Professional opinions


Lawyer-CPA Pham The Vinh

Director Hoang Gia-SCCT Law consulting&Auditing Co.Ltd

Unification of the two Investment Laws should not put two different subjects of these laws into one basket :

As definitions termed by the Investment Law (common), Enterprises with foreign owned capital comprise any enterprise established by a foreign investor in order to conduct investment activities in Vietnam; or a Vietnamese enterprise in which a foreign investor purchases shares, merges or redeems.

So, the unification of Foreign Investment Law and Law on Local Investment Incentive has put the two different subjects of the two previous laws together to form a new definition of foreign investment enterprises in the coming Investment Laws. However, to some extent, the definition is imprecise and does not include the case that foreign Investors shall be permitted to contribute capital to and to purchase shareholding in companies and branches operating in Vietnam as stipulated in the Article 25 of the Investment Law. In addition, according to former Decision 38/2003/QD-TTg and Governmental Decree 125/2004/ND-CP – guiding for the Enterprise Laws, foreign investors can contribute capital into Vietnamese enterprises. As previous regulations, both cases of capital contribution or purchase shareholding by foreign investors at a lawfull limit – the ratio of capital contribution as stipulated were not considered as foreign investment capital enteprises, since the foreign investors in the cases are defined as indirect investors not participating in management. While, in the new Investment Law, the two cases kinds of Vietnamese entities as mentioned above are considered as foreign investment enterprises and leading that the related foreign Investors shall be entitled to take part in direct management.

The entities turned into form of foreign investment enterprises by the new Investment Laws will thus surely cope with some unfavorable legal consequences : for instance, they have to change from land granted situation into hiring land from the Government because, according to the Land Law, foreign organizations or individuals investing into Vietnam under the investment regulations shall hire land from the Vietnamese Government, and they also have to apply foreign investment enterprises’accounting and auditing rules…

Incompatibilities of legal regulations from the definition of FIEs

According to Decree No.108/2006/ND-CP providing guidelines to the implementation Investment Law and Decree No.88/2006/ND-CP guiding business registration procedures upon the Enterprise Law, in cases a foreigners invest into Vietnam via capital contribution or purchase shareholding in Vietamese enterprises, these entities shall carry out business registered procdures subject to the Enterprise Laws. Therefore, in line with provisions of the two Decrees, after capital contributed or purchase shareholding by foreign investors, these enterprises still keep their forms as Vietnamese entities and remain operating with Certificate of Business Register issued by the Business Registered Office of Planning and Investment Department, not as foreign investment enterprises as defined by the new Investment Law. So, It can be said there is a gap between the newly issued Decrees stipulations and the Law on Investment. Evidenced that at Article 31 of Decree No.88/2006 contends that a company having foreign capital making up more than 50% charter capital is issued Business Register Certificate and the procedures for its business registration shall not be applied in accordance with investment conditions to be applied to foreign investment. However, if the entity asks for decreasing its charter capital, it shall be required to submit its Financial Statement audited by an independent auditing company (the requirement is similar as regulations to be applied for foreign investment enterprises)

In contrast, foreigners perform their investment under another way by joining with local investors to set up a liability company with two- members or more, a shareholding company, a partnership , the enterprise shall be defined as FIEs or operation under the form of Business Co-operation Contract (if not forming any newly legal status ) and the two investment forms operate upon Certificate of Investment conccurently as Certificate for Business Registration, issued by Provincial People’s Commitee, not depending on capital contribution ratio. (the minimum 51% foreign owned capital of charter capital only influences on investment conditions – conditional investment scopes – compared with domestic investors). Futhermore, If the joint venturue enterprise next joints with other local companies to establish new joint venture, the latter shall also operate under the type of Certificate of Investment stated above. By the way of investment, foreign investors must be subject to List of investment scope with conditions to be applied to foreigners (unless the minimum 51% foreign owned capital), since this is a foreign owned capital project implemeted under the form of joint venture or BCC.

Moreover, business cooperation between the two local entities under the form of BCC stated in Article 23 of the Law on Investment is currently not fallen within the subject to be applied by Decree 108/2006/ND-CP but considered as an economic contract. Whereas, BCC of the local entities was formerly applied according to Decision 38/HDBT of April, 1989 of Ministers Council on economic link in production, selling and services.

From the above analysis, we can see that upon the two new Decrees a foreign investor can have two ways available for investment, both are defined as direct investment but the legal status of enterprise or investment project are different and issued by the two different licensing departments. Resulting in, the way which is more convenient for investment shall be best used and exploded by the investors. It should be noted that investment procedures with joint venture contract or BCC will help investors to be classified as a foreign investment enterprise or not. If exerting a joint venture contract or BCC, it shall be considered as foreign capital investment project.

In conclusion, it should be acknowleged that unification of laws must be firstly unified conceptual meanings. It is expected Ministry of Planning and Investment will issue Circulars giving guidelines to overcome foresaid shortcomings and unequanties between foreign investors, between foreign and domestic investors, between local investors each other, so that we can have a justice and transparent investment environment in our country ./.

P/S: It was published on Vietnam Investment Review of October 23, 2006 and No.784 release date 23 month 10 year 2006.