With the aim of creating a breakthrough for the business environment in the country and improving the administration process for investors, on 25 November 2014, the National Assembly of Vietnam adopted the new Law on Investment (the “2014 Investment Law”) and Law on Enterprises (the “2014 Enterprise Law”), which came into force on 1 July 2015. After five years of these laws, and to make Vietnam a more attractive investment destination, on 17 June 2020 the National Assembly passed Law No. 61/2020/QH14 on Investment (the "2020 Investment Law") and Law No. 59/2020/QH14 on Enterprises (the “2020 Enterprise Law”), replacing the 2014 Investment Law and the 2014 Enterprise Law respectively.

Investment Treatment and Protection

As regulated in the 2020 Investment Law, in terms of policies on investment, the State provides equal treatment before the law to all investors from all economic sectors, and as between domestic and foreign investment. The State recognizes and protects the ownership of assets, invested capital and revenue and other lawful rights and interests of investors. The State also guarantees to open the investment market in compliance with schedules committed in international treaties to which Vietnam is a member.

As part of its accession to the WTO, Vietnam ratified TRIMs. In order to comply with TRIMs requirements, the Investment Law specified that the State will not impose any of the following requirements on foreign investors:

• Priority purchase of domestic goods or services;
• Export requirements or export limitations;
• Foreign exchange balancing;
• Localization ratios of goods produced;
• Minimum level of research and development activities in Vietnam;
• Obligation to supply goods or services in a particular location; and
• Obligation to establish head offices in a particular location.

Although Vietnam started negotiating bilateral investment treaties (“BIT”) only in the 1990s, by December 2019, it had signed 67 BITs, including those with most of its important trade and investment partners. All BITs typically provide for:

• National treatment, with certain exceptions;
• Fair and equitable treatment;
• The Most Favoured Nation treatment;
• Protection against nationalization or expropriation (allowed for a public purpose only in a non-arbitrary and non-discriminatory basis) and the obligation to provide prompt (without undue delay and including interests) adequate (typically the market value before the expropriation decision was made public) and effective compensation (realizable and freely transferable);
• The right to repatriate returns and assets; and
• Recourse to international arbitration.

Foreign Investment Entry

There are three main legal sources that define the specific restrictions to foreign investment entry: (i) the 2020 Investment Law and its guiding subordinate regulations; (ii) sectoral laws and regulations; and (iii) the schedule of specific commitments in services under the WTO accession agreement and other international treaties on the investment field, to which Vietnam is a party.

Under the 2020 Investment Law, major investment conditions for foreign investors are separated into two groups: (1) Business investment conditions which apply to any individual or entity (regardless of whether such entity is foreign-invested or otherwise) engaging in certain conditional business lines; and (2) Market access conditions which foreign investors must satisfy to invest in certain restricted sectors (a list of which the “List of Restricted Sectors”).

The List of Restricted Sectors comprises (1) the list of industries and trades for which there has not yet been market entry approval; and (2) the list of industries and trades for which market entry is conditional. The 2020 Investment Law provides a new approach for market access conditions, what has been called the “negative-list” approach. Particularly, for business sectors which are not included in the List of Restricted Sectors, the market access conditions applicable to foreign investors are the same as those applicable to domestic investors. This “negative-list” approach demonstrates efforts made by local authorities that should help resolve the conflicting interpretations of previous laws and create a consistent legal framework for market entry.

The 2020 Investment Law itself does not fully specify the nature and extent of the conditionality, and most of the conditional sectors are sectors that are subject to stringent licensing conditions in most countries. The precise nature and extent of foreign direct investment entry restrictions in conditional sectors are stipulated in sectoral laws and regulations and international treaties of which Vietnam is a member. Typical restrictions include ceilings on foreign ownership, joint venture requirements, and restraints on operations.

Government Approval and Registration

The 2020 Investment Law and the 2020 Enterprise Law provide for two separate registration procedures: investment registration and enterprise registration. The investment registration is required only for investment projects owned by foreign investors or foreign-invested enterprises with over 50% foreign ownership (“over-50% FIE”). Under Article 23.1 of the 2020 Investment Law, over-50% FIEs will be subject to the same conditions and investment procedures applicable to foreign investors if: (a) over 50% of its charter capital is held by foreign investors; (b) over 50% of its charter capital is held by an enterprise under Item (a); or (c) over 50% of its charter capital is held by foreign investors and enterprises under Item (a).

In cases where the investors being foreign investors or over-50% FIEs want to set up an enterprise in Vietnam, they must go through the following two steps:

• First, the investors must apply for an Investment Registration Certificate (“IRC”) which may be granted by the competent authority within 15 days only (or five (5) working days in case of certain strategic or mega projects which have obtained an investment policy as required by the 2020 Investment Law). The IRCs would be issued either by the local department of planning and investment (“DPI”) or by the Management Committee if the foreign-invested enterprise is located in a special purpose zone (industrial zone, export processing zone, high-tech zone or economic zone); and

• After receiving the IRC, the investors can establish a foreign-invested enterprise by going through the procedure of enterprise registration for an Enterprise Registration Certificate (“ERC”) which may be granted by the competent DPI within three (3) working days.

Under the 2020 Investment Law, M&A activities are not required to obtain an IRC, but shall be registered with the local DPI if: (i) the target company operates in a sector without restrictions on market entry; or (ii) as a consequence, the foreign investor or over-50% FIE hold 50% or more of the charter capital of the target company.

The investors shall not be required to notify the local DPI about M&A transactions if foreign investors invest in a Vietnamese company with less than 50% foreign ownership and this company does not operate in a sector with market access restrictions.

Forms of Investment

The 2020 Investment Law provides for the following investment forms which are no longer grouped under direct or indirect investment:

• to establish an economic organization (“EO”) to implement an investment project;
• to contribute capital, purchase shares or capital contribution into an EO; and
• to invest by way of a contractual arrangement, including investment contracts in the form of a business co-operation contract (“BCC”) and a public private partnership (“PPP”).

Establishing an EO

An EO is an organization established and operating in accordance with the laws of Vietnam. EOs include enterprises, co-operatives and unions of co-operatives and other organizations conducting business investment activities. Before the establishment of an EO, a foreign investor must have an investment project, carry out the procedures for registration of an investment project by way of obtaining an IRC and must satisfy certain market access conditions on ownership rates of charter capital and other conditions prescribed in international treaties. Subject to the market access restrictions applicable to foreign investors in certain economic sectors, foreign investors can choose to establish a wholly foreign-invested enterprise (“WFIE”) or a joint venture with Vietnamese partner(s) (“JV”).

WFIE is an independent legal entity owned and established by foreign investor(s). A WFIE may cooperate with another existing WFIE and/or foreign investor(s) to establish another new WFIE. A WFIE allows an investor to have independence and full management control over business operations, yet they assume full responsibility for its debt and liabilities.

The WTO Commitments and other international treaties to which Vietnam is a member permitted the establishment of WFIEs in many but not all sectors in Vietnam. A foreign investor is required to have a Vietnamese JV partner if the market access restriction is so regulated in international treaties to which Vietnam is a member. In this case, a foreign investor must set up a JV with Vietnamese partner(s). The maximum ownership of a foreign investor in a JV depends on the business sector. Usually, the foreign investor may hold a majority share, except for certain business sectors which place a cap on foreign ownership.

Like all business formations, a JV has both advantages and disadvantages. On the positive side, the Vietnamese partner may contribute crucial relationships with government officials and clients, local market know-how, staff, and land-use rights. On the negative side, a foreign investor in a JV will have a lot less control over that company than they would in a WFIE. Besides, disagreement can and often do arise between local and foreign parties to a JV. Arguments particularly occur when the foreign investor tries to increase its share in the company. If the dispute cannot be resolved, the company may have to be wound up at a significant cost to all involved.

Branches and Representative Offices

The laws of Vietnam allow certain foreign business entities to establish two other forms of commercial presence in Vietnam: a branch or a representative office. Both must be licensed by the relevant authorities.

A foreign company that wishes to establish a representative office in Vietnam must be duly established for at least one year in accordance with the laws of its home jurisdiction.
Representative offices are not an independent legal entity and thus are permitted to engage in commercial enhancement activities only within the scope permitted by laws and cannot directly conduct profit-making activities in Vietnam.

Foreign businesses can establish their branch(es) in Vietnam in accordance with the WTO Commitments and other international treaties to which Vietnam is a member. Under the WTO Commitments, a branch may be established in Vietnam by a foreign business entity in certain areas subject to certain phasing (e.g. non-life insurance, securities, computer and related services, management consulting services, construction, and franchising).

Branches of foreign companies are different from representative offices in that a branch is permitted to conduct commercial activities in Vietnam. To be permitted to open a branch, a foreign company must be duly established for at least five years in accordance with the laws of its home jurisdiction.

Investing in an existing enterprise

Investors may also choose to invest directly in Vietnam by making capital contribution to an EO or purchasing shares or portion of capital contribution in an existing EO with no limitation, subject to the following restrictions:

• The cap on foreign investment in public companies is regulated by the law on securities and its subordinate regulations;
• The cap on foreign investment in companies in certain sectors where specialized branch laws provide for foreign ownership must comply with such provisions;
• The cap on foreign investment in enterprises engaged in services business must be in accordance with international treaties to which Vietnam is a member; and
• The cap on foreign investment in enterprises with 100% State-owned capital undergoing equitization or conversion of their form by other methods shall be implemented in accordance with the law on equitization and conversion of enterprises with 100% State-owned capital.

Investing in the contractual forms

A Business Cooperation Contract (“BCC”) is a written agreement between investors in which the parties agree to cooperate to undertake certain business activities in Vietnam and to share the revenue or profits arising from such activities. The investment form of a BCC is usually used in order to establish a partnership which does not create a new legal entity but which is licensed to engage in business activities in respect of a specific project in Vietnam. During performance of the BCC, the contracting parties are entitled to use assets formed from business co-operation for the establishment of an enterprise in accordance with the law on enterprises.

PPP investment form is a form of investment conducted on the basis of a contract between an authorized State agency and the investor or the project enterprise in order to implement, manage and operate an infrastructure project or to provide public services. PPP investments are allowed in transportation, lighting systems, water supply systems, drainage systems, waste and wastewater collection and treatment systems, power plants and transmission, and infrastructure facilities for healthcare, education, culture, sport, industry and agriculture, and other projects as decided by the Prime Minister.

The concept of PPP is wide and covers any cooperation between the private sector and the public sector for infrastructure development or public services. Before the issuance of the 2020 Investment Law and Decree No. 63/2018/ND-CP dated 4 May 2018 (“new PPP Decree”), the investment in the form of PPP in Vietnam was regulated by the Decision of the Prime Minister on pilot PPP regulations dated 9 November 2010 (“PPP Regulations”) and some PPP models as contracts of build-operate-transfer (“BOT”), build-transfer-operate (“BTO”) and build-transfer (“BT”) which are governed by Decree on BOT, BTO, BT dated 27 November 2009 and the 2005 Investment Law. The PPP Regulations cap the State participation to a maximum of 30% of the total investment level, unless the Prime Minister decides otherwise. As from April 2015, there is no longer a cap on the State capital that can be used in a PPP project. The level of State capital is to be determined according to the project’s actual need for viability gap funding.

PPP Regulations do not set up any distinct investment regime for PPP projects. Investors still need to comply with all applicable investment regulations, including the obtaining of IRCs and ERCs for the establishment of a project enterprise.

The investor can choose to implement the PPP investment project through the various types of PPP contract, including the BOT, BTO and BT which were introduced by the previous regulations or by the new forms of contract as provided by the new PPP Decree, such as build-operate-own (“BOO”), build-transfer-lease (“BTL”), build-lease-transfer (“BLT”) and operate-manage (“O&M”). In essence, BOT, BTO and BOO contract forms permit the investor to recover an investment through charging user fees to end users for delivering services while the other forms of PPP contracts would permit the investor to recover its investment through periodic fixed payments by the competent state authority as agreed in the project contract.

A Build-Operate-Transfer Contract (“BOT”) is an investment form signed by a competent State body and an investor in order to construct and operate commercially an infrastructure facility for a fixed duration. Upon expiry of the contract’s duration, the investor, without compensation, will transfer the facility to the State of Vietnam.

A Build-Transfer-Operate Contract (“BTO”) is an investment form signed by a competent State body and an investor in order to construct an infrastructure facility; and, upon completion of construction, the investor transfers the facility to the State of Vietnam. In exchange, the government will grant the investor the right to commercially operate the facility for a fixed duration in order to recover the invested capital and obtain profits.

A Build-Transfer Contract (“BT”) is an investment form signed by a competent State body and an investor in order to construct an infrastructure facility, and, upon completion of construction, the investor transfers the facility to the State of Vietnam. In exchange, the government will create conditions for the investor to implement another project in order to recover the invested capital and obtain profits or to make a payment to the investor in accordance with an agreement in the BT contract.

A Build-Own-Operate Contract (“BOO”) is a contract signed by a competent State body and an investor for the construction of an infrastructure facility, and, upon the completion of construction, the investor owns and has the right to commercially operate the facility for a fixed term.

A Build-Transfer-Lease Contract (“BTL”) is a contract signed by a competent State body and an investor for the construction of an infrastructure facility, and, upon the completion of construction, the investor transfers such facility to the competent State body and has the right to provide services on the basis of operating and exploiting the facility for a fixed term; the competent State body shall hire such services and make payment to the investor as agreed in the contract.

A Build-Lease-Transfer Contract (“BLT”) is a contract signed by a competent State body and an investor for the construction of an infrastructure facility, and, upon the completion of construction, the investor has the right to provide services on the basis of operating and exploiting such facility for a fixed term; the competent State body shall hire such services and make payment to the investor as agreed in the contract; upon the expiry of the term for the provision of such services, the investor transfers the facility to the competent State body.

Corporate Forms

To work hand-in-hand with the Investment Law, in 2020, Vietnam also adopted the 2020 Enterprise Law which unifies the legal framework for all business entities, regardless of ownership.

Investors who decide to establish a legal entity in Vietnam may select one of the following types of enterprise structures:

• Limited liability company (“LLC”) that may have a single member (“SM-LLC”) or multiple members (up to a maximum of 50) (“MM-LLC”). A single investor can only set up an SM-LLC. If there are two or more owners, an MM-LLC must be chosen.
• Shareholding (joint stock) companies (“JSC”) must have a minimum of three shareholders whose liability is limited to their capital contribution. The company is allowed to issue ordinary shares as well as preference shares. The management structure follows international standards and is based on a general meeting of shareholders, a board of management, a general director and an inspection committee.
• Unlimited or limited liability partnership. A partnership requires at least two individuals to act as general partners (i.e. partners who are liable with their private assets for debts incurred by the partnership). This usually rules a partnership out as a suitable investment vehicle.
• Private enterprise (i.e. sole proprietorship).

An LLC or a JSC is likely to be the most appropriate structure for investors, especially for foreign investors who want to set up a JV or a WFIE in Vietnam. Both LLC and JSC forms shield their owners from liabilities incurred by the LLC or JSC. This means that owners may lose the capital that they contributed or committed to contribute to the LLC or JSC, but are not liable for other assets for debts of the LLC or JSC.