Law on Investment will take effect on January, 2021

On 17 June 2020, the new Law on Investment (“New Investment Law”) was passed by the National Assembly of Vietnam. This will take effect on 1 January 2021.

1. Market access conditions for foreign investors

The most notable change in the New Investment Law is the introduction of the “negative list” approach, according to which foreign investors will be entitled to market access conditions applicable to domestic investors for any sectors not included in the list of sectors in which foreign investors are restricted from accessing (“List of Restricted Sectors”).

• New definition of foreign invested economic organizations

The New Investment Law has amended the nature of foreign-invested economic organizations that will be treated as foreign investors when they make investments in other economic organizations. In particular, the below economic organizations must be subject to investment procedures applicable to foreign investors if it has:

• more than 50% of its charter capital held by foreign investor(s) (“Foreign Majority Company”); or
• more than 50% of its charter capital held by the Foreign Majority Company(ies); or
• more than 50% of its charter capital held by both foreign investor(s) and the Foreign Majority Company(ies).

Compared to the current Investment Law, the New Investment Law has decreased the threshold for being considered as a Foreign Majority Company (i.e., from 51% or more charter capital to more than 50% charter capital). That means, there will be more foreign-invested economic organizations captured by this amendment under New Investment Law.

• Clarification on M&A Approval procedures

Under the current Investment Law, a foreign investor is required to obtain preliminary approval (“M&A Approval”) from the local investment licensing authority if it intends to contribute capital to, or acquire equity from, an existing company if: (i) the target company engages in business lines conditional to foreign investors; or (ii) the capital contribution or the equity acquisition results in 51% or more foreign ownership of the charter capital of the target company. In practice, these regulations are interpreted differently by licensing authorities in different provinces.

The New Investment Law has clarified the instances where M&A Approval procedure is required, specifically as below:

• an increase of foreign ownership ratio in a target company engaging in business lines included in the List of Restricted Sectors;
• an increase of foreign ownership ratio in a target company from 50% or less than 50% to more than 50% of the charter capital;
• an increase of foreign ownership ratio in a target company where foreign ownership of the charter capital is already more than 50%; or
• a capital contribution or capital acquisition of a target company, which has already obtained land use right certificates for the lands located within areas having an effect on national security, such as sea-islands, borderlands and coastal areas, etc.
• Investment incentives regime

With an aim to boost the growth of start-ups, tech companies and other innovative sectors, the New Investment Law has supplemented the sectors that are entitled to investment incentives. These sectors include, among others, high-tech enterprises, scientific and technology enterprises, small and medium-sized start-up innovative enterprises, R&D centers, and investment in technical facilities for small and medium-sized enterprises.

In addition, the New Investment Law has new provisions on exceptional investment incentive regime for the below projects, which are considered as having significant socio-economic impact:

• establishment of new R&D/innovation centers, or expansion of the existing R&D/innovation centers, with the total investment capital of at least VND 3,000 billion (approx. USD 130 million), and at least VND 1,000 billion (approx. USD 43.4 million) being disbursed within three years; and
• investment projects in business lines eligible for exceptional investment incentives having total investment capital of at least VND 30,000 billion (approx. USD 1.3 billion), and at least VND 10,000 billion (approx. USD 434 million) being disbursed within three years.

Projects having significant socio-economic impact may be entitled to the exceptional tax and land incentives pursuant to approval from the National Assembly based on a proposal from the Prime Minister.

• New instances for termination of investment projects by the authorities

Besides the cases where the State authorities can terminate the investment projects as regulated by the current Investment Law, the New Investment Law has provided three new instances below.

• Investment projects become subject to land reclamation because the land is not being used or there is a delay in its use in accordance with the land law;
• Investors do not make a deposit or provide a guarantee of deposit obligations as security when implementing investment projects if it is required to do so by laws; and
• Investors implement such project based on forged transactions pursuant to civil laws.
• Changes to list of prohibited business and conditional business

Under the New Investment Law, debt collection service is a prohibited business. The New Investment Law further stipulates that the collection agreements signed before 1 January 2020 (i.e., the effective date of the New Investment Law) must be terminated as from 1 January 2020.

In addition, the New Investment Law has amended the list of conditional businesses. In particular, it has removed, among others, commercial arbitration, franchising and logistics services from the list of conditional businesses. Meanwhile, several sectors such as electronic identification and authentication services, data center, payment service not through customer’s bank account, fishing vessel registration business, have been added to the list of conditional businesses.

• Investment deposit for securing the implementation of the investment project

Under the New Investment Law, for investment projects which are to be allocated land, or leased land by the State, or for which the land use purpose will be changed, the investors must make a deposit or provide a bank guarantee for the deposit obligation as a security to implement the investment projects.  However, this requirement does not apply to the following cases:

• The investor wins the auction of land use rights to implement the investment project and the relevant land is allocated by the State with land use fees or the relevant land is leased from the State with one-off rental payment;
• The investor wins the bidding to implement the investment project using land;
• The investor is allocated or leases the land from the State on the basis of receiving the transfer of an investment project that the previous investor(s) has already made deposits on or has completed its contribution of capital or mobilization of capital in accordance with the approved schedule; and
• The investor is allocated or leases the land from the State to implement the projects on the basis of receiving the transfer of land use right or assets attached to land from other land users.

The New Investment Law further provides that the deposit ratio is from 1% to 3% of the investment capital and will vary depending on the scale, features and schedule of the investment project.

Source: https://www.lexology.com/library/detail.aspx?g=75ce815f-0e3f-4f5f-94f8-e719fb053ac4