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Things foreign investors need to know about Vietnam’s Law on Investment 2020

by Vietnam Insider

Vietnam’s revised Law on Investment (Law No. 61/2020/QH14)(“Law on Investment 2020”) enters into force from January 1, 2021. The National Assembly adopted the Law on Investment 2020 on June 17, 2020. It will replace Law No. 67/2014/QH13 (“Law on Investment 2014”), which has been in force since 2014.

Notable provisions of the Law on Investment 2020 for foreign investors in Vietnam include the introduction of a “negative list” for foreign investment, increases in ownership thresholds for treatment as a national investor, a “national security” provision, new investment incentives, and additional measures to streamline investment procedures.

Related: Forming a Limited Liability Company in Vietnam as foreign investors

The Law on Investment 2020 will be accompanied by implementing regulations, which are currently being developed by the Ministry of Planning and Investment, providing additional guidance as to conditions for investment in certain sectors, procedures for obtaining project approvals, and other key details.

Key outcomes in Law on Investment 2020

Negative list. The Law on Investment 2020 introduces, for the first time in Vietnam, a market access “negative list.” This means that foreign entities are afforded national treatment with regard to investment except in those sectors explicitly set out in an accompanying List of Restricted Sectors. This is a more permissive approach than previous iterations of Vietnam’s investment regulations, which followed a “positive list” approach, blocking market access except in listed sectors.
Under the Law on Investment 2020, investment in certain sectors may be entirely prohibited or subject to certain restrictions or conditions. All investment, foreign or domestic, is banned in eight enumerated sectors (including trading in certain chemicals and identified narcotics. Under the Law on Investment 2020, debt collection is newly added to this list of restricted sectors.1

Certain sectors are considered “conditional” for all investors, foreign or domestic, and may require formal approval (i.e., in the form of business licenses or other certifications).2 Such conditional sectors must “satisfy necessary conditions for reasons of national defense, security or order, social safety, social morality, and health of the community.” These sectors are listed in Appendix IV (“List of Conditional Investments and Businesses”) of the Law on Investment 2020. The Government of Vietnam is expected to release implementing regulations further detailing conditional investment rules and procedures. Conditional sectors will also be listed on the National Business Registration Portal.3

Conditional investment rules apply to foreign investors, with additional potential restrictions including:

  1. Percentage ownership limits;
  2. Restrictions on the form of investment;
  3. Restrictions on the scope of business and investment activities;
  4. Financial capacity of the investors and partners; and
  5. Other conditions under international treaties and Vietnamese law.4

These rules will be further explicated by forthcoming implementing regulations.

The List of Conditional Investments and Businesses of the Law on Investment 2020 details 227 sectors with some changes from the Law on Investment 2014. For example, sectors added to the conditional sectors list include water sanitization and architectural services. Certain sectors, including franchising and logistics, were removed from the list.

Lowering “foreign investor” threshold from 51% equity to 50%. Under the Law on Investment 2014, enterprises 51% or more foreign-owned were treated as “foreign investors” for the purposes of investment activities. Thus, a company more than 50% owned by a foreign entity could still receive the benefits afforded to domestic enterprises. The Law on Investment 2020 changes this, lowering the “foreign investor” threshold to 50%.5

Restrictions relating to “sham” nominee transactions. The Law on Investment 2020 tightens rules regarding the use of Vietnamese nominees in order for foreign investors to access restricted sectors. An investment undertaken “on the basis of a counterfeit civil transaction” – also translated as a “sham” or “façade” transaction – can be terminated by the government.6

National security measures. The Law on Investment 2020 states that investments shall be suspended or terminated if such activities are “harmful, or are in danger of harming national defense or security.”7 Notably, the terms “national defense” and “security” are not defined, leaving the Government of Vietnam interpretive freedom in applying this provision.

Investment incentives. The Law on Investment 2020 introduces new incentives for investment in certain sectors, including:

  1. High-tech sectors, including software development, clean energy technologies, and information and communications technology-related products;
  2. Recycling;
  3. Public transportation;
  4. Microfinance;
  5. Education;
  6. Pharmaceuticals and other health industries; and
  7. Investment projects for creative startups.

Further, the Law on Investment 2020 provides for investment incentives in “[a]reas with difficult socio-economic conditions” and industrial zones.8 Such incentives may include tax incentives, access to credit, support for research and development, and other measures.9

Other notable provisions. The Law on Investment 2020 includes a range of provisions dictating the terms for Vietnamese outbound investment and includes additional rules and guidance regarding investment approvals, including procedures for issuance, adjustment and termination of outward Investment Registration Certificates.

Outlook

While the Law on Investment 2020 appears structurally more permissive of foreign investment, certain administrative hurdles remain in place (e.g., the requirement that investors acquire project-specific Investment Registration Certificates and high-level approvals for certain types of investments). Further, uncertainty remains as to the specific conditions for investment in the “conditional” sectors, as well as the potential use of the blanket national security provision.

Despite these administrative and political considerations, foreign direct investment in Vietnam continues to increase at a consistent pace – reaching US $38.2 billion in 2019, up 7.2% from the year prior – and appears poised to continue. Vietnam’s ratification of the EU-Vietnam Free Trade Agreement (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in August 2020 and January 2019, respectively, also support the Government of Vietnam’s commitment to provide additional certainty and opportunities for foreign investors.

Two other notable laws of interest to foreign investors will also enter into force from January 1, 2021. The new Law on Public-Private Partnership (PPP) (Law No. 64/2020/QH14) will strengthen and codify provisions relating to PPP projects at the law level (as passed by the National Assembly), which could potentially reduce the uncertainty and ambiguity of the legal framework applicable to a particular infrastructure project. Meanwhile, the amended Enterprise Law (Law No. 59/2020/QH14) streamlines the regulation of the establishment, operation and governance of corporate entities in Vietnam and enhances protections for minority shareholders, among other key provisions.

By Samuel Scoles | Matt Solomon. Read original post here

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