ESTABLISHED A TRADING COMPANY WITH 100% FOREIGN CAPITAL IN VIETNAM
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Vietnam was admitted to the World Trade Organization (WTO) on 7 November 2006 after eleven years of negotiation as Vietnam committed to WTO standards with transparency, due process and liberalization of trade. The National Assembly of Vietnam approved WTO Accession Protocol on 29 November 2006.
Apart from WTO General Council Decision and WTO Accession Protocol, the following key documents give understanding, explanation and application of Vietnam’s WTO commitments:
- Working Party Report on Vietnam’s Accession;
- Commitment Schedule on Goods;
- Commitment Schedule on Services.
The Working Party Report is to examine the application of Vietnam and set forth questions and answers on clarification of Vietnam’s policies and domestic laws. The Commitment Schedule on Goods provides for tariff reduction and expansion of market access for imported products. The Commitment Schedule on Services contains undertakings for access to the Vietnamese market for a wide range of services sectors (including insurance, banking, securities, telecoms, energy services, etc). Vietnam also undertakes to give more liberal access than specified in the schedule.
Vietnam’s WTO commitments came into effect as from 11 January 2007 although 1 January 2007 marks the milestone for effect of some specific commitments.
2. How to implement WTO commitments
Before WTO accession, Vietnam had made great efforts to modify and adopt a wide range of domestic legislations to lay a ground for application and compliance with the WTO rules. By approval of WTO Accession Protocol, Vietnam adopted an automatic mechanism for implementation of WTO commitments to a limited extent. By virtue of Resolution No. 71 dated 29 November 2006, the National Assembly put into immediate effect of some specific rules of WTO as follows:
- Voting rights: the normal 51% standard of voting majority shall be allowed subject to the shareholders’ agreement and incorporation in the charter of the company. This is notwithstanding with the minimum 65% standard of the Vietnamese Law on Enterprises.
- Quorum: the quorum for a meeting is subject to the shareholders’ agreement, including no quorum.
- Restrictions on some specific services such as legal services and insurance shall be lifted notwithstanding the current domestic laws.
Resolution No. 71 further states that other commitments with sufficient clarity and detail shall be applied directly. And WTO commitments shall prevail on any subject matter where the domestic laws contain inconsistency.
Several matters of implementation are arising as to (i) how a WTO commitment is considered “sufficient clarity and detail”, (ii) how to determine inconsistencies between the domestic laws and WTO commitments and (iii) how WTO commitments could be upheld without any confirmatory ruling on such inconsistencies.
We set out below some important WTO commitments which influence in shaping the legal framework for foreign direct investment and business doing in Vietnam. All those commitments are facing the unprecedented test of interpretation and application in the context of the current domestic legislations of Vietnam.
3. Limitation on foreign ownership
The limitation on foreign ownership in Vietnamese companies is subject to different sets of legislations.
Foreign capital in new set-up of foreign invested companies is generally not subject to limitation, except for certain conditional sectors where cooperation with local partners is required. Wholly foreign owned companies have been allowed for foreign direct investment for long since Vietnam first adopted the Law on Foreign Investment in 1987.
However, foreign investors which want to acquire existing domestic companies are subject to 30% limit on unlisted companies (with the most recent regulations under Decision 36/2003/QD/TTg of the Government dated 11 March 2003) and 49% limit on listed companies (Decision 238/2005/QD/TTg of the Government dated 29 September 2005).
Foreign investors which wants to acquire shares in Vietnamese state owned companies are subject the regulations on equitisation (with the most recent regulations under Decision 109/2007/ND-CP of the Government dated 26 June 2007). Basically, foreign ownership is subject to 30% and 49% mentioned above for existing domestic companies. However, the requirements on initial public offering put the participation of foreign investors in a much less portion of ownership. For instance, foreign strategic investors could not own more than a half of the shares offered to the public. All shares on public offer would not exceed 49% in most equitised companies as the Government maintains the majority shares.
Following the entry into force of the Law on Investment on 1 July 2006, many foreign investors are keen to acquire shares in existing domestic companies to establish a presence in the Vietnamese market. Under the Law on Investment, foreign investors are not subject to foreign ownership or management restrictions apart from those restrictions contained in international agreements. However, the Government needs to update the above regulations to reflect the Law on Investment.
From legal perspective, the Law on Investment and its guiding regulations allow foreign investors to hold shares in existing local company without any restriction on ratio of ownership or business sectors. Exceptions are made only to some “special” business sectors which are currently subject to market access limitations to foreign investors under relevant international treaties to which Vietnam is signatory, including the WTO commitments.
According to the WTO commitments, for the service sectors committed in the Commitment Schedule on Services, foreign investors are not allowed to purchase more than 30% shares in domestic companies for the first year of accession (from 11 January 2007 to 11 January 2008). The 30% limit on foreign ownership is lifted as from 11 January 2008, except for joint-stock commercial banks and sectors not committed in the Commitment Schedule on Services. Some specific service sectors are subject to a further phasing out period in relation to limitation of foreign ownership (such as telecommunications, distribution, financial, education, tourism and transport services, etc).
After WTO accession, in an effort to clarify the ownership limitation for foreign investor to acquire shares in domestic companies, Decree 139/2007/ND-CP of the Government dated 5 September 2007 allows foreign investors to buy shares in domestic companies without any limitation with the following exceptions:
- Foreign ownership in companies which are listed in the stock exchange in accordance with the regulations on securities (i.e. 49% cap);
- Foreign ownership in companies which are established in some special sectors (such as bank, petroleum, aviation, publication, press, education, securities, etc);
- Foreign ownership in state owned companies which are equitised in accordance with the regulations on equitation;
- Foreign ownership in companies which operate in the service sectors in accordance with the WTO Commitment Schedule on Services.
Decree 139 does not go further to determine the limitation on foreign ownership in service sectors standing outside the WTO commitments. As such, the 30% cap could remain in place unless the licensing authorities permit on a case-by-case basis. This causes uncertainty for a number of service sectors such as real estate business.
It would take some time for Decree 139 to take full application at the level of local licensing authorities since the old-fashion 30% cap of Decision 36 mentioned above is still referred to some way in practice. Even the Government has recently considered introducing the 40% cap for foreign ownership in unlisted public companies. This is considered a “favourable” increase from the old-fashion 30% cap, which has no legal ground under Decree 139.
Despite the learning curve on the removal of foreign ownership limitation, the domestic laws of Vietnam have moved forward to give effect to the WTO commitments in this regard. More significantly, this forward step has opened a new channel to attract foreign direct investment into Vietnam, which used to be considered as “foreign indirect investment” by way of share acquisition in domestic companies. Foreign investors are allowed to participate in direct management and control of the domestic companies. New set-up of foreign invested companies is no longer the only way for foreign direct investment.
From the above, Vietnamese laws on foreign investment should be viewed in a much broader scope as integrated in the whole Vietnamese legal system.
4. Corporate voting rights
Since the first adoption of the Law on Foreign Investment in 1987, voting rights in foreign invested companies are subject to the normal majority standard with the exception of the unanimous requirement for certain important business decisions.
The Law on Enterprises with effect from 1 July 2006 abolishes the unanimous requirement, allowing foreign invested companies operate based on the voting rights like domestic companies. However, the Law on Enterprises increased the minimum voting rights from more than 50% to 65%.
It is silent in the Law on Enterprises as to whether the 65% voting standard shall operate as a matter of law. Instead, the shareholders should agree on an exact voting percentage, not less than 65%, in the charter of the company. Absent such exact percentage, it remains tested how the shareholders could be able to refer to the 65% voting standard.
Upon WTO accession, Vietnam allows the 51% majority of voting rights instead of 65% under the Law on Enterprises. But it is still silent on the automatic effect of the normal majority by operation of law. The shareholders should still need to agree on an exact voting percentage as low as 51%. Many existing foreign invested companies have struggled to benefit the abolition of the unanimous requirement. That is because of the hardship for negotiation among joint venture shareholders to abolish the unanimous decisions, even in many cases their company charter has anticipated or set forth such removal of the unanimous decisions and application of normal majority decisions in the future.
Foreign invested companies are facing another uncertainty to benefit the modern corporate governance rules under the Vietnamese Law on Enterprises and the WTO commitments. The voting rights under the Law on Enterprises are counted based on the capital ratio of the shareholders, rather than based on the number of representatives under the old Law on Foreign Investment. It is not quite clear whether existing foreign invested companies could maintain the mechanism of voting per head if the joint venture shareholders fail to negotiate and update their company charter to the full requirements of the Law on Enterprises.
Having acknowledged the benefits of the modern corporate governance rules for new foreign investors and projects, further legal grounds should be worked out to assist a big number of existing foreign invested companies to enjoy this benefit and keep their competitiveness in the market.
5. Trading rights
According to the Working Party Report on Vietnam’s Accession, the Government of Vietnam commits to grant all foreign individuals and organizations (including foreign invested companies) the limited right to import and sell to licensed local distributors (“Import Right”) as form 11 January 2007, except for certain products which are either reserved to "State-trading" enterprises or subject to further phasing-out period up to 11 January 2009.
The Import Right includes “the right to sell the imported goods to any individual or enterprise having the right to distribute such goods in Vietnam.” Foreign investors will not be limited to importing goods related to their business lines or those specified in their investment certificate, nor will they be prohibited from importing goods on the basis that these goods are of the same kind as those produced under the investment certificate.
From the above, foreign invested companies shall be allowed to import, among others, relevant products into Vietnam and sell them to licensed local distributors for sale to customers.
According to Decree 23/2007/ND-CP of the Government dated 12 February 2007, existing foreign invested companies can apply for amend their investment certificate for the Import Right. However, Circular 09/2007/TT-BTM dated 17 July 2007 of the Ministry of Trade (now the Ministry of Industry and Trade) limited the Import Right mandating that the foreign invested company could only sell to one local distributor for each type of product. This limitation was removed by Circular 05/2008/TT-BCT dated 14 April 2008 of the Ministry of Industry and Trade. Foreign invested companies now can sell their imported products to different local distributors.
Under the WTO commitments, the full distribution rights including whole sale, retail sale, sales agent and franchising are subject to the phasing out period on limitation on foreign ownership. According to Decree 23, a separate distribution license should be obtained by the existing foreign invested companies from the licensing authority, subject to prior consent by the Ministry of Industry and Trade. Newly established foreign invested companies will apply for the distribution rights as part of the application for its establishment under the investment certificate. A limitation on the distribution rights is that each new retail outlet shall be subject to the licensing approval.
Notwithstanding certain procedure and requirements, the Vietnamese domestic laws have been put in place to enforce the commitments on trading and distribution rights for foreign invested companies in Vietnam. The trading rights will further close the gaps between foreign invested companies and domestic companies in a more level playfield of doing business in Vietnam.
6. Distinction of foreign invested company and domestic companies
From the legal history on foreign direct investment, it is important to determine this distinction to assess how foreign investors could enter the local market and enjoy incentives and treatments for their investment in Vietnam.
However, the current Vietnamese legislations are not quite clear how the distinction line could be drawn and for what purposes. According to the Law on Foreign Investment, “foreign invested companies” are defined to comprise (i) companies which foreign investors newly set up and (ii) domestic companies which foreign investors acquire, merge or buy out.
This definition could cause uncertainty for the status of a domestic company with foreign minority shares since different treatments remain in terms of employment requirements and salaries, land use rights, share acquisition and incorporation procedure. For instance, foreign invested companies are not allowed to have a long term grant of land. They must lease land instead.
Decree 139 has clarified the distinction for the purpose of incorporation procedure. Newly established companies with minority foreign ownership (49% or less) may be incorporated like a domestic company without investment project.
As the lift of limitation on foreign ownership, the concept of “foreign indirect investment” would no longer exist in some situations as discussed in paragraph 3 above. Particularly, foreign investors’ acquisition and participation in management and control of domestic companies should not be considered as “indirect investment.” Therefore, the distinction of foreign invested companies and domestic companies should be reconsidered.
To the broader effect on the Vietnamese legal system, the relevant laws on land, employment and licensing procedure should be revised appropriately to assure the same treatments and benefits to companies which are subject to change of control over time in the market. Purely legal distinction should not affect the normal operations of companies regardless whether they are under control of foreign ownership or domestic ownership.
Vietnam has made great efforts before and after its WTO accession to adopt and modify the domestic legislations up to the WTO standards. There remains further works for Vietnam to put into effect of the WTO commitments in all respects. The process of implementation and enforcement of the WTO commitments has shaped a more predictable and integrated legal framework on doing business in Vietnam. This process also helps improve the level playfield for foreign invested companies doing business in Vietnam. Over 20 year operations in Vietnam, foreign direct investment has become an integral part of the Vietnamese economy from not only business perspective and but also legal perspective.
II. SETUP A COMPANY WITH 100% FOREIGN CAPITAL IN HONG DUC LAW FIRM:
• Customers do procedures established company with 100% foreign capital in the Hong Duc Law Firm will enjoy some free preferential services of our company such as:
• We will advise customers entire legal framework related to issues Established companies with 100% foreign capital such as: Consulting company’s organizational structure, mode of operation, the charter capital ...;
• Hong Duc Law Firm (LHD Firm) will examine and assess the legality of the consultation request and the documents of the customer;
• On the basis of requests and documents that the client provides our attorneys will analyze and assess the legality and conformity with the requirements of job performance;
• In case clients need a lawyer to participate in negotiations, meet to exchange with client’s partner in the establishment of companies with 100% foreign capital, we will arrange and ensure the participation as required;
• will conduct to compose Profile incorporation of 100% foreign capital for customers;
• Representing clients for translation, notarization of documents related;
• Representative to the Department of Planning and Investment to apply for Established Company with 100% foreign capital for clients.
• Representing track the records and the answers of Department of Planning and Investment, informed of the results submitted records for customers;
• Receive a certificate of business registration in the Department of Planning and Investment;
• Conducted procedures for enterprise seal;
• Conducted procedures for registration of Tax Code and Customs Code of the Company
• Apart from the preferential services mentioned above, after company with 100% foreign capital was established, we continue to support customers some preferential services, such as:
• Providing internal records of the company free of charge;
• Consulting drafting the rules and regulations of the company;
• Providing and counseling records free one year;
• Free Advice on finding the mark;
• Consulting trademark protection registration;
• Consulting logo design, brand identity system with the lowest support costs;
Please contact the Hong Duc Law Firm to get free advice and are providing the best of law consultancy services.