will be considered as a resident. On the other hand, a foreign investor, who is not incorporated in Vietnam will be considered as a non-resident. Residents and non-residents are treated differently under the foreign exchange regulations. It is not clear whether an FIE, who is considered as a Deemed Foreign Investor under the Investment Law 2014 (see 2.2), is treated as a non-resident or resident under 69 Article 38.2 of the Investment Law Article 38.3(b) of the Investment Law For example, the Ordinance on Foreign Exchange of the Standing Committee of the National Assembly dated 13 December 2005, as amended (Ordinance on Foreign Exchange 2005). 72 Article 4.2 of the Ordinance on Foreign Exchange Article 4.3 of the Ordinance on Foreign Exchange

40 the foreign exchange regulations. In practice, a remitting bank will likely follow the foreign exchange regulations issued by the SBV instead of general regulations on investments and consider a Deemed Foreign Investor to be a resident under the foreign exchange regulations Direct investment vs. indirect investment: Vietnamese law has two separate sets of foreign exchange regulations applicable to an FIE and a foreign investor depending on whether the investment by the foreign investor is classified as direct investment (đầu tư trực tiếp) or indirect investment (đầu tư gián tiếp). Direct investment is defined to mean an investment whereby the foreign investor brings in investment capital and participate in managing the investment activities in Vietnam (tham gia quản lý). 74 Indirect investment is defined to mean an investment whereby the foreign investor (a) invests by way of buying securities, valuable papers, making capital contribution, purchasing shares and through investment funds or other financial intermediary institutions, and (b) does not directly participate in managing the investment activities in Vietnam The distinction between a direct investment and an indirect investment is quite important. For example, payment for shares or capital contribution by a non-resident foreign investor in the context of an indirect investment must be made in VND and be paid from a single VND indirect investment capital account opened in Vietnam in the name of the foreign investor. 76 On the other hand, payment for share or capital contribution by a non-resident foreign investor in the context of a direct investment can be made in foreign currency and paid directly from offshore to the direct investment capital account in Vietnam which is opened in the name of the FIE In many cases, it is not easy to determine whether an investment by a foreign investor is a direct investment or indirect investment. The confusing point here is what participating in the management of investment activity means. For example, after purchasing shares of a listed company in Vietnam, a foreign investor attends the shareholders meeting of such company and exercises its voting rights then arguably the investor has participated in the management of the company in Vietnam. A more 74 Article 4.12 of the Ordinance on Foreign Exchange Article 4.13 of Ordinance on Foreign Exchange Article 12.1 of Ordinance on Foreign Exchange 2005 and Article 4.1 of Circular 5 of the SBV dated 12 March 2014 on opening and use of indirect capital account for indirect investment activities in Vietnam (Circular 5/2014). 77 Article 11.1 of Ordinance on Foreign Exchange 2005 and Article 6 of Circular 19 of the SBV dated 11 August 2014 on foreign exchange management of direct investment activities in Vietnam (Circular 19/2014). 40

41 relevant example is a foreign investor who purchases a minority stake in a JSC and nominates its personnel to hold position in the Board of such company. In such case, it is not clear if the investor could be deemed to have participated in the management of the company in Vietnam. To address this uncertainty, Circular 19/2014 seems to suggest that a foreign investor s investment in an FIE, which has an Investment Certificate, will be considered as a direct investment. 78 And a foreign investor s investment in an FIE which does not have an Investment Certificate will be considered as an indirect investment. 79 That said, under the Investment Law 2015, the concepts of indirect investment and direct investment have been removed. Therefore, it is not clear if the clarification under Circular 19/2014 will remain relevant Conversion and remittance: In Vietnam, Vietnamese Dong can only be converted into foreign currency if the conversion is for a permitted transaction (e.g. a current transaction (giao dịch vãng lai) or a capital transacton (giao dịch vốn)) and there is supporting document for such transaction. 80 Even if where conversion is permitted, the SBV strictly controls the exchange rate between US Dollar and Vietnamese Dong by setting a base rate and a margin. 81 The foreign exchange regulations regulate in details the use of a foreign currency account or a Vietnamese Dong account of a foreign investor. 82 Nominal conversion of Vietnamese Dong into foreign currencies whereby the parties to a transaction agree to denominate the transaction value in foreign currency but settle in Vietnamese Dong equivalent is generally prohibited except in certain limited cases Foreign loans: Under foreign exchange regulations, a foreign loan is a borrowing transaction between the borrower being a resident and a lender being a non-resident. 84 The discussion in this paragraph 3.21 only applies to foreign loans not guaranteed by the Government. There are separate regulations 85 regulating foreign loans guaranteed by the Government which are quite common for borrowers being SOEs. A foreign loan 78 Article 11.1 of Circular 19/ Article 11.2 of Circular 19/ Article 39 of the Ordinance on Foreign Exchange Article 15 of Decree 70 of the Government dated 17 July Circular 16 of the SBV dated 1 August 2014 on use of foreign currency accounts and Vietnamese Dong accounts of residents and non-residents (Circular 16/2014). 83 Article 22 of the Ordinance on Foreign Exchange 2005 and Circular 32 of the SBV dated 26 December 2013 on limitation of use of foreign exchange in Vietnam (Circular 32/2013). 84 Article 4.15 of the Ordinance on Foreign Exchange Law on Management of Public Debts of the National Assembly dated 17 June 2009 (Law on Public Debts 2009). 41

42 can take the form of financial loans, deferred payments or debt securities. 86 A foreign loan is classified into short-term loan which has a term of up to one year or medium or long term loan which has a term of more than one year. 87 Generally, a foreign loan must be used to: finance business plan or investment project of the borrower or of a company that the borrower makes a direct investment. In the latter case, the foreign loan must be a medium or long term loan; 88 or refinance existing foreign loans of the borrower provided that the cost of borrowing is not increased. 89 A short term loan cannot be used to finance long term or medium term projects or business plans. 90 A medium or long term loan will need to be registered with the SBV before the first disbursement of the loan but within 30 days from the date of signing of the loan agreement. 91 A short term loan which is extended beyond 1 year will also need to be registered with the SBV within 30 days from the extended date. There are special conditions for foreign loans taken by credit institutions or by SOEs Remitting banks being gatekeepers: The SBV requires any remitting bank to check related documents before entering into a foreign exchange transaction with its clients (e.g. sale, perchance or remittance of foreign currency). 93 This requirement effectively makes each remitting bank to be gatekeeper for compliance with foreign exchange regulations. As such, parties to any cross-border transaction especially M&A transactions should ensure that the remitting bank agrees with their remittance and conversion plan for the transaction. Governing law Under Investment Law 2014, 94 if a contract has at least one party to it being a 86 Article 3.1 of Decree 219 of the Government dated 26 December 2013 on foreign loans (Decree 219/2013). 87 Articles 2.1 and 2.2 of Circular 12 of the SBV dated 31 March 2014 on criteria for foreign loans which are not guaranteed by the Government (Circular 12/2014). 88 Article 5.1 of Circular 12/ Article 5.2 of Circular 12/ Article 11.1(a) of Circular 12/ Article 9 of Circular 3/2016 of the SBV dated 26 February 2016 on foreign loan registration, as amended (Circular 3/2016). 92 Articles 10 and 11 of Circular 12/ Article 39.2 of the Ordinance on Foreign Exchange Article 4.4 of Investment Law

43 Deemed Foreign Investor or a foreign investor then the parties to such contract may agree to select foreign governing law or international investment practice provided that the agreement on selection of foreign governing law or international investment practice is not contrary to Vietnamese law. There are various uncertainties regarding this provisions (see ). But in the broadest sense, this provision can be interpreted to mean that an FIE, which qualifies as a Deemed Foreign Investor, may be entitled to select foreign governing law for all of its contracts during their operation. If this interpretation is accepted by Vietnamese courts and other authorities, then it would bring substantial benefits to many FIEs in Vietnam given the current development of Vietnamese law and the risk of change in law in Vietnam (see [ ]). Previously, Investment Law 2005 only generally provides that regarding foreign investment activities, if Vietnamese law does not have a specific provision, parties to a contract may agree in the contract to apply foreign governing law and international investment practice provided that the application foreign governing law and international investment practice is not contrary fundamental principles of Vietnamese law Under the Commercial Law 2005, the parties to a commercial transaction with a foreign element may agree to apply foreign law if such foreign law is not contrary to the fundamental principles of the law of Vietnam. 96 Article 758 of the Civil Code 2005 defines a civil relation involving foreign elements to be a civil relation in which a least one of the participating parties is a foreign body, organisation or individual, or a Vietnamese residing overseas, or the civil relation is between participating parties being Vietnamese citizens or organisations but the basis for the establishment, alteration or termination of such relation was the law of a foreign country, or such basis arose in a foreign country, or the assets involved in the relation are located in a foreign country. As such under the Commercial Law 2005, a transaction between an FIE and another company in Vietnam does not usually have a foreign element and can be subject to a foreign governing law Reading the Commercial Law 2005 and the Investment Law 2014 together may result in two possible interpretation: on the one hand, it is arguable that by virtue of Article 4.4 of the Investment Law 2014, an FIE being a Deemed Foreign Investor would be considered as a foreign organisation and would make a transaction involving such FIE have a foreign element 95 Article 5.4 of Investment Law Article 5.2 of the Commercial Law. 43

44 as required by the Commercial Law Accordingly, a transaction involving an FIE being a Deemed Foreign Investor could be subject to foreign governing law; or on the other hand, it can also be argued that since a transaction between an FIE and another company in Vietnam does not have a foreign element, an agreement to select foreign governing law for such transaction would be contrary to Vietnamese law and would therefore be invalid. The first interpretation seems to be more reasonable. This is because if the second interpretation is applicable then there would be no new benefit or aspect introduced by Article 4.4 of the Investment Law In addition, investors in BOT projects have relied on similar provisions under Decree 15/ on public private partnership to select foreign governing law for a contract between a BOT company and a local offtaker It is not clear if the term contracts under Article 4.4 of the Investment Law 2014 includes: all kinds of contracts to be entered by an FIE; or only contracts relating to the investment activities governed by the Investment Law The first interpretation is supported by fact that Article 4.4 of the Investment Law 2014 refers to contracts in general. However, the second interpretation is supported by the fact that Article 4.4 of the Investment Law 2014 refers to international investment practices instead of international practices. If Article 4.4 was intented to apply to all kinds of contracts then it should have referred to international practices not just international investment practice. In addition, the Investment Law 2014 is intended to apply to, among other things, investment business activities (hoạt động đầu tư kinh doanh) in Vietnam. 99 So it would be a stretch to expand the scope of Article 4.4 of the Investment Law 2014 to all activities including those not regulated by the Investment Law An FIE being a Deemed Foreign Investor may cease to be a Deemed Foreign Investor in certain circumstances. In that case, there is a risk that the foreign governing law clause in a contract which has been entered into by the FIE when it is a Deemed Foreign Investor may be challenged if the FIE ceases to be a Deemed Foreign Investor 97 Decree 15 of the Government dated 14 February 2015 on public private partnership (Decree 15/2015). 98 Article 37 of Decree 15/ Article 1 of Investment Law

45 thereafter. Dispute resolution Article 14.3 of the Investment Law 2014 provides that disputes among investors of which at least one party is a foreign investor or an FIE being a Deemed Foreign Investor may be referred to (1) Vietnamese courts, (2) Vietnamese arbitration, or (3) foreign arbitration or international arbitration or an ad-hoc arbitration established by the parties for dispute resolution. Disputes among domestic investors and FIEs which are not Deemed Foreign Investor or disputes among FIEs which are not Deemed Foreign Investor and Government authorities relating to investment business activities can only be referred to (1) Vietnamese courts or (2) Vietnamese arbitration for dispute resolution. 100 This is different from Investment Law Under the Investment Law 2005, transactions with any company with any level of foreign ownership (not necessarily at least 51%) could be referred to foreign arbitration for dispute settlement. 101 There are two potential consequences, among other things, arising from this change: A foreign arbitration clause in a contract which is entered into before 1 July 2015 and involves a foreign invested enterprise with less than 51% foreign ownership may be considered invalid after 1 July 2015; and A foreign arbitration clause in a contract which is entered into after 1 July 2015 and involves an FIE being a Deemed Foreign Investor should have a fall back dispute resolution forum if such FIE ceases to be a Deemed Foreign Investor Together with the ability to select foreign governing law, the ability to select foreign dispute resolution by an FIE being a Deemed Foreign Investor will bring substantial benefits to foreign investors who wish to have a more predictable and stable legal framework for their investment in Vietnam. However, Article 14.3 of Investment Law 2014 seems to apply to (1) disputes arising from investment business activities only and (2) disputes among investors only. Therefore, (1) disputes between an FIE being a Deemed Foreign Investor and a Government authority or (2) disputes involving an FIE being a Deemed Foreign Investor not arising from investment business activities may not be referred to a foreign arbitration for settlement. Given the broad definition of investment business activities, it may be difficult to determine whether a dispute arises from investment business activities. 100 Article 14.2 of Investment Law Article 12.3 of Investment Law

46 4. FOREIGN OWNERSHIP LIMITS General rules 4.1. Article 22.3 of the Investment Law 2014 provides that foreign investors may own unlimited amount of charter capital of a company in Vietnam (i.e. Vietnam EO) except that: the foreign ownership limit in a Public JSC will comply with securities regulations (see ); the foreign ownership limit in a company, which is incorporated by way of equitising or otherwise restructuring a Wholly SOE, will comply with regulations on equitisation or restructuring of SOEs (see ); the foreign ownership limit in a company, which is not a Public JSC and is not a company incorporated by way of equitising or otherwise restructuring a Wholly SOE, will comply with other provisions (quy định khác) of applicable Vietnamese law and international treaties to which Vietnam is a party. 104 Usually, Vietnam s committments regarding foreign ownership limits under various international treaties are the minimum standards that Vietnam must comply with when it issues law and regulations on the same issues. However, by specifically referring to international treaties, Article 22.3 of the Investment Law 2014 effectively makes Vietnam s international committments become domestic law on foreign ownership limits Foreign ownership limits under Article 22.3 of the Investment Law 2014 are determined by reference to the amount of charter capital that foreign investors may own in a company in Vietnam. In fact, the legal treatment of a company in Vietnam under the Investment Law 2014 will depend much on the amount of charter capital held by foreign investors (or Deemed Foreign Investors) in such company (see ). However, the Enterprise Law 2014 defines foreign ownership ratio by reference to the voting rights held by foreign investors in a company in Vietnam (see [ ]). However, it is not clear if one can rely on the definition of foreign ownership ratio of foreign investors under the Enterprise Law 2014 to exclude non-voting portion of charter capital held by the foreign investors in a company in Vietnam from the calculation of foreign ownership limits under Article 22.3 of the Investment Law This because: 102 Article 22.3(a) of the Investment Law Article 22.3(b) of the Investment Law Article 22.3(c) of the Investment Law

47 although the Enterprise Law 2014 introduces the defined term of foreign ownership ratio, no reference to this defined term or related provision is provided in the Enterprise Law 2014 and its implementing Decrees; and international treaties and domestic special laws have also provided their own criteria to calculate the foreign ownership limits. For example, the calculation of foreign ownership limit in joint stock Vietnamese credit institutions is based on the charter capital held by foreign investors while the calculation of foreign ownership limit in public companies is based on the voting shares held by foreign ivnestors It is not clear in which companies in Vietnam foreign investors may own unlimited amount of charter capital under Article 22.3 of the Investment Law The opening sentence of Article 22.3 of the Investment Law 2014 suggests that other than the exceptions listed at Article 22.3(a) (c), foreign investors may own unlimited amount of charter capital in any company in Vietnam. However, exception (c) to Article 22.3 of the Investment Law 2014 is defined very broad to include all companies, which are not a Public JSC and are not a company incorporated by way of equitising or otherwise restructuring a Wholly SOE. Therefore, in effect, there is no clear types of companies in which foreign investors may own unlimited amount of charter capital. This is very different from Decree 102/2010, 105 which only includes the following exceptions to the unlimited foreign ownership principle: Listed JSCs must comply with securities regulations regarding foreign ownership limit; companies subject to special laws must comply foreign ownership under such special laws; companies which are incorporated by way of equitising or otherwise restructuring a Wholly SOE, will comply with regulations on equitisation or restructuring of SOEs; and companies in service sectors will comply with foreign ownership limits under WTO Commitments. Non-Public Cos 4.4. Non-Public Cos are companies, which are not Public JSCs. Except for Non-Public 105 Article 13.1 of Decree 102/

48 Cos which are incorporated by way of equitising or restructuring a Wholly SOE (see [ ]), most Non-Public Cos will fall under exception (c) to Article 22.3 of the Investment Law Accordingly, Non-Public Cos will need to comply with foreign ownership limits under applicable Vietnamese law and international treaties Foreign ownership limit is a form of FIE Condition. 106 Accordingly, the rules on applying an FIE Condition under Decree 118/2015 (see ) will also apply in determining foreign ownership limit in a Non-Public JSC. In particular, in light of the principles under Decree 118/2015: if a Non-Public Co operates in multiple industries or business lines and is subject to multiple foreign ownership limits then the lowest foreign ownership limit will apply; if a business line is subject to multiple international treaties and, therefore, multiple foreign ownership limits then a foreign investor must seclect one international treaty when investing in a Non-Public Co operating in such business line; foreign ownership limits provided in WTO Commitments will apply to a Non- Public JSC; if a Non-Public Co operates in an Uncommitted Sector and Vietnamese law has a specific foreign ownership limit applicable to such Uncommitted Sector then such foreign ownership limit will apply to the Non-Public Co; if a Non-Public Co operates in an Uncommitted Sector and Vietnamese law has no specific foreign ownership limit applicable to such Uncommitted Sector then the foreign ownership limit applicable to such Non-Public Co will be subject to opinions from the MPI and the relevant Ministries; 111 and if (a) a Non-Public Co operates in an Uncommitted Sector and Vietnamese law has no specific foreign ownership limit applicable to such Uncommitted Sector but (b) in practice, there are cases where foreign investors have been permitted to invest in another Non-Public Co in the same Uncommitted Sector and such Uncommitted Sector 106 Article 10.1 of Decree 118/ Article 10.2(a) of Decree 118/ Article 10.2(b) of Decree 118/ Article 10.2(d) of Decree 118/ Article 10.2(c) of Decree 118/ Article 10.2(dd) of Decree 118/

49 has been published in the National Portal then the existing foreign ownership limit in the latter Non-Public Co may apply to the former Non-Public Co The following issues may arise from applying the principles of determining foreign ownership limit under Decree 118/2015 together with Article 22.3 of the Investment Law 2014: if an international treaty contains a foreign ownership limit for a particular business line then such foreign ownership limit will apply to a Non-Public Co operating in such business line; 113 and it is not clear if the opening sentence of Article 22.3 of the Investment Law 2014 could provide unlimited foreign ownership limit for an Uncomitted Sector, which is not subject to a specific foreign ownership limit in other laws of Vietnam. On one hand, reference to other provisions in exception (c) to Article 22.3 of the Investment Law 2014 (see 4.1.3) seems to suggest that the opening sentence of Article 22.3 of the Investment Law 2014 does not apply to Non-Public Cos included in exception (c). On the other hand, it is also arguable that the unlimited foreign ownership limit provided in the opening sentence of Article 22.3 of the Investment Law 2014 is the foreign ownership limit provided by law as referred to in various provisions of Decree 118/2015. Taken into account the intention of Article 22.3 of the Investment Law 2014 and the provisions before it (i.e. Decree 102/2010), the latter interpretation seems to be more reasonable Before Vietnam joined the WTO in 2006, many Pre-2006 FIEs were licensed to do business in sectors, which are subject to foreign ownership limits under the WTO Committments and other international treaties enterred after 2006 by Vietnam and the foreign ownership level in such Pre-2006 FIEs exceeds the foreign ownership limits under the WTO Committments and other international treaties enterred after The two notable examples are Metro Cash and Carry Vietnam 114 in retail business and Megastar 115 (now CGV Cinemas). By virtue of the transition provisions under the Investment Law and Decree 118/2015, 117 a Pre-2006 FIE, which exceeds foreign ownership limits under the Investment Law 2014, should be able to continue to operate as permitted in its Investment Certificate. However, it is not clear if such Pre-2006 FIE 112 Article 10.2(e) of Decree 118/ Article 22.3(c) of the Investment Law Article 74.1 of Investment Law Article 59.1 of Decree 118/

50 may expand its business without complying with the existing foreign ownership limit which is lower than the foreign ownership level in such Pre-2006 FIE. In some specific circumstances, the MPI has taken the view that a Pre-2006 FIE, which exceeds foreign ownership limits under the Investment Law 2014, is not allowed to expand its business (e.g. opening a new branch) unless such Pre-2006 FIE complies with foreign ownership limits under the Investment Law Equitised SOEs 4.8. The Investment Law 2014 allows the regulations on equitisation of SOEs and conversion of SOEs to have separate rules on foreign ownership limit. Under the Law on State Capital 2014, in addition to equitisation, there are two other methods for converting a Wholly SOE as follows: sale of whole companies; and sale of part of the Wholly SOE to convert the Wholly SOE into a Multiple LLC Regarding equitisation of Wholly SOEs, the regulations on equitisation of SOEs 120 do not have specific rules on foreign ownership limit. Instead, Decree 59/2011 generally allows the authority in charge of the equitisation to decide on the ownership structure of an Equitised SOE, which includes the foreign ownership limit in the Equitised SOE, subject to compliance with any requirement on minimum Stateshareholding in the relevant Equitised SOE as decided by the Prime Minister (see [ ]). 121 Presumably, if an Equitised SOE must maintain a minimum State shareholding then the foreign ownership level in such Equitised SOE must not exceed the remaining shareholding available to non-state shareholders If the equitisation of the relevant SOE involves a public offering of shares then under Decree 58/2012, 122 unless there is a foreign ownership limit under the equitisation regulations, the rules on determination of foreign ownership limit in a Public JSC (see ) will apply. Since there is no specific foreign ownership limit under equitisation regulations, there are two possible interpretations: the rules on foreign ownership limit under Decree 58/2012 will apply to any 118 Official Letter 4776 dated 10 July 2013 from MPI regarding Megastar s new branch in Dong Nai. 119 Article 37.1 of Law on State Capital Decree 59/ Article 36.2(a) of Decree 59/ Article 2a.2 of Decree 58/

51 Equitised SOE, which conducts a public offering during the equitisation process; or the rules on foreign ownership limit under Decree 58/2012 will apply to Equitised SOEs which are not subject to minimum State shareholding requirement only. This is because for Equitised SOEs which are subject to minimum State shareholding requirement, there is an implied foreign ownership limit Regarding sale of whole companies, under Decree 128/2014, 123 if a Wholly SOE is to be sold in accordance with Decree 128/2014, FIEs and foreign investors may purchase unlimited amount of ownership interest except in the following cases: if the Wholly SOE involves in business lines, which are subject to foreign ownership limits under international treaties then the foreign ownership limits under international treaties will apply; if the Wholly SOE involves in business lines which are not subject to foreign ownership limits under international treaties but are subject to foreign ownership limits under Vietnamese law, then the foreign ownership limits under Vietnamese law will apply; if the Wholly SOE is subject to multiple foreign ownership limits then the lowest foreign ownership limit will apply. Decree 128/2014 is issued before the Law on State Capital Therefore, it is likely that Decree 128/2014 will be replaced by a new Decree in the coming time Regarding sale of part of a Wholly SOE, currently, there is no specific procedures for doing so. Therefore, it remains unclear how to determine foreign ownership limit in case of sale of parts of a Wholly SOE. Public JSCs Under Decree 58/2012, the foreign ownership limit in a Public JSC will be determined in accordance with the following principles: only shares with voting rights are counted towards the applicable foreign ownership limits in a Public JSC. 125 By implication, foreign investors may hold unlimited 123 Decree 128 of the Government dated 31 December 2014 on sale, transfer and hand-over of Wholly SOEs (Decree 128/2014). 124 Article 4.2 of Decree 128/ Article 2.13 of Decree 58/

52 non-voting shares unless otherwise provided in the charter of the Public JSC or in special laws applicable to the Public JSC; shares held by foreign investors or 51% Top-level FIEs are included in the calculation of the foreign ownership limit in a Public JSC. 127 It is not clear if shares held by a Deemed Foreign Investor, which is not a 51% Top-level FIE, will be included in the calculation of the foreign ownership limit in Public JSC. This is because on the one hand, the definition of foreign ownership ratio under Decree 58/ does not include shares held by a Deemed Foreign Investor, which is not a 51% Top-level FIE. On the other hand, Circular 123/2015 provides that a Vietnam EO in which foreign investors hold 51% or more of the charter capital including indirect holding via authorisation or entrustment must (a) obtain a securities trading code and (b) comply with regulations on foreign ownership limit if a Public Co operates in multiple industries or business lines and is subject to multiple foreign ownership limits then the lowest foreign ownership limit will apply. 130 This principle is similar to the principle applicable to Non-Public Cos (see 4.5.1); where a Public JSC operates in sectors which are subject to specific foreign ownership limits under an international treaty then the specific foreign ownership limits provided in such international treaty will apply. 131 This principle is similar to the principle applicable to Non-Public Cos (see 4.6.1); where a Public JSC operates in sectors which have FIE Conditions including specific foreign ownership limits under investment regulations or other laws then the specific foreign ownership limits provided in investment regulations and other laws will apply; where a Public JSC operates in sectors which have FIE Conditions but have no specific foreign ownership limit then the applicable limit is 49% % is the most 126 Article 2a.4 of Decree 58/ Article 2.13 of Decree 58/ Article 2.13 of Decree 58/ Article 3.8 of Circular 123/ Article 2a.1(c) of Decree 58/ Article 2a.1(a) of Decree 58/ Article 2a.1(b) of Decree 58/ Article 2a.1(b) of Decree 58/

53 common foreign ownership limit for public companies in Vietnam before 1 July 2015; where a Public JSC operates in sectors which have no FIE Conditions and are not subject to any specific foreign ownership limit under international treaties or Vietnamese law then the applicable limit is 100%; the charter of a Public JSC may specify a foreign ownership limit applicable to such Public JSC, which is lower than the applicable foreign ownership limit under Decree 58/ However, Circular 123/2015 does not address the scenario where the local shareholders in a Public JSC, which has a minority foreign shareholder, decide to reduce the applicable foreign ownership limit in order to kick out the foreign shareholder against its will; foreign investors can hold unlimited convertible bonds issued by a Public JSC as long as the foreign ownership limits applicable to such Public JSC are complied with when the convertible bonds become due for conversion (đến hạn chuyển đổi). When a convertible bond becomes due for conversion, it is not clear if this means that (a) the conditions for conversion have been satisfied and the convertible bonds become convertible or (b) the conditions for conversion have been satisfied, the convertible bonds become convertible and the bondholders have exercised the conversion rights. Interpretation (a) is different from the traditional approach before 1 July 2015, which allows foreign investors to hold unlimited convertible bonds as long as the foreign ownership limits are complied with when the convertible bonds are actually converted (not just become convertible); If Public JSC exceeds its foreign ownership limit then the Public JSC and related individuals or organisations must ensure no further increase in the foreign shareholding of the Public JSC. 138 It is not clear how related individuals or organisations in this context are identified and monitored. If a conversion of a derivative securities or an ETF fund will result in a Public JSC exceeding its foreign ownership limit then the VSD must request the relevant parties to sell the exceeding shares and settle in cash 134 Article 2.1 of Decision 55 of the Prime Minister dated 15 April 2009 on foreign ownership limits in Vietnam securities markets (Decision 55/2009). 135 Article 2a.1(d) of Decree 58/ Article 2a.1(d) of Decree 58/ For example, see Article 7.8 of Decree 1 of the Government dated 3 January 2014 on foreign investors acquiring shares in Vietnam credit institutions (Decree 1/2014) or Official Letter 4736 of SSC dated 22 August Article 11.4 of Circular 123/

54 instead; 139 and If a Public JSC ceases to satisfy conditions to be a Public JSC, it still needs to comply with the regulations on foreign ownership limit applicable to a Public JSC for at least one year unless the Public JSC becomes a Non-Public Co due to certain restructuring events (e.g. merger, consolidation), liquidation, bankruptcy or change of corporate form Regarding the principle described at , again it is not clear if 100% limit provided in the opening sentence of Article 22.3 of the Investment Law 2014 will qualify as specific foreign ownership limit under investment regulations under Decree 58/2012 (see 4.6.2). Literally, there is an argument supporting the view that 100% limit provided in the opening sentence of Article 22.3 of the Investment Law 2014 will qualify as specific foreign ownership limit under investment regulations under Decree 58/2012. However, if that view is adopted then the principle set out at becomes irrelevant. Accordingly, this may not be a logical interpretation of Article 22.3 of the Investment Law 2014; Decree 58/2012 requires a Public JSC to report to the SSC and publish information regarding foreign ownership percentage on its website, the website of VSD or the relevant exchange. 141 Decree 58/2012 uses the term foreign ownership percentage instead of the foreign ownership limit. Therefore, literally, this may mean that a Public JSC must report to the SSC any change in its actual foreign shareholding. However, the report form attached to Circular 123/2015 only requires a Public JSC to report the foreign ownership limit (i.e. the maximum permitted foreign shareholding) applicable to it. 142 Circular 123/2015 also requires a Public JSC to determine the maximum foreign ownership level in the Public JSC. 143 This task is not easy for a Public JSC given the difficulty in navigating all the applicable regulations and possible scenarios under Vietnamese law and international treaties regarding foreign ownership limit (see for example 3.8). Therefore, a prudent foreign investor before acquiring shares in a Public JSC in Vietnam may need to check if the Public JSC has successfully reported its foreign ownership to the SSC. 139 Article 3.7 of Circular 123/ Articles 36.1, 36.2 and 36.3 of Decree 58/ Article 2.5 of Decree 58/ Form 16 of Circular 123/ Article 11.2 of Circulr 123/

55 4.16. Wording of Decree 58/2012 seems to require any Public JSC to report to the SSC about the foreign ownership limit applicable to it. However, under Circular 123/2015, a Public JSC is only required to report about the foreign ownership limit applicable to it in certain circumstances, when a Public JSC takes an action resulting in a change to such foreign ownership limit. The issue is that given the change in the rules to determine foreign ownership limit under Decree 58/2012, the current foreign ownership limit of a Public JSC may not be clear. Therefore, it may be difficult to determine whether there is a change to the foreign ownership limit of a Public JSC if the current limit is not known Circular 123/2015 lists out the following particular cases where a Public JSC must report its foreign ownership limit: when registering a Public JSC s status or when offering or issuing securities, a Public JSC adjusts its foreign ownership limit. 144 The Vietnamese wording of Article 12.1(b) of Circular 123/2015 may also be read as follows when a Public JSC registering its Public JSC s status, issuing or offering securities, or adjusting foreign ownership limit. However, this may not be the intention of the draftsman since it is not consistent with the first sentence of Article 12 of Circular 123/2015; when a Public JSC is restructured resulting in a change to the foreign ownership limit; a Public JSC, which is not subject to any foreign ownership limit, adjusts its foreign ownership limit. 146 This seems to refer to the case where a Public JSC, which is not subject to any foreign ownership limit, amends its charter to apply a voluntary foreign ownership limit; when a Public JSC registers or changes its business lines resulting in a change to the foreign ownership limit; 147 and when there is a change in law or change in the international treaties resulting in a change to the foreign ownership limit. 148 This obligation may be difficult to comply with since not all Public JSCs have the resources to monitor all law applicable to it. In 144 Article 12.1(b) of Circular 123/ Article 12.1(c) of Circular 123/ Article 12.1(a) of Circular 123/ Article 12.1(d) of Circular 123/ Article 12.1(dd) of Circular 123/

56 addition, international treaties entered into by Vietnam are not generally publicily available for a Public JSC to follow Circular 123/2015 only provides procedures for reporting of foreign ownership limits in the last three scenarios ( ). In particular, the documents submitted to the SSC includes: a report in prescribed form 150 including (a) list of business lines, (b) foreign ownership limits under Vietnamese law, international treaties, or the Public JSC s charter; and (c) the proposed foreign ownership limit applicable to the Public JSC; and evidence of that the proposed foreign ownership limit complies with law or that the Public JSC is not subject to any foreign ownership limit including information from the FIE Condition List The SSC will review the documents and, if necessary, ask for opinions from other authorities before confirming the report. The review period is 10 working days excluding the time needed to obtain opinions from other authorities. 151 The SSC has broad discretion to determine whether opinions from other authorities will be required (e.g. when there is inconsistency in the law or when the law or international treaties are silent). 152 Accordingly, it may take substantial time for the SSC to confirm a report on foreign ownership limit by a Public JSC. Only after obtaining the SSC s confirmation on the proposed foreign ownership limit, a Public JSC may make public disclosure of such limit 153 and foreign investors may hold shares up to the limit reported to the SSC In other scenarios ( ), it is not clear how a Public JSC will report to the SSC about its proposed foreign ownership limit In addition to determination of foreign ownership limit in a Public JSC, there is also a practice of allocating the available foreign ownership limit to different types of foreign investors. For a Quoted JSC whose shares are freely traded and are monitored by the VSD, usually, the Quoted JSC does not control the foreign ownership level held by foreign investors in the company. However, there are cases where a Quoted JSC needs to control the foreign ownership level held by general foreign investors so that 149 Article 13.1 of Circular 123/ Form 16 attached to Circular 123/ Article 13.2 of Circular 123/ Article 13.3 of Circular 123/ Article 13.4 of Circular 123/ Article 13.5 of Circular 123/

57 there is available foreign ownership room for certain specific foreign investors. For examples, if a Quoted JSC plans to issues new shares to a foreign investor by way of private placement at a price higher than the market price and, then the Quoted JSC would want to ensure that there is enough foreign ownership room for the proposed foreign investor at the time of closing. This is because after disclosing the news of the deal on the market, there is a good chance that general foreign investors may try to buy shares of the Quoted JSC in the open market reducing the foreign ownership room available for the proposed foreign investor; if a Quoted JSC issues convertible securities to foreign investors then the Quoted JSC would also want to ensure that there is enough foreign ownership room for foreign investors to convert their convertible securities into shares in the future; and if a Quoted JSC plans to make a public offering and list its shares on an offshore stock exchange then the Quoted JSC would also want to ensure that there is enough foreign ownership room for foreign investors trading on an offshore stock exchange. This is because the listing process may take a long time and during this period, general foreign investors may buy more shares of the Quoted JSC in the open market reducing the foreign room available to foreign investors in the offshore stock exchange In practice, at the request of a Public JSC and subject to approval by the SSC, the VSD has agreed to limit the foreign ownership level available to general foreign investors and to reserve the remaining foreign ownership level to specific types of investors. 155 However, it appears that there is no clear specific procedures for the VSD to do so. In practice, the Quoted JSC usually has to submit a resolution of the GMS approving to limit the foreign ownership level available to general foreign investors. The SSC and the VSD usually give their approvals on the condition that the foreign ownership level available to general foreign investors will be restored to the normal level once the reason for limiting ceases to exist. Potential workarounds Non-Public Cos If a foreign investor wishes to acquire shares or capital contribution in a target company being a Non-Public Cos exceeding the foreign ownership limit applicable to it then there may be potential workarounds in respect of the appllicable foreign owner- 155 See for examples:

58 ship limit. The exact workaround will depend on specific cases and the commercial goals of the foreign investor (e.g. having voting control, economic interests or both). In the following paragraphs (see ), we will discuss certain potential workarounds in respect of a foreign ownership limit. These potential workarounds address one or more of the following issues: increasing the applicable foreign ownership limit; reducing the foreign shareholding in the Non-Public Co; or alternative structures to achieve the commercial goal of the foreign investor without adjusting the foreign ownership limit or foreign shareholding in the Non- Public Co Removal of restricted business lines: If the Non-Public Co registers for a business line, which is subject to a foreign ownership limit, but does not actually perform such business line in practice then the Non-Public Co may consider removing such a business line from the Enterprise Registration Records of the Non-Public Co. Removing a restricted business line may help to increase the applicable foreign ownership limit in a Non-Public Co if the removed business line has the lowest foreign ownership limit Investing through non-foreign investors: Under the Investment Law 2014, only certain Vietnam EOs are regarded as Deemed Foreign Investors (see ). Therefore, if a foreign investor sets up a Vietnam EO, which is not a Deemed Foreign Investor, and invests in the target company via such Vietnam EO then technically, the ownership interest held by such Vietnam EO is not regarded as foreign ownership and is not counted against the foreign ownership limit. For example, a subsidiary of a 51% Top-level FIE, in which foreign investor owns less than 51% charter capital, will be regarded as a domestic investor when such subsidiary invests in another company There are several examples of overcoming a specific foreign ownership limit by holding through an investment vehicles being non-foreign investors under the Investment Law For examples, this structure as demonstrated by the following diagrams: 58

59 59

60 60

61 4.27. However, investing through non-foreign investor has certain obstacles, among other things: this approach usually requires many corporate layers which involving setting up multiple companies simply serving as investment vehicles. Managing multiple companies may take time and resources. This is because for each company in the structure, the investor must have a specific investment project and must maintain a business line; in certain cases, the law may expressly require calculation of indirect shareholding by foreign investors. In that case, the structure may not work. For example, Decree 30/ regarding air transportation services will calculate indirect foreign share- 156 Decree 30 of the Government dated 8 April 2013 on air transportation services (Decree 30/2013). 61