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1 December 2010 edition contents Tighter restrictions on profit remittance Last minute reprieve for banks Automatic GMS proxies The latest on foreign employees New rules for enterprise statistical reporting More regulation for higher education Branch dilemmas when is a branch required? New legal instruments In brief: In our final edition for 2010 we look at some recently issued legal instruments covering offshore remittance of profits, banks' capital requirements and enterprises' reporting obligations. We also canvass several areas being considered for legislative reform including proxies for shareholder meetings, foreign employees and university operations. In this issue we also ponder the question of when an enterprise is required to set up a branch and how this might differ between Vietnamese and foreign-invested companies. Visit subscribe to (or take a free tour of) Vietnam Laws online database a searchable database of over 3,400 of our English translations of Vietnamese laws regulating investment and business access free translations of a selection of Vietnamese laws Allens Arthur Robinson (Allens) is a leading international law firm in South East Asia, Greater China, and Australia. With 15 offices in Bangkok, Beijing, Brisbane, Hanoi, Ho Chi Minh City, Hong Kong, Jakarta, Melbourne, Perth, Phnom Penh, Port Moresby, Shanghai, Singapore and Sydney, Allens has an extensive network in Asia. The material contained in Vietnam Legal Update is intended to inform readers of recent legal developments in Vietnam. It is not intended and should not be relied upon as legal advice. Should readers wish further information in relation to any legal instrument or matter mentioned in this issue, they are encouraged to contact one of our Vietnam offices (details at the end of this issue). read the Vietnam Legal Update from 2010 back to complete with index of contents and search function find out more about our practice in Vietnam Visit find out more about the Allens Arthur Robinson network and our international practice Allens' Vietnam practice is led by resident partners Bill Magennis, Nigel Russell and Thomas Miller. Our incountry team consists of international and local lawyers and legal translators. We encourage feedback from our readers regarding the Vietnam Legal Update. Please direct all enquiries, comments and suggestions to us via at VLU@aar.com.au.

2 1 Tighter restrictions on profit remittance Circular TT-BTC of the Ministry of Finance Guiding Remittance of Profit Overseas by Foreign Organizations and Individuals Having Profit from Direct Investment in Vietnam in accordance with the Law on Investment, dated 18 November 2010 (Circular 186) The ability to remit or repatriate profits made in Vietnam is a key concern for foreign investors. Recently the Ministry of Finance issued Circular 186, replacing Circular 124 dated 23 December 2004 (Circular 124), to guide the remittance of profits earned from direct investment in Vietnam. While the fact that the new Circular maintains the current principle that remittance of profits is free from tax is welcomed, the new Circular also introduces some far less welcome stricter restrictions on profit remittance. We will now take a look at some of the main differences between Circular 124 and the new Circular, which will take effect from 2 January Annual remittance Circular 186 generally provides that profits may only be remitted once 'financial obligations to the State of Vietnam' (that is, tax obligations) have been fulfilled. The new Circular goes on to provide that profits may be remitted annually, after the investment enterprise has submitted its audited financial statements and the declaration for finalisation of corporate income tax (CIT) for that financial year to the tax office. As is the case now under Circular 124, in practice, the requirement for audited accounts means it will likely take several months after the end of a financial year before an investor can remit profits overseas. New regulations will make remittance of profits less flexible The significant, negative change, however, is that Circular 186 does not include the provision in Circular 124 that permitted 'provisional transfer' of profits during a financial year, once every quarter after payment of corporate income tax. Circular 124 included a relatively flexible regime under which, if provisional remittances turned out to be higher than the end-of-year amount, the difference could be made

3 2 up in the following period. Circular 186 has removed flexibility and made remittance a purely annual event, except in the special case of remittance on closure of an investment entity. Accumulated losses Circular 186 also specifically addresses the circumstances of accumulated losses. The Circular makes it clear that even if profit is made in a particular financial year, if, after carrying forward losses from previous years, there remain accumulated losses, then no remittance is allowed. Notification It is not all bad news though. Given that remittance is now only an annual event which takes place after tax finalisation, investors are only required to inform the tax office 7 days before a remittance is made. By contrast, under Circular 124, investors had to obtain certification from the tax office that CIT had been paid before profit could be remitted. Remittance in kind In another positive development, Circular 186 explicitly recognises that remittance may be in cash or in kind, in which case the value would be converted according to the laws on import and export of goods and other related laws. By comparison, Circular 124 referred only to remittance in cash. Last minute reprieve for banks Amendment to Decree ND-CP of the Government issuing List of Levels of Legal Capital of Credit Institutions, dated 22 November 2006 (Decree 141) With only 2 weeks left to the deadline, set back in 2006, for credit institutions to reach specified levels of legal capital, the Prime Minister has approved a proposal from the State Bank of Vietnam (SBV) to extend the deadline by one year. As reported in the VLU back in June 2007, Decree 141 set out new levels of required capital for various types of credit institutions. The new levels were to be achieved in 2 stages, the first by 31 December 2008 and the second by 31 December By way of example, under Decree 141, shareholding commercial banks were required to have VND1,000 billion in legal capital by 31 December 2008 and VND3,000 billion by 31 December The 31 December 2010 deadline has now been pushed out to 31 December On 14 December 2010, the SBV's website reported on an interview with Mr Duong Quoc Anh, the chief inspector of the SBV. In the interview Mr Duong Quoc Anh explained that the Prime Minister had approved the suggestion of the SBV to extend the deadline and had directed the SBV to coordinate with other relevant bodies to submit to the Government an appropriate amendment of and addition to

4 3 Decree 141. Given the many newspaper reports on the difficulties faced by smaller banks in achieving these thresholds, particularly given the current state of the Vietnamese stock market, this last minute reprieve is likely to be welcomed by many banks. Automatic GMS proxies Draft Circular amending Decision QD-BTC Promulgating regulations on corporate governance applicable to companies listed on the stock exchange or a securities trading centre, dated 13 March 2007 (Decision 12) The 'problem' Under the Law on Enterprises, the required quorum for a General Meeting of Shareholders (GMS) is persons holding at least 65% of the voting shares. In practice, it has proven difficult for companies particularly large listed companies with a disparate shareholder base to achieve this quorum, forcing companies to postpone their GMS. As discussed in the VLU in August 2010, during the drafting of the new decree implementing the Law on Enterprises, it was proposed that this problem be solved by including an 'automatic authorisation' (or automatic proxy) allowing the independent members of the Board of Management to vote on behalf of any shareholders absent from the GMS. As reported previously, however, there was no consensus on this proposal and ultimately this concept was not included in Decree ND-CP issued on 1 October The proposal to automatically appoint the VSD as proxies is designed to solve the problem of listed company AGMs being adjourned for lack of quorum The (new) proposal The matter, however, has not been laid to rest entirely. The concept of an 'automatic proxy' has again been proposed, this time in the form of a draft Circular to amend Decision 12. Under this new proposal, which would apply only to listed companies, a company's Board of Management would be entitled to

5 4 invite the Vietnam Securities Depository (VSD) to represent (and vote on behalf of) any non-attending shareholders. This proposal is, in fact, an extension of a concept already contained in Decision 12 which allows an individual shareholder to appoint the VSD to act as their proxy within an authorised scope. The key difference with the current proposal, however, is that the VSD would act at the request of the Board of Management and would not, on the basis of the current draft, be given any mandate or instructions as to how to exercise the votes of the absent shareholders. The current draft also does not contain any provisions requiring the VSD to act in the best interests of the absent shareholders or making the VSD liable for their actions in voting on behalf of the absent shareholders. Not such a neat solution While the new proposal would give the Board of Management the power to solve the problem of repeated postponement of the GMS for lack of quorum, it also raises considerable concerns. Firstly, given that the current draft does not require the VSD to vote in a particular way - for example, in the 'best interests' of the absent shareholders - and the fact that the VSD will generally have no particular interest in the outcome of any specific decision of a GMS, the proposal runs the risk of GMS resolutions not reflecting the true opinion of shareholders. Secondly, this 'automatic proxy' concept would have a peculiar, and potentially detrimental, outcome when used in conjunction with other provisions of the Law on Enterprises. The Law on Enterprises provides that where a resolution is passed by a GMS which is attended (whether in person or by proxy) by persons holding 100% of the voting shares, the resolution will be lawful and effective even if the orders or procedures for convening and conducting the meeting are not properly implemented. Presumably, the underlying policy behind this provision is that, given all shareholders have attended either in person or through their individually authorised representative, they have had an opportunity to learn whether something new is added to the agenda or other procedural changes have occurred. However, under the current proposal, if the VSD were invited by a Board of Management to attend and vote on behalf of all absent shareholders, the GMS will automatically be attended by persons holding 100% of the shares, enabling any resolutions (whether pre-advised to shareholders or not) to be passed without proper procedure. Thirdly, the practical aspects of the proposal must be considered. There are currently over 600 listed companies and that number is growing, which are located in provinces across Vietnam. It is possible that the VSD would have to go on a significant recruitment drive to simply have sufficient staff to attend the many meetings.

6 5 It remains to be seen whether this, or another alternative solution, is actually passed into law to address the issue of GMS quorum. The latest on foreign employees Submission 73 of the Ministry of Labour, War Invalids and Social Affairs (MOLISA) to the Government on amendment of and addition to Decree 34/2008/ND-CP on employment and administration of foreigners working in Vietnam, dated 16 November 2010 (Submission 73) As discussed in previous editions of the VLU, Decree 34/2008/ND-CP dated 25 March 2008 and Circular TT-BLDTBXH dated 10 June 2008 set out the regulations on employment and administration of foreigners working in Vietnam. Various changes were proposed to the regulations in Decree 34 and Circular 08, including by the Prime Minister in document No.780/VPCP-KGVX dated 5 August 2009 and Resolution No. 25 /NG-CP of the Government dated 2 June 2010 on simplification of administrative procedures of ministries and branches. Now, after a lengthy consultation with the public, foreign employers and other relevant bodies, the Government has issued a Draft Decree amending provisions of Decree 34 (Draft Decree) as well as an explanatory Submission. Initially it was believed that the Draft Decree would be finalised this year, to come into effect from 1 July 2010, however the Decree has yet to be passed so this timing may change. We will now take a look at the major changes proposed in the Draft Decree. New entities covered as employers The Draft Decree makes it clear that other types of entities, including associations, business households and business individuals who have been granted with business registration certificate in accordance with Vietnamese laws, will also be subject to the provisions on foreign employees. This is consistent with the Labour Law. Stricter management of foreign employees The Draft Decree imposes several new stricter controls on the employment of foreigners including requirements that: any foreign enterprise preparing a dossier for a tender invitation must prepare a plan on employment of foreign employees in accordance with Vietnamese laws. The plan must give Vietnamese employees priority; where a foreign contractor requires more employees in a tender, the contractor must approach the Peoples Council Chairman in order to have Vietnamese employees introduced for the purposes of employment. Only where the competent bodies cannot provide or introduce the required

7 6 number of Vietnamese employees, will the Chairman consider and allow recruitment of foreign contractors; employers must register their plan for use of foreign employees annually with the local Department of Labour, War Invalids and Social Affairs; and in a departure from the concession in Decree 34, the Draft Decree provides that any spouse of a foreign employee who is entitled to diplomatic immunity, who wishes to work in Vietnam, must have a work permit except where provided otherwise in signed treaties. Simplification of administrative procedures The Draft Decree also contains several welcome changes designed to simplify the administrative procedures surrounding employment of foreigners. These include: removal of the requirement for the employee's curriculum vitae; a concession that, in the case of certain specialised employees (such as foreign footballers, foreign pilots or foreign employees maintaining aircraft), the requisite certificates of 'high skill' qualifications may be replaced by other relevant documents; removal of the requirement that all application documents which were issued, certified or notarised by a foreign body, also be consularised; several new categories have been added to the list of persons who do not require a work permit, including the chief representative, head of a project office or foreign employees working for an authorised NGO or foreign employees involved in an internal transfer within an enterprise operating in one of the services sectors stipulated in Vietnam's WTO's commitments; simplification of the procedures for amendment of the work permits already issued to foreign employees who wish now to work for another employer; and a reduction of the timelines for issuing or renewal and reissuing of work permits to 10 days and 3 days respectively. New rules for enterprise statistical reporting Decision 77 of the Prime Minister on Basis Statistic Reporting Regime applicable to enterprises, dated 30 November 2010 (Decision 77) With the intention of combining all regulations relating to the statistical reporting regimes for State Owned Enterprises and foreign owned enterprises, on 30 December 2010 the Prime Minister issued Decision 77. Under the Decision there are 4 types of reports to be submitted: monthly, quarterly, 6-monthly and annual reports.

8 7 Interestingly, under Decision 77 it appears that foreign owned enterprises are not long required to use the forms previously provided in Circular 01/LB-TCTK- BKHDT. However, it remains to be seen whether in practice, the authorities will still expect the forms to be used. The relevant information to be included in each report is summarised in the table below. Each report must be submitted to the General Department of Statistics or the State administrative body for foreign direct investment in the relevant province or city under central authority. The new requirements come into effect on 15 January Timing Monthly report, due by the 12th of each month Quarterly, due by the 12 th of the last month of each quarter Enterprises required to make report State Owned Enterprises (SOEs) and Foreign Owned Enterprises (FOEs) involved in mining, industrial processing, electricity, natural gas, water supply, solid and/or water waste treatment, information and communications, real estate business, transportation and warehousing, commerce and services SOEs, FOEs and projects with foreign direct invested capital operating in the areas of agriculture, forestry and aquaculture, and construction; enterprises making or receiving payment for provision of services from or to foreign parties, and enterprises acting as investors. Items to be reported Net turnover for each operational industry or branch. Product quantity/output for each operational industry or branch. For enterprises engaged in import /export, the volume and value of goods imported to or exported from each country For enterprises and projects with capital from foreign direct investment, the charter capital and implemented invested capital, employment, taxes and other items paid to the State budget. For construction enterprises, the value of their construction output for each type of building or engineering works. For enterprises making or receiving payment for provision of services from or to foreign parties, the value of receipts and disbursements for each type of service. For enterprises acting as investors, the implemented invested capital according to each capital source and each investment item.

9 8 Timing Every six months, due by 12 June and 12 December each year Annually, due by 31 March the following year Enterprises required to make report All SOEs and FOEs and projects with foreign direct invested capital All State enterprises and all enterprises and projects with foreign direct invested capital Items to be reported Employment lists and income of their employees. For enterprises engaged in growing and cultivating activities, the area in which annual crops have been seeded or planted and the area of current perennial crops. For enterprises engaged in breeding activities, the quantity/number and output of a number of breeds. For enterprises engaged in forestry activities, the area of planted forests and the output of exploited wood and exploited non-wood products. For enterprises engaged in farming marine plants and animals and aquaculture production, their aquaculture and exploited aquaculture product output. The enterprise's name. The results of production and business of the enterprise, being turnover of each operational industry or branch; taxes, fees and charges paid to the State budget; and profit. Employees and their income; contributions made by the enterprise to social insurance, medical insurance, job loss insurance and trade union funding. Implemented invested capital in the year according to each capital source and each investment item. Payments for, and investments in, scientific research and technological development; and in environmental protection and treatment. Payments made by the enterprise for application of information technology. The status of waste treatment and environmental protection by the enterprise.

10 9 More regulation for higher education Decision 58/2010/QD-TTg providing for a university charter, dated 22 September 2010 (Decision 58) Draft Decision on conditions and procedures for university establishment, merger, division, separation and dissolution to replace Decision 07/2009/QD-TTg (Draft Decision) The Government has recently taken several steps to enhance the regulation of universities in Vietnam. In September 2010 they issued clear guidance on the required contents for a university's charter, in the form of Decision 58. At the same time, the Government also issued a Draft Decision on conditions and procedures for university establishment, merger, division, separation and dissolution. The Draft Decision is intended to replace Decision 07/2009/QD-TTg covering the same areas, dated 15 January 2009 (Decision 07). Establishment of a university Similarly to Decision 07, the Draft Decision sets out a 5-step process required to establish a university: Step 1: obtain approval of People's Committee of the relevant province where the university will be situated; Step 2: obtain 'in-principle' approval from the Prime Minister; Step 3: obtain an investment certificate from the Department of Planning and Investment Step 4: obtain formal (final) approval from the Prime Minister; and Step 5: obtain an 'operation license' from the Ministry of Education and Training. New and proposed regulations provide more clarity around the process of establishing and operating a university in Vietnam While these 5 steps are broadly the same as those set out in Decision 07, the Draft Decision also contains some new clarifications including setting out in more detail the matters that the Ministry of Education and Training will take into account (such as the number of tenured staff and lecturers; the curricula, the facilities of the university and the financial capacity of the university) when

11 10 considering whether to provide an operation licence to a university. Unfortunately several of the key steps, particularly those relating to 'local' approval from the People's Committee and Department of Planning and Investment, remain unclear giving authorities a wide discretion. In practice investors would need to liaise closely with the relevant authorities to understand the specific requirements on a case-by-case basis. One significant change to the establishment regulations is an increase in the required charter capital. This has increased to VND150 billion from only VND 50 billion under Decision 07. Operation of a university Both Decision 58 and the Draft propose several professional requirements and standards for the operation of a university. For example, a university must maintain a minimum number of tenured lecturers in order to commence its undergraduate program, including a requirement that at least one lecturer must hold a doctorate degree in the relevant subject, while three of the lecturers must hold at least a masters qualification in the relevant area. Decision 58 also sets out different requirements for each level of study offered by the university. Interestingly, Decision 58 and the Draft Decision make no mention of the stipulated ratios of lecturers to students previously set out in Decision 07. Branch dilemmas when is a branch required? Official Letter 7132/BKH-PC of the Ministry of Planning and Investment, dated 8 October 2010 (Official Letter 7132) Vietnam's Laws on Enterprises safeguards a company's rights to run its business 'autonomously', including by giving each enterprise the right to expand its business scope by establishing representative offices and branches outside its head office. Branches versus representative offices Both representative offices and branches are dependent units of their parent company. While representative offices are not allowed to conduct revenueearning business activities, a branch may conduct any or all of the business activities for which the parent company is licensed. As such, where a company wishes to expand its business activities in a location outside its head office, the logical choice is often to establish a branch in the new location. Is a branch compulsory? While the Law on Enterprises refers to a company's right to establish a branch to conduct business outside its head office, it is unclear whether a company must, in fact, establish a branch if it wishes to conduct business in a new location. In our experience, licensing authorities in different locations have differing views

12 11 on this issue. While some do not require that a branch be set up, others do on the basis that a company must have some sort of registered presence in the new location. Recently the Ministry of Planning and Investment shed some light on this issue through Official Letter 7132, sent in response to a query from a real estate company in Hanoi. From the letter, it appears that the real estate company wanted to expand its business to a new location by carrying out sub-leasing activities there. While the response relates to the specific case of the Hanoi company, the Ministry made some general observations that may be more widely applied. According to the Ministry's letter, companies have the right, based on the principle of business autonomy set out in the Law on Enterprises, to decide on establishment of branches based solely on their own business demands, unless industry specific legislation provides otherwise. Given that there is no specific legislation in the real estate sector requiring companies to set up branches in order to expand their business to new locations, the Ministry determined that the decision on whether to set up a branch to conduct the sub-leasing was entirely at the company's discretion. What's good for the goose, is not necessarily good for the gander Unfortunately, the Ministry's guidance in Official Letter 7132 may arguably not apply to foreign-invested enterprises. The view that it does not apply would stem from the fact that the type of business activity under consideration, namely real estate sub-leasing, is not open to foreign-invested companies. The position for foreign-invested companies is also complicated by the fact that, in addition to the provisions in the Law on Enterprises (as considered by the Ministry of Planning and Investment in this case), the establishment of branches by foreign invested enterprises is also subject to another layer of regulation under the Law on Investment. When the Law on Investment and Law on Enterprises first came into effect, most licensing authorities held the view that if a foreign-invested enterprise were to expand into a new location, it must do so in the form of a new investment project. On this basis, the foreign-invested enterprises were required to have an investment project in the new location and obtain an investment certificate in order to set up the branch. However, this issue was subsequently clarified in Decree 139/2007/ND-CP of the Government dated 5 September 2007 on the Law on Enterprises and more recently in Decree 102/2010/ND-CP of the Government dated 1 October Under Decree 102, a foreign-invested enterprise has the right to set up a branch outside its head office and the branch does not require a separate investment project. Under the current law then, it seems that there are effectively two types of branches for foreign-invested enterprises, those with an investment project and

13 12 those without. If a branch of a foreign-invested enterprise is set up without an investment project, the parent company only needs a 'branch operation registration certificate'. The process for obtaining this certificate is relatively straightforward and is similar to Vietnamese companies. If, however, a branch is set up with a separate investment certificate, the parent company must follow the investment registration or approval process and obtain a separate investment certificate for the branch. This is a much lengthier process. Unfortunately, both Decree 139 and 102 have gone only part of the way in clarifying issues relating to branches of foreign-invested enterprises. In particular, although the Law on Enterprises provides that a branch can conduct any or all of the business activities licensed to its parent, currently some licensing authorities hold the view that if a branch is set up without an investment project, that branch cannot conduct any business activities at all, and may only act as a 'transaction office', ultimately ending up more like a representative office than a branch. Ultimately, further regulation or clarification from the central ministries will be required to provide certainty in the law and to end the inconsistent practices of local licensing authorities. Legal instruments recently uploaded on to the Vietnam Laws online database Vietnam Laws online database (available at is an online searchable database containing English translations of more than 3,400 Vietnamese laws. Legislation recently uploaded includes: Decision 26 regulating securities depository activities, 22 April 2010 Circular 122 on prices, 12 August 2010 Law 57 on Environmental Tax, 15 November 2010 Decision 77 promulgating the reporting regime applicable to foreign direct invested enterprises and projects, 30 November 2010 Decision 78 on both import duty and VAT exemption for goods valued at one million VND or less which are imported via fast delivery services, 30 November 2010 Bangkok Beijing Beijing IP Brisbane Hanoi Ho Chi Minh City Hong Kong Jakarta Melbourne Perth Phnom Penh Port Moresby Shanghai Singapore Sydney Decree 112 on penalties for administrative offences in commercial activities, 1 December 2010 Decision 80 exempting the construction charge currently imposed by local people's councils at from 0.5 to 2% of construction costs, 9 December 2010 Hanoi Suite 401, Hanoi Tower 49 Hai Ba Trung Street, Hoan Kiem District Hanoi, Vietnam T F Bill.Magennis@aar.com.au Ho Chi Minh City Suite 605, Saigon Tower 29 Le Duan Boulevard, District 1 Hi Chi Minh City, Vietnam T F Nigel.Russell@aar.com.au