#14 Investment: Capital contribution, share purchase, and stakes purchase from foreign investors under Vietnamese Law (Part 1)

Hello dear listeners, welcome back to the Lawyers Talk, the podcast channel from BLawyers Vietnam. We are delighted to have you with us on today’s Podcast episode. I am Bùi Quang Thái, and together with Mr. Huỳnh Kim Thành, we will be your host as we explore today’ topic.

Our discussion today will revolve around an extremely important form of investment that foreign investors are interested in Vietnam. These investment methods include contributing capital, and purchasing shares and stakes.

Co-host

Hello, Mr. Thái, and dear listeners of The Lawyers Talk. I am Huỳnh Kim Thành, and I’ll be your co-host for today’s podcast.

When working at BLawyers Vietnam, I often receive questions from clients about what is an investor under Vietnamese law.

So, before we dive into the main content, I’d like to take a moment to share the definition of an investor according to Vietnamese law.

According to Clause 18, article 3 of the Investment Law 2020, an investor is an organization or individual who carries out business investment activities, including domestic investors, foreign investors, and foreign-invested business organizations.

Subsequently, Clause19 of this article defines a foreign investor as follows: for individuals, it refers to those holding foreign nationality; for organizations, it refers to those established under foreign law that conduct business investment activities in Vietnam.

Host

In addition to the concepts of domestic investors and foreign investors, I noticed that Mr. Thành mentioned another term that I would like to clarify further. That term is the concept of foreign-invested business organizations.

First of all, I would like to share with the listeners the concept of a business organizations. A business organization is an organization established and operating in accordance with Vietnamese laws, including enterprises, cooperatives, cooperative unions, and other organizations that carry out business and investment activities.

Accordingly, a foreign-invested business organization is an organization whose members or shareholders are foreign investors.

So, when you engage with clients who are foreign investors looking to invest in Vietnam, Mr. Thành, how would you advise them on the best way to proceed with their investments in Vietnam?

Co-host

When discussing this issue, it’s important to note that under Vietnamese law, there are quite a few forms of investment form. Specifically, foreign investors can consider the following forms of investment:

1. First, they can invest by establishing a business organization;
2. Second, they can invest through capital contributions, share purchases, or stakes purchase;
3. Additionally, foreign investors can invest by implementing investment project;
4. Or, they can invest through business cooperation contracts, commonly known as BCC for short;
5. Finally, they can invest through other new forms of investment and types of business organizations are prescribed by the Government’s regulations.

Additionally, please note that when the entity making the investment in Vietnam is a foreign investor, they must meet specific conditions to carry out the above forms of investment.

Host

With the topic of capital contribution, share purchase, and stakes purchase by foreign investors, we will talk more about the conditions and principles governing these forms of investment for our listeners. Would that be alright, Mr. Thành?

Co-host

Of course, Mr. Thái. First, I would like to inform our listeners as well as foreign investors that these conditions and principles are clearly regulated in the system of legal documents on investment and related guidelines under Vietnamese law.

To ensure that our listeners and investors can grasp these conditions and principles, Mr. Thái and I will thoroughly explore each regulation regarding the conditions, principles, and other relevant provisions on investment in the form of capital contributions, share purchases, and stakes purchases by foreign investors.

To begin with, for a general understanding, foreign investors who intend to contribute capital, purchase shares, or stakes in business organization established in Vietnam must meet conditions prescribed by the Investment Law 2020, including:

1. First, Market access conditions applied to foreign investors when contributing capital, purchasing shares, purchasing stakes in business organization established in Vietnam according to the provisions of the Investment Law 2020 and Decree No. 31/2021/ND-CP of the Government;
2. Second, Conditions concerning assurance of national defense and security; and conditions for land use applied to a business organization that contains foreign investors contribute capital, or purchase shares or stakes if such business organization has a certificate of rights to use land on the island, in a border commune, ward or town; or coastal commune, ward or town; other areas that affect defense and security, except for the business organization executing an investment project in an industrial park, export-processing zone, hi-tech zone or economic zone established under the Government’s regulations.

In addition, any foreign organization or individual that receives shares or stakes in a business organization established in Vietnam by a gift or exchange or another contract of transfer of ownership rights as prescribed by law or through inheritance shall satisfy the conditions mentioned above and carry out procedures in accordance with regulations applicable to foreign investors making investment in the form of capital contribution, purchase shares or purchase stakes.

For example, if a foreign individual inherits a capital contribution in a company in Vietnam, that person must also meet the required conditions and carry out the procedures for registering the purchase of capital contributions as a foreign investor

Host

Based on the overview Mr. Thành just presented, I can see that the market access conditions for foreign investors in the form of capital contributions investment, share purchases, and stake purchases, are specifically regulated under the Law on Investment 2020 and Government Decree No. 31/2021/ND-CP. When I assist clients with this form of investment, I notice that the conditions outlined in these two documents are closely related to each other.

Specifically, according to Clause 3, Article 9 of the Investment Law 2020, market access conditions for foreign investors specified in the list of industries and professions with restricted market access for foreign investors, or Restricted List for Market Access list, include:

1. The holding proportion of charter capital by the foreign investor in a business organization;
2. Investment method;
3. Scope of investment;
4. Capacity of the investor; partners participating in the investment activities;
5. Other conditions specified in the law and Resolutions of the National Assembly, Ordinances and Resolutions of the Standing Committee of the National Assembly, Decrees of the Government, and international treaties to which the Socialist Republic of Vietnam is a member.

Regarding the provisions of Government Decree No. 31/2021/ND-CP, foreign investors must meet market access conditions and principles for industries and professions with restricted market access. First, I would like to share with Thai and our listeners the regulations on industries and professions with restricted market access for foreign investors:

1. Industries and professions with restricted market access for foreign investors and the restrictions are specified in the laws and Resolutions of the National Assembly, Ordinances and Resolutions of the Standing Committee of the National Assembly, Decrees of the Government, and investment-related international treaties. For details, please refer to the Restricted List for Market Access provided in Decree No. 31/2021/ND-CP;
2. Market access conditions for foreign investors shall apply investment methods specified in Investment Law 2020 and published and updated on the National Investment Portal;
3. In addition to the market access conditions mentioned above, foreign investors and foreign-invested business organizations also need to fulfill the following conditions (if any) when carrying out business investment activities in Vietnam:
   1. Use of land, employ workers; natural resources, minerals;
   2. Manufacture, supply of public services, goods or goods and services under state monopoly;
   3. Ownership, trade of housing, real estate;
   4. Application of assistance and aid of the State in certain industries, sectors, or geographical areas;
   5. Participation in state-owned enterprise equitization programs or plans;
   6. Other conditions specified in the laws and Resolutions of the National Assembly, Ordinances and Resolutions of the Standing Committee of the National Assembly, Decrees of the Government and investment-related international treaties that prohibit or restrict market access by foreign-invested business organizations.

Co-host

As Mr. Thái mentioned, our listeners can refer to the industries and professions with restricted market access in the Restricted List for Market Access for Foreign Investors, which is published in Decree No. 31/2021/ND-CP. Alternatively, they can look up the specific conditions for each sector on the National Investment Portal.

Host

And for those industries and professions with restricted market access and the associated limitations and conditions, to whom do these apply?

Co-host

Specifically, the Restricted List for Market Access is applied to:

1. Foreign investors;
2. Business organizations must meet conditions and carry out investment procedures for foreign investors as prescribed in Investment Law 2020 when investing in establishing other business organizations; contributing capital, purchasing shares or stakes of other business organizations; and investment in the form of BCC.

Additionally, with regard to business investment activities carried out in Vietnam, an investor holding both Vietnamese and foreign nationality may decide whether to apply market access conditions and investment procedures applied to domestic investors or foreign investors. If market access conditions and investment procedures applied to domestic investors are selected, the investor holding both Vietnamese and foreign nationality is not allowed to exercise the rights and obligations of a foreign investor.

Host

Finally, one of the most crucial and challenging aspects when advising clients in investmenting in the form of capital contributions, share purchases, and stake purchases, is the principles for applying market access restrictions to foreign investors. These principles clearly outline how the conditions and restrictions are applied to an investor who seeks to contribute capital, purchase shares, or stakes in a company engaged in a specific industríe or professions.

Co-host

Could you please elaborate this for our listeners?

Host

First, for industries and professions listed in the Market Access Restrictions List for Foreign Investors:

1. Foreign investors are not allowed to invest in industries or professions listed in Section A of the Market Access Restrictions List for Foreign Investors (Sectors and Trades Not Open to Foreign Investors—such as fishing or exploiting marine resources);
2. When investing in industries or professions listed in Section B of the Market Access Restrictions List for Foreign Investors (industries and professions with Conditional Market Access), foreign investors must meet the market access conditions published on the National Investment Portal;
3. Except for the industries or professions listed in the Market Access Restrictions List for Foreign Investors, as issued with Decree No. 31/2021/ND-CP, foreign investors may access the market under the same conditions as domestic investors;
4. Foreign investors engaged in activities across different industries or professions listed in the Market Access Restrictions List for Foreign Investors must satisfy all market access conditions applicable to those sectors or trades.

Co-host

In addition to the principles that apply to industries and professions listed in the Market Access Restrictions List for Foreign Investors, as Mr. Thái just outlined, I would also like to share some principles regarding market access restrictions for foreign investors in industries or professions where Vietnam has not yet made commitments on market access.

Host

I believe our listeners would first like you to share more about the definition of industries where Vietnam has not yet committed to market access. We haven’t discussed this definition so far, so Mr. Thành, could you please provide more details to help our listeners better understand?

Co-host

According to Article 2.13 of Decree No. 31/2021/ND-CP, sectors where Vietnam has not yet committed to market access refer to those sectors in which Vietnam, under international investment treaties, has not made commitments, has not yet made commitments, or has reserved the right to implement measures that do not conform to obligations related to market access, national treatment, or other non-discriminatory obligations between domestic and foreign investors as specified in those international investment treaties. For example, sectors where Vietnam has not committed to market access in its WTO service schedule.

1. Accordingly, if the laws, resolutions of the National Assembly, ordinances, resolutions of the Standing Committee of the National Assembly, or decrees of the Government (hereinafter collectively referred to as Vietnamese law) do not provide restrictions on market access for that sector, then foreign investors are allowed to access the market under the same conditions as domestic investors;
2. If Vietnamese law has already stipulated market access restrictions for foreign investors in that sector, the provisions of Vietnamese law will apply;
3. In cases where Vietnamese law, as I just mentioned, is newly issued (hereinafter referred to as the newly issued document) and includes market access conditions for sectors where Vietnam has not yet committed to market access, those conditions will apply as follows:
   1. Foreign investors who have already been subject to market access conditions for sectors where Vietnam has not yet committed to market access before the newly issued document comes into effect may continue their investment activities under those conditions (for example, if Sector A had no market access conditions and Investor X purchased capital contributions in Company Y, which operates in Sector A. If a new document is issued that introduces market access conditions for Sector A, Investor X may continue their investment activities under the original conditions, specifically without any market access conditions);
   2. In the case of new investments, such as equity investments, share purchases, or acquisitions of capital contributions in another economic organization, as per today’s topic, if the newly issued document requires compliance with market access conditions, those conditions must be met. However, the competent state authority may not re-evaluate market access conditions for sectors where the investor had previously been approved (Continuing the example above, if after the new document takes effect, Investor X wants to purchase shares in Company B, which operates in Sector A, the new market access conditions would apply. However, the state authority cannot re-evaluate the conditions for Investor X’s prior investment in Company Y).

Host

Besides the principles of applying market access conditions according to Vietnamese law, another important aspect that I often research before advising clients involves international treaties and the market access conditions for sectors under these treaties. So, how can we provide specific advice to clients when there are both market access conditions under Vietnamese law and those under international treaties? According to Decree No. 31/2021/ND-CP, the principles for applying these conditions related to international treaties are as follows:

1. Foreign investors from countries or territories that are not members of the WTO, when investing in Vietnam, are subject to the same market access conditions as those from WTO member countries, unless otherwise stipulated by Vietnamese law or international treaties between Vietnam and that country or territory (e.g., a Free Trade Agreement).
2. Foreign investors subject to the provisions of an international investment treaty that offers more favorable market access conditions than those provided under Vietnamese law may apply the market access conditions of the treaty.
3. If a foreign investor is subject to different international treaties with varying market access conditions, they may choose to apply the conditions of one treaty for all business sectors. In this case, the investor must comply with all provisions of the chosen treaty, including any newly signed or amended treaties after the initial treaty came into effect.
4. Regarding restrictions on foreign ownership percentages as stipulated in international investment treaties, the application is as follows:
   1. If multiple foreign investors contribute capital, purchase shares, or acquire capital contributions in an economic organization, and they are subject to one or more international investment treaties, the total foreign ownership in that organization must not exceed the highest percentage allowed under any of the applicable treaties for a specific sector (e.g., if Investor X from the U.S. and Investor Y from Thailand wish to invest in Company A, operating in Sector B. The treaty between the U.S. and Vietnam allows a 49% ownership in Sector B, while the treaty between Thailand and Vietnam allows 51%. Thus, when X and Y invest in Company A, their combined ownership cannot exceed 51%).
   2. If multiple foreign investors from the same country or territory contribute capital, purchase shares, or acquire capital contributions in an economic organization, the total ownership must not exceed the percentage specified in the international investment treaty applicable to those investors.
   3. For public companies, securities companies, fund management companies, or securities investment funds, if the securities laws stipulate a different foreign ownership limit, the provisions of the securities laws will apply.
   4. If an economic organization engages in multiple sectors with different foreign ownership limits under international investment treaties, the foreign ownership in that organization must not exceed the lowest ownership limit applicable to any of those sectors (e.g., if Investor X invests in Company A, which operates in sectors F, G, and H, and the international investment treaty stipulates an ownership limit of 50% for Sector F, 49% for Sector G, and 30% for Sector H, then the foreign ownership must not exceed 30% when Investor X acquires capital contributions in Company A).

Co-host

Dear listeners, we’ve now reached the halfway point of our discussion on equity investment, including capital contributions, share purchases, and acquisitions of capital contributions. I hope the information we’ve shared so far has been helpful to you. As the time for this podcast episode is limited, Mr. Thái and I look forward to seeing you in the next episode, where we will continue our discussion on the procedures for registering capital contributions, share purchases, and acquisitions of capital contributions, also known as the procedures for conducting investment activities in these forms for foreign investors.

Host

Thank you, dear listeners, for your attention.

If you have any questions or concerns, please leave a comment below. For more information about BLawyers Vietnam, feel free to visit our website, which you can find below the podcast screen of The Lawyers Talk.

Goodbye, and see you next time.

The above is not official advice from BLawyers Vietnam. If you have any questions or suggestions about the above, please contact us at info@blawyersvn.com. BLawyers Vietnam would love to hear from you.

Date: 24 August 2024