Vietnam has been very successful in attracting foreign direct investment, sustaining FDI levels around USD 10-11 billion a year over the last five years, up from almost nothing just a decade ago. Vietnam’s attractiveness to foreign investors resulted in large part from the country’s open government policies encouraging FDI, geographical position near global supply chains, political and economic stability, and abundant labor resources.
Vietnam officially encourages foreign investment as part of its development strategy and the government has stated its commitment to improving the country’s business and investment climate. The Investment Law of 2005 provides the legal framework for foreign investment in Vietnam.
Vietnam became the 150th member of the World Trade Organization on January 11, 2007. Vietnam undertook commitments on goods (tariffs, quotas, and ceilings on agricultural subsidies) and services (provisions of access to Foreign Service providers and related conditions). It has also committed to implement agreements on intellectual property (TRIPS), investment measures (TRIMS), customs valuation, technical barriers to trade, sanitary and phyto-sanitary measures, import licensing provisions, anti-dumping and countervailing measures, and rules of origin. Vietnam has made progress in implementing its bilateral and international obligations.
The government of Vietnam (GVN) holds regular “business forum” meetings with the private sector, including both domestic and foreign businesses and business associations, to discuss issues of importance. Foreign investors use these meetings to draw attention to investment impediments in Vietnam. These fora, together with frequent dialogues between GVN officials and foreign investors, have allowed foreign investors to comment on many legal and procedural reforms.
The 2005 Investment Law, together with its implementing decrees and circulars, regulates investment in Vietnam, including investors’ rights and obligations, investment incentives, state administration of investment activities, and offshore investment. The Investment Law also provides for guarantees against the nationalization or confiscation of assets and applies to both foreign and domestic investors. The Investment Law designates prohibited and restricted sectors for investment, but there are additional laws that apply conditions to investments in sectors such as mining, post and telecommunications, property trading, banking, securities, and insurance.
The Investment Law provides for five main forms of foreign direct investment: (1) 100 percent foreign-owned or domestic-owned companies; (2) joint ventures (JV) between domestic and foreign investors; (3) business contracts such as business cooperation contracts (BCC), build-and-operate agreements (BOT and BTO), and build and transfer contracts (BT); (4) capital contribution for management of a company; and (5) merger and acquisitions (M&A). Foreign investors can, with restrictions, invest indirectly by buying securities or investing through financial intermediaries.
Vietnam has gradually opened some sectors for foreign investment through M&A. While foreign investors are allowed to buy shares in some domestic companies without limitation, examples where this has occurred are rare. The ratio of total foreign ownership permitted in a project depends on a number of factors, including Vietnam’s international commitments, the economic sector in question and the type of investor, among others. There are strict foreign ownership limitations for certain listed companies and service sectors. For example, foreign ownership cannot exceed 49 percent for listed companies and 30 percent for listed companies in the financial sector. A foreign bank is allowed to apply to establish a 100 percent foreign owned affiliate in Vietnam but may only own up to 20 percent of a local commercial bank. Individual foreign investors are usually limited to 15 percent ownership, though a single foreign investor may increase ownership to 20 percent through a strategic alliance with a local partner and with approval from the Prime Minister’s Office.
The Investment Law distinguishes four types of sectors: (1) prohibited sectors; (2) encouraged sectors; (3) conditional sectors applicable to both foreign and domestic investors; and (4) conditional sectors applicable only to foreign investors.
The list of sectors in which foreign investment is prohibited includes cases where the investment would be deemed to be “detrimental to national defense, security and public interest, health, or historical and cultural values.”
The list of sectors in which investment is encouraged includes high-technology, agriculture, labor-intensive industries (employing 5000 or more employees), infrastructure development, and projects located in remote and mountainous areas.
The list of sectors in which investment is conditional for both foreign and domestic investors includes those having an impact on national defense, security, social order and safety; culture, information, press and publishing; financial and banking; public health; entertainment services; real estate; survey, prospecting, exploration and exploitation of natural resources; ecology and the environment; and education and training.
The sectors where certain conditions are applicable to foreign investors include telecommunications, postal networks, ports and airports, and other sectors as per Vietnam’s commitments under international and bilateral arrangements.
Foreign investors have the right to sell, market, and distribute what they manufacture locally, and to import goods needed for their investment projects and inputs directly related to their production, provided this right is included in their investment license.
Foreign participation in distribution services, including commission agents, wholesale and retail services, and franchising, opened to fully foreign-owned businesses in 2009. Vietnam has excluded certain products from its WTO distribution services commitments, including rice, sugar, tobacco, crude and processed oil, pharmaceuticals, explosives, news and magazines, precious metals, and gemstones. Distribution of alcohol, cement and concrete, fertilizers, iron and steel, paper, tires, and audiovisual equipment opened to foreign investors in 2010. Investment in retail outlets is subject to a strict “economic needs test.”
Local authorities in Vietnam’s 58 provinces and 5 municipalities generally have the authority to issue investment licenses. Provincial authorities and the management boards of industrial zones are the issuing entities for most types of investment licensing, with the exception of build-and-operate projects (BOT, BO, BTO), which are still licensed by the central government. Domestic investors with projects of less than VND 15 billion (approximately $714,000) do not need to acquire investment licenses.
The procedure to obtain investment certification is complex, requiring investors to get approval from several ministries and/or agencies, depending on ownership (foreign or domestic), size and sector of the investment. Projects deemed to be of “national importance” must be approved by the National Assembly. Key infrastructure projects must be approved by the Prime Minister’s Office (see below). Investments in conditional sectors such as broadcasting, mining, telecommunications, banking and finance, ports and airports and education are subject to a more complex licensing process.
Licensing is required to establish a new investment as well as to make significant changes to an ongoing enterprise, such as to increase investment capital, restructure the company by changing the form of investment or investment ratios between foreign and domestic partners or add additional business activities.
Decentralization of licensing authority to provincial authorities has in some cases streamlined the licensing process and reduced processing times. It has also, however, given rise to considerable regional differences in procedures and interpretations of relevant investment laws and regulations.
Investment projects that must be approved by the Prime Minister include:
- All projects, regardless of capital source and size, in airports and seaports; mining, oil and gas; broadcasting and television; casinos; tobacco; higher education; sea transportation; post and delivery services; telecommunication and internet networks; printing and publishing; independent scientific research establishments; and establishment of industrial, export processing, high-tech and economic zones.
- All projects having capital in excess of VND 1.5 trillion (approximately $71 million), regardless of foreign ownership, in electricity; mineral processing and metallurgy; railways, roads and domestic waterways; and alcoholic beverages.
- All foreign-invested projects in sea transport, post and telecommunication, publishing, and independent science research units.
Vietnamese authorities evaluate investment license applications using a number of criteria, including the legal status and financial capabilities of the foreign and Vietnamese investors; the project’s compatibility with Vietnam’s “Master Plan” for economic and social development; the benefits accruing to the GVN or to the Communist Party of Vietnam; projected revenue; technology and expertise; efficient use of resources; environmental protection; plans for land use and land clearance compensation; project incentives including tax rates and land, water, and sea surface rental fees.
The 2005 Commercial Law and the implementing guidelines contained in Decree 72, issued in July 2006, allow foreign firms to establish branches or representative offices. Branches may engage in trading activities, while the representative offices are allowed to liaise with customers, negotiate and enter into contracts on behalf of their parent company, and conduct market research, but not to engage in commercial or profit making activity.
Participation of Foreign Investors in the GVN “Privatization” Program
Foreign investors are allowed to buy shares in state-owned enterprises (SOEs) being “equitized” (converted to joint stock companies, though rarely fully privatized) by the GVN. Shares are typically offered through an auction. Foreign ownership in certain specified sectors may not exceed the limits for that sector, generally 49 percent.
Other Investment Related Legislation
Vietnam’s Bankruptcy Law of 2004 provides that parties other than creditors are able to participate in bankruptcy procedures and gives courts legal authority to deal with insolvent businesses.
The Law on Competition of 2004 aims to create an equitable and non-discriminatory competitive environment, and protect and encourage fair competition. The Law acknowledges the importance of the rights of organizations and individuals to compete freely, and addresses anti-competitive agreements, state monopolies, economic concentration, and unfair competition.
In December, the GVN proposed to lower corporate income tax rates from the current 25 percent to 20 percent for small- and medium-sized enterprises and 23 percent for all other enterprises. If approved, the tax cut would take effect January 1, 2014. Corporate income tax for extractive industries varies from 32 to 50 percent depending on the project, and can be as low as 10 percent if an investment is made in selected priority sectors or in remote areas. Incentives are the same for both foreign-invested and domestic enterprises.
Vietnam does not tax profits remitted by foreign-invested companies. However, companies are required to fulfill their local tax and financial obligations before remitting profits overseas and are not permitted to accumulate losses, and the government has shown a strong interest in investigating alleged transfer pricing. A new personal income tax regime placing Vietnamese and foreigners on the same tax rate schedule took effect in January 2009. The new law regulates all types of personal income, including income previously subject to other laws such as income from individual businesses and property sales. The lowest tax rate is 5 percent while the highest is 35 percent.
Vietnam and the United States began discussions toward a bilateral agreement on the avoidance of double taxation in December 2010 and will hold their fourth round of negotiations in early 2013. There is currently no intergovernmental agreement on implementation of the Foreign Assets Tax Compliance Act (FATCA).