In the era of globalization, the foreign capital inflows to Vietnam are becoming stronger and stronger, adding more resources to enterprises. However, there are a number of “checkpoints” that the law requires the foreign investors to comply. For the avoidance of struggle with the requirements and procedures to receive foreign capital, the enterprises need to firmly grasp new regulations regarding foreign investors and foreign-invested enterprises that the Law on Investment 2020 has brought from January 1, 2021.
Business lines for foreign investor: “prohibited list” instead of “allowed list”
For a long time, the foreign investors have to figure out by themselves which line of business is allowed in Vietnam along with its requirements or conditions dispersed in many legal normative acts. This “allowed list” approach causes many difficulties for the investors and the enterprises by limiting them within narrow, vague and complex area.
Applying new turning-point of legal thinking, the Law on Investment 2020 introduces “fresh from the oven” regulation named “business lines restricted in market access to foreign investors” setting new legal corridor for foreign investors by “prohibited list” approach. Accordingly, this list includes:
- Business lines not allowed in market access: in which the foreign investors are completely prohibited to conduct.
- Business lines allowed in market access with conditions: in which the foreign investors are allowed to conduct provided that they shall satisfy the requirements and conditions (mainly on foreign ownership ratio of capital, investment form, scope of activity and other conditions).
As result, for the first time, the foreign investors are able to clearly foresee business investment opportunities in Vietnam. The above-mentioned list will be officially published by the Government in the coming time.
Definition of business entities with dominant foreign capital
The Law on Investment 2014 provided different approach and treatment for the foreign-invested enterprises. Specifically, the enterprises will be treated as foreign investors if the foreign capital is dominant, in particular if at least 51% of its charter capital is owned by foreign investors and/or business entities with dominant foreign capital.
The enterprises with foreign capital below 51% will be “off the hook” and treated as domestic investors, which means they do not need to satisfy the specific conditions and requirements only for the foreign investors.
However, according to the Law on Enterprise, a ratio of more than 50% is enough to acquire the majority of vote for the enterprise affair. This provision causes many enterprises with dominated foreign capital in practice not being treated like foreign investors under the Investment Law. For the consistency, the Law on Investment 2020 has changed the minimum rate from 51% down to 50%. This is an important change that enterprises with foreign capital should firmly grasp to avoid “playing the wrong role”.
Supplement of cases in which foreign investors must apply for registration to contribute capital and acquire shares or capital contribution
Previously, a foreign investor had to obtain approval from the State if (1) contributing or acquiring capital in enterprises conducting conditional business line to foreign investors or (2) the capital contribution/acquisition leads to dominant foreign capital (at least of 51%).
The Law on Investment 2020 modified the above cases which include only: (1) contribution or acquisition of capital in the enterprises conducting business lines with restriction in market access, which increases the foreign ownership ratio of capital, and (2) change of rate from 51% down to 50%.
The Law on Investment 2020 also supplement a new case: the foreign investors contribute or acquire capital in the enterprises having land use right on islands, communes at borderland or coastal, or areas affecting national defense and security (approval from the Ministry Defense, Ministry of Public Security is required). This is a measure of pre-control for foreign projects in sensitive areas for the assurance of national defense and security.