Vietnam: legal framework transformation favouring foreign investors

14 May 2021

By: B&Company Vietnam

Industry Reviews

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The Covid-19 outbreak since the end of 2019 has caused far-reaching impacts on all sectors around the world including severe economic crisis. Southeast Asia is no exception. Myanmar is facing a dual crisis because of Covid-19 and political instability. Thailand’s post-Covid economic recovery plan may continue to be delayed in the event of the 3rd Covid-19 outbreak.

On the contrary, until recently it can be said that Vietnam has temporarily limited the impact of Covid-19, become the first country in ASEAN to start easing social distancing measures, implementing economic recovery and a favourable destination for many foreign investors. According to recently published East Asia and Pacific Economic Report by World Bank in April 2020, Vietnam’s economy is recovering in a V-shape with output exceeding pre-pandemic levels. According to the Government press conference at the end of 2020, Vietnam is the only country in the ASEAN region and one of the few in the world to witness positive growth in 2020. According to data from the Department of Foreign Investment of Vietnam, as of March 20, 2021, the total foreign investment registered in Vietnam reached USD 10.1 billion, a sharp increase of 18.5% over the same period in 2020. In particular, Japan ranked second among 56 countries and territories invested in Vietnam in the first 3 months with USD 2.1 billion (accounting for 20.8% of total investment capital).

In order to encourage foreign investors, besides the factors such as stable politics, sustainable economic growth, favorable geographical location, Vietnam is constantly improving the legal framework of investment to build an effective and healthy competitive market. In 2020, the Law on Investment 2020 and Law on Enterprises 2020 were promulgated and took effect from January 1, 2021, amending and supplementing many provisions to create favorable conditions for foreign investors in Vietnam.

Some outstanding new points of the Law on Investment 2020

With the newly updated Law, foreign investors do not need to submit an investment project proposal and follow the procedures for issuance an investment registration certificate upon establishing a small and medium-sized enterprise or investment fund in the sector of innovative start-up. Accordingly, foreign investors are allowed to establish enterprises following the same procedure as domestic investors, shortening the time for procedures for issuance of investment registration certificates (from 20 to 45 days, depending on specific cases).

Foreign investors investing in conditional business organizations for foreign investors, without increasing the ownership rate of foreign investors in this organization, will no longer have to carry out procedures for registration of new capital contribution, purchase of shares, purchase of contributed capital shares with state agencies. This updated regulation especially eases up the process of capital- transferring activities between foreign investors or the increase in capital contribution as long as the updated capital contribution rate of domestic and foreign investors remains the same.

In addition, the Law on Investment 2020 supplements regulations on investment incentives for production of products formed from scientific and technological results on the list of supporting industrial products prioritized for development, higher education, production of medical equipment, producing goods, providing services to create or participate in value chains and industry-linked clusters where foreign investors are encouraged and supported in multidisciplinary development incentives in the context of the strong development of technology 4.0.

The Law on Enterprises 2020 supplements regulations on expanding scope and powers to protect the interests of foreign shareholders and investors. The shareholder or group of shareholders that holds at least 5% of the ordinary shares or a smaller ratio specified in the company’s charter and does not require a term of ownership (instead of 10% for a continuous period of at least 06 months as in previous Law) shall have the rights to access, extract the company’s documents, demand that a GMS be convened in some cases, and request the Board of Controllers to investigate into specific matters relevant to the company’s administration where necessary. This helps foreign investors, including shareholders and small investors when investing in Vietnamese enterprises have many opportunities to participate in the process of controlling business activities of enterprises, information transparency, finance, avoiding cases of inefficient investment due to insider trading or information asymmetry.

In summary, it can be said that Vietnam’s business investment environment is constantly improving with the trend of transparency and in accordance with international standards, manifested in participation in international trade agreements and areas such as technology, education and health in Vietnam are encouraged to invest. In particular, the legal framework is increasingly being perfected to create the healthiest competitive environment especially in the context of the complicated Covid-19. The legal regulations change in the direction of reducing complex procedures so that investors can easily access the market. In addition, certain legal constraints are added to protect the interests of foreign investors.

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