Adjustments to put wind in private sector’s sails

09:00 | 01/05/2019
Vietnam is amending the Law on Investment 2014 and Law on Enterprises 2014, aiming to bring half a decade old laws up to speed with current realities. Nguyen Xuan Thuy and Vu Thanh Minh, partners of LNT & Partners, which has just been awarded for the second time as Vietnam Law Firm of the Year 2019  by ALB Thomson Reuters, delves into what key changes the amendment should focus on to clear away existing barriers to leverage private investment in the future.
adjustments to put wind in private sectors sails
Nguyen Xuan Thuy (left) and Vu Thanh Minh, partners of LNT & Partners

The launch of the Law on Investment (LOI) and the Law on Enterprises (LOE) in 2014 has brought about significant improvements to the investment environment by, inter alia, simplifying relevant administrative procedures. The gradual transition from pre-check to post-check is also clearly reflected in these laws. Furthermore, but for the barriers in Vietnam’s World Trade Organization commitments on services, domestic and foreign-invested enterprises would have been treated equally.

However, after five years of implementation, certain defects persist. This is the reason why in 2019 lawmakers have decided to amend these laws to meet expectations from the state management as well as the investors’ changing demands under new circumstances. The draft amendments to the laws have been developed and widely commented on from different perspectives.

The amended laws intend to deliver three outcomes. First, by addressing regulations on conditional business lines and business conditions, they commit to continue upholding the freedom to do business of both enterprises and individuals, as well as guaranteeing their consistency.

Second, by revolutionising administrative processes, they seek to resolve current difficulties and problems in investment and business activities as well as expanding the right of enterprises in investment, business, and management activities in accordance with international laws and practices.

Third, they aim to perfect the allocation of authority and co-operation between regional and federal bodies in the management of domestic business activities, as well as both domestic and outwards investment, while enabling effective government management.

adjustments to put wind in private sectors sails
The amended LOI and LOE will remove several real-life obstacles and simplify procedures for businesses, Photo: Le Toan

The key changes brought forward by the amended laws in order to materialise these goals include:

- Revision to clarify and amend certain regulations on business conditions for domestic and foreign investors, including separating the definitions of business conditions applicable to domestic and foreign investors, and providing detailed guidance on amendments to the list of conditional business activities;

- Assess the length of application for investment incentives on the basis of the investor’s performance and grant extension for investment incentives in projects with especially important socio-economic impact;

- Clarify the relationship between the LOI and other specific laws governing various activities such as the subscription of shares, capital contribution, and other economic activities, as well as the control of government funds and government funding in investment;

- Introduce new regulation specifying investment procedures for investment projects requiring land usage and clarify the scope of the prime minister’s approval for investment projects;

- Clarify requirements for the granting of an investment registration certificate for investment projects outside the scope of approval by the National Assembly, the prime minister, and provincial people’s committees;

- Clarify prohibited activities and conditional business activities for outward investment;

- Resolve differences and dispersal regarding business registration procedures between the LOE and other relevant laws, such as the Law on Auction, the Law on Lawyers, and the Law on Securities;

- Abolish administrative business registration procedures which are unnecessary, costly, and time-consuming for enterprises, such as the registration of seal specimens before use, reporting changes in the information of the enterprise manager, sending information to the business registration office where the enterprise is headquartered when establishing a branch or setting up a new business location or requiring the director and general director to have professional qualifications and experience in business administration; and

- Abolish and amend unclear provisions, which are incompatible with changes in relevant laws or inconsistent with practice in order to assist shareholders in protecting their legitimate interests, and remove regulations that hinder the exercise of shareholders’ rights.

Amended laws on incentives

In light of the drafts, we find that the lawmakers are focusing on amendments which seek to (i) tackle problems that have actually arisen in the past, (ii) simplify administrative procedures, and (iii) promote post-check.

However, we have not found any new regulation aimed at encouraging investment and business, apart from the principle of non-retroactivity for incentives as stated in the draft LOI. In particular, the amended LOI is silent on the mechanisms, policies, supporting measures or authority to determine new investment incentives.

Furthermore, concerns about the importation of old machinery and technology which are still relevant to Vietnam’s current situation should be considered and governed by a management mechanism rather than being prohibited as at the present.

In addition, we believe that the amended LOI should avoid introducing a new yet ambiguous management mechanism as it may result in inconsistency of application, for instance, regulations on investments in projects that affect national security or projects in border areas.

Particularly for the amended LOE, we suggest that lawmakers should research and develop management mechanisms and specific incentive policies for social enterprises, small- and medium-sized enterprises, and enterprises that invest in high-tech sectors, and enterprises that support technology transfer from abroad into Vietnam.

Goals for the new age

The new situation gives lawmakers more difficult tasks in ensuring the progressiveness and stability of the laws post-amendment. Consequently, for the LOI, in addition to solving the existing problems, lawmakers should delineate the extent of state management of future investment activities so that unnecessary regulations in the LOI can be cut down.

When the tasks of corporate management have been mostly transferred to the LOE, we believe that the LOI should only regulate foreign investment, and investment projects which affect the economy, society or which operate in special sectors under special control and are entitled to investment support and incentives. Here reference should be made to the very advanced investment laws of other countries where investment incentive policies are being applied so as to give us an objective view of investment activity management.

For the LOE, enterprises are currently experiencing certain annoyance with the administrative procedures, despite significant improvements introduced by the LOE.

With the construction of a general business registration portal at the present, we think that a nationwide business registration system should be applied without dependence on administrative regions so that an investor may register their business at any investment management agency, regardless of their head office ­address. Furthermore, administrative procedures should be reviewed and reduced as much as possible; for example, the procedure for notification of changing business registration contents.

Here we should make reference to the enterprise management mechanisms that are being applied in developed countries such as Singapore where state agencies are only in charge of registering incorporation of enterprises, recording basic information of enterprises, focusing on tax collection and post-check.

In addition, the recent problems relating to capital contribution, purchase of enterprises’ shares, voting ratio in limited liability companies with two or more members, application of the voting ratio under Resolution No.71/2006/QH11 dated 2006, regulations on cross-ownership, and so on should be assessed for removal or amendment in the most appropriate way.

As a matter of practice, lawmakers also need to develop draft decrees and circulars guiding the amended laws to avoid a case in which they already take effect but cannot be applied in practice due to lack of relevant guiding regulations.

In short, if the amendments to the laws are not formed on proper foundations, they may end up in a vicious circle and even generate negative ­impressions from investors and enterprises. Bearing in mind that Vietnam’s competitiveness is not highly ranked, lawmakers need to have a meticulous insight into the ­current issues and make ­breakthrough decisions so that the laws are genuinely ­supportive instruments to ­investors and enterprises.

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