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Law changes spur reforms
Vietnamese authorities are in the process of finalising a draft law to amend several existing laws affecting investment and construction issues in Vietnam.
The purpose of these proposed amendments are to improve investment conditions in Vietnam and to formulate policies that will help Vietnam survive the global economic crisis.
The Government has proposed some changes to Investment Law, Enterprise Law, Land Law, Bidding Law, Construction Law, Environment Law, Fire Protection and Prevention Law and Law on Corporate Income Tax. It is expected that the amendments will be adopted by the National Assembly in May 2009.
The proposed amendments envision changing some key provisions in laws affecting the construction sector. Yet, if one takes a closer look on the proposed amendments, the impact on foreign investment is quite significant in the event this draft law is approved.
One of the more important proposed amendments is to remove the deadline for re-registration for existing foreign invested enterprises incorporated before July 1, 2006. The current laws have imposed a deadline of July 1, 2008 for the re-registration and many existing companies have failed to re-register to operate under the new Enterprise Law.
Many companies were reluctant to proceed with the re-registration process because of issues relating to maintaining investment incentives and corporate structure. However, the failure to re-register would not allow the relevant enterprise to extend its project life or to expand its scope of business operations. One example is that a company engaged in a manufacturing business would not be able to conduct trading or distribution activities if it has not been re-registered.
It appears that a substantial number of foreign invested enterprises failed to meet the deadline and only 6.6 per cent of them were able to meet the deadline and complete the re-registration process. As a result many foreign invested enterprises have asked to extend the deadline because of the need to compliment their businesses with the fast changing economic environment of Vietnam.
Therefore, to address this issue, the Minitry of Planning and Investment (MPI) has instead proposed to simply remove the deadline altogether. This means that if the amendment is approved, foreign invested enterprises may elect to choose when they will re-register.
Another significant amendment is the definition of foreign invested companies under the current Investment Law. The National Assembly should carefully deliberate on the definition of foreign invested enterprises because the impact of this definition is very significant in terms of licensing, business implementation and investment incentives.
In other jurisdictions, a domestic company is usually defined as a company established in accordance with the law of that country (i.e., a company established in accordance with the laws of Vietnam is a domestic company), a foreign company would usually be defined as a company established in accordance with foreign laws i.e., Company A is established in Singapore and would be considered a foreign company. Such definitions are straightforward and generally will not cause confusion as to the rights and obligations of both domestic and foreign companies.
Currently, a foreign invested enterprise comprises any enterprise established by a foreign investor in order to carry out investment activities in Vietnam, or a Vietnamese enterprise in which a foreign investor purchases shares, with which it merges or which it acquires. Under this definition, some State authorities in Vietnam have treated companies having 1 per cent foreign ownership as foreign invested companies.
The impact of this interpretation has caused so much confusion as to the rights and obligations of foreign invested enterprises especially in terms of the investment conditions and the application of Vietnam’s WTO Commitments. However, this interpretation by State authorities is not without basis because the current definition of foreign invested enterprises is quite vague i.e., a Vietnamese enterprise in which a foreign investor purchases shares, with which it merges or which it acquires.
Following this definition, one may conclude that even if a foreign investor only owns 1 per cent of the company it can be considered as a foreign invested company. Under the proposed law, the foreign invested enterprise will be defined as a company in which a foreign investor owns 30 per cent or more of the chartered capital. In terms of investment licensing, the procedure will hopefully be more straightforward and less burdensome.
If the proposed amendment is approved by the National Assembly next month, then many investment conditions affecting foreign invested enterprises will be affected. Under the proposed new definition, if the foreign investor owns less than 30 per cent of the chartered capital, then it is not considered a foreign invested enterprise and it will not have to undergo the rigorous and time consuming process of investment evaluation for obtaining an investment certificate.
Another important issue relating to the definition of a foreign invested enterprise is the issue of land allocation. Currently, only domestic companies are allowed to receive land from the Government. Again, theoretically speaking, if the foreign investor owns less than 30 per cent of the chartered capital of a company, the question now is will such a company also be treated as a domestic enterprise and therefore have the right to receive land from the Government.
There are basically two ways to obtain the right to use land in Vietnam. One is by way of land allocation and the other is by way of land leases. “Land allocation” means the granting of the right to use the land to a land user by the Government through a decision (decision to grant the land) and the land user is entitled to sublease, transfer and grant a mortgage over the relevant land use rights. However, land allocation is not available or applicable to foreign investors.
In case the proposed definition of foreign invested enterprise is approved, hopefully companies having less than 30% foreign ownership of the chartered capital will be already allowed to receive land from the Government.
This new definition will also affect the level of minimum wage to be paid by the company. Generally speaking, a foreign invested enterprise pays higher minimum wage rates to its employees compared to a domestic company. For example, the minimum wage for an employee working at a domestic company in Ho Chi Minh City is VND 800,000 per month. Whereas, the minimum wage for an employee working in a foreign invested enterprise in Ho Chi Minh City is VND1,200,000 per month.
Another impact of the amendment, of the definition of foreign invested enterprises, relates to the requirement of economic needs test (ENT) for foreign invested enterprises who want to establish a distribution branch or retail outlet beyond their first retail outlet. Under current regulations, foreign invested enterprises are required to satisfy the ENT requirements if such an enterprise wants to establish a distribution branch or additional retail outlets.
Under the ENT, the foreign-invested company would have to apply for a separate license for each subsequent outlet. The criteria for the establishment of additional retail outlets is considered on a case-by-case basis, depending on (i) the number of retail establishments, (ii) market stability, (iii) population density in a province/city; and (iv) the approved planning of the province/city.
The ENT is entirely subject to the assessment and opinion of the licensing authority. In case the new definition is approved, it may mean that if the foreign investor owns less than 30 per cent of the chartered capital of a company, then it is no longer considered a foreign invested enterprise and not subject to the ENT requirement for its distribution business in Vietnam.
Vietnamese authorities have also proposed to amend the Law on Corporate Income Tax that would allow an existing company to enjoy tax incentives when it implements a new investment project. This means that, Company A (currently engaged in manufacturing activities) decides to open a branch in Ca Mau province.
The opening of the branch is a new investment project which will entitle the branch to enjoy tax incentives depending on the business sector and geographical area. Under current tax regulations, only newly established enterprises are entitled to enjoy tax incentives. If this proposed amendment is approved, it will hopefully encourage existing companies to embark on new investment activities in Vietnam.
For those companies engaged in construction, the current law requires the preliminary design to be evaluated and approved by the relevant Government authority. However, in the proposed amendment, the company will now be responsible to evaluate the preliminary design before making any investment decision. This amendment can be seen as giving investors more leeway in terms of making decision and removing administrative requirements that tend to add delay to the development of projects.
Another proposed amendment relates to the issuance of only one certificate for land use rights (i.e., red book) and assets attached to land (i.e., pink book). Currently, land owners will have two documents to prove their “ownership” over land use rights and assets attached to land. This amendment can be viewed as lessening the burden for landowners in terms of obtaining ownership certificates.
Another amendment relates to the approval of environmental impact assessment reports. Currently, under Article 18 of the Law on Environment, an investment certificate could only be issued to some projects after its environmental impact assessment report has been approved by another Government authority.
The issuance of investment certificates of certain investment projects could be delayed because of the approval requirement for environmental impact assessment reports. Under the proposed amendment, the Government has decided to remove the approval for the environmental impact assessment reports during the licensing process. However, that approval would be required after the issue of the investment certificate and before the commencement of construction.
In light of the global economic crisis, many investors seem to have adopted the wait-and-see attitude before they make any further move in terms of business strategy and investment. Hopefully the investment climate in Vietnam will improve in case amendments are approved by the National Assembly. The crisis seems to bring positive developments because it has led the Government to rethink and reflect on investment policies affecting foreign investors in Vietnam.
vietnamnet, vir
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