Various new foreign exchange regulations governing the use of all types of foreign currency accounts, including investment accounts, of Vietnamese enterprises and their investors have recently come into effect. The changes will affect current and potential foreign investors, as well as foreign-invested enterprises. Partner Robert Fish and Associates Cara Stevens and Vinh Dang report.
- A new regulation has recently become effective, requiring all enterprises with foreign-owned capital to open a new direct investment capital account at an authorised bank in Vietnam.
- Foreign direct investors must conduct specified transactions, such as capital contributions, or payments for the purchase of shares or capital, via this direct investment capital account.
- Indirect investments of foreign investors will continue to be conducted via a separate indirect investment capital account, in the name of the foreign investor.
- There remains some overlap between the new direct investment regulations and the previous regime, which has not been repealed. Foreign investors and foreign invested enterprises alike are watching closely for further developments.
Circular 19/2014/TT-NHNN guiding foreign exchange control of foreign direct investment activities in Vietnam (Circular 19) is a recent attempt by the State Bank of Vietnam (the SBV) to clarify the requirements for payments and the use of capital accounts by foreign direct investors and their foreign-invested enterprises in Vietnam.
With the introduction of Circular 19, the regulatory regime is now split according to whether a foreign investor is a direct investor (ie it participates in the management of the foreign-invested company or project), or is an indirect investor (with the latter now being governed by Circular 05/2014/TT-NHNN on the implementation of indirect investment activities in Vietnam (Circular 05), issued by the SBV earlier this year).
As Circular 19 applies only to Vietnamese enterprises with foreign-owned capital (FDI enterprises), the existing regime continues to apply in relation to direct investments into enterprises owned by Vietnamese shareholders (Decision 88-2009-QD-TTg of the Prime Minister and Circular 131/2010/TT-BTC on capital contribution and purchase of shareholding by foreign investors in Vietnamese enterprises (Decision 88 and Circular 131 respectively)).
However, as noted below, it is not clear how these three categories are to be distinguished in practice.
Circular 05 requires all indirect investment activities to be conducted via one 'indirect investment capital account', which must be an account in Vietnamese dong opened by a foreign investor at an authorised bank in Vietnam. All indirect investments (whether they be purchasing shares in a company as an indirect investor, a purchase or sale of bonds or other securities, or any other form of permitted indirect investment), must be conducted via this indirect investment capital account. Similarly, profits derived from all indirect investment activities must also be remitted to the foreign investor via its indirect investment capital account.
Following Circular 05, the more recent Circular 19 introduced the concept of the 'direct investment capital account'. Circular 19 provides that each FDI enterprise must open a direct investment capital account at an authorised bank in Vietnam. A direct investment capital account may be in foreign currency or in Vietnamese dong, depending on the currency in which equity is contributed by the foreign investor.
In addition to its primary direct investment capital account, an FDI enterprise may also open other direct investment capital accounts in order to receive drawdown and make repayment of foreign loans, as well as to conduct other permitted foreign currency transactions specified in Circular 19, which are required to be conducted in a different currency from the currency of contributed equity in the FDI enterprise. These other direct investment capital accounts must be opened with the same authorised bank as the primary direct investment capital account.
Circular 19 specifies certain transactions that must be carried out using the direct investment capital account of the FDI enterprise. They include:
- receiving capital contributions from investors;
- receiving drawdown, and making repayment, of foreign loans;
- remitting profits, and other lawful income, to foreign investors; and
- receiving, and then remitting, money in payment of the value of an assignment of investment capital and of an investment project.
While most of the above transactions have always been conducted via specialised foreign currency capital accounts, the last of these is a notable change. While exactly what is required is still being hotly debated, it does seem now to be required that payment from an offshore purchaser to an offshore seller for a transfer of capital in an FDI enterprise be routed through the direct investment capital account of the FDI enterprise itself, and it is likely that the relevant licensing authority will check this in approving any transfer.
Although Circular 19 applies to all foreign investors carrying out direct investment activities, it does not apply to all Vietnamese enterprises – only those with foreign-owned capital (ie FDI enterprises). It is not yet clear how the requirements of Circular 19 apply to Vietnamese companies in which a new foreign direct investor is planning to invest. On the one hand, it would seem that the foreign investor would be obliged to comply with Circular 19, but, on the other, the target company would not be an FDI enterprise and, therefore, may not have an investment certificate evidencing its foreign ownership (which, due to the fact that it is referred to throughout Circular 19, appears to be required in order to open a direct investment capital account).
The regime generally applicable to Vietnamese enterprises (contained in Decision 88 and Circular 131), is different from that set out in Circular 19, and requires payment for a transfer of capital to be made to the seller, in Vietnamese dong, via an onshore account of the purchaser. In the case of the purchase of shares as an indirect investment, this regime appears to be more or less consistent with Circular 05 on indirect investment (other than the name of the indirect investment capital account).
However, for direct investors purchasing capital in a Vietnamese-owned enterprise, it appears difficult to reconcile the two regimes. Adding to the confusion is the fact that the provision of Circular 05, which allowed a foreign investor to convert its indirect investment capital account into a direct investment capital account if the nature of the investment has changed, was repealed by Circular 19, possibly implying that it is not intended that foreign direct investors maintain their own separate account for the purpose of a direct investment.
Each of Decision 88, Circular 131 and Circular 19 includes foreign direct investors and FDI enterprises within its scope of application. Neither Decision 88 nor Circular 131 has been repealed or amended since Circular 19 came into effect. In the case of a purchase of shareholding in an FDI enterprise, particularly where the purchase price is paid in foreign currency, it is not clear whether, or how, it is possible to comply with both regimes. Due to the fact that these regulations have been issued by different authorities, it appears that further consultations will be necessary in order to resolve these inconsistencies.
It will be interesting to see whether the authorities issue any further guidance on the practical application of the new regulations. Stay tuned for further updates from us.