Hong Kong: Vietnam - Legal Overview - Inward Investment and Ancillary Contracts

Last Updated: 20 November 1995
Most Read Contributor in Hong Kong, September 2016
The laws of Vietnam are complex and new legislation is constantly being introduced. What follows is no more than an introductory overview that we hope will assist investors to decide which areas of law they will need to research further.

This summary is, necessarily, selective and is no substitute for detailed legal advice.

1. Introduction

1.1 The purpose of this Section is not to try in any way to provide a comprehensive review but to highlight issues that seem to us to be the most likely to be material to an investor in Vietnam.

Because of the prevalence of Joint Venture Companies ("JVC") as an investment vehicle, in this Section, we largely refer only to JVC's as convenient shorthand for other investment vehicles. We do refer to other vehicles specifically where appropriate.

1.2 The main investment vehicles available to foreign investors in Vietnam are:-

1.2.1 a joint venture enterprise;

1.2.2 a wholly foreign owned enterprise ("a WFOE");

1.2.3 a business co-operation contract ("a BCC");

1.2.4 a build operate transfer contract ("a BOT Contract");

1.2.5 there is also provision for direct investment in banks in Vietnam, with the consent of the State Bank but subject to restrictions, including as to the maximum amount able to be invested.

1.2.6 there is also provision in some circumstances for a foreign corporation to establish a branch in Vietnam.

1.3 A JVC

1.3.1 In a JVC, the parties form a new legal entity under the laws of Vietnam pursuant to a joint venture agreement ("a JVA") which has to comply with the foreign investment laws of Vietnam. The JVC is formed on the registration of the Charter (equivalent to bye-laws or Articles of Association of the JVC) and grant of an Investment Licence by the State Committee for Co-operation and Investment ("the SCCI").

On 28 December, 1994, the Prime Minister issued a Decree changing the way in which certain investments are to be approved with the intention of expediting the approval process. In essence, there is now provision for the approval for these identified projects to be dealt with by the Prime Minister's office and for certain, more stringent, timetables for the approvals to be applied.

1.3.2 A JVA is a contract between a foreign investor and a Vietnamese party (or more than one from each side) under which both parties agree to contribute to the JVC in agreed proportions and to share in the profits generated, or losses suffered, by the JVC.

1.3.3 The principal documentation required to establish the contractual relationship of the parties under a JVC are the JVA and the Charter.

1.3.4 Both parties are entitled by law to share in the management of the JVC, although important decisions require the unanimous consent of the members of the Board of Management and all others require the consent of a two thirds majority of the Board of Management. Subject to certain legal requirements the parties will agree in the JVA and Charter on the extent of representation.

1.3.5 In certain important economic sectors, the Vietnamese party will have a right to increase its share in the JVC. There is no specific definition of "important economic sector". The SCCI is said to be working on guidelines.

1.4 A WFOE

1.4.1 In a WFOE there is only one investor, the foreign party. If, however, the WFOE is in an important economic sector of Vietnam's economy, there is a similar right for there to be a Vietnamese partner in due course and at such time the WFOE is converted into a JVC.

1.4.2 The WFOE is a new legal entity under the laws of Vietnam. Its principal document is its Charter.

1.4.3 Although there is no legislative definition of what a WFOE may be used for, the SCCI have said that they will not accept the use of a WFOE for investment in "highly profitable" sectors. They cannot now be used for construction projects.

1.5 A BCC

1.5.1 This is a method of investing in which no new legal entity is formed and where the parties agree to share profits and losses, in much the same way as a partnership; it is, in effect, a contractual joint venture. It is a method of investing which is particularly seen in the telecommunications sector and in the oil exploration sector.

2. Technology Transfer

2.1 Technology transfer is important because it is a widely defined concept which affects many commercial transactions. The laws on technology transfer are contained in several items of legislation and, where necessary, are referred to individually in a separate Section.

2.2 Technology transfer contracts are required to be approved by the Ministry of Science, Technology and Environment ("MOSTE").

2.3 It should be noted that in the technology transfer legislation there are restrictions on the fees, in particular, that can be charged for the provision of management services and/or the licensing of intellectual property rights. For example, management contracts for hotel projects are subject to restrictions on the fees that can be charged.

3. The Ordinance And The Decree On Economic Contacts

3.1 Economic Contracts, as defined in Vietnamese law, include a significant number of the day-to-day contracts in Vietnam with which any economic enterprise will be concerned. The topic is complex and what follows is no more than the briefest of summaries.

3.2 The law requires that for there to be an Economic Contract the parties to it must (in broad terms) be entitled to carry on business in Vietnam. The position in relation to contracts which are entered into by foreign representative offices (for example for the refurbishment of their offices) appears to be that they are treated as Economic Contracts even though a representative office is not a vehicle permitted to carry on business in Vietnam.

3.3 The distinction between an Economic and a Civil Contract is that the former relates to business purposes. For example, a contract between a utility company and an individual for his home is a Civil Contract. The same contract for the individual's business would be an Economic Contract.

3.4 The Ordinance and the Decree on Economic Contracts contain provisions that have substantive effect, for example in relation to force rnajeure, damages and certain time limits and they require that disputes be settled in Vietnam under Vietnamese law.

4. Representative Offices

4.1 These are not allowed to do business in Vietnam, their role is strictly limited to liaison/representation.

5. Sale Of An Interest In a JVC/WFOE/BCC

5.1 There is tax on the transfer of the share of a party to a JVC/BCC. No specific provision is made in the case of WFOE'S. There is a right of pre-emption in the case of JVC's and BCC'S. This means that the parties must give particular care to the way in which they hold their investment in a JVC/ BCC/WFOE and must scrutinise the provisions to be included in the JVA/Charter to deal with transfer and change of control.

5.2 Consideration needs to be given to the possibility where there may be several foreign investors that they hold through a vehicle that unifies their interests, so that there are only two parties to a JVA.

6. Timing

6.1 Any application to the SCCI for a licence will require to be accompanied by a feasibility study and this will, in normal circumstances, include details of proposed borrowing requirements of the JVC. These borrowing requirements will need to distinguish between the loans to be made to the JVC by the investors as part of the capital of the JVC and the loans to be taken by the JVC as funding from commercial banks.

6.2 In principle, all ancillary contracts to be entered into by the JVC can only be agreed by the JVC's Board of Management after the JVC is formed and are not usually able to be annexed as mandated forms by way of exhibits to the JVC when it is submitted to the SCCI for approval.

6.3 The JVA will be expected to contain a schedule of the making of the contributions by the parties and the SCCI will require the parties to abide by that schedule.

6.4 It is our experience of dealing with the SCCI that they are reluctant to agree to there being any conditions precedent to the contribution of funds once the Investment/ Business Licence has been granted.

7. Board Control

7.1 After AJVC is formed, all items of major importance will require the unanimous consent of the board of Management. In the event that the Board cannot reach agreement where unanimity is required, there are, in effect, two options: (i) the matter is resolved by the SCCI; or (ii) the parties dissolve the ivc.

8. Buy- In

8.1 Fundamentally, any buy-in provisions relating to an investment in an important economic sector should be agreed before the JVA is signed, so far as possible. The JVA should record that it is not in an important economic sector, so that, if it is approved, it may later be possible to avoid a buy-in being imposed, but there is no guarantee of this. Key matters are likely to be

- can the right of buy-in be waived;
- how will the buy-in be priced;
- what will be the effect on any guarantees given by the parties;
- will this have any impact on the ancillary rights given to the parties such as distribution and pre-emption of supplies.

There are no legal guidelines on pricing a buy-in.

9. Future Changes In The Law

9.1 This topic needs to be considered particularly in the context of the way in which, for example, force majeure would apply. Contractual wording can be included to give some protection to the parties by including provisions for termination and/or modification of the contract.

9.2 The laws of Vietnam and the Constitution guarantee that there will not be confiscation of investments. Article 21 of the FIL contains an express statement that the assets of foreign investors will not be nationalised.

9.3 Article 99 of Decree 18 provides that if there are changes in the law that adversely affect the interests of foreign economic organisations, the parties can agree with the SCCI one of the following four alternatives:-

(i) to change the stated objectives of the protect;
(ii) to reduce or grant exemption from payment of tax in accordance with the law;
(iii) deem the adverse effect on the investor to be a loss and set off the loss in accordance with Article 27.2 of the FIL;
(iv) to permit the operations to continue where the operations are not significantly affected.

9.4 Article 99 also says that the Government of Vietnam guarantees the fair and equal treatment of foreigners investing in Vietnam under the Foreign Investment Law but goes on to provide that where there is an investment protection treaty between Vietnam and a foreign country, the provisions of that treaty will prevail.

10. Early Termination

10.1 A problem that will need to be addressed in any Contractual documentation, even though it is not exclusive to Vietnamese law, is as to what is to happen if a JVA or BCC terminates early. The principal questions are as to the valuation of the business and the payment for it and ensuring that the payments are in foreign currency.

NOTE: 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.

If you would like further advice please contact: David Ellis, Johnson Stokes & Master, 16th Floor, Princes Building, 10 Chater Road, Hong Kong; Tel 2843 4226; Fax no. : 2845 9121. Alternatively do a text search "Johnson Stokes and Master" and "Business Monitor".

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