A Guide for Foreign Investors: Foreign Ownership Restrictions on Entering the Vietnamese Market

Attorney Admitted in Japan and Registered Foreign Lawyer in Vietnam

Kazuya Mori, Chief Advisor (Japanese Law) at the Firm

NEXORA Law Firm — Managing Attorney
Attorney-at-Law (Vietnam)
Mediator/Conciliator, Bankruptcy Trustee, Outside Statutory Auditor

Table of Contents
01 - Purposes Behind the Vietnamese Government's Restrictions on Foreign Investment
02 - Selecting the Business Purpose of Your Investment in Vietnam
03 - Types of Restrictions Applicable to Foreign-Invested Enterprises

For companies considering entering the Vietnamese market. NEXORA Law Firm has a proven track record of supporting several hundred foreign companies with their investments in Vietnam. Attorneys with deep expertise in investment law, real estate law, corporate law, licensing, M&A, and labor matters are based on the ground in Hanoi, Ho Chi Minh City, and Da Nang, and can respond quickly anywhere in the country. Drawing not only on legal knowledge but also on hands-on operational experience and negotiating skill, we support the success of your entry into Vietnam. For those searching terms such as "Vietnam investment restrictions," "foreign investor company formation in Vietnam," "Vietnam business sector restrictions," "foreign ownership ratio," or "Vietnam investment license," this article explains — in clear legal terms — the matters foreign companies need to address when entering Vietnam, including choosing an investment vehicle, obtaining an Investment Registration Certificate (IRC), and understanding sector restrictions and conditional business lines. It also reflects the latest developments in foreign investment restrictions and key points to watch, so that even first-time investors in Vietnam can use it with confidence.

For reasons that include protecting domestic Vietnamese enterprises and managing Vietnam's overall economic development plans, the Vietnamese government imposes restrictions on foreign investors — including Japanese investors and business operators — investing in Vietnam. For example, under the Law on Investment, all foreign direct investment projects into Vietnam, as well as certain foreign indirect investment projects, require prior investment approval (an Investment Registration Certificate, or approval of an M&A transaction). In granting prior investment approval, the Vietnamese authorities review the specific application documents submitted by each foreign investor or business operator against a range of conditions and make case-by-case determinations. Furthermore, because the applicable standards are not applied uniformly across the country and can vary from locality to locality — such as between Hanoi, Ho Chi Minh City, and Da Nang — it is necessary to check not only the statutory provisions but also each locality's local rules and regulations.

01 - Purposes Behind the Vietnamese Government's Restrictions on Foreign Investment

Vietnam has adopted a "socialist-oriented market economy" as its economic model. Under this model, while the Vietnamese government leaves economic development largely to market forces, it also sets policy direction for economic development, exercises comprehensive management and guidance, and retains elements of a planned economy, so as to achieve the state's economic objectives. As a result, investment activities that may affect Vietnam's domestic economy — whether from domestic or foreign sources — must undergo review by the Vietnamese government before investment approval is granted. The principal items reviewed include the following.

■ Whether the proposed investment business/sector and its development plans are consistent with the state's economic development goals and sector-development policy

■ Whether public order and national defense can be safeguarded

■ Whether sustainable development and environmental protection can be ensured

■ Whether state-provided assets (in particular, land use rights) will be used efficiently and for an appropriate purpose

In addition, the Vietnamese government imposes restrictions on foreign investors in order to prevent adverse effects on Vietnam's economy and society — such as environmental pollution, transfer pricing, and the introduction of outdated technology — and to protect Vietnamese enterprises.

02 - Selecting the Business Purpose of Your Investment in Vietnam

When deciding to enter the Vietnamese market, the first matter to determine is what business you intend to invest in and for what purpose. In other words, your company must carefully consider what it wants to do in Vietnam and what business it intends to carry out. Once the business has been identified, it is necessary to check whether it falls within any of the following foreign investment restrictions.

2-1

Whether the Business Falls Within a Prohibited Investment/Business Sector

The business lines and sectors in which investment and business operations are prohibited under the current Law on Investment (No. 61/2020/QH14) are as follows. In practice, the items most relevant for Japanese companies to consider are mainly ② and ⑧ below.

① Narcotics-related business listed in Appendix 1 to the current Law on Investment No. 61/2020/QH14

② Business relating to the various chemicals and minerals listed in Appendix 2 to the Law on Investment No. 61/2020/QH14

③ Business relating to specimens of wild flora and fauna of natural origin listed in Appendix I to the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), as referenced in Law on Investment No. 61/2020/QH14, and business relating to specimens of endangered, precious, and rare wild flora, fauna, and aquatic species of natural origin in Group I as listed in Appendix 3 to Law on Investment No. 61/2020/QH14

④ Prostitution business

⑤ Human trafficking, and trading in human tissue, corpses, body parts, or fetuses

⑥ Business activities relating to human asexual reproduction (cloning)

⑦ Business relating to the sale of firecrackers

⑧ Debt collection business

(Quoted from a JETRO translation)

2-2

Whether the Business Falls Within a Conditional Investment/Business Sector

The list of conditional investment/business sectors is set out in Decree No. 31/2021/ND-CP, which provides guidance for implementing certain provisions of the current Law on Investment No. 61/2020/QH14. The JETRO translation below is a useful reference.

https://www.jetro.go.jp/ext_images/jfile/country/vn/invest_02/pdfs/vn7A010_jokentsukikeieitoushi_yugu.pdf

2-3

Confirming the Business's CPC (Central Product Classification) Code and VSIC (Vietnam Standard Industrial Classification) Code

The CPC code is a numbering system established by the United Nations to classify businesses by type. When a foreign investor establishes an entity in Vietnam, the relevant business code must be stated on the IRC (Investment Registration Certificate).

The CPC code can be checked at the following World Trade Organization (WTO) Center.

https://trungtamwto.vn/file/20908/cpc-verson-2.1.pdf

In addition, after acceding to the WTO, Vietnam entered into commitments to open its market to a certain extent to foreign investors in the services sector (the "WTO Commitments"), which list the CPC codes for service industries and set out the applicable market-entry conditions. Foreign investors need to check and understand these conditions.

The VSIC code is a classification of domestic economic sectors established by the Vietnamese government according to business type. It is required for the ERC (Enterprise Registration Certificate) procedure that both domestic Vietnamese companies and foreign-invested companies must complete when incorporating a legal entity. The code is listed as the company's business lines (objectives) on the national business registration portal, where company information is registered and made public. The VSIC code is set out in Decision No. 27/2018/QD-TTg.

Only once the CPC code and VSIC code have been determined can preparations for the various procedures involved in entering the Vietnamese market begin.

CPC codes are also referenced in the international treaties to which Vietnam is a party. For Japanese investors, both (i) the WTO Commitments and (ii) the Japan-Vietnam Investment Agreement can serve as useful references. For businesses not covered by either instrument (i.e., sectors that have not been opened up), approval must be obtained based on a case-by-case determination by the competent authority (for example, linen supply services). Please contact us regarding any specific business you are considering.

03 - Types of Restrictions Applicable to Foreign-Invested Enterprises

The types of restrictions (conditions) applicable to foreign investors include the following.

■ Restrictions on the foreign ownership ratio of charter capital in the local entity

■ Restrictions on the form of investment

■ Restrictions on the scope of business activities

■ Conditions relating to the investor's capacity (financial capacity), experience, and similar factors

■ Other conditions required under Vietnamese law

3-1

Restrictions on the Foreign Ownership Ratio of Charter Capital in the Local Entity

Restrictions on the foreign ownership ratio of charter capital in a local entity generally fall into four broad patterns.

① 100% foreign ownership is permitted (e.g., IT business, consulting, real estate business, real estate services)

② Maximum foreign ownership capped at 49% (e.g., domestic maritime shipping services, railway services, entertainment services)

③ Foreign ownership in a joint venture capped at 51% or less (e.g., agriculture, forestry services)

④ A joint venture with a local entity is required, with no minimum foreign ownership floor (e.g., advertising business)

3-2

Restrictions on the Form of Investment

Under the current Law on Investment, five forms of investment are recognized: ① establishing a local presence; ② investment through additional capital contribution, or the purchase of equity interests or shares; ③ implementation of an investment project; ④ investment under a BCC contract; and ⑤ special forms of investment prescribed by the government. Of these, the forms most commonly chosen by foreign investors are ① establishing a local presence and ② investment through additional capital contribution, or the purchase of equity interests or shares.

① For this form, establishing a local presence, there are three options: (a) incorporating a local company, (b) setting up a branch, and (c) setting up a representative office. Foreign investors may choose among (a), (b), or (c) depending on the business they intend to conduct in Vietnam. Of these, (b) setting up a branch is permitted only for a very limited range of business activities.

② It is also common to see investors choose ④ investment under a BCC contract in cases where incorporating a local company is not possible.

Whichever form of investment is chosen, the applicable market-access conditions must be satisfied.

3-3

Restrictions on the Scope of Business Activities

Restrictions on the scope of business activities are set out in the specialized legislation governing each sector. For example, while foreign investors are permitted to enter the cargo rental (leasing) business, the scope of activities that foreign investors and foreign-invested enterprises may carry out is far more limited than for local Vietnamese companies.

The scope of business activities also encompasses the geographic scope of operations. In principle, foreign investors and foreign-invested enterprises may not operate in areas relating to national defense or the maintenance of public security.

3-4

Conditions Relating to the Investor's Capacity (Financial Capacity), Experience, and Similar Factors

In addition to the conditions set out in the specialized legislation governing each sector, when obtaining an Investment Registration Certificate (or an equivalent certificate), the authorities' assessment criteria regarding a foreign investor's capacity (financial capacity) and experience require the submission of proof of the investor's financial capacity (such as audited financial statements for the preceding two years, a statement explaining the investor's financial capacity, or a commitment letter regarding financial guarantees from the parent company or another financial institution), together with documentation evidencing the investor's overseas track record and experience relevant to the business it intends to carry out in Vietnam.

3-5

Other Conditions Required Under Vietnamese Law

Other conditions required under Vietnamese law are set out individually in the specialized legislation governing each sector, as well as in decrees, circulars, and similar instruments issued by the competent authority overseeing the business to be conducted in Vietnam. The principal conditions required include the following.

■ Obtaining specific licenses

■ Minimum charter capital or legal (statutory) capital

■ Qualification requirements for the company's managers, experts, and technicians

■ Provision of facilities and infrastructure

■ Other conditions

[Note]

*The discussion above assumes a company that is not subject to regulation under the Law on Securities, which governs securities trading by public companies.