Amended Investment Law – major shift in Vietnam's approach to foreign investment

In brief 9 min read

Foreign investment has been one of the key drivers of socio-economic growth in Vietnam over the last 30 years.

Following the recent Resolution 50/NQ-TW of the Politburo on foreign investment policy towards 2030, Vietnam is set to continue to improve its legal framework and processes to attract more foreign investment. However, emphasis will now also be placed on the quality and effectiveness of foreign investment activities and the national defence and security considerations in licensing these activities.

To implement the resolution, the National Assembly passed the amended Law on Investment on 17 June 2020 (Amended LOI) which will come into effect from 1 January 2021. We look at the key changes under the Amended LOI and their implications for foreign investors.¹

New 'negative list' approach to market entry

In an unprecedented move, the Amended LOI introduces a new 'negative-list' approach to market entry for foreign investors. Accordingly the Government will issue two lists of business sectors and lines which are restricted and conditional for foreign investors, based on the prevailing Vietnamese laws and international treaties. Apart from these two lists, foreign investors will be treated as Vietnamese investors in respect of their investment in other business sectors and lines.   

This change represents a major shift in the approach to foreign investment by Vietnamese regulators, and is expected to increase the transparency and consistency in the authorities' approach to foreign investment and the overall licensing process. The two lists will be issued by the Government in the decree implementing the Amended LOI.

In addition, the Amended LOI amends the general list of conditional business lines which apply to all investors and adds 'debt collection' to the list of prohibited business lines (with the requirement that all current debt collection services be suspended from 1 January 2021).

New condition on ensuring 'national defence and security'

Reflecting on the recent concerns with foreign investment projects in the border and coastal areas of Vietnam and their impact on the national defence and security, the Amended LOI introduces two additional conditions for foreign investment. Accordingly, foreign investment by way of M&A activities or incorporation of certain greenfield projects must (i) not harm the national defence and security of Vietnam and (ii) comply with the conditions on the use of sea-islands, borderlands and coastal lands in accordance with the applicable land law.

Furthermore, under the Amended LOI, should foreign investment activity cause harm to national defence and the security of Vietnam, it may be suspended by a decision of the Prime Minister upon proposal by the Ministry of Planning and Investment.

The term 'national defence and security' is not defined, which gives licensing authorities broad discretion in approving, suspending or terminating foreign investment activities, particularly in respect of sensitive sectors or locations. However, it is expected that Vietnam would only rely on this condition as an exceptional measure in special cases affecting its national security.

Nominee arrangements under scrutiny

Vietnamese authorities have recently started to look into nominee arrangements adopted by foreign investors to invest in restricted sectors using Vietnamese nominees and companies (particularly in sensitive sectors for foreign investment or projects in the border areas) and have identified this as one of the major loopholes in the current foreign investment management regime of Vietnam.

To address this concern, the Amended LOI now allows Vietnamese authorities to terminate an investment project if the investor conducts investment activities on the basis of a façade transaction. Under the civil law, a façade transaction is understood as a transaction established by the parties in order to conceal another (true) transaction (which could capture nominee arrangements). The relevant provision of the Amended LOI is high level and vague and it is expected that the Government's decree implementing the LOI will provide more details on the precise circumstances and structures to which this right of termination will apply.

New 50% foreign ownership threshold

Under the current law, a foreign invested enterprise incorporated in Vietnam (FIE) is subject to the same conditions and investment procedures applicable to foreign investors (ie foreign corporates and individuals) if 51% or more of such FIE's charter capital is held by (a) a foreign investor, (b) an FIE in item (a), or (c) a foreign investor and an FIE in item (a) jointly.

Under the Amended LOI, the above 51% threshold will be reduced to 'more than 50%'. This change is to close the loophole created by the discrepancy between the current LOI and current Law on Enterprises, under which a company can be 'controlled' by foreign investors with more than 50% but less than 51% interest, yet still be treated by the current LOI as Vietnamese investors for the purpose of their investment activities in Vietnam. 

This change will have a significant implication on tiered corporate structures, where the holding company is an FIE with more than 50% but less than 51% foreign ownership and, hence, is treated as a Vietnamese investor in respect of its investment and ownership in the operational subsidiary. It is not entirely clear under the Amended LOI whether the existing investment of these FIEs in the operational subsidiary will: (i) continue to be considered as investment by local Vietnamese investors or (ii) be considered as investment by foreign investors under the Amended LOI going forward. If it is the latter, changes may need to be implemented to comply with the Amended LOI – either by way of the holding company reducing its foreign ownership to 50% or less to be treated as a Vietnamese investor under the Amended LOI, or the operating subsidiary complying with the conditions applicable to FIEs in respect of its business activities. This issue needs to be further clarified in the implementing decree.

Separately, the Amended LOI contemplates that public and listed companies will be subject to a different treatment regime, as their foreign ownership level may fluctuate frequently depending on the trading in the securities market. 

Clearer guidance on when an M&A approval is required

The Amended LOI provides welcome clarification on the circumstances where a foreign investor must obtain an M&A approval for its investment in a Vietnamese target company. Specifically, an M&A approval will be required when the acquisition by the foreign investor leads to:     

1. an increase in the ownership of the foreign investor in the target company engaging in business lines with market entry restrictions for foreign investors.
   
   It is unclear whether this applies to an increase of ownership of each individual foreign investor, or an increase of the total ownership of all foreign investors in the target company. The former seems to be more appropriate as the maximum foreign ownership that an investor can hold in a company will depend on such investor's nationality (eg whether it is from a WTO or non-WTO country). Therefore, it sees more reasonable for the licensing authorities to consider the ownership of each individual investor separately;
2. an increase in foreign ownership in the target company from less than 50% to more than 50% of the charter capital; or
3. an increase of foreign ownership in the target company where foreign ownership is already exceeding 50% of the charter capital.

The above threshold for foreign ownership has been reduced from 51% under the current law to 50%. Similar to the new classification of FIEs which are treated as foreign investors (as discussed above), this is to capture the cases where foreign investors acquire control in Vietnamese companies by holding more than 50% to less than 51% (eg 50.9%), which are currently not captured by the M&A approval procedures.

In addition to the above, the Amended LOI now also requires an M&A approval in respect of foreign investment in target companies if they utilise land located in sea-island, borderland and coastal land areas or other areas which may affect national defence and security. This new condition is consistent with the approach to 'national defence and security' discussed above. It is expected that the implementing decree will provide further details on how this criterion will be assessed by the authorities.

Streamlined process for selection of investors

The Amended LOI consolidates and streamlines the mechanisms for selecting investors under different regimes prescribed by the land laws, tendering laws and investment laws. Specifically, an investor may be selected via one of the following methods: (a) an auction of land use rights if required by land laws; (b) a tender process if required under tendering regulations; or (c) selection by the licensing authority responsible for the investment in-principle approval without going through an auction of land use rights or a tender process in certain cases (eg if the investor already has legitimate land use rights or acquires such land use rights via capital contribution).

The Amended LOI clarifies that for an investment project which is subject to both requirements of obtaining an investment in-principle approval and going through either an auction of land use rights or a tender process for selection of the investor, the licensing authority will first issue the investment in-principle approval under the Amended LOI and then assign the relevant authorities to organize the auction or tender as required by law.

Revised investment in-principle approval process

The Amended LOI amends the list of investment projects which must obtain an investment in-principle approval of the National Assembly, the Prime Minister or the Provincial People’s Committee. For example, as compared to the current law, the Amended LOI adds to the list investment projects of certain size in construction of urban areas, houses for sale, for rent or for lease-purchase or projects located in sea-island, borderland or coastal areas.

The Amended LOI also provides for additional circumstances where an investor must apply for an amendment to the issued in-principle approval. For example, if there is an extension of the investment schedule by 12 months or more (provided that the total extension must not exceed 24 months except for limited circumstances), or if there's a change in the investor before the project commences operation or the total investment capital by 20% or more.

Relaxation of investment conditions for startups

Under the Amended LOI, a foreign investor who incorporates a small- and medium-sized startup innovative enterprise or an innovative startup investment fund is neither required to have an investment project nor obtain an investment registration certificate. This relaxation of investment conditions is aimed at attracting foreign investment in this sector and facilitating the growth of innovative startups in Vietnam.

The above changes in the Amended LOI reflect Vietnam's new approach to foreign investment, whereby Vietnam will continue its efforts to attract more foreign investment but with a more cautious approach to ensure that such investment is efficient, complies with Vietnamese law and does not harm the national security interests of Vietnam. 

Some of the changes will need further guidance in the implementing decree which is expected to be issued before the Amended LOI comes into effect on 1 January 2021. We will continue to monitor the developments in this space and update our readers of the upcoming changes.