Business start-up rules contradict intent of law

Setting up an enterprise in Viet Nam has been giving business people headaches for years, gobbling up mounds of paper and gallons of ink. However, the consolidation of several different laws on business establishment into one common Law on Enterprises in 2005 marked a step forward, and the Law on Investment, enacted the same year, affirmed the nation’s non-discriminatory approach to both domestic and foreign investors.

Despite the admirable objective of creating a level playing field for all enterprises, establishing an enterprise in Viet Nam remains a tangled web.

The complications date back to 2007, when Government Decree No 139/2007/ND-CP was issued, representing a rather liberalised approach to establishing enterprises, to the delight of many foreign investors. Decree No 139 appeared to allow foreign investors to take full advantage of the legal procedures for business registration which apply to domestic investors, thus treating Vietnamese nationals and foreigners identically with regards to the establishment of enterprises.

Section 3(b) of Article 9 provides: “If the foreign investor will not own more than 49 per cent of the charter capital in the enterprise proposed to be established, then establishment of the enterprise shall be implemented in accordance with the provisions of the Law on Enterprises and Government Decree No 88/2006/ND-CP dated August 29, 2006, on business registration. In this case the same regulations which apply to domestic investment projects shall apply to registration of the investment.”

Decree No 139, therefore, carved out a large exception to the Law on Investment. So long as the foreign portion of a new firm’s charter capital did not surpass 49 per cent, no investment certificate was required. With this new exception, foreign investors successfully incorporated enterprises under relatively simple legal procedures, without undergoing the more costly and lengthy procedures for obtaining approval of an investment project. The “investment project” track for foreign investors, apparently required by the Law on Investment, was largely ignored in favour of the simplified “business registration” track offered by Decree No 139.

But this situation proved short-lived. Two years after its issuance, the Ministry of Planning and Investment issued Official Letter No 1752/BKH-PC on procedures for incorporation of enterprises with foreign investors owning less than 49 per cent of charter capital. Official Letter 1752 provided that “foreign investors contributing capital jointly with Vietnamese investors to form an enterprise in which foreign investors hold less than 49 per cent of the charter capital of such enterprise [must] establish an investment project and carry out procedures for issuance of certificate of investment.”

Official Letter No 1752 therefore appeared to play a decisive role in shutting down the exception created by Decree No 139. Under the Official Letter, any enterprise in which foreigners invested, regardless of their percentage of ownership, were required to follow the investment project track. Despite this apparent clarity, troubling legal questions remained. Decree No 139 was still in effect, and, technically, an official letter could not supersede a decree. Nevertheless, the ministry has strictly enforced the Official Letter, while apparently ignoring the contradictory provisions of Decree No 139.

Meanwhile, Government Decree No 102/2010/ND-CP took effect in November of last year, expressly replacing Decree No 139.

Decree No 102 dictates requirements for three different business establishment scenarios. Article 11, Section 3, provides: “An enterprise established in Viet Nam of which foreign investors hold not more than 49 per cent of the charter capital is subject to investment or business conditions applicable to domestic investors.” Article 11, Section 4, provides: “An enterprise established in Viet Nam of which foreign investors hold more than 49 per cent of the charter capital is subject to investment or business conditions applicable to foreign investors.” And Article 12, Section 3, provides: “Investors being foreign organisations or individuals establishing for the first time an enterprise in Viet Nam shall register investment concurrently with establishment of an economic organisation under the Law on Investment.”

Decree No 102, therefore, continues the contradictions with Official Letter No 1752. While the decree and the official letter are in agreement regarding enterprises in which a foreigner is investing for the first time, and in the establishment of enterprises in which foreigners will hold over 49 per cent of charter capital, they differ in their treatment of subsequently established enterprises (beyond the first by a particular foreign investor) in which foreign investors will hold not over 49 per cent of charter capital. For such enterprises, Decree No 102 does not require an investment certificate and permits the enterprise to be established pursuant to regulations applicable to the establishment of domestic enterprises.

The apparent differences in treatment of investors has the result of failing to provide for a “unification in application of the laws” and the principle of non-discrimination – the very intent of lawmakers when enacting the Law on Investment and the Law on Enterprises in 2005.

Nevertheless, Section 1, Article 50, of the Law on Investment states that: “foreign investors investing in Viet Nam for the first time must have an investment project and perform the procedures for investment registration or evaluation of investment at the State administrative body for investment in order to be issued an investment certificate.”

Official Letter No 1752 reaffirmed these words with precision, while Decree No 139 ignored this language. While enormously popular with investors, the decree was not consistent with the Law on Investment. While it was in effect, the decree was welcomed and upheld by local authorities, helping attract additional investment and other advantages offered by foreign investors.

While Decree No 102 is more closely aligned with the Law on Investment, it also does not strictly comply with the law. While the Law on Investment requires an investment certificate only for enterprises in which a particular foreign investor is investing in Viet Nam for the first time, the decree imposes an additional hindrance. It requires foreign-invested enterprises, beyond the first one in which a particular foreign investor is involved, where foreign investors will hold more than 49 per cent of the charter capital, to be established according to the investment project procedure, rather than the simplified business registration procedure. In terms of creating an attracting environment for foreign investment, Decree No 102 remains a step backwards from the Law on Investment.

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