Vietnam has long been an attractive investment destination for foreign investors, thanks to its strategic location, socio-political stability and low-cost yet skilful labour force. Despite the difficulties posed by the pandemic, Vietnam has proved that it can effectively handle the crisis and get its economy back on track post-pandemic.
As reported by the Foreign Investment Department of the Ministry of Planning and Investment, Vietnam witnessed a decrease in the number of newly registered projects and M&A deals by foreign investors in 2021 due to a months-long lockdown that prevented experts from entering the country to conduct surveys and prepare for new projects. Still, as compared to 2020, the total amount of newly registered and adjusted capital and the total value of share purchases have increased by 9.2%. This shows a positive sign for foreign investment activities in Vietnam in the coming time when the pandemic is expected to slow down in the second half of 2022.
Sector-wise, manufacturing and processing attracted the most foreign direct investment (FDI) capital with more than USD18.1 billion, accounting for 58.2% of the total FDI capital in 2021, followed by power generation and distribution, real estate, and wholesale and retail. Speaking of M&A activities, foreign investors are most active in manufacturing and processing, wholesale and retail, and science-technology sectors. Country-wise, Singapore ranked first in terms of the number of newly registered and adjusted projects and amount of capital registered, ahead of South Korea and Japan, respectively.
Vietnam has been determined to create a better investment environment for foreign investors during the past few years. Recently, the National Assembly has adopted new Law No. 03/2022/QH15 (the New Law No.3) dated 11 January 2022, which will take effect on 1 March 2022. The new law amends a number of legislations relating to foreign investments, including the Law on Investment 2020, Law on Enterprises 2020, Law on Securities 2019, Law on Electricity 2004, Labour Code 2019, and Law on Environmental Protection 2020, among others. Several legislations have been proposed for amendment, the most notable of which is the Land Law 2013.
With the introduction of the Law on Investment 2020 replacing the 2014 law, Vietnam has adopted the “negative list” approach with respect to market entry conditions applied to foreign investors. Accordingly, any business lines not on the list subject to market entry conditions under Decree 31/2021, including those that Vietnam has not committed under international treaties, are open for foreign investors under the same conditions as domestic investors.
Compared to the previous “positive list” approach under which state agencies had the discretion to decide the market entry conditions applied to business lines that Vietnam has not committed under international treaties, the new approach warrants transparency and saves significant time for administrative licensing procedures.
Under the Law on Investment 2020, the prime minister was empowered to grant in-principle approval for real estate projects with at least 50 hectares or less of land but with a population of at least 15,000 people in the urban area, and real estate projects using at least 100 hectares or less of land with a population of at least 10,000 people in the rural area. Provincial People’s Committees were authorised to grant in-principle approvals for the remaining real estate projects.
With the New Law No.3, the prime minister’s authority is narrowed down to real estate projects using at least 300 hectares of land or having a population of at least 50,000 people. The provincial People’s Committee’s authority is expanded to real estate projects using less than 300 hectares of land and having a population of up to 50,000 people. This will shorten the timeline to obtain in-principle approvals in certain real estate projects.
Given the high rise in renewable energy projects and long-standing demand to privatise the development and operation of the national electricity transmission system, the new law has removed the state’s monopoly by allowing private companies, including foreign-invested companies, to invest in and operate the electricity transmission systems. This will open new opportunities for foreign investors in the electricity generation and transmission sectors, helping investors to ensure connectivity from their power projects to the grid.
Vietnam is committed to supporting businesses’ recovery. In 2021, companies with revenue of less than VND200 billion (USD8.7 million) and a decrease in revenue compared to 2019 were entitled to a 30% cut of corporate income tax. In 2022, certain groups of goods and services are entitled to a reduction of the value-added tax rate, from 10% to 8%. In addition, companies that have participated in the unemployment insurance fund before 1 October 2021 are entitled to a reduction of contribution into that fund from 1% to 0% until 30 September 2022.
Foreign investors investing in Vietnam via M&A activities remain a consistent trend in the past decade. However, buying shares or capital contributions of existing shareholders or members in a local company is risky from a legal perspective if the foreign investor is not well aware of the “legal health” of the target before the M&A transaction, for instance, whether the target is properly incorporated, has sufficient licences, or legally authorised to implement the concerned project.
Many local targets are not organised and operated in full compliance with the applicable laws, partly due to the lack of awareness and also to the complication of the current regulations. Hence, conducting due diligence before the transaction is practically a must for any foreign investor. Alternatively, the target should be required to establish and then transfer the concerned project to a greenfield special-purpose vehicle to be acquired by the foreign investor. However, the project transfer would be subjected to several legal conditions to be completed.
In share acquisitions and newly set up joint ventures, an investor holding 75% or more of the capital contribution in a limited liability company or holding 65% or more of the shares of a joint-stock company can, under Vietnamese laws, decide all matters. An investor holding less than the said percentage can still gain control over important matters by including a list of “reserved matters” with higher approval thresholds under the company’s charter. However, public companies’ charters must follow the template prescribed by the regulators, and the scheme of “reserved matters” and “veto” right would unlikely be allowable, in which case this approach affords the minority investor an implied “veto” right.
Investors should be more mindful of the applicable foreign ownership limit if the target is a public company. Under Vietnam’s securities laws, the foreign ownership ratio in business lines that are subject to market entry conditions pursuant to Decree 31/2020, but no specific foreign ownership limit is set out under Vietnamese laws and international treaties, would be capped at 50% in the relevant public company. In addition, investors should pay attention to regulations on securities trading on the stock market and public disclosure.
Merger filing has become more common in M&A activities, given the new clearer filing thresholds under Decree 35/2020. With the adoption of the new effects-based approach under the Law on Competition 2018, it may take longer to complete the filings than under the previous regime. Investors should complete the filing as soon as possible after the transaction structure is finalised to avoid any delay in the transaction, noting that filings only require draft agreements and/or MOUs (together with a market share report and other supporting documents) to be submitted.
Large projects usually require massive land for construction and project implementation. However, acquiring land is a complex issue under Vietnamese laws. To obtain land, an investor usually can either receive the transfer of land from existing land users or request the state to recover it from existing users to allocate to the investor. In each of these options, investors must expect that it would take months to obtain the desired land successfully. The notable challenges that need to be carefully dealt with include, inter alia, land zoning and planning, land compensation and clearance, land use purpose conversion and procurement of a land use rights certificate.
Investors must be mindful that for projects in certain sectors (e.g. real estate and construction), the local authorities are required to open bids to select investors. Even for a project originally proposed by a specific investor, the investor must still join the bid, which is not well regulated by laws, resulting in local authorities and investors being confused in many instances. Quite a few large projects have been significantly delayed due to complications arising in the bidding process. Many local authorities impose tight deadlines for potential investors to submit bids. Therefore, at the beginning of project formulation, an investor should first check if its project is subject to investor selection bidding, and if that is the case, the investor should carefully familiarise itself with the applicable bidding procedure and paperwork.
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