Founded the company distributes foreign capital in Vietnam
Vietnam's economy has consistently been one of the fastest growing in the world and it has become a favoured location for manufacturers of products such as clothing, footwear and electronics in recent years. Foreign companies have been quick to recognise Vietnam's advantages in the form of low cost, political stability, sound policies and good transportation networks. By the end of August 2007, Vietnam had 150 industrial zones attracting foreign manufacturers mainly from Singapore, Taiwan, Korea, Japan and China.
In 2008, the Vietnamese government announced that fighting inflation was its highest priority. Stricter financial and fiscal policy presents significant opportunities to foreign investors through tightened liquidity and falling prices. With its accession to the World Trade Organisation in 2007, combined with its competitive manufacturing base and low labour costs compared to its neighbours, Vietnam will continue to be attractive to foreign investors who have a longer term view.
This Guide will provide an overview of the legal framework and regulatory procedures that are relevant to foreign investors considering doing business in Vietnam.
Recent reforms and developments
The legal system in Vietnam is socialist in nature. However, Vietnam is quite different from other socialist countries as it also adopts characteristics of other countries with civil legal systems. The law in Vietnam is sourced from legislation (Codes and Laws) enacted by the National Assembly, and Ordinances issued by the Standing Committee of the Standing Assembly when the former is not in session.
Vietnam has undergone many significant and positive changes in its political, diplomatic and economic relations with other countries. In recent years, it has enacted over 90 legal documents associated with foreign direct investment activities and has executed agreements with 28 countries that promote investment. This demonstrates the country's clear determination to create a better, more attractive regulatory framework for foreign direct investment activities.
All newly-established foreign invested and domestic invested enterprises are now governed by the Enterprise Law and Investment Law. These laws aim to promote the equal treatment of foreign and domestic companies, and allow foreign investors to:
- establish branch and representative offices in the country;
- establish legal entities, such as limited companies and partnerships, either as a fully foreign invested entity or as a joint venture with domestic players;
- invest through use of contractual forms.
The legal system in Vietnam had been criticised for its incompleteness and inconsistencies. In order to overcome this problem and create a more attractive playing field for foreign investors, the government has enacted many new laws while amending existing laws to bring them into line with international standards. As a result of these efforts, new laws and regulations in areas such as intellectual property, tax, foreign exchange, construction, employment and banking have been developed.
Despite the country's central government, there is a great deal of variation in local practice and interpretation where central policy is silent or unclear. For this reason, legal analysis should always be tailored to conditions in the relevant domestic target locations.
Setting up a business in Vietnam
The original Law of Foreign Investment in Vietnam was replaced by the Unified Law on Enterprises ('Enterprises Law') and Common Law on Investment ('Investment Law') on 1 July 2006. These new laws, like their predecessors, allow foreigners to invest in most sectors of the economy, particularly in export-oriented products, agricultural activities, new materials, high technology, research and development and environment protection.
Under the Enterprises Law and Investment Law, there are several modes of investment that foreign investors can use.
Business cooperation contract (BCC): A BCC is a partnership signed by two or more parties with the aim of conducting one or more business operations in Vietnam. A BCC involves mutual allocation of responsibilities and sharing of profits. It is not a separate legal entity – contractual rights and obligations are shared between the parties.
Limited liability company (LLC): An LLC can have one or more members. It is not permitted to issue shares, and the number of investors must be within the range of two to 50. It is a separate legal entity, effective from the date of its business registration certificate.
Joint stock company (JSC): A JSC is a company established by at least three investors, either local or foreign, and may incorporate both entities and individuals. It is a legal entity that most have ordinary shares, and may have preference shares. It can issue shares to the public.
Partnership: A partnership is an enterprise with no fewer than two individual partners as joint owners of the company with unlimited liability and, if relevant, one or more limited liability partners who are not allowed to participate in daily management or carry out business activities on behalf of the partnership. Partnerships are regarded as a separate legal entity in Vietnam.
Infrastructure contracts such as Build-Operate-Transfer (BOT) contracts.
In addition to these vehicles, foreign investors may wish to establish representative and branch offices in Vietnam.
Representative offices (RO) are not separate legal entities. Typically, an RO's activities are restricted to business promotion, identification of and accelerating trade opportunities and supervision of the execution of contracts signed between its parent and local partners. ROs are not permitted to generate profit from operations in Vietnam, make or receive payments directly or purchase local goods directly for export or distribute important products on behalf of their head office. They are permitted to lease office space, employ staff and execute contracts as long as this falls within the boundaries of their permitted activities. The license of an RO has a term of five years, although it may be extended.
Despite their limitations, ROs are the most popular vehicle chosen by foreign investors to establish a presence in the country.
Branch offices (BO) can be established by foreign banks, auditing firms, law firms and foreign economic organisations. Unlike ROs, BOs are permitted to conduct business activities, execute contracts and perform all other commercial activities for which they are licensed. A BO is permitted to trade products and carry out trading-related activities according to the laws of Vietnam. They are subject to national taxes.
In seeking to attract foreign investment in particular industries and geographical areas, the Vietnamese government has introduced various investment incentives such as tax concessions and cuts on land use fees. Typically, these incentives are provided in sectors associated with:
- manufacture of new materials, high tech or bio-tech products and information technology;
- agricultural and environmental protection and development through use of advanced technology;
- breeding, growing, rearing and processing of agricultural, forestry and aquaculture products;
- labour intensive industries;
- large scale infrastructure projects;
- development and educational training of the Vietnamese public;
- development of the local ethnic crafts and culture;
- investment projects located in remote or underdeveloped areas.
Other incentives, including temporary business income tax reduction or exemption for the first profit-making year or preferential rates, are also available depending on the nature and scope of the project.
Special trade zones
Foreign investors in Vietnam may benefit from several special trade and customs areas. These areas are established by a decision of the Government or the Prime Minister, and enterprises operating within them must be limited liability companies under Vietnamese law which are subject to Vietnamese foreign investment legislation.
Export Processing Zones (EPZ) cater for enterprises involved in the manufacturing or processing of export goods and the supply of export related services. Investors with investment projects in EPZs are entitled to incentive policies such as tax reduction and lower corporate income tax, as well as the policies applicable to areas with especially difficult socio-economic conditions. Additionally both Vietnamese and foreign employees working in an EPZ are given a 50% reduction in personal income tax, and the cost of building, maintaining or renting apartments and infrastructure buildings for the benefit of those employees is deductable from the employer's income tax.
Industrial Zones (IZ) focus on enterprises specialising in the production of industrial goods and the supply of industrial manufacturing services. They are open to companies engaged in:
- construction, manufacturing, processing or assembly of industrial products;
- development of and trading in patents, technical know-how and technological process;
- scientific technological research;
- provision of services to support industrial production.
Both foreign invested and domestic enterprises may operate in IZs, with both being eligible for the same incentives as enterprises operating within EPZs.
High-Tech Zones (HTZ) are created to develop high-tech technology within Vietnam, both through research and development and technology transfer. As such, they are reserved only for high tech enterprises. Enterprises operating within these zones are eligible for the same incentives as IZs and EPZs.
Business related laws
The Enterprise Law and the Investment Law took effect in 2006 and provide a level playing field for all newly-established foreign invested and domestic enterprises in Vietnam.
The Enterprise Law sets the framework for Vietnam's corporate law and designates the types of corporate vehicles, as laid out above, that investors may establish to carry out their investment projects. Foreign investors are no longer restricted to establishing limited liability enterprises.
The Investment Law regulates how an investment in Vietnam may be approved, the rights and obligations of investors, the protection of the investors' legal rights and investment incentives.
Vietnam Civil Code and Commercial Law
The areas covered by the 2005 Civil Code and its implementing regulations are wide-ranging and govern not only civil relations but also certain trade, business and labour relations. The Code covers principles of ownership and protection of property rights, measures of security that may be taken over property, principles of performance of civil contracts, transfer, exchange, mortgage and inheritance of land use rights, intellectual property rights and technology transfer.
The 2005 Commercial Law has a wide scope governing all profit-making activities, including transactions involving the sale or purchase of goods and other related activities and those relating to the commercial provision of services, investment, trade promotion and other commercial activities. The concept of goods is extended to cover all types of movable assets, including future assets and all assets attached to land. The concept of commercial services has been extended to include all services that are not prohibited by law.
Accounting and Auditing
All foreign-invested enterprises must use the Vietnamese accounting system and Vietnamese language in their bookkeeping, subject to application for an exemption. This causes some concern among foreign investors as the Vietnamese system does not always adopt commonly-accepted international principles of accounting.
Foreign invested enterprises must also employ a Vietnam-qualified chief accountant for their auditing function. They must undergo an annual audit of their accounts.
Vietnam's court system remains underdeveloped, and it can be cumbersome and time-consuming to obtain a court ruling in Vietnam. The country's court hierarchy has three tiers: the Supreme Court, Provincial Courts and the District Courts. Most members of the judiciary are also members of the Communist Party and will seek its advice on sensitive matters. In practice, therefore, it makes sense to resolve disputes by mediation and negotiation where possible.
Disputes may be referred to arbitration if a local court is not desirable, and it is important to ensure that a proper arbitration agreement is included in the contract. Foreign investors often prefer to arbitrate in either Hong Kong or Singapore due to their close proximity, developed legal systems and better availability of skilled arbitrators and legal professionals. The Civil Procedure Code sets out the procedures for the recognition and enforcement of foreign arbitral awards under the New York Convention, although it remains time-consuming to have foreign arbitral awards enforced in Vietnam.
Contractual parties may also choose to hear disputes within Vietnam's own arbitral body, the Vietnam International Arbitration Centre, or the newly established Pacific International Arbitration Centre.
Parties are free to select the conduct of their dispute resolution either inside or outside the territory of Vietnam. If the dispute involves a 'foreign element', the parties are also free to select the language to be used in arbitration proceedings and tribunals are able to apply foreign laws selected by the parties without having to first consider whether it contravenes the basic principles of Vietnamese law. More importantly, parties can request the arbitration tribunal to order an interim relief instead of having to apply to the court.
Despite these developments, Vietnamese law does not allow for the rearbitration of disputes unless this has been explicitly agreed by the parties. This means that if an award is set aside due to a procedural irregularity, the arbitration clause will have been exhausted and the parties will be forced to go to court. Furthermore, there is still uncertainty surrounding the recognition and enforcement of foreign awards in Vietnam – these are classed as 'foreign arbitral awards', and the Vietnamese courts retain the power to refuse to enforce an award if it is contrary to the basic principles of Vietnamese law.
In Vietnam, the Economic Courts of provinces or cities may declare any enterprise established under Vietnamese law – whether state-owned, domestic or foreign invested – insolvent on receiving a bankruptcy petition filed by a creditor, union or labour representative. They may then distribute the enterprise's assets, or the proceeds from their sale, among its creditors.
There is no provision for individual bankruptcy.
Repatriation of capital
In the event of the voluntary (and solvent) liquidation of a foreign invested enterprise, the foreign investor is entitled to repatriate their invested capital only after all other outstanding payments such as those to the State, employees and other creditors have been made. It is now possible, depending on the type of business entity under which the business is established and operated in Vietnam, to reduce the invested capital during the operational term of the investment project under the Enterprise Law.
Immigration, visas and work permits
There are various entry and exit visas available and renewable for:
- foreigners considering investments in Vietnam, their families and staff;
- foreigners implementing investment projects in Vietnam, their families and staff.
Temporary resident cards are available for longer term foreign employees.
Foreigners working in foreign enterprises in Vietnam must, subject to certain exceptions, obtain a work permit which will be valid for up to three years. Foreign employees may be employed for jobs for which qualified Vietnamese people are not available, and training programmes must be established for future replacement staff. A work permit may be renewed only if the Vietnamese employees have not been fully trained to replace the foreign employees.
Five groups of employees are exempt from necessary work permits:
- foreigners entering Vietnam to work for less than three months and to resolve emergency situations for which no person in Vietnam is qualified;
- members of Board of Management;
- chiefs of representative or branch offices in Vietnam;
- foreign lawyers certified to practice in Vietnam; and
- foreign employees sent by a foreign company or organisation to perform contracts – other than labour contracts – signed with Vietnamese partners.
There are no longer any caps on the number of foreign employees who can be hired in proportion to local employees. Employers can now hire an unlimited number of foreign employees if such employees meet the above criteria.
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