Doing Business In… 2021 – Shareholders – Vietnam

ARTICLE

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1. LEGAL SYSTEM

1.1 Legal System and Judicial Order

The legal system in Vietnam follows the civil law tradition and
is noticeably influenced by continental European codifications of
civil law (particularly the French Civil Code). The Vietnamese
legal system consists of a Constitution, codes, laws, ordinances,
decrees, decisions, circulars, directives and resolutions. Legal
texts are published in the Official Gazette. Decrees and circulars
contain guidelines to implement laws, codes and ordinances. Local
governmental agencies may also issue official letters further
guiding the implementation of any of these pieces of
legislation.

Vietnam is a one-party socialist republic, and the judiciary
falls under the leadership of the Communist Party of Vietnam and is
accountable to the National Assembly. Judges and procurators are
members of the Party. The judicial order of Vietnam’s court
system is separated into the local, regional and national levels.
Usually, a civil case brought before a competent Vietnamese court
will undergo a maximum of two instances: the first instance and the
appellative instance. The Constitution of Vietnam governs the
Vietnamese judicial system, together with the Law on the
Organisation of People’s Courts and the Law on the Organisation
of People’s Procuracies.

The Supreme People’s Court is the highest court. Below that,
there are three levels of People’s Courts: the High
People’s Courts, the Provincial-Level People’s Courts and
the District-Level People’s Courts. The High Courts in Hanoi,
Da Nang and Ho Chi Minh City are appellate and cassation courts,
and responsible for the northern, central and southern regions of
the country, respectively. The Provincial Courts are both trial and
appellate courts, and the district courts are trial courts.

Business, commerce or labour-related cases in which one party or
the related asset is located offshore, or that require judicial
assistance by an overseas representative agency of Vietnam, a
foreign court or other foreign competent authority, are generally
subject to the jurisdiction of the Provincial Court.

2. RESTRICTIONS TO FOREIGN INVESTMENTS

2.1 Approval of Foreign Investments

Foreign investment into Vietnam requires approval and licensing
by the local authorities, the scope and shape of which largely
depend on the nature of the envisaged business. The (new) 2020 Law
on Investment, which entered into force as of 1 January 2021,
retains clear distinction between a foreign and Vietnamese
investor. A variety of procedures apply to foreign investors,
defined by the volume and type of their desired Vietnamese
engagement. A foreign investor is required to register their
investment or to obtain certain documents before they can start
with the investment project.

According to the law, a foreign investor is, or is considered as
such, with respect to investment conditions and procedures:

• an individual with foreign nationality;
• an organisation incorporated in a foreign jurisdiction; or
• a Vietnamese-incorporated enterprise in the following
  cases:
• 1. more than 50% of its charter capital is held by a foreign
     investor(s), or a partnership has a majority of partners being
     foreign individuals in the case of a partnership enterprise;
  2. more than 50% of its charter capital is held by an
     enterprise(s) prescribed in point (a) above;
  3. more than 50% of its charter capital is held by a foreign
     investor(s) and an economic organisation(s) prescribed in point (a)
     above.

From the perspective of a foreign investor, Vietnamese
investment law makes a general distinction between
“conditional/restricted” and
“unconditional/unrestricted” business lines. The
conditional/restricted ones, in which certain additional
requirements may apply, are designed to regulate foreign activities
in Vietnam in industries that are considered “sensitive”
or “crucial to the national interests of Vietnam”. Some
restricted business lines may not be performed under foreign
ownership at all.

Under the 2020 Law on Investment, there are currently 227
conditional business lines, which include:

• accounting services;
• insurance services;
• securities trading;
• betting and casinos;
• oil and gas;
• healthcare-related businesses;
• businesses related to transport;
• real estate businesses;
• educational businesses;
• banking and finance-related businesses; and
• agriculture-related businesses

A foreign investor in the market to purchase an existing
(Vietnamese) entity – depending on the nature and scope of
its business – may need to obtain prior approval of the
Department of Planning and Investment (DPI) (“M&A
Approval”) before capital can be contributed or acquired in an
existing enterprise.

2.2 Procedure and Sanctions in the Event of Non-compliance

A foreign investor generally needs to undergo a two-step
procedure in order to obtain a licence to operate in Vietnam. In a
first step, the investor licenses their investment into Vietnam
(obtaining an Investment Registration Certificate). In the second
step, through the issuance of the Enterprise Registration
Certificate (ERC), a new (foreign-owned) company is born.

For local investment by means of M&A, there is a special
rule set, which requires the investor to announce the acquisition
to the competent authorities and obtain their approval.

Due to the close monitoring of the local business landscape
through the competent authorities (DPI) and a tight grip of the
State Bank of Vietnam (SBV) on compliance with strict foreign
exchange regulations, investing in Vietnam without authoritative
approval is hard to imagine in practice.

Should a foreign investor find a way to pour their money into a
local business illegally, possible consequences may include
mandatory termination of part of, or the entire operations of, the
investment project.

2.3 Commitments Required from Foreign Investors

Commitments from investors (in addition to the investment
capital they promise to deploy during their engagement in Vietnam)
are not generally regulated. In practice, there are situations
where the Vietnamese licensing authority will make its discretional
agreement dependent on certain commitments from the investor (eg,
contribution to infrastructure developments in the location of the
business). There are, however, no generally imposed commitments for
foreign investors, outside the general obligation to comply with
all laws of the Socialist Republic of Vietnam while doing business
there.

2.4 Right to Appeal

There may be possibilities for a foreign investor to challenge
the negative decision of an investment-related authority (mostly
the DPI) in court under the 2015 Law on Administrative Procedures.
However, such a challenge is not likely to have a positive result.
In fact, only when the investor is able to prove that the decision
affects their legitimate rights and benefits. This should be
difficult as, due to the absence of relevant laws and regulations,
any dispute over the requirements of an investment endeavour or the
legality of an intended corporate structure and business model will
generally be solely governed by the discretion of the competent
authority.

Vietnamese (investment) law therefore grants to the authorities
a high level of decision power, which can pose an obstacle to the
feasibility or efficacy of some investment types. In these
situations, in which the DPI or another authority communicates that
it deems an investment to be problematic, investors will often be
given the chance to – through their local counsel and
advisers – reiterate their intentions and amend their
business plans according to the DPI’s agreement.

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Originally published by Chambers Global Practice
Guides.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.