Fair land rents for enterprises
Land for implementation of investment projects is an important issue for all types of enterprises regardless of being foreign invested enterprises (FIEs) or Vietnamese enterprises (VIEs). However, how to get the land and how much an enterprise should pay for using the land, are the issues containing differences between FIEs and VIEs.
Under the Land Law of 2003, in order to get land for carrying out a licensed investment project, a VIE can apply for land allocation or land leasing with annual rental payments, while a FIE cannot apply for land allocation. It is only entitled to lease the land. However, the Land Law allows a FIE to choose either paying annual rent or one-off rental payments for the entire lease term, resulting in the different rights for FIEs over leased land.
According to those provisions, we can see that FIEs and VIEs are entitled to lease the land with annual rental payments. Obviously there is no difference between FIEs and VIEs regarding rental payments and land prices for the same land lot.
However, according to the Land Law, regarding land leases with annual rental payments, the land user’s rights over such land are limited. The land user is only entitled to transfer and mortgage the assets attached to the leased land and make capital contributions using the value of such assets. The user cannot transfer or mortgage the value of land use rights or use the land use rights to make capital contribution to other company, regardless of being a FIE or VIE.
Besides, only the land users, who are allocated land or lease the land with one-off rental payments for the entire lease term, are entitled to transfer and mortgage the land use rights and make capital contributions using land use rights within the term of land allocation or lease. Based on that fact, some VIEs prefer to apply for land allocation and for FIEs, application for land leases with one-off rental payments for the entire lease term. As explained above, the land users’ rights in case of land allocation or land leases with one-off rental payments are similar, but the difference here is how much they have to pay to get such rights.
According to the Land Law, in order to be allocated with the land, land user must pay land use fees for the term of allocation and in order to lease the land with one-off payments, the land user must pay rentals for the entire lease term.
What is the difference between the land use fees and the land rentals in the event of one-off payment for a certain piece of land with the same use term? Under Decree 198/2004/ND-CP dated December 3, 2004 on land use fees, amended by Decree 17/2006/ND-CP dated January 27, 2006 and Decree 84/2007/ND-CP dated May 25, 2007 (hereinafter collectively referred to as Decree 198), the land use fees will be determined on the basis of land prices stipulated by provincial people’s committees from time to time (Land Price), according to which the land use fees of each square metre for the term of 70 years is equivalent to the Land Price.
However, in case where an investment project has term less than 70 years, the term of land allocation shall be less than 70 years and the land use fees will be deducted by 1.2 per cent of Land Price for each year. The method of calculation for the land use fees in case where the term of allocation is less than 70 years was clearly stipulated in Circular 117/2004/TT-BTC issued by the Ministry of Finance (MoF) on December 7, 2004 guiding the implementation of Decree 198 and amended by the MoF’s Circular 70/2006/TT-BTC dated August 2, 2006 (hereinafter collectively referred to as Circular 117) in accordance with the following formula:
The land use fees for “n” years = The land use fees for 70 years - [ The land use fees for 70 years x (70 - n) x1.2% ]
Note: "n" is the number of years of land allocation
At the same time, land rentals are regulated by Decree 142/2005/ND-CP (Decree 142) dated November 14, 2005 on rentals of land and water surfaces stipulating that the annual land rental is equivalent to 0.5 percent of the Land Price, in cases where the land is located in urban areas and trade and service centres or has other special advantages, the annual rental may be adjusted for a rate higher than the mentioned above one. But, in all cases it cannot exceed 4 times (i.e. 2 per cent of Land Price). The land rentals in case of one-off rental payments for the entire lease term are determined in accordance with the following formula:
The payable land rental = The number of years of lease term x The lease price for each year x The leased area
Based on above provisions and with the assumption that a piece of land has the Land Price of VND10 million (around US$560) without any special advantages and the annual rental being determined equivalent to 0.5 per cent of the Land Price, if a VIE is allocated such land for a 50-year term the land use fees per each square metre is calculated by the following formula:
The payable land use fees = 10,000,000 – [10,000,000 x (70-50) x 1.2%] = VND7,600,000
Meanwhile, if a FIE leases such land for the same term and makes one-off payments of the land rentals for the entire lease term, the land rental per each square metre shall be calculated by the following formula:
The payable land rental = 50 x 0.5% x 10,000,000 = VND2,500,000.
For the same land and use term, to obtain the rights to transfer and mortgage the land use rights as well as make capital contributions using the land use rights, the VIE must pay land use fees for land allocation much higher than the land rentals paid off once for the entire lease term by the FIE. The said difference leads to the FIEs’ preference to lease the land with one-off land rental payment for the entire lease term and VIEs’ preference to lease the land with annual land rental payments.
However, such differences have caused some complicate issues when house-for-sale projects become hotter and more attractive regarding many foreign and domestic investors. The foreign investors, who are obligated to establish FIEs under the laws of Vietnam to carry out such kind of project, are only entitled to lease the land for a certain term. Meanwhile, their clients, who will buy the houses for residential purpose, are entitled to use the land on a stable and long-term basis.
The above-mentioned contradictory point was settled by Circular 120/2005/TT-BTC guiding the implementation of Decree 142, which provides that in case where a FIE carries out a house-for-sale project, it must make one-off land rental payments for the entire lease term, upon selling the houses, the FIE is obligated to pay the different amounts between the paid land rental and the land use fees.
But this provision caused many difficulties for both FIEs, which developed house-for-sale projects and their end users. In order to resolve this matter, on May 25, 2009, the Government issued Decree 84/2007/ND-CP, which stipulates in Article 32 that in case of implementation of housing projects, FIEs are obligated to make one-off land rental payments for the entire lease term and the land rentals are equivalent to the land use fees. Hence, upon the coming into force of Decree 84, the difference between the land rentals in one-off payment cases and land use fees in relation to house-for-sale projects was eliminated.
More recently, Decree 69/2009/ND-CP (Decree 69) has been issued on August 13, 2009 providing supplemental regulations with respect to land use plans, land prices, land recovery and has been effect from October 1, 2009. Amongst others, we are of opinion that the provision in Article 13 on one-off land rental payment is one of the most important issues referred to in the Decree.
This article clearly stipulates that, in case where the land user is allowed to lease the land and makes one-off land rental payment for the entire lease term, the payable land rental shall be equivalent to the land use fees in case of land allocation for the same using purpose and using term.
As a result, the difference between one-off land rental payment cases and land use fees is absolutely abolished with the issuance of Decree 69. In order to obtain the rights to transfer and mortgage the land use rights and make capital contribution using the land use rights, the FIE must pay as much as the VIE paid before.
The equal treatment reserved for FIEs and VIEs is necessary to create an attractive and transparent investment environment in Vietnam, illustrated by the land rental example, through which legislative authorities can get more experiences to deal with remaining similar maters.
Vision & Associates