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Conflicts bedevil investment laws
by Lawyers of Vilaf – Hong Duc
Nearly three years have passed since the laws on Enterprises and Investment took effect in July 2006. These two laws opened new opportunities to foreign investors by levelling the playing field for both domestic and foreign investors. But, three years on, there have been some shortcomings as well.
For one, the procedures for registering the establishment of an enterprise with foreign ownership remain a major concern due to a conflict in provisions in the two laws and regulations in Government Decree No 139/2007/ND-CP of September 2007.
Under the Law on Investment, foreign investors investing in Viet Nam for the first time, regardless of the proportion of capital owned by foreign parties, must have a specific investment project proposed and complete procedures for evaluating and registering the investment in order to receive an investment certificate.
The Law on Enterprises also requires foreign investors making their first investment in Viet Nam to register under the Law on Investment. Registration under the Law on Investment results in a single certificate being issued, the investment certificate, which contains both the business registration and details on the investment project.
Decree No 139, however, provides a different path for establishing foreign-invested enterprises with less than 50-per-cent foreign ownership. Under Decree No 139, the establishment of such enterprises is subject to the business registration procedures applicable to domestic enterprises, under the Law on Enterprises.
The upshot of this is that – at least according to Decree No 139 – foreign investors investing in Viet Nam for the first time with ownership of no more than 49 per cent of charter capital or equity in the enterprise are not required to have an investment project. They can bypass investment procedures and simply register a business under the Law on Enterprises.
Authorities are concerned that this regulation is inconsistent with the law and provides a legal basis for foreign investors to dodge investment registration requirements. In practice, many enterprises incorporate with 49 per cent or less foreign ownership and then increase their foreign ownership up to 99 per cent after the issuance of the business registration certificates. This practice not only allows foreign investors to bypass the requirement of an investment project but also means that they are absent from the list of foreign-invested enterprises compiled by the Ministry of Planning and Investment.
From the perspective of the foreign investor, Decree No 139 is a boon, simplifying procedures for foreign investors by letting them perform the same business registration procedures as domestic investors and save time and expense. From a State perspective, however, there needs to be an additional regulation requiring enterprises that increase their share of foreign ownership to over 50 per cent to carry out investment registration procedures. All enterprises with majority foreign ownership would then fall under administration by investment officials and be included in statistics on foreign-invested enterprises.
Although Decree 139 has simplified the business registration procedure for foreign investors, it causes some uncertainty in relation to its application to other laws such as those related to land and labour. It is still unclear whether enterprises with 49 per cent or less foreign ownership would be treated as domestic enterprises in the application of other laws that distinguish between foreign invested and domestic enterprises.
Current regulations on foreign ownership limits, either through the purchase of shares or capital contributions, are also still overlapping and conflicting.
Foreign investor capital contributions or share acquisitions in Vietnamese enterprises are limited to 30 per cent of charter capital, pursuant to Decision No 36 (Decision 36/2003/QD-TTg of the Prime Minister of March 2003). Meanwhile, Decree No 139 allows foreign investors to contribute capital and to purchase shares at an unrestricted amount in a domestic enterprise. Decision No 36 is still considered effective because there has not been any legal document issued which officially repeals or replaces it. This has caused confusion for both enterprises and licensing authorities.
There is also no clear legal framework or guideline for foreign-invested enterprises to register a second project. Under the Law on Investment and Viet Nam’s WTO commitments, an enterprise may have multiple projects, and foreign investors may carry out their second project without establishing a new enterprise. There is uncertainty among both enterprises and licensing authorities as to whether capital for the second project can come in the form of a loan, or whether the second project can be located in a different province.
Finally, some local licensing authorities refuse applications in business sectors which are neither listed on the schedule under Viet Nam’s WTO commitments nor regulated in current domestic law. Such authorities are of the opinion that they should not be making licensing decisions for business sectors not expressly authorised for foreign investment. This opinion goes against the general idea of the Law on Enterprises and the Law on Investment, which is that investors or enterprises are entitled to conduct business in any sector not otherwise banned by law. In other words, if the business sector is not on the list of banned business sectors in Decree No 139, it should be licensed. — VNS
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