Vietnam Legal Update. July 2002

Transcription

1 Vietnam Legal Update July 2002

2 VIETNAM LEGAL UPDATE July 2002 Part 1 Summary of Selected New Legal Instruments 1.1 Profits Remittance Tax: Official Letter 2732 of the Ministry of Finance dated 22 July Pre-Operational Expenses: Official Letter 7515 of the Ministry of Finance dated 9 July Pharmaceutics: Circular 10 of the Ministry of Health dated 4 July Advertising Medicines and Cosmetics: Decision 2557 of the Ministry of Health dated 4 July Inter-Bank E-Payment System: Decision 700 of the State Bank of Vietnam dated 4 July Non-Performing Loans: Decision 688 of the State Bank of Vietnam dated 1 July Foreign Currency Trading: Decision 679 of the State Bank of Vietnam dated 1 July Equitization: Decree 64 of the Government dated 19 June Prices: Ordinance 40 of the National Assembly dated 26 April Part 2 Features 2.1 Proposed Amendments to Foreign Investment Regulations Foreign Direct Investment Status Report Banking and Finance in Vietnam Regular Government Meeting July Part 3 Did You Know? 3.1 Vietnamese Government - National Assembly Elections Waiver of Jackson-Vanik Amendment Foreign Arbitration Awards in Vietnam Vietnam Legal Aid Fund Inter-Bank E-Payment System Industrial Property Pre-Packaged Goods 22 Part 4 Phillips Fox Publications 23 This publication is copyright. Except as permitted under relevant laws, no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Phillips Fox The material contained in Vietnam Legal Update is intended to inform you of recent legal developments in Vietnam. It is not intended, and should not be relied upon, as legal advice. Should you wish further information in relation to any legal instrument or matter mentioned in this issue, please do not hesitate to contact one of our offices in Vietnam. For the most recent issues of Vietnam Legal Update (since July 2001), go to For all past issues of Vietnam Legal Update (since September 1997) go to (a search function will assist you in looking for articles on particular subjects)

3 Vietnam Legal Update: July Part 1 Summary of Selected New Legal Instruments 1.1 Profits Remittance Tax Official Letter 2732-TCT-NV5 of the General Department of Taxation - Ministry of Finance dated 22 July 2002 on Profits Remittance Tax ("Official Letter 2732") Article 50 of Decree ND-CP of the Government dated 31 July 2000 Providing Detailed Regulations on Implementation of the Law on Foreign Investment in Vietnam ("Decree 24") reduced the rates of profits remittance tax from 10%, 7% and 5% to 7%, 5% and 3% respectively, depending on the type of foreign investment project. Clause 2 of Section II of Part 2 of Circular TT-BTC of the Ministry of Finance dated 8 March 2001 ("Circular 13") provided that investors having investment licenses which stipulated higher profits remittance tax rates than the reduced Decree 24 rates should apply for official amendment of their licenses. In Official Letter 2732 to Roussel Vietnam Co., the General Department of Taxation confirms that the reduced Decree 24 rates apply to all overseas remittances by foreign investors, irrespective of whether a foreign invested enterprise has applied for amendment of its investment license to reflect the new rates. 1.2 Pre-Operational Expenses Official Letter 7515-TC-TCT of the Ministry of Finance ("MoF") dated 9 July 2002 on Allocation of Expenses Incurred in Pre-Operational Stage ("Official Letter 7515") In Official Letter 7515 to Daedong-Mien Dong JV Company (and HCMC Taxation Department), the MoF confirms that, pursuant to Decision QD-BTC of the MoF dated 30 December 1999 on Depreciation, items such as establishment expenses (as well as land use expenses and payments for patents or copyright) of more than VND5 million and having a use duration of more than 1 year, will be deemed "intangible fixed assets" and can be depreciated over 5 to 40 years. The JV company can itself decide the depreciation period and the depreciation can be accounted for as a business cost. 1.3 Pharmaceutics Circular TT-BYT of the Ministry of Health dated 4 July 2002 on Conditions for Practising Pharmaceutics ("Circular 10") Circular 10 makes detailed provisions on practising conditions for establishments producing, trading, importing, exporting, preserving and inspecting pharmaceutical drugs; and on application files, procedures and authority for issuance of certificates of satisfaction of conditions for practising pharmaceutics. Circular 10 was effective as of 4 July Advertising Medicines and Cosmetics Decision QD-BYT of the Ministry of Health dated 4 July 2002 Issuing Regulations on Information on and Advertisements of Medicines Used by Human Beings and Cosmetics Having Direct Impact on People's Health ("Decision 2557") Decision 2557 stipulates the prohibited contents of advertisements for medicines; prohibited medicine advertisements; necessary contents of advertisements for cosmetics; and prohibited cosmetics advertisements. Decision 2557 was effective as of 4 July 2002.

4 Vietnam Legal Update: July Inter-Bank Electronic Payment System Decision QD-NHNN of the State Bank of Vietnam ("SBV") dated 4 July 2002 on Compulsory VND Reserve Deposit by Credit Institutions Participating in Inter-Bank Electronic Payment System ("Decision 700") The inter-bank e-payment system was first provided for in Decree ND-CP of the Government dated 20 September 2001 on Payment Operations via Organizations Providing Payment Services, followed by Decision QD-TT of the Prime Minister dated 21 March 2002 on Use of Electronic Documents for Accounting and Payment by Organizations Providing Payment Services and Decision QD-NHNN of the SBV dated 29 May 2002 issuing Regulations on Electronic Signatures on Electronic Documents for Inter- Bank Electronic Payments. The SBV officially opened the inter-bank e-payment system on 15 July 2002 (see Part 3.5 below). Decision 700 requires credit institutions to deposit a compulsory VND reserve in order to participate in the inter-bank e-payment system. The amount of the compulsory reserve is determined on a monthly basis, based on the average monthly balance of deposits raised in the term for determining the compulsory reserve (as notified by each participating credit institution to the Transactions Department of the SBV branch in the province or city where the credit institution has its head office). The SBV IT Department is responsible to prepare and implement a program for SBV entities and SBV branches to calculate the amounts of compulsory reserves of participating credit institutions. Decision 700 is effective as from the July 2002 term for maintaining a compulsory reserve. 1.6 Non-Performing Loans Decision QD-NHNN of the State Bank of Vietnam ("SBV") dated 1 July 2002 on Transferring Loans of Customers of Credit Institutions to Overdue Debts ("Decision 688") Article 13.2 of the Regulations on Lending by Credit Institutions to Customers issued with Decision QD-NHNN of the SBV Governor dated 31 December 2001 ("Decision 1627") stipulates: "When repayment of principal or interest falls due and the client is unable to repay on time, if the repayment period of principal or interest is not adjusted or extended, the credit institution shall reclassify the whole of the outstanding debt as an overdue debt. Decision 688 provides that, as from 1 July 2002, credit institutions must transfer any non-performing loans of customers arising either prior to or after 1 July 2002 to overdue debts in accordance with article 13.2 of the Decision 1627 Regulations. Decision 688 provides that such non-performing loans may be normal loans; preferential loans as designated by the Government or Prime Minister; loans funded by credit from the State for investment and development; loans made by delegation of domestic or foreign organizations or individuals. Decision 688 was effective as of 1 July To the extent that it is inconsistent with Decision 688, the following article 3 of Decision 1627 is repealed: "In the case of credit contracts which were entered into prior to [1 February 2002] but the loans have not been disbursed or not fully disbursed, and in the case of credit contracts with outstanding loans as at the end of 31 January 2001, credit institutions and clients shall continue to implement them in accordance with the clauses in the signed contracts until the loans are fully repaid, or they may agree to amend and add to the credit contracts in order to make them consistent with the [Decision 1627 Regulations]."

5 Vietnam Legal Update: July Foreign Currency Trading Decision QD-NHNN of the State Bank of Vietnam ("SBV") dated 1 July 2002 Making a Number of Provisions on Foreign Currency Trading by Credit Institutions Authorized to Conduct Foreign Currency Trading ("Decision 679") Decision 679 confers wider discretion on general directors of credit institutions authorized to conduct foreign currency trading to set their own foreign currency trading rates as follows: - Spot buying and selling rates of VND against USD may be set within the band of ± 0.25% (previously 0.1%) of the average exchange rate in the inter-bank foreign currency market of the most recent transaction day as published by the SBV. - Spot buying and selling rates of VND against other foreign currencies may be set at the complete discretion of general directors. - Forward and swap transactions may only be conducted for a minimum term of 7 days and maximum term of 180 days (in both cases, calculated from date of signing the transaction contract). However, in the case of VND-USD transactions, the exchange rate is now subject to a maximum of the ceiling spot exchange rate (see above) at the date of signing the transaction contract, plus the following permissible rates of increase (as a percentage of the ceiling spot exchange rate) for each term: 0.5% for 7-30 day terms (previously 0.4%); 1.2% for day terms; 1.5% for day terms; 2.5% for 91 to 180 day terms (previously 2.35%). Exchange rates for transactions relating to other foreign currencies may be set at the complete discretion of general directors. Decision 679 was effective as of 1 July 2002 and replaces Decision QD-NHNN7 of SBV dated 25 February 1999 on Principles for Determination of Foreign Currency Buying and Selling Rates of Credit Institutions Authorized to Conduct Foreign Currency Trading, as amended by Decision QD-NHNN7 of SBV dated 30 August 2000 and Decision QD-NHNN of SBV dated 18 September Equitization Decree ND-CP of the Government dated 19 June 2002 on Conversion of State Owned Enterprises into Shareholding Companies ("Decree 64") Decree 64 replaces the earlier (and first) Decree ND-CP of the Government dated 29 June 1998 ("Decree 44") on conversion of State owned enterprises ("SOEs") into shareholding companies, commonly referred to in Vietnam as "equitization" of SOEs. In large part, Decree 64 repeats the provisions of Decree 44. The most important Decree 64 reforms relate to the valuation and financial preparations of SOEs for the purpose of equitization, tasks that have proved difficult and an impediment to equitization to date. Of interest, Decree 64 permits each equitized SOE to decide how many of its former employees it continues to employ after equitization, subject to the condition that it employs the maximum number possible. Previously, no redundancies were permitted for 12 months post-equitization, severely limiting the potential for immediate streamlining of the operations of equitized SOEs. Of note for foreign investors, Decree 64 incorporates expressly the provisions of Decision QD-TTg of the Prime Minister dated 28 June 1999 (which post-dated Decree 44, but were previously incorporated by reference) relating to the rights of foreign investors to purchase only 30% of shares in equitized SOEs and to participate in management and remit income. Decree 64 also incorporates expressly the provision of Decision QD- TTg of the Prime Minister dated 10 June 1999 (again, which post-dated Decree 44) entitling foreign investors to participate in trading of shares upon listing of an equitized SOE on the stock exchange. Decree 64 was effective as of 4 July 2002.

6 Vietnam Legal Update: July Prices Ordinance PL-UBTVQH10 of the Standing Committee of the National Assembly dated 26 April 2002 on Prices ("Ordinance 40") Ordinance 40 provides for State administration of prices and activities of production or business organizations and individuals (both domestic and foreign) with respect to prices. The State is empowered to take necessary measures aimed at stabilizing market prices of important and essential goods and services, controlling inflation, stabilizing the socio-economic situation, protecting the legal rights and interests of production or business organizations and individuals, consumers and the State, and encouraging investment and development. The State is empowered to fix prices (either specific prices, standard prices, price scales, or maximum/minimum prices) of land, water surfaces and important natural resources, State owned assets to be sold or leased out, goods or services subject to monopoly, and goods and services important for national welfare and people s livelihood. Such prices will be fixed on the basis of the costs of production or circulation; the relationship between supply and demand; the purchasing power of Vietnamese currency; domestic and world market prices; and policies on socio-economic development from time to time. Where market prices of important and essential goods or services fluctuate abnormally (that is, rise or fall due to economic crisis, natural calamity, enemy-inflicted destruction or other extraordinary circumstances), the State may take the following measures to stabilize prices: (a) Adjust supply or demand with respect to domestically produced goods and imported or exported goods; with respect to goods between different areas or localities in Vietnam; (b) Purchase goods for stock or sell goods in stock; (c) Control goods in stock; (d) Provide a maximum or minimum price or scale of prices; (e) (f) Control elements constituting prices; Provide subsidies for agricultural products when the market price falls too low causing damage to producers; subsidies for other important or essential goods or services. Certain State owned assets are subject to price evaluation (that is, evaluation or re-evaluation of value in conformity with the market conditions in a given place at a given point of time in accordance with Vietnamese standards or international practice). Only certified price evaluators may carry out price evaluation. Where necessary, the State is empowered to control costs of production or circulation and prices of goods or services of organizations or individuals when it identifies indications of price monopoly co-operation or when the consideration of formulation of a monopoly price is required. Price monopoly co-operation is defined as an arrangement between production or business organizations and individuals to fix a price aimed at controlling the market or causing damage to the legal interests of other production or business organizations and individuals, consumers and the State. Monopoly price is defined as the price of goods or services fixed by any one seller or purchaser in the market, or the price of goods or services of multiple organizations and individuals co-operating in a monopoly, holding a major share of the market and having the power to dominate market prices. Dumping is strictly prohibited. Dumping is defined as an act of selling goods or services at a price much lower than the normal price in the Vietnamese market aimed at controlling the market, restricting lawful competition, or causing damage to the legal interests of other production or business organizations and individuals and the interests of the State. Various cases of price reduction are expressly deemed not to be dumping (eg, reduction of the selling price of goods in stock because the quality of such goods is reduced or such goods are out-of-date or are no longer suitable for the taste of consumers). In "non-dumping" cases of price reduction, the former price, the new price and the period of price reduction must be displayed publicly and clearly at shops or places of transactions. The State may take measures to deal with acts of dumping, including: - Determining a minimum selling price (which does not restrict lawful competition or cause damage to the legal interests of consumers and the State); - Administrative penalty; - Compulsory compensation for any damage suffered by other production or business organizations and

7 Vietnam Legal Update: July individuals arising from an act of dumping; - Criminal prosecution. The above measures to control prices of essential goods and services and to prevent dumping and price-fixing are considered a stop-gap pending the Law on Competition, which is not expected to be passed until late All production or business organizations and individuals are required by law to display prominently the prices of goods and services at their shops or places of purchase or sale of goods or provision of services. The Government has yet to nominate the authorized State body for administration of prices, which body will have power to require any business to report all its costing data upon receiving a request for control of monopoly prices. Specialized price inspectors (who will operate under the State administrative body for prices) are empowered to examine and inspect the observance of the laws on prices and other relevant laws by organizations and individuals. Organizations and individuals breaching the laws on prices will be subject to administrative penalty or criminal prosecution; and compensation for any damage. Ordinance 40 was effective as of 1 July 2002.

8 Vietnam Legal Update: July Part 2 Features 2.1 Proposed Amendments to Foreign Investment Regulations Amendments to Decree ND-CP of the Government dated 31 July 2000 ("Decree 24") Providing Detailed Regulations on Implementation of the Law on Foreign Investment in Vietnam ("LFI") are currently being finalized by the Ministry of Planning and Investment ("MPI") for submission to the Government at the end of July. It is hoped that the proposed amendments will be considered and approved prior to the end of the term of the current Government cabinet, otherwise final approval of the amendments may be delayed until late September (after the new Government cabinet settles into office). Phillips Fox has provided assistance to MPI with the preparation of the proposed amendments to Decree 24 ("Amended Decree 24"). The following information is based on Draft 6 of Amended Decree 24 dated 9 July 2002 (as revised on 15 July 2002) and on informal discussions with MPI. The final amendments to Decree 24 may differ from the proposals below. Draft 6 proposes amendments to 28 articles, including articles 1, 6, 11, 21, 31, 32, 36, 46, 48, 57, 67, 71, 81, 83, 88, 89, 92, 95, 105, 111, 112, 113, 114, 115, 116, 117, 121, 123, and to Appendix I. Article 6 Article 11 Article 21 Article 31 Article 32 Article 36 Article 46 A foreign invested enterprise ("FIE") will be expressly entitled to enter into and implement a business co-operation contract ("BCC") with another foreign party and/or Vietnamese party. A new type of joint venture enterprise ("JVE") will be expressly provided for, being a joint venture between an existing 100% foreign owned enterprise ("100% FOE") and any one of the following entities: (i) a Vietnamese enterprise; (ii) a medical examination and treatment, education and training, or scientific research establishment; or (iii) an existing JVE. A new type of 100% FOE will be expressly provided for, being formed where: (i) two licensed 100% FOEs co-operate with each other; (ii) two licensed 100% FOEs co-operate with each other and with foreign investor(s); or (iii) a 100% FOE co-operates with a foreign investor(s). Definitions of division, merger, de-merger and consolidation of FIEs will be inserted. In cases of such re-organization, FIEs will be expressly required to notify their creditors and employees within 15 days of the decision on re-organization. The entitlement of "re-organized" FIEs to preferential tax treatment will be clarified. Preferential treatment applicable to a FIE prior to re-organization will not automatically continue to apply after re-organization. Entitlement to preferential treatment will depend on the new conditions of the reorganized FIE. The provisions on temporary suspension of operations will be expanded. If a FIE or BCC parties are unable to continue implementing a project upon expiry of a 6 month temporary suspension of operation or extension of the implementation schedule of the project, the investment license of the FIE or BCC will be revoked. The preferential corporate income tax ("CIT") rate of 15% will apply to any and all manufacturing enterprises located in an industrial zone (not just to those exporting at least 50% of their products, as previously). Prior to Draft 6 of Amended Decree 24, it was proposed that investment projects which provide for assets to be transferred to the State without charge upon expiry of project duration should no longer be entitled to the preferential CIT rate of 15%. Such proposal has now been finally rejected. The preferential CIT rate of 10% will apply to any and all manufacturing enterprises located in an export processing zone (not just to "exporting processing enterprises", as previously).

9 Vietnam Legal Update: July Projects investing in a number of sectors and/or in different regions to which different preferential CIT rates apply will be permitted to pay CIT at the respective preferential rates provided that the projects maintain separate independent cost-accounting systems for each different sector/region. If they maintain a consolidated cost-accounting system, CIT will be payable at the rate applicable to the sector/region in which the registered amount of investment capital is the greatest. Article 48 Article 57 Article 67 Article 81 Manufacturing enterprises located in an industrial zone which export less than 50% of their products will be entitled to a 2-year CIT holiday. All other manufacturing enterprises located in an industrial zone, and all other projects entitled to the preferential CIT rate of 15%, will be entitled to a 2-year CIT holiday plus a 50% reduction in CIT for the 3 following years. The current import duty exemption for raw materials for production will be expanded to supplies and components imported by FIEs or foreign BCC parties for a period of 5 years from the commencement of production in the case of specially encouraged investment projects and investment projects in areas with especially difficult socio-economic conditions. FIEs and foreign BCC parties will be permitted to purchase foreign currency to satisfy their current transaction requirements and for other permitted transactions from any banks licensed to trade in foreign currencies in Vietnam. Presently, they are only permitted to purchase foreign currency from authorized commercial banks. The value of technology to be contributed as capital will be subject only to agreement by the parties, and will no longer be subject to the value limit of 20% of legal capital. Prior to Draft 6 of Amended Decree 24, MPI had proposed that foreign investors should no longer be required to obtain approval of capital contribution in the form of technology from the Ministry of Science, Technology and Environment ("MoSTE"). Regrettably, MPI was unsuccessful in its proposal and MoSTE remains empowered to approve or disapprove capital contributions in the form of technology. Article 83 Article 88 Article 89 Article 92 FIEs and BCC parties are now permitted to recruit directly local and foreign staff. For consistency with recent reforms of the laws on land, the authority to make decisions on the lease of land will be vested in people's committees of provinces and cities under central authority. (Currently, the Prime Minister makes decisions on the lease of land to projects which require 5 or more hectares of urban land or 50 or more hectares of other land.) A plan for compensation and site clearance will no longer be required to be included in the landrelated documentation submitted with an investment license application. For consistency with recent reforms of the laws on land, it will be expressly provided that a Vietnamese party making its capital contribution in the form of the value of land use rights for which land rent has already been paid may mortgage the value of land use rights with credit institutions which are permitted to operate in Vietnam, provided that such mortgage is agreed to by the joint venture parties. Although the Government continues to support the proposed reform that FIEs should be permitted to mortgage land use rights to foreign lenders, the MPI has informally advised us that it is highly unlikely that this reform will be included in Amended Decree 24 due to the necessity for parallel amendments to other legislation (including LFI, Law on Credit Institutions and Law on Land), which amendments are not achievable within the time schedule for Amended Decree 24. Article 95 Preliminary designs indicating the proposed architecture of an investment project will only be required for: projects investing in the construction of infrastructure facilities and projects located in urban areas.

10 Vietnam Legal Update: July Article 105 The export ratio requirements applicable to projects eligible for registration (in contrast to application) for issuance of investment licenses will be reduced to: 80% (down from 100%); or 50% (down from 80%) in the case of manufacturing projects with a total invested capital below USD5 million. Article 111 The authority of provincial people's committees and industrial zone management boards to amend investment licenses will be expanded to include cases of conversion of JVEs and BCCs into 100%FOEs and cases of re-organization of FIEs, provided that the prior written approval of MPI is obtained. Article 114 The types of investment projects which fall with the decision-making authority of the Prime Minister will be slightly adjusted. Cultural projects will be excluded, along with printing projects such as printing of packaging, labels and textiles. Cinematographic and artistic performances will be included, along with investment projects in import services and domestic distribution services. (Unfortunately, the scope of import and domestic distribution services is not clarified.) Article 115 The types of investment projects which fall outside the decision-making authority of provincial people's committees, irrespective of the amount of invested capital) will be expanded to include projects undertaking to transfer assets to the State without charge upon expiry of duration and projects for construction and operation of supermarkets. Article 117 The MPI will make proposals to the Government on establishment of missions in regions and countries with potential to invest in Vietnam. The MPI and the Ministry of Justice will be responsible to review regularly all legislation relating to foreign investment and to propose necessary amendments, additions, suspension or repeal. Article 121 Any prevailing legal provisions which offer foreign investors more favourable treatment than previous ones will continue to apply. Amendments to any existing investment licenses in order to reflect these more favourable provisions will be made following written requests from foreign investors. As at the date of Draft 6, it was still undecided whether to propose that the time when foreign investors may benefit from these incentives should be (i) the date on which any legal instrument providing such incentives takes effect or (ii) the date on which the amended investment licence becomes valid. Appendix 1 Additions to list of specially encouraged investment projects include: production of refined steel; manufacturing mechanical tools for wood processing; manufacturing equipment for testing toxicity in foodstuffs; manufacturing communications technology software. Moved from list of encouraged investment projects to list of specially encouraged investment projects: production of high-quality steel, alloy, non-ferrous metal, special metal; manufacturing of machinery, equipment and component packs for oil and gas exploitation, mining, and energy fields; manufacturing of large-size lifting equipment; manufacturing mechanical tools for metal processing, metallurgy equipment; producing medical equipment for analytical and extractive technologies in medical sector. Deleted from list of encouraged investment projects: projects intensively using labour and effectively utilizing natural resources available in Vietnam; production of high-quality steel, alloy, non-ferrous metal, and special metal, steel billet and sponge iron used in industry. Additions to list of encouraged investment projects include: projects regularly employing 500 or more employees; manufacturing various types of insecticide, plant protection agents and veterinarian drugs with a localized value added portion of 40% or more; producing paper, wood pulp and cardboard thread (as well as paper pulp, as previously); technical services for agriculture, forestry and fisheries. Minor amendments only to the list of regions in which investment is encouraged. No change to list of sectors in which investment will not be licensed. Most significant amendment to list of sectors in which investment is conditional: Investment in construction and operation of international telecommunications networks and local

11 Vietnam Legal Update: July telecommunications networks and in press, radio and television will only be permitted to be conducted in the form of a BCC with the Vietnamese Party being a specialist entity which is licensed to conduct business in the sector. 2.2 Foreign Direct Investment Status Report Based on information from the Ministry of Planning and Investment, the status of foreign direct investment ("FDI") in Vietnam as at mid-july 2002 is as follows: From 1987 to date, licences have been issued to a total of 4,047 projects, with registered capital of USD41.5 billion. 1,432 projects have been expanded after initial licensing by total capital increases of USD7.05 billion. So, the aggregate of newly issued registered capital plus supplementary capital is USD48.6 billion. Implemented (or disbursed) capital totals approximately USD22 billion. Currently, there are 3,264 projects in operation, with a total registered capital of USD38.3 billion. The rate of FDI funds coming into Vietnam during the 3 years of 1997 to 1999 declined continuously due to the Asian economic crisis. FDI funds committed in 1997 reached USD4.6 billion, in 1998 only USD3.8 billion, and in 1999 only USD1.5 billion. From 2000 to date, there have been signs of recovery, but the FDI stream into Vietnam is still not stable. In 2000, FDI capital increased by 28.6% over 1999 figures and in 2001, increased by 25% over 2000 figures. To date, 73 countries and territories have FDI projects in Vietnam. Singapore is the largest investor with 288 projects, with invested capital of over USD6 billion. Next are the developed Asian nations of Taiwan, Japan, Hong Kong and Korea, with invested capital from these 4 countries and territories accounting for 39% of the aggregate funds committed to Vietnam (more than USD16 billion) and accounting for 52.9% of the total number of projects (2,141 projects). France, British Virgin Islands, England, the Russian Federation and USA are also in the list of the top 10 countries and territories in terms of invested capital. FDI is primarily concentrated in the following industries: - Industry (including heavy industry, petroleum industry, light industry and foodstuffs industry) and construction, with 2,743 projects with registered invested capital over USD23 billion, which is 67.7% of the total number of projects and 55% of the total registered invested capital FDI projects are in the agricultural, forestry and marine products sectors, with registered invested capital over USD1.5 billion, which is 10% of the total number of projects and 3.5% of the total registered invested capital FDI projects are in the services industries, with registered invested capital of approximately USD17 billion, which is 21.6% of the total number of projects and more than 40% of the total registered invested capital. In the first 6 months of 2002: Licenses were issued to 237 projects, with total registered capital of USD430.7 million, which is an increase of 16% over the number of projects for the same period in 2001 but only 44% of the registered invested capital of the equivalent 6 months in FDI remains concentrated in the sectors of industry and construction with 187 projects and registered invested capital of USD million, which represents 78.9% of the total number of projects and 82% of the value of total registered investment capital. 14 projects are in the agricultural, forestry and marine products sectors, with registered investment capital of USD28.65 million or 6.6% of the total registered investment capital. The services industry accounts for 36 projects with registered invested capital over USD49.2 million, which is 11% of the total registered investment capital. 23 nations and territories invested in Vietnam. Korea took over first place on the list of investors in terms of investment capital, with more than USD119 million or 27.6% of the total. Taiwan was second in terms of investment capital with USD85.4 million or 25.8% of the total, and Malaysia overtook Japan for third place with 12 projects and investment capital of USD44.89 million. Investment capital from England, Germany, France, Italy and USA is low, at around USD10 million level each. Perceived comparative advantages of investment environment in Vietnam: - Vietnam s socio-political environment is stable, security is assured, and its location in the Asia-Pacific Ocean region is advantageous economically (Vietnam is a member of the ASEAN Free Trade Area). - Vietnam maintains a stable macro-economic environment with high economic growth rate, averaging 7.5% per annum. In the period, Vietnam s GDP growth rate was higher than the average (3.7%) of developing countries, total GDP over 10 years has doubled, and there are positive changes in the structure of the economy.

12 Vietnam Legal Update: July The wages of workers and engineers in Vietnam are 60-70% of those paid in Thailand and China, and only 18% of the wages paid in Singapore. - With a population of nearly 80 million, Vietnam has the 13 th largest population in the world. Living standards are increasing (at an average of 4-5% per annum) which provides conditions for market expansion. - Financial and monetary reform is moving quickly via restructuring of the banking system, deregulation of foreign exchange dealings, improvements in budgeted revenue and expenses, and reforms to the tax system. - The process of administrative reform continues, resulting in State administration being more efficient. - There has already been substantial investment in socio-economic infrastructure (power, water, communications, transport, and so forth). - There has been a policy for diversifying and extending external relations and this policy maintains its impetus, with business co-operation projects with more than 150 countries and territories. Vietnam actively participates in co-operative institutions in the region and internationally (ASEAN, ASEM, APEC), is increasing the tempo of negotiations to join WTO, and in 2001 signed the Vietnam-US Bilateral Trade Agreement. - The legal framework for foreign investment in Vietnam (most recently revised in mid-2000) is considered to be both attractive and competitive in comparison with the legal frameworks of other countries in the region: - Corporate income tax in Vietnam is the lowest in the region with a common rate of 25%; preferential tax rates are 20%, 15% and 10%, and tax holidays (in special cases, up to 8 years). Rates of profit remittance tax are 7%, 5% and 3%. Import duty exemptions are available. From 1987 to date: FDI has contributed up to one-quarter of the total of society s investment capital, above 35% of the value of industry, 23% of the value of exports, and above 13% of GDP for the whole country (excluding petroleum). The FDI sector has given direct employment to more than 400,000 workers, and indirect employment to hundreds of thousands of others. Future objective of the FDI sector is to attract more sources of foreign investment with higher quality, in particular: - Issuance of new investment licenses with registered capital of USD12 billion; - Implemented capital of USD11 billion; - By 2005, FDI is hoped to contribute approximately 15% of GDP, 25% of export output, and more than 10% to the total State Budget revenue. Solutions to achieve future objectives: - To expand the sectors attracting FDI to include the real estate sector and a number of service sectors in conformity with international undertakings for opening the goods, services and investment markets; to reduce the list of projects which must satisfy the requirement for exporting at least 80% of their products and abolishing this requirement in accordance with the AFTA's time schedule; to step up attraction of foreign investment into industrial zones. - To diversify the forms of attracting FDI and to conduct a pilot application of the form of shareholding companies with foreign owned capital; to study and apply forms of capital management companies, partnerships, and so forth. - To continue to cut power tariffs and telecom charges, and to abolish gradually the discrimination between domestic and foreign invested enterprises in terms of prices and charges for a number of goods and services; to reduce individual income tax. - To continue to amend a number of policies on land, foreign currency, finance, and so forth, in order to facilitate foreign investment activities. - To simplify procedures for investment aimed at expanding the scope of projects which are permitted to be registered for issuance of investment licenses; to review legal instruments on FDI in order to repeal inappropriate provisions and any procedures which obstruct the activities of foreign invested enterprises. - To improve the ability of authorities at all levels to assume State administration; to expand the powers and responsibilities of people's committees and of provincial industrial zone management committees to resolve investors problems quickly. - To invest in and to improve infrastructure facilities for power, water, communications, and so forth, and to improve the quality of financial and banking technical services in order to facilitate business activities. - To strengthen the provision to foreign investors of information on laws and policies.

13 Vietnam Legal Update: July Banking and Finance in Vietnam This article was written by Maureen McLaughlin and Nigel Russell of Phillips Fox and first published in mid-july 2002 in the Banking and Finance Yearbook 2002 of the International Financial Law Review. Market structures & trends In order to promote domestic and foreign investment, Vietnam has gradually developed its banking and finance regulatory framework since the introduction of its doi moi (renovation) policy in the late 1980 s. Despite recent reforms precipitated by the Asia crisis and moves towards joining the WTO, Vietnam s banking and finance sector remains tightly controlled. Domestic banking sector Reflecting Vietnam s socialist history, 4 large State owned banks dominate the banking sector, with 74% of the lending market (primarily to State owned enterprises (SOEs)). Joint-stock (shareholding) banks (JSBs) now number 34, after 3 years of rationalization at the directive of the State Bank of Vietnam (SBV), with 15% of the lending market (primarily to private Vietnamese companies). Co-operative banks and people s credit funds enjoy a small market share. No JSBs are currently listed on Vietnam s stock exchange, which is still in its preliminary stage with only one Stock Trading Center open in Ho Chi Minh City and only 17 listed companies. An application for listing by Vietnam s largest JSB, Asia Commercial Bank (ACB), is pending. Foreign market participation Reflecting the Vietnamese Government s policy of protection of domestic companies, foreign participation in the banking and finance sector remains restricted. Foreign shareholdings in JSBs are not generally permitted, with the case-by-case exception of several foreign investment funds since Vietnam Enterprise Investment Limited, managed by British firm Dragon Capital, currently holds shares in 3 JSBs and Vietnam Frontier Fund, managed by Thai firm Finansa, has recently sold its shares in 2 JSBs (with ACB in both portfolios). Connaught Investors and LG hold shares in ACB only. No foreign shareholder currently holds more than 10% of shares in a JSB (with a 5-year restriction on transfer) but a number hold board positions. Foreign market participation is largely limited to prescribed forms of direct investment. Currently, there are 4 joint venture (JV) banks, 27 foreign bank branches and 53 representative offices of foreign banks. Operations are small scale due to market size and operating restrictions. Most lending is to SOEs and foreign invested enterprises (FIEs), due to the scant (if any) credit history and lack of accountability of private Vietnamese companies. Increasingly, lending in Vietnamese dong (VND) is preferred over foreign currency lending due to restrictions by law on onshore foreign currency transactions by most borrowers. There are only 2 foreign invested finance leasing companies and no foreign invested finance companies or securities companies yet established. There are 9 foreign invested insurance companies, with two further applications pending. All FIEs operate as limited liability companies, in which the interest of the foreign investor is its share of capital contribution. A draft decree on foreign invested shareholding companies is currently under consideration by the Government, but it is currently unknown whether they will be permitted in the banking and finance sector. Effective 10 December 2001, the US-Vietnam Bilateral Trade Agreement (BTA) commits Vietnam to a wide range of regulatory reforms, aimed at increasing trade between the US and Vietnam. With respect to banking and financial services, the BTA provides, inter alia: - After 3 years, Vietnam commits to provide full national treatment with respect to access to central bank rediscounting, swap and forward facilities. - Over the first 8-10 years, Vietnam will phase-in full national treatment with respect to the right of US bank branches to accept VND deposits from Vietnamese customers.

14 Vietnam Legal Update: July US-invested financial institutions will be permitted to issue credit cards on the same basis as Vietnamese banks after 8 years. - After 9 years, 100% subsidiary banks of US banks will be permitted to be established. Despite a Vietnamese Government undertaking to provide to European investors (and expectations of investors from other jurisdictions to enjoy) equal treatment in all aspects of the BTA, there are some concerns that US financial service providers may enjoy preferential removal of restrictions on market access. In this respect, it remains to be seen to what extent the BTA represents the roadmap for liberalization of the Vietnamese banking and finance sector for all foreign investors. Presumably, however, the terms of WTO accession (Vietnam hopes to join by 2004) will include (and possibly extend) the liberalization measures set out in the BTA. Offshore loans obtained by Vietnamese businesses (including FIEs) remain subject to prescribed conditions, with SBV registration required for medium and long-term loans before drawdown. The main regulatory bodies and their powers The State Bank of Vietnam (SBV) is a Government body, responsible for State administration of monetary and banking operations. In addition to being the central bank of Vietnam, the SBV has the powers inter alia to issue legal instruments on currency and banking operations, issue and revoke licenses of credit institutions, authorize the dissolution, division or merger of credit institutions, inspect and control operations of credit institutions, and deal with offences. The Ministry of Finance (MOF) is a Government ministry, responsible for State administration of insurance business, with the power inter alia to issue legislation relating to insurance business, issue and revoke insurance business licenses, inspect and control insurance operations, and deal with offences. The MOF also regulates financial regimes of credit institutions and participates in planning and policy for the Vietnamese financial system. The State Securities Commission (SSC) is a Government body, responsible for State management of the securities market, including licensing of securities issues, trading and services, inspection of companies involved in securities activities, and dealing with securities offences. Types of financial institutions and key legislation/regulatory developments Each of the principal types of financial institutions - credit institutions, insurance businesses and securities businesses - is subject to a separate legislative framework, within which specific regulations govern foreign invested institutions. Credit institutions Credit institutions are governed by the Law on Credit Institutions 21 December 1997 (LCI) and subject to licensing by the SBV. Credit institutions encompass banks and non-banking credit institutions, such as finance companies and finance leasing companies (permitted to conduct a number of banking operations but not permitted to receive on-call deposits or provide payment services). Non-credit institutions may be licensed by SBV to conduct banking operations in limited circumstances only. Under Decree 64 of the Government dated 20 September 2001 (updating the regime for payment operations), banks may now determine the procedures for opening bank accounts, provision of overdraft facilities is permitted, and international payment operations may be governed by international rules and practices (provided that they are not contrary to Vietnamese law). Provision of credit card facilities remains restricted.

15 Vietnam Legal Update: July Under Decision 1627 of the SBV dated 31 December 2001, the highly prescriptive regulations on bank lending have been relaxed. Banks may now make their own lending decisions (including form, purpose, term, security, interest rate, extensions of loans) subject only to broad conditions. Restrictions on unsecured lending remain. Recently updated regulations on inter-bank and syndicated bank lending also reflect this trend towards greater autonomy in lending decision-making. Specific regulations on licensing and operating conditions for foreign credit institutions are provided under Decree 13 of the Government dated 17 March Implementing Decree 13, Circular 08 of the SBV dated 4 July 2000 provides detailed guidelines on foreign bank branches and JV banks. Foreign bank branches may be licensed for up to 20 years. JV banks (maximum 50% foreign capital for commercial banks) may be licensed for up to 30 years. Licenses are extended on a caseby-case basis. The National Office for Registration of Security Transactions commenced operation in March 2002, finally allowing credit providers to register security agreements as required by law. However, credit providers remain wary, attaching little value to security over immoveable assets located in Vietnam, as recent attempts to enforce the stepin rights of lenders have not been encouraging. Foreign bank branches and JV banks are subject to various restrictions designed to protect domestic banks. Branches may not receive foreign currency deposits from Vietnamese customers. Since November 2001, JV banks may accept foreign currency deposits from Vietnamese individuals, subject to a limit of 50% of capital (and interest rate caps). VND deposits are restricted to on-call accounts and subject to a limit of 25% of capital (anticipated to be relaxed to 50% this year under the BTA). As there is no inter-bank VND market, restrictions on VND deposits severely limit VND liquidity. De-regulation of VND loan interest rates (effective 1 June 2002) should assist VND liquidity. The inter-bank foreign currency market established in 1999 and de-regulation of foreign currency loan interest rates in mid-2001 has facilitated foreign currency (predominantly USD) liquidity. Decree 16 of the Government dated 2 May 2001 and Circular 08 of the SBV dated 6 September 2001 provide specific guidelines on wholly foreign owned and JV (minimum 30% foreign capital) finance leasing companies, which may be licensed for up to 50 years. No specific guidelines on foreign invested finance companies have yet been issued. Securities companies Securities companies (effectively stockbrokers), securities investment funds and fund management companies are governed by Decree 48 of the Government dated 11 July 1998 (Decree 48) and subject to licensing by the SSC. Foreign investment in securities companies is limited to JVs (maximum 30% foreign capital). Decision 04 of the SSC dated 13 October 1998 (amended 29 December 2000) provides specific guidelines. Reportedly, the first application for a JV investment fund is currently under consideration by the SSC. To conduct securities business, credit institutions must establish independent securities companies. Specific regulations on establishment of securities companies by foreign credit institutions are yet to be issued. Insurance companies Insurance companies and brokers are governed by the Law on Insurance Business 9 December 2000 (Insurance Law) and subject to licensing by the MOF. To conduct insurance business, credit institutions must establish independent insurance companies. Wholly foreign owned or JV (minimum 30% foreign capital) insurance companies or insurance brokers may be licensed for up to 50 years. The type of insurance business (life and/or non-life) is prescribed in their licenses, and they are prohibited from providing insurance to SOEs. Detailed guidelines for implementation of the Insurance Law were issued under Decree 42 of the Government dated 1 August 2001 and Circular 71 of the MOF dated 28 August Regulations on the financial regime