Methods of direct investment into Vietnam

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With the strong competitive advantages of geography, natural resources, and an abundant labor force, Vietnam is one of the leading investment destinations in Southeast Asia, attracting a large amount of capital each year. Despite being affected by the COVID-19 pandemic, in 2021, total newly registered, adjusted, and paid-in capital for share purchase by foreign investors reached about USD 31.15 billion, an increase of 9.2% compared to the same period in 2020, focusing mainly on some sectors, namely processing and manufacturing, electricity production and distribution, real estate business, wholesale and retail[1].

To be able to achieve this impressive figure, the Government of Vietnam has developed many policies to support investors, helping them to access the Vietnamese market easily and effectively. In order to help foreign investors easily find the right methods to maximize the benefits of direct investment in Vietnam while still complying with relevant laws, we have published this article.

Currently, to make direct investments in Vietnam, foreign investors can choose one of the following popular approaches: (i) establishment of a new legal entity, (ii) capital contribution/acquisition in existing legal entities, and (iii) Business Cooperation Contracts (BCC) signed with other local or foreign investors.

Establishment of a new legal entity

Before establishing a business organization, the foreign investor must have an investment project and follow the procedures for applying for an Investment Registration Certificate.

Depending on the business industry, the number of investors, the size of the project, and whether there is any intention to list the entity, a foreign entity may establish its presence in Vietnam as a limited liability company (LLC), a joint-stock company (JSC), or a partnership. 

For example, investors can choose to establish a single-member LLC if there is only one investor, or a multimember LLC if there are two or more members, but not exceeding fifty members, as well as they hope that their liability is limited to the extent of the registered capital contributions into the company. Regarding joint-stock company (JSC), the required number of shareholders is at least three, and there is no restriction on the maximum number of shareholders. Besides, the liability of the shareholders is also limited to the extent of the registered capital contributions to the company. The final type of business that investors can choose to establish is a partnership. In this type of business, there must be at least two unlimited liability partners. Besides the unlimited liability partners, the partnership can have limited liability partnerships. The foreign investors can choose to be limited liability partnership in the company.

Capital contribution/acquisition in existing legal entities

The foreign investors may contribute capital to a business organization in the following forms: (i) purchase of shares of JSC through the initial public or additional application, (ii) contribution of capital to LLC and partnerships. They also may purchase shares or stakes of a business organization by (i) purchasing shares in a JSC from such company in some exceptional circumstance or its shareholders, (ii) purchasing stakes of members of an LLC, or (iii) purchasing stakes of capital contributing member of a partnership. This purchase of shares or stakes of a business organization is known as a Merger and Acquisition transaction.

There is one thing that foreign investors need to be aware of when joining an M&A transaction. Before obtaining an Enterprise Registration Certificate, if the share/capital acquisition of foreign investors results in the increase of foreign ownership ratio in the target company, and (i) the target company works in conditional business industries applied to foreign investors, or (ii) the foreign ownership ratio after the share/capital acquisition is 50% or more, the target company must apply for approval for capital contribution/ acquisition for fo at the Investment Registration Division of provincial Department of Planning and Investment.

Business Cooperation Contracts (BCC)

A Business Cooperation Contract (BCC) is normally signed between foreign investors and Vietnamese investors or between foreign investors only in order to carry out certain business activities. Procedures for issuing Investment Registration Certificates shall apply to BCC if one of the parties is a foreigner. With this form of investment, the parties can support each other with each other’s shortcomings and weaknesses in the production and business process. In addition, foreign investors can quickly access information under the knowledge of the market through domestic partners.

This form of investment does not constitute the creation of a new legal entity. The investors in a BCC share the revenues and/or products that arise from a BCC and hold unlimited liability for the financial obligations of the BCC. Parties to a business cooperation contract shall establish a coordinating board to execute the BBC. Functions, tasks, and powers of the coordinating board shall be agreed upon by the parties. Contents of a business cooperation contract shall contain at least the basic provisions under Article 28, Law on Investment 2020.

In conclusion, to decide to invest in Vietnam, investors will need to consider many other factors such as the conditional business lines[2], investment incentives in relation to corporate income tax, import duty tax, land rental, and land use tax based on project location, business industry. However, we hope this article has helped investors gain some information when preparing to invest in Vietnam.

By: Tam (Amy) Vu | LinkedIn

[1] Report on foreign direct investment in 2021. Ministry of Planning and Investment Portal. (2021, December 28). Retrieved February 15, 2022, from https://www.mpi.gov.vn/en/Pages/tinbai.aspx?idTin=52660&idcm=122

[2] Vietnamese Law on Investment 2020 provides a consolidated list of 227 conditional business lines. This list, together with the business conditions are publicly posted in the National Portal on Business Registration at https://dangkykinhdoanh.gov.vn/ and https://dautunuocngoai.gov.vn/

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