Back ground

The more integration by Vietnam into the global economy, the more investment and business opportunities are available for foreigners. To do their investment in Vietnam, foreigners can choose either foreign direct investment (“FDI) or foreign indirect investment (“FII”). If under FDI scheme, foreigners must, before July 2006, follow the Law on Foreign Investment in Vietnam of 1996 (“FIL 1996”), and from July 2006, the Law on Enterprises of 2005 (“LoE 2005”) with respect to their local company incorporation (commonly called foreign invested companies or “FIE”), and the Law on Investment of 2005 (“LoI 2005”) with respect to their local investment projects in Vietnam. If under FII scheme, foreigner investors must, before July 2006, follow the Law on Enterprises of 1999 (“LoE 1999), the Law on Domestic Investment Promotion of 1998 (“LDIP 1998”), and the under-law regulations on securities particularly Decree No. 144/2003/ND-CP, dated 28 November 2003, of the Government, on securities and securities market (“Decree 144”), and from July 2006, generally speaking, the LoE 2005 and LoI 2005, and from January 2007, the Law on Securities of 2006 (“LoS 2006”) in particular.

Under the LoI 2005, “direct investment” means a form of investment where investors invest their investment capital and participate in its management, while “indirect investment” means a form of investment where investors buy shares, capital contribution portions, bonds, and/or other valuable papers, by themselves or via investment funds or other financial intermediaries, but not directly participate in investment activity management.

Foreign direct investment and investment account

Under the FIL 1996, once having a FIE establishment and to carry out its investment project, apart from common accounts in VND and foreign currencies for normal operations, FIE must open a so called “special capital deposit account in foreign currencies”, at any bank licensed to operate in Vietnam, solely for the purpose of dealing with foreigners’ capital-related transactions, including initial capital contribution (inflow) and foreigners’ legal income needs to be sent outside (outflow) from Vietnam. Concretely, with respect to the inflow, all capital to be contributed to the charter capital of FIE by foreigners, from outside to Vietnam, must be transferred to this account. Similarly, with respect to the outflow, the original capital and all of the legal incomes, including those derived from capital transfer to other investors, must be transferred to this account for the purpose of conversion of VND into foreign currencies (if any) before being further remitted from Vietnam to abroad. This is the only way to get VND capital amount and/or income converted into foreign currencies and send it out of Vietnam. The legal instruments that provide the guidelines for opening, using and maintaining the account, comprise Circular No.04/2001/TT-NHNN, dated 18 May 2001, of the State Bank of Vietnam (“SBV”), on the forex issues with respect to FIE and foreigner party to the business cooperation contract (“Circular 04”). For reference here only, such so-called “special capital deposit account in foreign currencies” is briefly referred to as “Circular 04 Account”. Note that Circular 04 was issued to provide the guidelines for the implementation of Decree No. 24/2000/ND-CP, dated 31 July 2000, of the Government, on the implementation of FIL 1996, which has been replaced by LoE 2005 and LoI 2005.

Foreign indirect investment and investment accounts

Under the regulations on securities and stock market, to do investment, a foreigner must, in addition to applying for a trading code, registering securities trading account, etc., open the so called “account for capital contribution and share purchase in VND”, at any bank licensed to operate in Vietnam, in case of capital contribution to and share purchase from unlisted companies (i.e. only for equity or shares purchase), in accordance with Circular No. 03/2004/TT-NHNN, dated 25 May 2004, of the SBV, on the management of forex issues with respect to the capital contribution, share purchase by foreign investors in Vietnamese companies (called as “Circular 03 Account”, for reference here only). Similarly, foreign investors must  open such so called “special securities transaction account in VND” at any bank licensed to operate in Vietnam, through or as recommended by a securities company where they open their securities trading account, in case of investment into listed securities (including shares, bonds and other securities), in accordance with Decision No.1550/2004/QD-NHNN, dated 6 December 2004, of the Governor of the SBV, on the management of forex issues with respect to the sale and purchase of securities by foreign investors on the securities trading centres/ stock exchanges (called as “Decision 1550 Account”, for reference here only). Similar to Circular 04 Account, the sole purpose of the latter accounts (i.e. Circular 03 and Decision 1550 Accounts) is to deal with foreigners’ capital-related transactions, including inflow and outflow. Again, this is the only way to get their original capitals and legal incomes in VND converted into foreign currencies, and send them out of Vietnam. Note that Circular 03 was issued to provide the guidelines for the implementation of Decision No.36/2003/QD-TTg, dated 11 March 2003, of the Prime Minister. This Decision issued the regulations on foreigners’ capital contribution and share purchase in Vietnamese companies (“Decision 36”), and was an instrument to provide guidelines for implementation of the LoE 1999 and LDIP 1998, which have been replaced by LoE 2005 and LoI 2005. And, Decision 1550 was issued to provide guidelines for the implementation of Decree 144, which has been replaced by LoS 2006.

Foreign exchange management and investment accounts

The Ordinance on Foreign Exchange of 2005 (“Forex Ordinance 2005”) sets out the general rules for all issues relating to forex issues in Vietnam. Although it combinedly defines a sole purpose of investment accounts (applicable to foreign investors), that is, to deal with their initial investment capital transferred to Vietnam, and that capical along with legal incomes sent out of Vietnam, it remains to distinguish “foreign direct investment capital account in foreign currencies” (which may be identical to Circular 04 Account), applicable to FDI activities in Vietnam, from “foreign indirect investment capital account in VND” (which may be identical to Circular 03 and Decision 1550 Accounts), applicable to FII activities in Vietnam. However, to date, there is only Decree No. 160/2006/ND-CP, dated 28 December 2006, of the Government (“Decree 160”), issued to provide guidelines for its implementation. We still await further detailed regulations (may be at circular level), to provide further detailed guidelines for the forex issues and investment accounts applicable for FDI and FII activities, which may then replace Circular 04, Circular 03 and Decision 1550 accounts, and be consistent with the requirements on foreign exchange as provided in Forex Ordinance 2005, LoE 2005, LoI 2005 and LoS 2006.

Due to the fact that there is no detailed guidelines for implementation of Forex Ordinance 2005 and Decree 160 as mentioned above, we must still follow the old rules as provided in said Circular 04, Circular 03 and Decision 1550, as legal basis to carry out foreign exchange transactions and foreign investors’ capital management. Generally speaking, certain regulations of Circular 04, Circular 03 and Decision 1550 are not fully compatible with the new requirements on forex management in Forex Ordinance 2005, LoE 2005, LoI 2005 and LoS 2006, as well as the same newly arisen in the current investment environment context that has been much changed over the last ten years.

Untransparent law enforcement, leading to uncertainties to capital transactions and risks to foreign investors

The continued use of the old regulations in the new context as mentioned above, plus the absence of specific guidelines for the new regulations, along with different interpretations that have been occurred from time to time during law application and enforcement, have resulted in certain troubles to foreign investors’ capital transactions, and risks of being unable to transfer their capital and legal income out of Vietnam. Among other causes to such uncertainty, we can list out as follows:

First, it is unclear which accounts, i.e. only Circular 03 Account or Decision 1550 Account or both, will be used when a foreign investor invests through FII, in both unlisted shares and listed securities, without participating in investment operation management. As mentioned above, Circular 03 Account is only served for the sale and purchase of contributed capital portion or unlisted shares, while Decision 1550 Account - the sale and purchase of listed securities (including not only shares, but also bonds, other valuable papers, etc.).

Is there any difference in case where a foreigner both invests and participates in management of its investment (i.e. their investment, according to LoI 2005, turns into FDI, but not FII)? If so, will Circular 04 Account (only for FDI) be applicable (as mentioned above, such account is served only for FDI, in particular for new FIE incorporation in Vietnam, and to which account foreign investor must then transfer his/her capital in foreign currency), simultaneously with, or instead of, the above-mentioned Circular 03 Account and Decision 1550 Account?

Second, it is also unclear which account, that is, only Circular 04 Account or both Circular 03 Account and/or Decision 1550 Account, should be used when a foreigner invests in shares newly issued and offered by an existing FIE (for capital raising during its operation) or transferred from existing shareholders in that FIE, during its operation, and participates in such investment activity management (i.e. FDI). As mentioned above, Circular 04 Account is apparently served for capital transactions in FIEs only when they are newly established.

Again, is there any difference in case where a foreigner invests in FIE but not participates in its management (i.e. FII)? If so, will Circular 03 Account and/ or Decision 1550 Account be applicable instead?

Solution

To clear off the above said uncertainties, new regulations at circular level should be issued as soon as possible to implement Forex Ordinance 2005. Such regulations should comprehensively address to the above said forex issues arisen out of the investment capital transactions, within the framework of the LoE 2005, LoI 2005 and LoS 2006. From the practical point of view, and for the purpose of SBV’s centralized control on the forex inflow and outflow by foreign investors, a single investment capital account for each foreign investor in Vietnam should be considered. Such account should be registered with the SBV and used for all investment/ capital transactions (whatever it is, FDI or FII) made by foreigners, instead of two or three accounts as now. However, where a distinction needs to be made between an account for direct investment capital and the same for indirect investment capital, their use should be allowed to be more flexible. A foreign investor can be a FII investor today, but it can be a FDI investor tomorrow and vice versa. In particular, with respect to FII activities, it can be a FII investor in the unlisted/OTC (over-the-counter) market today, but it can be FII investor in the stock exchanges tomorrow, and the other way around./.