Identification of a foreign-invested economic organization: simple or complicated?

Nguyen Thi Le Thi - Nguyen Huu Viet

DIMAC Law Firm

After over two years’ application, the new provisions of the Law on Investment and the related regulations have achieved remarkable positive results. However, besides such positive signals, some inadequacies in understanding and applying the law have caused many difficulties to foreign investors, one of which is how to identify a foreign-invested economic organization in order to apply for a Business License when conducting trading and its directly-related activities ("Commercial Activities").

Inconsistence in determination of a foreign-invested economic organization

The present Law on Investment has specific provisions on how to define a foreign-invested economic organization. Nevertheless, overlapping legal provisions and different interpretations of the Authorities have make it difficult for enterprises to apply the law in Commercial Activities. The following example will help clarify this issue.

Cross World Limited Company ("Cross World")[1], an enterprise incorporated in Vietnam, in which the foreign investor holds 49% of its charter capital, has established Cross Vietnam Limited Company ("Cross Vietnam") as the sole owner to conduct Commercial Activities. Under Article 2 of Circular No. 08/2013/TT-BCT guiding Decree No. 23/2007/ND-CP ("Decree 23"), foreign-invested economic organizations ("Foreign-Invested Organization") must obtain a Business License before carrying out Commercial Activities. In this case, whether Cross Vietnam is regarded as a Foreign-Invested Organization and must obtain a Business License?

To protect the opinion that Cross Vietnam is not regarded as a Foreign-Invested Organization and not required to obtain a Business License, Article 23.1 of the 2015 Law on Investment is cited[2]. Particularly, because the capital contribution ratio of Cross World in Cross Vietnam is only 49%, which does not fall under the circumstances in Article 23.1 of the 2015 Law on Investment, Cross Vietnam will implement the conditions and procedures of investment for domestic investors when establishing an economic organization. This also complies with the definition of the domestic investor in Article 3 of the 2015 Law on Investment[3]. In particular, although Cross World is a foreign-owned economic organization owning 49% of its charter capital, Cross Vietnam does not have a foreign investor as its member; Cross Vietnam must be understood as a domestic investor. Decree 23 only regulates Foreign-Invested Organizations while Cross Vietnam is not regarded as a foreign-invested organization; therefore, Cross Vietnam does not have to obtain a Business License.

However, another opinion holds that Cross Vietnam must obtain a Business License. This view is based on the concept of "foreign-invested enterprise" that is neither explained nor defined in Decree 23 and the Commercial Law; therefore, the definition in the 2005 Law on Investment at the time when Decree 23 is issued will be applying. Specifically, Article 3.6 of the 2005 Law on Investment states that "Foreign-invested enterprises include enterprises established by foreign investors to carry out investment activities in Vietnam; Vietnamese enterprises which a foreign investor purchases shares from, merges with or purchases.” Accordingly, an enterprise can be considered as a foreign-invested economic organization if (1) a foreign investor is a member or shareholder of the enterprise; or (2) if the charter capital of the enterprise has capital from a foreign investor regardless of whether the owner/member/shareholder is a foreign investor.

In practice, the understanding of the Authority in (2) still exists. In this case, Cross Vietnam is owned by Cross World, a foreign-owned economic organization, and Cross Vietnam is also referred to as a Foreign-Invested Organization and must obtain a Business License. Consequently, it takes from two to three months for such an enterprise as Cross Vietnam to obtain a Business License and while so waiting, the enterprise will bear losses due to suspension of its purchase and sale activities and the orders placed with it.

Proposed solution

Upon the entry into effect of the 2015 Law on Investment, the Government asked the Ministry of Industry and Trade to draft a new decree replacing Decree 23, instructing it to create maximum support and conditions for foreign investors to carry out Commercial Activities in Vietnam. But up to now, although the new Decree has many versions, it is still unclear when the decree will be promulgated. Therefore, in the near future, in order to early submit to the Government for promulgation a new Decree to replace Decree 23, the Ministry of Industry and Trade should quickly finish drafting the Decree, specifying cases where a foreign-invested economic organization must apply for a Business License on the principle of ensuring compliance with the provisions of the 2015 Law on Investment. This will help the enterprises feel secured and at ease to conduct Commercial Activities and ensure the consistency of applying procedures all over the country.

[1] The business name given here is for reference only and does not refer to any enterprise.

[2] Article 23.1 of the Law on Investment

1. An economic organization must satisfy the conditions and carry out investment procedures in accordance with regulations applicable to foreign investors upon investment for establishment of an economic organization; investment in the form of capital contribution or purchase of shares or portion of capital contribution to an economic organization; or investment on the basis of a BCC contract in any one of the following cases:

a) 51% or more of its chapter capital is held by a foreign investor(s)…;

b) 51% or more of its chapter capital is held by an economic organization(s) prescribed in paragraph (a) of this clause;

c) 51% or more of its chapter capital is held by a foreign investor(s) and an economic organization(s) prescribed in paragraph (a) of this clause.

[3] Article 3. Interpretation of terms

…15. Domestic investor means any individual with Vietnamese nationality or any economic organization without a foreign investor being a member or shareholder.

…17. Foreign-invested economic organization means an economic organization with a foreign investor being a member or shareholder.