This content is from: Local Insights

Draft investment law

Vietnamese authorities are finalising a draft law to amend several laws on investment and construction in Vietnam. The laws to be amended include the Investment Law, Enterprise Law, Land Law, Bidding Law, Construction Law, Environment Law and Fire Protection and Prevention Law, and the Law on Corporate Income Tax. The Government's purpose in all these proposed amendments is improving the investment conditions in Vietnam and formulating policies that will help Vietnam survive the global economic crisis. Set out below are some major changes that may affect how foreign investors do business in Vietnam.

The first proposed amendment is to remove the re-registration deadline for existing foreign invested enterprises incorporated before July 1 2006. The current laws have imposed a deadline of July 1 2008 for the re-registration and many existing companies have failed to re-register for operating under the new Enterprise Law. Failure to re-register would mean the relevant enterprise could not extend its project life or expand its scope of business operations. For example, a manufacturer would not be able to conduct trading or distribution activities if it has not been re-registered.

Another amendment relates to the definition of foreign invested companies under the Investment Law. Currently, a foreign invested enterprise comprises any enterprise established by a foreign investor in order to carry out investment activities in Vietnam or a Vietnamese enterprise in which a foreign investor purchases shares, with which it merges or which it acquires. Under this definition, some state authorities in Vietnam have treated companies with 1% foreign ownership as foreign invested companies.

Under the proposed law, a foreign invested enterprise will be defined as a company in which a foreign investor owns 30% or more of the charter capital or equity. If the proposed amendment is approved by the National Assembly next month, many investment conditions for foreign invested enterprises will be affected. For example, if a foreign investor owns less than 30% of the charter capital of an enterprise, then it is not considered a foreign invested enterprise and will not have to undergo the rigorous and time-consuming process of investment evaluation for obtaining an investment certificate.

Another effect is the requirement of economic needs test (ENT) for foreign invested enterprises that want to establish a distribution branch or extra retail outlets. Under regulations of Vietnam, foreign invested enterprises are required to satisfy the ENT requirements if they want to establish a distribution branch or additional retail outlets. Under the ENT, the foreign-invested company would have to apply for a separate licence for each subsequent outlet. The criteria for the establishment of additional retail outlets is considered on a case-by-case basis, depending on (i) the number of retail establishments, (ii) market stability, (iii) population density in a province or city; and (iv) the approved planning of the province/city. The ENT is entirely subject to the assessment and opinion of the licensing authority. If the new definition is approved, it may mean that if a foreign investor owns less than 30% of the charter capital of a company, it is no longer considered a foreign invested enterprise and not subject to the ENT requirement for its distribution business in Vietnam.

Vietnamese authorities have also proposed to amend the Law on Corporate Income Tax, which would allow an existing company to enjoy tax incentives when it implements a new investment project (an investment activity). Under tax regulations, only newly established enterprises are entitled to tax incentives. If this proposed amendment is approved, it will hopefully encourage existing companies to embark on new investment activities in Vietnam.

The crisis seems to be bringing positive developments, leading the government to rethink and reflect on investment policies affecting foreign investors in Vietnam.

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