INVESTING IN VIETNAM

I.COMMON FORMS OF INVESTING IN VIETNAM

1. Establishing a New Company

One of the most common methods for foreign investors to enter the Vietnamese market is by establishing a new company.

2. Contributing Capital or Purchasing Shares/Equity

Investors can also contribute capital or purchase shares in existing companies. This method is particularly attractive as it allows entry into established businesses with existing market presence and operational infrastructure. Investments can be made in non-listed companies, which often involve direct negotiations, or in listed companies through stock exchanges, which offer liquidity and market-driven pricing.

3. Business Cooperative Contracts (BCC)

BCCs are contractual forms of investment without creating a new legal entity. BCCs are popular in sectors requiring substantial capital and expertise, such as infrastructure, oil and gas, and telecommunications. They allow partners to pool resources and share profits and risks according to the agreed terms.

4. Purchasing Bonds or Other Securities

Investing in bonds or other securities issued by Vietnamese entities offers a relatively stable investment with regular income streams through interest payments. Corporate bonds, government bonds, and municipal bonds are available options. This method is suitable for investors seeking lower-risk investments compared to equities.

5. Investing Through Securities Investment Fund Management Companies

Another method is to invest through securities investment fund management companies. These companies pool funds from multiple investors to purchase a diversified portfolio of securities, providing professional management and reducing individual investment risk. This approach is ideal for investors looking to diversify their investments without managing a portfolio actively.

II. PRE-INVESTMENT CONSIDERATIONS

(a) Business Lines of the Target Company

Vietnam categorizes business activities into three primary groups: prohibited business lines, conditional business lines, and permitted business lines. Each category carries distinct regulatory implications for foreign investors.

• Prohibited Business Lines: Certain sectors are off-limits to investment due to their sensitive nature. These restrictions apply to both Vietnamese and foreign investors, ensuring that specific activities remain under stringent state control.

• General Prohibitions for All Investors:
  • Examples include trading in narcotics, firecrackers, and debt collection services. These sectors are deemed too risky or detrimental to public order and safety to permit any form of private investment.

• Prohibitions Specific to Foreign Investors:
  • Foreign investors face additional restrictions in sectors such as public survey services and travel services (with exceptions for international services catering to inbound tourists). These sectors are often reserved for domestic companies to maintain national security and cultural integrity.

• Conditional Business Lines: Foreign investors can enter certain sectors provided they meet specific conditions set forth by Vietnamese law. These conditions are designed to safeguard national interests while allowing controlled foreign participation. Compliance with these conditions is mandatory throughout the operational lifespan of the business.

• Examples of Conditional Business Lines:
  • Advertising Business:
    • Foreign investors are allowed to cooperate and invest with Vietnamese advertising service providers through joint ventures and Business Cooperation Contracts (BCC).
    • Some state agencies require that owners of advertising companies be advertising companies themselves, reflecting a practical constraint not explicitly stated in the law.

• • Casino Business:
    • Entry into the casino business requires meeting stringent financial and operational criteria, including establishing a legally recognized entity and adhering to equity and debt regulations.

• Permitted Business Lines: These sectors do not fall under the prohibited or conditional categories, allowing foreign investors relatively unrestricted access. However, compliance with general business regulations is still required.

• Examples of Permitted Business Lines:
  • Management Consulting Activities:
    • This sector is open to 100% foreign ownership with no special conditions beyond standard business regulations.

(b) Foreign Ownership Thresholds

Foreign ownership limits in Vietnamese companies vary based on the business lines and are influenced by Vietnam’s commitments under the World Trade Organization (WTO), international treaties, and domestic laws. These thresholds determine the extent to which foreign investors can control or participate in a Vietnamese company.

• Examples of Foreign Ownership Limits:
  • 100% Ownership:
    • Sectors such as management consulting activities and casino businesses allow for full foreign ownership, enabling investors to operate independently without local partners.
  • 51% Ownership:
    • In film production services, foreign investors can hold a majority stake, allowing significant control while still partnering with local entities.
  • 49% Ownership:
    • The electronic game business restricts foreign ownership to a minority stake, ensuring that domestic entities retain substantial control over operations.

III.         INVESTMENT PROCESS FOR FOREIGN INVESTORS IN VIETNAM

1. Establishing a New Company

Obtaining Investment Registration Certificate (IRC) When a foreign investor or a company considered as a foreign investor establishes a new enterprise in Vietnam, obtaining an Investment Registration Certificate (IRC) is mandatory. The IRC is a crucial document that outlines the investment project’s scope, investor’s rights, and obligations, and other necessary details pertinent to the proposed investment. The IRC process involves submitting a proposal that includes the investment project’s objectives, scale, and capital investment, among other critical economic and technical indices​.

Obtaining Enterprise Registration Certificate (ERC) Following the receipt of the IRC, investors must secure an Enterprise Registration Certificate (ERC). The ERC formalizes the business entity’s establishment under Vietnamese law, detailing the business’s legal status, form, and scope of activities. It’s essential for the legal operation of the company within Vietnam​.

2. Acquiring Shares/Equity in an Existing Private Company

Obtaining M&A Approval Foreign investors planning to acquire shares or equity in an existing Vietnamese company need to procure M&A Approval. This step is crucial to ensure compliance with Vietnamese investment regulations, especially when the targeted company operates in a conditional or restricted sector.

IV. BCC VS. EQUITY STAKEHOLDING

1. Business Cooperation Contracts (BCC)

A Business Cooperation Contract (BCC) is an agreement between foreign investors and Vietnamese partners to conduct specific business activities without forming a new legal entity.

Key Features of BCC

• • No New Legal Entity: BCC does not create a new legal entity. The partners collaborate on a project basis, sharing profits, products, and liabilities.
  • Flexibility: BCCs offer flexibility in terms of contribution and profit-sharing arrangements, allowing parties to structure their cooperation according to their strengths and needs.
  • Regulatory Requirements: Parties to a BCC must obtain an Investment Registration Certificate (IRC) and may need to set up an operating office in Vietnam to manage the contract.
  • Operational Mechanism: The contract must outline the objectives, scope of business, contributions, profit distribution, duration, rights and obligations, amendments, and dispute resolution mechanisms.

Advantages of BCC

• • Speed and Cost-Efficiency: Since BCCs do not require the establishment of a new entity, the process is quicker and less costly compared to setting up a company.
  • Resource Utilization: Investors can leverage the local knowledge, networks, and resources of their Vietnamese partners.
  • Flexibility in Agreements: The contract terms can be tailored to specific project needs, offering considerable flexibility.

Challenges of BCC

• • Unlimited Liability: Parties in a BCC share unlimited liability, which can pose significant risks.
  • No Unified Management: The lack of a centralized management structure can lead to coordination challenges.
  • Limited Long-term Suitability: BCCs are generally more suited for short-term projects due to the complexity and potential for disputes in long-term engagements.

2. Equity Stakeholding

Equity stakeholding involves acquiring shares in a Vietnamese company, thereby becoming a part-owner. This method is regulated under the Law on Enterprises and the Law on Investment.

Key Features of Equity Stakeholding

• • Ownership and Control: Investors gain ownership stakes and, depending on the percentage of shares owned, can influence company decisions.
  • Formation of Legal Entity: This approach necessitates the creation or acquisition of a legal entity in Vietnam, subject to local incorporation regulations.
  • Compliance and Reporting: Companies with foreign ownership must comply with various statutory requirements, including regular reporting and adherence to corporate governance standards.

Advantages of Equity Stakeholding

• • Control and Influence: Investors can have a say in the company’s management and strategic direction.
  • Long-term Investment: Equity investments are generally more suitable for long-term engagements, providing potential for substantial returns and growth.
  • Limited Liability: Shareholders typically have limited liability, confined to their share capital contribution.

Challenges of Equity Stakeholding

• • Complexity and Cost: Establishing or acquiring a company involves significant legal and administrative procedures, which can be time-consuming and costly.
  • Regulatory Compliance: Maintaining compliance with local laws and regulations requires ongoing effort and resources.
  • Market Risks: The investment is subject to market risks, including economic fluctuations and changes in regulatory policies.

Practical Considerations

When choosing between a BCC and equity stakeholding, investors should consider the nature of their project, investment horizon, risk tolerance, and the regulatory environment. BCCs may be advantageous for projects requiring quick market entry and flexible collaboration, while equity stakeholding is better suited for investors looking for long-term control and potential high returns.