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Establishing an Enterprise in Vietnam

Overview Joint Ventures and Wholly Foreign Invested Enterprises (FIEs) Corporate Forms Non-Corporate Forms Application Process Resources Rate this QuickCounsel

Overview

Vietnam continues to open its market to foreign investment. A comprehensive legal regime exists in the form of the Enterprise Law (EL) and the Investment Law (IL). The EL creates a unified legal system and provides a menu of business vehicles from which both domestic and foreign investors can choose. The IL regulates the process of applying for and obtaining an Investment Certificate (IC), and describes the rights and responsibilities of investors.

Vietnam's World Trade Organization (WTO) in 2007 has stimulated liberalization. Progress has continued pursuant to a schedule incorporated in Vietnam's WTO Commitments. Most Commitments are unrestricted. However, some services are restricted for a certain period of time; if a service is considered conditional or restricted, foreign investment in that area is usually limited in form and amount. Deeper foreign investment is allowed in those restricted areas over time.

Direct investments with foreign capital must be licensed. That requires submission of documents that describe the investment and establish how the investment will be carried out. An Investment Certificate (" IC" ) is issued and it serves simultaneously as the investment vehicle's certificate of incorporation.

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Joint Ventures and Wholly Foreign Invested Enterprises (FIEs)

Under the IL and Decree 108/2006/ND-CP (Decree 108), foreign investors may cooperate with domestic investors to establish a joint venture (JV). The JV may take one of several possible corporate forms, discussed below. The JV is a corporate entity, but is not itself a special form of enterprise. Rather, it fixes the relationship among the parties vis à vis their ownership in the newly formed enterprise. The relationship is governed by a joint venture agreement.

Vietnamese law requires that investment in a few conditional or restricted business areas proceed only in the form of a joint venture. The issue then becomes the maximum capital the foreign investor may own in that business. Usually, the foreign investor may hold a majority share.

Business areas that require a joint venture, but which do not specify a cap, may have a joint venture with " unlimited" foreign participation. One interpretation of " unlimited" foreign participation is foreign investment of 99%, with the Vietnamese partner owning only 1%. A recent Official Letter, however, has rejected 99% foreign ownership on the grounds that such an arrangement deprives the Vietnamese partner of any meaningful role in the company and renders the enterprise a de facto 100% foreign invested enterprise (FIE), undermining the purpose of the joint venture requirement. Licensing authorities differ on what level of foreign ownership is required to preserve the nature of a joint venture. At least 80% seems universally acceptable.

In other business areas, Vietnam's WTO Commitments state an explicit cap on foreign participation in a joint venture. Some Commitments also include a schedule for reducing or eliminating the cap entirely. For example, advertising services were subject to a 51% foreign participation cap until January 1, 2009. Thereafter, the 51% cap was lifted, but not removed, so that now a foreign company in the advertising business must still have a joint venture, but is no longer limited to 51% ownership.

In a select few, highly specialized areas, the cap is permanent. Providing audiovisual services, for example, is limited to 51% foreign ownership, and this limit on foreign participation is not scheduled to increase.

The limits on foreign investment within a joint venture are not insurmountable challenges for foreign investors. Investors are routinely able to achieve their business goals within the joint venture structure.

Some of Vietnam's WTO Commitments have been reduced to law, while others have not. All of the Commitments are discussed broadly in Vietnam's Working Paper. The Schedule of Commitments lists business lines and describes any limits attached to each business line.

In order to determine whether a particular business line falls under one commitment or another, the investor must refer to the classification of services in the U.N. Statistics Division's Classification Registry, on which the categories in the WTO Commitments are based.

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Corporate Forms

Whether the investment is structured as a joint venture with a local partner or as a 100% FIE, the enterprise can select a corporate form that is appropriate for its needs and goals. There are two main options: limited liability companies (LLCs) and joint stock companies (JSCs). An LLC is the most popular form of investment vehicle.

LLCs can be either single-member LLCs or multi-member LLCs, which have between two and fifty members. JSCs must have at least three shareholders, but there is no maximum number. Investors in LLCs and JSCs can be either corporations or individuals.

An LLC cannot issue shares. A JSC is entitled to issue securities, including common and preferred shares, and bonds. Investors will often choose this form if they plan to go public in the future.

Management: In an LLC with multiple owners, each member appoints representatives to manage its investment in the company and to serve on the Members' Council. The Members' Council, under the leadership of a Chairman, has a management role, and a Director or General Director manages much of the daily business of the company. In a JSC, the shareholders nominate one or more representatives to the Management Board; the shareholders elect Board Members from amongst nominees during a Shareholders' General Meeting. The Board's responsibilities are similar to those of an LLC Members' Council, and a Director or General Director oversees the daily business of the company.

A single member LLC is usually managed by a President, selected by the sole member.

Dividends: There are two basic conditions necessary for the distribution of dividends. The enterprise must first fulfill tax and other financial obligations, e.g., creating reserve funds for certain kinds of enterprises such as banks or insurance providers. Distribution of dividends must not jeopardize the continued solvency of the enterprise.

Legal Representative: Enterprises operating in Vietnam require a Legal Representative. The Legal Representative must also serve as either the General Director or as the Chairman of the Members' Council or Management Board. The Legal Representative may be an expatriate or a Vietnamese person, but must reside in Vietnam.

Corporate Documents: Whether the enterprise is formed as an LLC or a JSC, a charter serves as the basic governing document. The charter sets out quorum requirements for a meeting of the Members' Council or Management Board and minimum voting requirements for approval of different resolutions.

The enterprise must also produce and maintain certain documentation, such as a Members' Register or a Shareholders' Register. Vietnamese law also requires local businesses to comply with certain document preservation rules.

Charter Capital Contribution: Charter capital is equity injected into the company by the shareholders or members. With a very few exceptions, there is no minimum charter capital requirement. Founding shareholders in a JSC must register and follow a schedule of charter capital contribution, provided that they contribute capital equivalent to at least 20% of the enterprise' registered ordinary shares within 90 days of the day on which the IC is issued. Registered but unissued shares must be issued within three years. While an LLC does not have a statutory minimum contribution requirement, the Members must set up a schedule for capital contribution and register the schedule with their application documents. They must make their charter capital contributions according to their schedule.

Transfer of Capital or Shares: In an LLC, capital can be freely transferred amongst members. A member is entitled to transfer all or part of its capital to a third party if the capital is first offered under the same terms to all the other members in proportion to their share. The capital share may be transferred to a non-member only if the other members decline to purchase their full portion of the offered capital within 30 days.

In a JSC, shares can be freely transferred except for the first three years after the date the IC is issued. During that period, any transfer of ordinary shares from a founding shareholder to a third party is subject to approval by the other shareholders. When the transfer is approved, the shareholder acquiring the shares becomes a founding shareholder. In any case, dilution of the shareholding of a Vietnamese shareholder or member may not alter any mandated limitations on foreign ownership.

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Non-Corporate Forms

Business Cooperation Contract (BCC): Investors may enter into a BCC to cooperate in business activities with an agreed form of profit-sharing. Although a BCC does not create an enterprise, there are some similarities between a BCC and an enterprise. For example, although a BCC is not a corporate form, it receives an IC to undertake the desired project, and often has a joint mechanism to coordinate the actions of the contracting parties.

Representative Office (RO): Often, foreign investors who seek to explore business opportunities will establish a RO. They are able to develop knowledge, make contacts, conduct market research, and promote opportunities for their parent company. Some coordinate the activities of a local distributor that purchases and sells the RO's parent's goods or services. The RO itself cannot generate profits.

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Application Process

A foreign investor that invests in Vietnam for the first time applies for an IC. The application must define a project that involves specific business activities. The IC will enumerate the business activities the enterprise is permitted to undertake. An enterprise may not operate outside of the parameters of its IC.

Certain kinds of projects will require submission of certain documents for approval. For example, construction projects will require documents that cover environmental considerations, design plans, etc. Some few projects must meet special licensing requirements, such as minimum capital requirements or requirements related to particular expertise or experience in running that kind of business.

All investment projects must provide a basic level of disclosure about the project, such as location, capital contribution, a schedule for capital contribution, and details of the business activities. For example, an investment application to construct a brewery, even though not itself a conditional investment area, must disclose the kind of alcohol the brewery plans to produce and estimated production volume once operation begins, and must also provide a feasibility study that covers equipment, materials, technology, and proposed plant design.

Applications are generally submitted to and reviewed by a licensing authority that is constituted under a City or Provincial People's Committee in the area where the company plans to locate its main office. The process to assemble an application and receive an IC can take between 30 and 60 business days, depending on the complexity of the proposed investment.

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Resources

Government Resources

ACC Resources

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