Vietnam - Legal and Regulatory Fr
The amended Law on Foreign Investment now contains 21 fresh additions and 20 changed articles. Major changes include alterations to investment forms and voting procedures in joint ventures.
Investors will now be allowed to open offshore accounts and can expect investment procedures to be simplified. A number of import tariffs and tax exemptions have been changed while land use rights concerning mortgages and clearance have been improved.
Joint venture boards will be required to reach mutual agreement when making appointments and dismissals of general and deputy general directors. Mutual agreement will still also be required for changes to business functions. Other important issues like the voting procedures requiring mutual agreement when making annual final accounting reports, loans, and appointment and dismissal of chief accounts were noticeably missing in the amendments.
One change now allows companies that suffer monetary losses from changing regulations to offset those losses against their income to lower their tax bill.
The amendments will reduce some of the current and fixed expenses for investors that were already too high compared to other countries in the region. For example, electricity is 25 percent higher than throughout the region, while postal and telecommunications charges are four to five times higher.
Investors are now allowed to open offshore accounts, assuming approval from the central bank. The taxes on profits reimbursed overseas were lowered to three, five, and seven percent from the previous five, seven, and 10 percent brackets.
Foreign investors are allowed to invest in Vietnam in various areas of the economy. Vietnam encourages investment in economic sectors and localities as follows:
a. Production of exports;
b. Cultivating, growing, and processing agricultural, forestry, and aquatic products;
c. High technology, advanced know-how industries, with a view to protecting the ecological environment, investment in research and development;
d. Labour-intensive industries; processing materials and using domestic natural resources efficiently;
e. Construction of infrastructure and other important industrial production facilities;
a. Mountainous and remote regions;
b. Areas underdeveloped in terms of socio-economic factors;
c. Foreign investment licenses are not granted in sectors and areas where foreign investment may hamper national security and defense, cultural and historical heritage, custom, and the ecological environment.
In accordance with planning and development guidelines, the government specifies which localities are suitable for foreign investment, issues lists of priority and prime priority investment projects, lists of conditional investment sectors, and lists of prohibited investment sectors. Private economic organizations are allowed to engage in investment cooperation with foreign investors in most sectors and under conditions regulated by the government.
(iii) Perceived problems
Following a Ministry of Planning and Investment (MPI) survey of 64 foreign-investment enterprises, officials identified the three most pressing problems in Vietnam's investment climate: dual pricing, discrimination against private firms in favor of state-owned enterprises, and difficulties in accessing land. Other problems the MPI pollsters found were related to the business approval and labour recruitment processes. The lowest ranked complaint related to difficulties in choosing which form of investment would be most suitable to conduct business.
(iv) Investment guarantees
The Government of Vietnam guarantees that capital and other lawful assets of investors will not be expropriated or confiscated by administrative measures and that businesses with foreign invested capital will not be nationalized. Additionally, laws and regulations will not be applied retroactively if they adversely affect investors' interests.
(v) Remittances and conversion policies
Subject to foreign exchange availability and after payment of all tax obligations, foreign investors may repatriate their share of legal after-tax profits (only during the year in which the profits were actually made), principal and interest due on loans, royalties or fees paid, invested capital and any other legally owned money and assets.
This guarantee is valid if the activities are supported by an underlying contract that has been approved by the relevant government authorities.
Expatriates working for businesses with foreign invested capital are allowed to remit their income abroad.
Under the FIL, foreign parties to a BCC and foreign investment enterprises are generally required to be self-sufficient in foreign currency requirements to pay expenses, repatriate profits, and repay loans and other foreign currency expenditure requirements.
Foreign investment enterprises may apply to the State Bank to purchase foreign currency.
However, it distributes available foreign currency according to official priorities with favored projects, such as infrastructure construction and import-substitution, having priority.
(vi) Land ownership
The principle of private ownership of land does not yet exist in Vietnam. Foreign investment under the FIL permits foreign investors to use land by leasing it directly or through a joint venture relationship with a local partner who has been allocated land use rights by the State.
Land leases to foreign entities may be granted for up to 50 years or in special circumstances 70 years with the approval of the Prime Minister.
In the case of a joint venture, the State grants the land lease to the Vietnamese partner (invariably state-owned) who usually contributes the land as legal capital worth the value of the land use right.
Previous Ministry of Finance rules said that foreign investors had to pay 0.01 percent of the project's total amount as a registration fee at a minimum of US$50 and maximum of US$10,000 per project.
The MPI is designed as a "one-stop" licensing body responsible for coordinating with other government authorities to evaluate and approve an investment license application.
Once a license has been approved, the MPI monitors and regulates the performance of licensed projects.
To direct foreign investment into priority areas, the MPI publishes an investment priority list that provides information regarding projects, industries, and locations identified by various Vietnamese authorities as those appropriate for foreign investment.
For evaluation purposes, investment projects are classified as Group A or Group B, with mandated approval periods of 47 days and 40 days, respectively.
Group A requires the approval of the Prime Minister and includes projects in industrial zones, export processing zones and BOT; projects with investment capital of US$40 million or more; projects in the areas of culture, press, and publishing; projects related to national defense and security; and projects that use five hectares or more of urban land and 40 hectares or more of other types of land.
Group B includes all other projects and is approved solely by MPI, except for certain kinds of projects that can be approved by the provincial People's Committees and Industrial Zone Authorities. Investors can expedite the licensing process by informing and consulting with the relevant State and local authorities about the investor's purpose and progress before formal submission of the application.
Group B projects that can be licensed by the People's Committees and Industrial Zone Authorities entail projects with a legal capital of US$10 million or less in Hanoi and Ho Chi Minh City; projects with a legal capital of US$5 million or less in other provinces; and projects in industrial zones. However, local authorities may be required at times to consult with the MPI before issuing an investment license.
Several elements of an application carry weight in MPI's evaluation criteria: 1) legal status and financial capabilities of the project's foreign and Vietnamese partners; 2) tangible and equitable benefits to the Vietnamese people; and 3) compatibility with the government's policy goals and priorities in terms promoting economic and social development, jobs creation, greater production capability, and technology transfer.
The application process is summarized below:
Group A projects
Stage 1: Investor submits application to MPI.
Stage 2: Application forward by MPI to concerned ministries.
Stage 3: Relevant ministries render a written opinion to MPI. (Failure to reply means automatic consent.)
Stage 4: MPI establishes advisory committee, if necessary.
Stage 5: MPI submits opinion to the Prime Minister.
Stage 6: Prime Minister issues decision to grant or deny license.
Stage 7: MPI notifies applicant.
Stage 8: MPI issues investment license.
Group B projects
Stage 1: Investor submits application to MPI or People's Committee (if applicable for the latter).
Stage 2: MPI forwards application to concerned ministries.
Stage 3: If the application is under MPI jurisdiction, the provincial People's Committee issues a written opinion to MPI. (Failure to reply means automatic consent.) If under the jurisdiction of the People's Committee, then it evaluates the project itself.
Stage 4: MPI issues a decision to grant or deny license. Or, if relevant, the People's Committee issues a decision on the project.
Stage 5: MPI notifies applicant.
Stage 6: MPI issues investment license.
The application package must include the following:
• Application form, which includes names of the parties involved, name of the company, address, legal capital, amount of each party's contribution to capital, information on the Board of Management, profit and loss distribution ratios, insurance information, dispute resolution procedures, and anticipated tax treatment
• Joint venture contract, if applicable
• Charter of the foreign invested enterprise
• Feasibility study and environmental impact assessment, if required
• Corporate documents related to the legal and financial status of the parties in the project
• Additional documents, if relevant to the project: technology license contract, trademark license contract, and memorandum of understanding for a land lease
Types of investment forms
A BCC is a contractual arrangement between the foreign and Vietnamese party and no separate legal entity is created. It is considered the most flexible arrangement in some respects but has other limitations with respect to the other investment types.
A BCC receives a business license as opposed to an investment license and is not entitled to many tax holidays and other concessions given to foreign investment projects. In practice, the duration granted rarely exceeds 15 years and is commonly five years.
To secure Ministry of Planning and Investment (MPI) approval, the parties involved must show that a high degree of commercial involvement on both sides will occur, and that it is not merely a subcontracting arrangement (processing contracts are regulated by the Ministry of Trade).
BCCs are common in the petroleum and telecommunications sectors, where foreign investors are prohibited from having operational involvement or management control.
(ii) Joint venture enterprise (JV)
A JV is the most common form of establishment, accounting for about 70 percent of total foreign investment. A joint venture creates a private limited liability company through shared ownership by Vietnamese and foreign partners. The minimum legal capital requirement for the foreign party is 30 percent and there is no statutory ceiling limit.
In practice, JVs are usually structured as a 70 percent contribution by the foreign party, and 30 percent by the Vietnamese party. Legal capital contribution by the foreign party may be in the form of cash, plant, equipment, technology, and know-how.
The Vietnamese party's contribution is usually land-use rights. Under the FIL, valuation of all capital contributions is based on international market prices.
Licenses are issued for a maximum duration of 50 years, although in special cases, they may be granted up to 70 years.
JVs are required to form a board of directors, referred to as the Board of Management in Vietnam, the membership of which reflects the proportion of each party's capital contribution.
However, the guiding principle for the management of foreign investment projects in Vietnam is equality between both parties. As such, at least two members on the board must be from the Vietnamese party, and certain major decisions affecting the JV require a unanimous vote of the board. Other decisions require a two-thirds majority. Perhaps most important is that Vietnamese partners benefit from a right to veto in joint venture enterprises.
(iii) 100 percent foreign owned enterprise (FOE)
The FOE is established as a limited liability company incorporated with 100 percent foreign capital. Like JVs, FOEs can only be established for specific investment purposes. The FOE accounts for about 17 percent of foreign investment.
The duration of operation of an FOE is stated in the investment license but normally does not exceed 50 years. Foreign investors are not entitled to ownership of land under an FOE, but it can lease land from the government, institutions, and special industrial/export zones.
(iv) Build-Operate-Transfer (BOT)
The BOT investment form is designed to attract private foreign investment in public infrastructure projects. Under a BOT license, investors build the infrastructure, operate the project for a reasonable time period to recover their initial investment and earn a reasonable profit, and at the end of the contractual period, transfer the project without compensation to the Vietnamese government.
Subsequently, the negotiated terms are set forth in contracts establishing the joint venture or may be expressly stated in the foreign investment license.
In general, a licensed foreign investment is eligible for the incentives specified below:
Corporate income tax: The standard rate is 25 percent, which compares favorably with rates of 25 percent, 35 percent, or 45 percent specified for Vietnamese-owned enterprises.
Preferential rates of 10 percent, 15 percent, and 20 percent may be applied to investment projects meeting certain criteria or identified as projects of special importance prescribed by the MPI. Rates of 20 percent, 15 percent, and 10 percent have specific eligibility requirements and duration. The eligibility requirements depend on such factors as the percentage of production exported, the number of workers employed, and the type of business activity. The duration schedules are as follows:
• 20 percent: 10 years
• 15 percent: 12 years
• 10 percent: 15 years
Import duty: A joint venture company, 100 percent foreign-owned enterprise, and the foreign party to a BCC are exempt from paying duty on the import of equipment and materials which form part of the capital contribution of the foreign investment.
Technology transferred as part of a foreign party's capital contribution is also exempt from import duty.
Export manufacturers receive reimbursement of import duties paid on materials used in production once the finished products are exported.
Other incentives: Tax refunds are available on profits reinvested for at least three years. Joint ventures and 100 percent foreign-owned enterprises may carry forward their losses for up tofive years.
Foreign investors may also enjoy tax concessions and holidays for investments in Export Processing Zones (EPZ) and Industrial Zones (IZ).
Projects located in EPZs enjoy the following investment incentives, among others:
• Exemption from export tax on finished products exported from the EPZ to foreign markets
• Tax rates of 10 percent for production enterprises and 15 percent for service enterprises
• Exemption from tax on profits for the first four profitable years for production enterprises and first two profitable years for service enterprises
• A tax rate on profit remitted abroad of five percent Projects located in an IZ enjoy the following investment incentives, among others:
• Profit tax rates of 18 percent for production enterprises and 22 percent for service enterprises; those firms that export at least 80 percent of their production enjoy a lower rate of 12 percent;
• Exemption from profits tax for the first two profitable years for production enterprises and one year for service enterprises;
• Export processing enterprises located in an IZ are still entitled to enjoy EPZ tax incentives.
• Corporate income tax: The corporate income tax was described in section 4 above.
• Value added tax (VAT): On January 1, 1999, Vietnam introduced a VAT regime. The scheme has two calculation methods and a four-tiered rate structure that includes rates of zero percent, 5 percent, 10 percent and 20 percent, with 10 percent being the standard rate. Twenty-six categories of goods and services are exempt from VAT. Foreign-owned enterprises and BCCs can temporarily defer VAT payment on raw materials and materials imported for manufacturing exported goods.
• Income remittance tax (IRT): IRT is a withholding tax imposed on income remitted abroad. IRT is imposed at rates of 3 percent, 5 percent, and 7 percent, with the lowest rate reserved for encouraged categories of investment.
• Special sales tax (SST): The SST is an excise tax imposed on goods and services that are considered to be luxurious. SST is imposed on automobiles, tobacco, alcohol, and golf for example.
• Personal income tax: Vietnam's income tax for foreigners and Vietnamese citizens/permanent residents ranges from 0 to 50 percent. The scale is as follows:
|Individual's income per month (in dong)||Tax rate (in percent)|
|Up to 5 million||0|
|Over 5 million to 12 million||10|
|Over 12 million to 30 million||20|
|Over 30 million to 50 million||30|
|Over 50 million to 70 million||40|
|Over 70 million||50|
For Vietnamese citizens and permanent residents of Vietnam, the income tax rates range from 0 to 60 percent. The scale is as follows:
|Individual's income per month (in dong)||Tax rate (in percent)|
|Up to 2 million||0|
|Over 2 million to 3 million||10|
|Over 3 million to 4 million||20|
|Over 4 million to 6 million||30|
|Over 6 million to 8 million||40|
|Over 8 million to 10 million||50|
|Over 10 million||60|
Foreigners working in Vietnam are not subject to social security or an insurance levy, but employed Vietnamese citizens must contribute 5 percent and 1 percent of their base salary to the State Social Insurance and Health Insurance funds, respectively. These contributions are deducted by the employer, who is also required to contribute 15 percent and 2 percent, respectively, of their employees' base salary to these two funds.
The Ministry of Labour, War Invalids, and Social Affairs provides state-owned businesses with guidelines on how to implement the five-day working week system. Their owners decide working and leisure time in line with the Labour Code of businesses of other economic sectors.
However, the State encourages these businesses to implement a 40-hour working week. The official monthly minimum wage for foreign-investment joint ventures is US$40.
Unions are controlled by the Vietnamese Communist Party and have only nominal independence. However, union leaders influence some key decisions, such as those on health and safety issues, and on minimum wage standards.
Workers who wish to join or form unions must receive approval from the local office of the Party-controlled Vietnam General Confederation of Labour (VGCL).
The VGCL is the umbrella organization under which all local trade unions must operate, and it claims four million members in branches in each of the major cities and provinces. VGCL officers report that the VGCL represents 95 percent of public sector workers, 90 percent of workers in state-owned enterprises, and 50 percent of private sector workers.
The Labour Law requires provincial trade union organizations to establish unions within six months at all new enterprises with more than 10 employees as well as at existing enterprises that operate without trade unions. Management of those companies is required by law to accept and co-operate with those unions.
The Labour Law provides for the right to strike under certain circumstances. The law requires that management and labour resolve labour disputes through the enterprise's own labour conciliation council. If that fails, the matter goes to the provincial labour arbitration council. Labour courts, which were established in 1996 within the people's court system, have heard a small number of cases but still are in the early stages of development and lack sufficient personnel because of government budget constraints.
The government-controlled labour unions stipulate written procedures for managing labour disputes that permit unresolved disputes to be arbitrated before a court. Unions have the right to appeal a council decision to the provincial people's court and to strike. However, the law prohibits strikes in 54 occupational categories, including enterprises that serve the public and those that are important to the national economy or national security and defense. These functions are defined by the government and include electrical production, posts and telecommunications, railway, maritime and air transportation, banking, public works, and the oil and gas industry.
(ii) Collective bargaining
Workers must have the approval of the provincial or metropolitan branch of the VGCL to organize unions in their enterprises, but they also can bargain collectively through the partyapproved unions at their enterprises. In the past the State generally set wages since most employees worked for state companies.
With the growth of the private sector and the increased autonomy of state firms, a growing percentage of companies are setting wages through collective bargaining with the relevant unions.
Customs and Trade Procedures
(b) Formal tariffs Import duties are levied on most items. Rates are specified in the "Export and Import Tariff for Commercial Goods," which is subject to frequent revisions. In January 1996, rates on a list of goods under the Common Effective Preferential Tariffs (CEPT) scheme were lowered to below 60 percent. The highest rates are levied on consumer goods, especially products considered as luxury items (e.g., liquor, cigarettes, and cars).
Capital goods and materials are granted low or zero duties. Tariffs on 857 imports from ASEAN are five percent or below, of which over half are commodities, machinery and equipment. Exemptions are granted for certain goods, including non-refundable aid, goods in transit and temporary imports, and re-exports for exhibitions.
Goods brought in for foreign-investment projects may qualify for exemption if they fall under three categories: 1) Goods and technology transfer considered as capital contribution by the foreign partner; 2) Goods and materials for use in export production; and 3) Goods used for capital construction or as fixed assets for business co-operation contracts.
Some products are also subject to less formal and temporary "quantitative targets" that the MOT regulates to complement economic goals. For example, import quotas on motorcycles and automobiles (finished and CKD kits) in an effort to encourage a long-term strategy for the "localization" of automobile parts production. Import quotas are often administered through the import licensing system managed by MOT and are mainly granted to state-owned enterprises.
Streamlining the tariff structure is one remaining key trade liberalization issue. However, some of the government's major obstacles stem from pressures to protect domestic industries and the potential loss of significant tax revenues.
Nevertheless Vietnam is committed to reducing or eliminating tariffs and other trade restrictions since it is a requirement of its membership in the ASEAN Free Trade Area (AFTA) and if it is to realize its hopes for membership in the WTO.
Customs valuation of imported products may be based on CIF prices declared by the importers or on reference prices established by the administration authorities. Although in principle reference prices are used to counteract the practice of under-invoicing, the system is not always responsive to world market price fluctuations.
The formal rules on customs declaration require that an application be lodged at the local office of the General Department of Customs for each permitted consignment of imported or exported goods. For imports, a declaration must be made within 30 days of the arrival of the goods in Vietnam. Customs is required to respond within one day, and any duty must be paid within 30 days of receiving the custom's notification. In the case of exports, duty must be paid within 15 days of receiving notification.
In general, authorized enterprises will have an import allocation, which is typically valid for a period of six to 12 months, and an import license, which may cover several shipments. For those companies, including foreign firms, that do not have import or export rights, they must do so through an authorized import-export company. The average transaction cost for the service is about 2-3 percent of the value of the consignment of goods.
The import of firearms, ammunition, explosives and military equipment; drugs and toxic chemicals, dangerous and unhealthy cultural products; materials for making cigarettes; secondhand consumer goods (except motorcycles and cars under 12 seats) and used equipment are prohibited, with certain exceptions. As certain products are often placed on temporary bans, current advice should be sought.
Export duties are levied on mostly natural resources and commodities, with a maximum rate of 45 percent. Manufactured goods for exports are exempt from export duty.
Prohibited exports include antiques of high value, logs, timber, rattan canes, and precious or rare plants and animals. Three commodities - rice, oil and wood products - are subject to government imposed quantitative restrictions or targets and are administered through export
Other relevant regulations for import/export
Goods exported or imported as samples or for the purpose of advertising are subject to export or import duty. Exemption from duty is granted to goods permitted to be temporarily exported or imported for exhibitions.
At the end of the exhibition, they must be re-imported into Vietnam in the case of temporary exports, or re-exported from Vietnam in the case of temporary imports. Documents required for exemption for exhibitions include a notification of, or invitation to, the exhibition and an export or import license from the Ministry of Trade.
Since January 1, 1997, all products distributed in Vietnam have to have labels with the following information on the name of the product, name and addresses of manufacturer, quantity, composition, quality, instructions for use or maintenance, date of manufacture and expiration dates.
Specific information by product or by standard may be provided by the importing organization or sought from the relevant ministry or the government's management body with overall responsibility, i.e., General Department of Standards, Weights, Measures and Quality (STAMEQ) of the Ministry of Science, Technology, and Environment (MOSTE).
The operation of customs warehouses was approved in 1994. Entities permitted to lease customs bonded warehouses are foreign enterprises; individuals and overseas Vietnamese; Vietnamese import-export licenses companies; and foreign investment enterprises licensed to carry import-export activities. Most goods pending import and domestic goods pending export can be deposited in bonded warehouse under the supervision of the provincial customs office.
The exceptions are goods prohibited from import or export, Vietnamese-made goods with fraudulent trademarks or labels, goods of unknown origin, and goods dangerous or harmful to the public or environment. The lease contract must be registered with the customs bond unit at least 24 hours prior to the arrival of the goods at the port.
Documents required are a notarized copy of authorization of the holder to receive the goods; a notarized copy of the warehouse lease contract; the bill of landing; a certificate of origin; a packing list, and customs declaration forms.
Owners of the goods pay import or export tax when the goods are removed from bonded warehouse.