Regulations on investment entities to establish economic organizations in Vietnam
Clause 17, Article 3 of the 2014 Law on Investment defines: “Foreign-invested economic organization is an economic organization whose foreign investor is a member or shareholder”. This definition remains the same in Clause 20, Article 3 of the Draft Amendment Law on Investment 2020. This means that foreign investors who want to establish or participate in establishing economic organizations in Vietnam can only establish those to which investors will become members or shareholders. In other words, foreign investors are only allowed to invest in the establishment and participate in the establishment of limited liability companies, joint-stock companies and partnerships. (The Law on Enterprises 2014 stipulates that investors will be called members or shareholders after establishing these types of business).
That foreign investors are not allowed to establish private enterprises is also indirectly regulated in the Law on Enterprises 2014. Specifically, Article 20 of the Law on Enterprises 2014 stipulates that the application for registration of a private enterprise includes an application form for enterprise registration, and a copy of citizen card, ID card, passport or other legal personal identification of the owner. While enterprise registration documents of all types of companies (from Article 21 to Article 23) must include "a copy of the Investment Registration Certificate for foreign investors in accordance with the Law on Investment".
There are many reasons why the Law on Investment and the Law on Enterprises do not allow a foreign investor to establish a private enterprise in Vietnam. The unlimited liability of the owner of a private enterprise may be the main cause.
However, it is not reasonable and inconsistent among the provisions of the Law on Enterprises to not allow foreign investors to establish private enterprises if it is just because of their limited liabilities. Specifically, Clause 5, Article 21 of the Law on Enterprises 2014 recognizes that a foreign investor as an individual still has the right to be a general partner of a partnership. This means that if the investor is a foreign individual who acts as a general partner of the partnership, he must be “responsible with all his assets for the obligations of the partnership." (according to Point b, Clause 1, Article 172), and “jointly responsible for paying off the remaining debts of the company if the assets of the company are not enough to cover the debts of the company” (according to Point dd, Clause 2, Article 176).
Regulations on the certificate of investment registration
According to Clause 1, Article 22 of the Law on Investment 2014, before establishing an economic organization, a foreign investor must have an investment project and carry out the procedures for issuance of an Investment Registration Certificate as prescribed in Article 37 of this Law. The Draft Amendment Law on Investment 2020 adds 2 exceptions that do not require a project and an Investment Registration Certificate including small and medium-sized creative start-ups and investment fund for creative startups in accordance with the Law on support for small and medium-sized enterprises.
The above stipulation on the project conditions and the Investment Registration Certificate are not completely reasonable for the following reasons:
Firstly, it creates more cumbersome procedures for foreign investors. According to the current Law on Enterprises, the registration of capital scale and business lines is very free, except for those with business conditions. For domestic investors, a project and investment registration certificate are not required when establishing a business. Therefore, the provision of these two conditions for foreign investors will create inequality between domestic investors and foreign investors.
Secondly, it does not make sense when foreign investors do not want to be members or founding shareholders of an economic organization. According to current regulations, it does not require foreign investors to have projects and investment registration certificates to purchase shares or contribute capital to an economic organization. Therefore, foreign investors can participate in an economic organization without applying for an investment registration certificate by requesting Vietnamese investors to establish an economic organization first. Right after the economic organization is established, foreign investors will invest in the membership and shareholders in the form of capital contribution, share purchase, and capital contribution purchase then change registration content to immediately participate in company management positions.
Regulations on the rights of foreign investors
For a partnership, Clause 2, Article 25 of the 2014 Law on Investment stipulates that foreign investors are only allowed to "buy the contributed capital shares of capital contributors in partnerships to become capital contributors”. In other words, the Investment Law limits the rights of foreign investor to purchase a general partner's share of capital to become a general partner of a partnership.
The above provision contradicts with both the provisions on general partners being foreign investors recognized in this law, and the partnership's right to transfer stakes of the general partners in the Law of Enterprises. Specifically, the Law on Investment 2014 recognizes that an investor who is a foreign individual is allowed to invest in establishing a partnership as a general partner (Article 22) and to contribute capital to a partnership to become a general partner (to contribute capital to increase the charter capital of a partnership under Clause 1, Article 25).
In summary, some provisions in the Law on Investment 2014 directly related to foreign investment are being finalized in the Draft Amendment Law on Investment 2020. However, there are still problems that hinder foreign investors having not been fixed.
Law on Investment 2014;
Law on Enterprise 2014;
Draft Law on Investment 2020;
Draft Amendment Law on Enterprises 2020.
Source: Vietnam’s Law Library
Writer: Henry Tran - VietnamCredit