The Real Estate Business For Foreign Invested Enterprises In Vietnam – Some Key Factors

The real estate business in Vietnam can be complicated. This article discusses the legal framework for foreign invested enterprises. The memo is divided into two parts (1) general land use rights issues, and (2) some specific legal issues which are important to a foreign invested enterprise (FIE).

1. General land use rights issues

Land cannot be owned either by individuals or by entities, whether they are Vietnamese or foreign. Land is owned by the entire people and the State administers the land for the people. In its exercise of the people’s ownership, the State allocates or leases a piece of land to individuals, households or entities to use in accordance with the Land Law.

Each type of land user receives its land use rights (LURs) in a different way. Vietnamese individuals and domestic entities can receive their LURs by being allocated[1] or leased land by the State, or by having their existing LURs recognized by the State, or by receiving LURs by reason of a transfer from another LURs holder. Foreign investors can only receive their LURs through an FIE established in Vietnam. An FIE with an investment project for construction of residential housing for sale or sale in association with leasing out is allocated land by the State with payment of land use fees. For other projects, an FIE may choose to lease land and to pay rent annually or it may lease land and pay rent in a lump sum for the entire term of the lease.[2] FIEs may lease land from the State or lease land from a private entity to implement their investment projects.

Rights and obligations of a land user who is allocated land by the State are different from those of persons who are leased land by the State or who lease land from others. In addition, each type of land user has different rights and interests in relation to the use of a specific parcel of land. By comparison to Vietnamese citizens who reside in Vietnam, FIEs have limited entitlements to the right to use land.

Any individual or entity to which a piece of land is allocated or leased must use the land for the purposes stipulated in the land allocation decision or in the land lease. These purposes are also stipulated in general terms in the LURs certificate[3]. The scope of the LURs depends on the categories of land and the categories of land users. After being allocated or leased a parcel of land, or after a land user receives a piece of land transferred from others, the land user is entitled to receive an LURs certificate, which is granted by the appropriate State agency[4] in order that land users may defend their rights and interests. Even though individuals, households and entities do not have ownership of land, when they are granted an LURs certificate, they have basic control over the land and are entitled to exercise many rights such as the right to use, transfer, mortgage, lease, and many other such rights associated with land ownership.

FIEs can also be granted an LURs certificate if it leases land from the State or leases or subleases land in industrial zones, hi-tech zones or in some specific areas in economic zones.

Foreign investors can also set up a joint venture with a local partner that has already received LURs for a particular piece of land. FIEs that are joint venture enterprises can receive capital contribution in the form of land use rights from contributors who are not households or individuals, and who have been (i) assigned land by the State in return for payment of land use fees, or (ii) have been leased land by the State with one-off payment of land rent. In fact, this is a common way in which projects involving land are developed by FIEs.

2. Foreign invested enterprises and the real estate business in Vietnam

2.1 Scope of the real estate business available to foreign invested enterprise

Under the Law on Real Estate Business which took effect on July 1, 2015, an FIE is permitted to carry out the following activities:[5]

• lease an existing property to sub-lease to others;
• invest in/develop residential houses to lease out, houses and other construction works which are not residential houses for sale, for lease or hire purchase on land leased from the State;
• receive the transfer of a part or of entire real estate projects from other real estate developers in order to construct houses and/or buildings for the purpose of sale, lease or hire purchase;
• invest in/develop residential houses for sale, sale in combination with lease or hire purchase on the land allocated from the State;
• invest in/develop houses and other construction for business purposes complying with the land use rights purposes, on leased land located in industrial zones, export processing zones, hi-tech zones or economic zones; and
• provide real estate business services (including real estate brokerage services, real estate evaluation services, real estate transaction floor services, real estate consultancy services, real estate auction services, real estate advertisement services and real estate management services).

It is worth noting that, compared to a Vietnamese counterpart, an FIE is not allowed to buy houses or construction works for resale, lease or hire-purchase. At present, Vietnam only encourages FIEs to invest as real estate developers and real estate service providers rather than to invest in every area of the real estate business.

Under Vietnamese law, the term “house” is used to describe a place to live and the term “construction work” usually refers to a factory or a warehouse. To be consistent with the language of the law, the term “residential house” in this memo means primarily a residence, but the term “house” alone means a building such as a commercial complex or an office building which is not a residence. Different types of buildings may be treated differently for purposes of tax calculation or determination of value.

2.2 Land for real estate projects invested by FIEs

FIEs which need land to develop houses/construction works for sale and/or lease or to develop infrastructure to lease out may choose one of the following formats:

• Being allocated land from the State to develop residential houses for sale, sale in combination with lease or hire purchase;
• Leasing land from the State to develop residential houses to lease out, investing to develop houses and other construction works which are residential houses, not for sale, but to lease or to hire purchase;
• Leasing land from an industrial zone, export processing zone, hi-tech zone or economic zone developer and then to develop houses and other construction works for business purposes following the land use rights purposes in those zones;
• Form a joint venture with a Vietnamese entity that has LURs and that is entitled to contribute LURs to the joint venture company. The following domestic entities are entitled to contribute LURs to a joint venture company:

• A domestic company that has been allocated land by the State and the LURs fee paid for the land did not come from the State budget;
• A domestic company to which LURs have been transferred from another entity and the money paid for the transfer did not come from the State budget; or
• A domestic company which was leased land by the State with the land rent having been paid in a lump sum for the entire lease term.

Real estate project investors (especially housing project investors) should receive land allocated by the State or should lease land from the State rather than from other land users, when the State leases a specific parcel of land to a specific developer for a particular project. It means that the project is in line with the planning of the area. If land is not allocated by the State nor leased from the State, the lessee must confirm that the intended purpose of the land meets the purpose stated in the LURs certificate. In most cases, land allocated or leased by the State for development of residential housing projects must be obtained through an auction or bidding process.

Only FIEs allocated land from the State with land use fees (levy) paid in full can develop a real estate project in which residential houses can be built for sale, lease or hire purchase. FIEs that pay the land rents annually can only develop residential houses for lease.

FIEs that invest in the construction of residential houses for rent can be issued a house ownership certificate[6] for those houses. FIEs that invest in the construction of residential houses for sale are entitled to sell houses to anyone entitled to own a house in Vietnam and purchasers are entitled to be issued house ownership certificates. The house ownership certificate issued to the purchaser will entitle the purchaser to use the land underneath. The house ownership certificate issued to a Vietnamese individual or an overseas Vietnamese who purchases the house/apartment is for an indefinite term. However, the LURs certificate issued to FIEs (the developer of the project) will expire at the time the investment project expires. There are opportunities for extension of the investment certificates and if so, the LURs certificate can also be extended.

2.3 Prospective customers of real estate property

FIEs investing in the real estate business may want to know if foreigners can buy. Vietnamese entities and Vietnamese individuals (including overseas Vietnamese) are entitled to own real property regardless of their place of business or residence. But there are some restrictions on foreigners’ right to own real property. Generally, foreigners are not permitted to buy a residential house/apartment unless in one of the following groups:

• FIEs, branches or representative offices (licensed to operate in Vietnam) of foreign organizations, foreign investment funds and foreign bank branches licensed to operate in Vietnam are entitled to buy and own houses in order to provide accommodations for their employees. In such cases, a foreign organization must meet certain conditions: (i) it must have an operating licence/permit (for a foreign organization) or an investment certificate or investment registration certificate (for an FIE); and (ii) it must not be licensed to operate in the real estate sector.
• A foreign individual may buy and own houses in Vietnam if he is permitted to enter into Vietnam (ie, persons with a valid passport affixed with a proper visa and entry stamp). However, the foreign buyer may not be in a category of persons entitled to preferential treatment or diplomatic immunity. Foreign individuals may own houses in Vietnam for up to 50 years, and the period may be extended.
• In addition to the outright purchase of a house, a foreigner may own a house through hire-purchase, gift, or inheritance and is entitled to use such houses, but only for residential purposes. Other purposes (eg, leasing, office use, etc.) are not permitted. Payment for purchase or hire-purchase must be made through a credit institution licensed to operate in Vietnam (eg, a bank).

There are also some restrictions on the aggregate number of houses that foreigners (including an organization and individual) can own in a commercial residential project or apartment building or in a geographical area. Foreign organizations or foreign individuals may buy and own houses, including villas and townhouses with attached land, apartments, or condominiums, but only if they are part of commercial residential projects. The number of apartments/condos is limited to 30% of the total number of apartments/condos in one apartment building. The number of separate houses is limited to 250 villas/town-houses in an area having a population size equivalent to the administrative level of a ward. There is no explicit restriction on the total number of houses or apartments that a foreigner can own. However, as foreigners can only own residential houses/apartments for residential purposes and are banned from buying residential houses/apartments to resell for profit making purposes, it may not be practical for foreigners (being individuals) to own many residential houses/apartments. In other words, foreigners need to prove that they use the house/apartment for residential purposes. Even though the law allows foreigners to lease out their residential house, if they do so in a scale which can be seen as a commercial activity, they are deemed to carry out the real estate business and therefore such–activity is not allowed.

Thus, there is certainly an incongruity when recognizing that, while an FIE or a foreigner may own hundreds of apartments and townhouses, they may not sell or lease them out for commercial purposes.

In addition, foreigners are not permitted to own houses or apartments located in national defense and security areas as prescribed by the Ministry of Defense and the Ministry of Public Security.

The term of a foreign organization’s permitted ownership is limited to the term of its investment certificate, as it may be extended.

2.4 Some other legal issues regarding form of business and other related conditions

Decree 02/2022/NĐ-CP dated January 6, 2022 (Decree 02) provides guidelines to implement the Law on Real Estate Business. Under Decree 02, there are conditions that any real estate businesses (irrespective of whether it is domestic or foreign) must meet. The conditions relate to equity capital requirements for a real estate development project and practicing certificate requirements for staff (applicable to enterprises which provide real estate services). Minimum required equity capital is at least 15% of the total investment capital of any project that uses 20 hectares or more land. That rises to 20% for a project that uses less than 20 hectares of land. Companies that are licensed to provide real estate services must employ staff holding practicing certificates. Different categories of real estate services require different types of practicing certificates. For example, a company which provides real estate brokerage services must employ at least two persons who hold a real estate broker’s certificate.

Generally, there is no limitation on the percentage of foreign involvement in a company engaged in the real estate business. This means that 100% FIEs are allowed to engage in the real estate business.

Setting up a company in Vietnam to engage in the real estate business requires that the application dossier receive in-principal approval from either the People’s Committee of the province where the project is located, the Prime Minister, or even the National Assembly. Leaving in-principal approval aside, the procedures and time to establish a company to engage in the real estate business are similar to those necessary to establish a company for any other business.