SETTING UP AN INDUSTRIAL ZONE IN VIETNAM, WHAT DO FOREIGN INVESTORS NEED TO KNOW?

Partner Thân Trọng Lý

Junior Associate – Nguyễn Minh Tuấn

1. Introduction

Setting up an industrial zone in Vietnam (the “Project”) by a foreign investor (the “Investor”) is complicated and subject to various regulations, among others, including the Investment Law 2020, the Land Law 2024, the Law on Real Estate Business 2023, the Law on Bidding 2023, and other relevant laws on investment conditions applicable to the Investor and the Project. This document briefly introduces the statutory conditions and procedures for setting up the Project by Investor for your reference.

Under the laws of Vietnam, an industrial zone (“IZ”) is a designated area enclosed by definite boundaries, specializing in production of industrial goods and provision of services satisfying the industrial production needs[1]. Additionally, a project on construction and business of infrastructure facilities of an IZ refers to an investment project that utilizes land for developing comprehensive technical infrastructure within the IZ. This includes leasing or sub-leasing land to investors for the construction of various facilities, such as premises, office, storage yards and facilities, public service and utility facilities; implementation of investment projects, organization of production and business activities under law[2].

As IZ is a special area, the establishment of IZs can take various forms. The six primary forms of IZs recognized in Vietnam include: (i) industrial parks; (ii) export processing zones; (iii) supporting industrial parks; (iv) specialized industrial parks; (v) eco-industrial parks and (vi) hi-tech industrial parks[3]. Each type of IZ is governed by its own construction planning, which is incorporated into the master plan for construction of the economic zone in which the IZ is located.

Thus, before implementing the Project, the Investor must first determine whether the designated area is suitable for the development of an IZ. An IZ is considered established once the competent authority approves the investment policy and accepts investors, or issues the investment registration certificate for implementation of investment projects on construction and business of infrastructure facilities of an industrial park as per the laws on investment[4].

In practice, to implement the proposed Project, the Investor can either directly set up its entity in Vietnam, corporate with local partners to incorporate its subsidiary (the “Subsidiary”) or acquire capital from an existing company who is already a developer of the IZ in Vietnam. However, regardless of the investment forms, the Investor and the Project itself must meet the various conditions to implement the Project. These conditions encompass compliance with legal, financial, and technical requirements, which ensure that the Investor as well as the Subsidiary have the necessary capacity to develop and operate the IZ in accordance with applicable regulations.

Since the Project is a special type of project as defined by law, both the Project and the Subsidiary must also meet the conditions set forth in sector-specific laws.

2. Conditions applicable to the Subsidiary as the investor of the Project

In order to implement the Project, the Subsidiary, as the investor of the Project, has to satisfy all the following conditions[5]:

1. Condition of real estate business as per the law on real estate business

In order to legally engage in real estate business, the Subsidiary’s main business lines must include real estate business[6]. Hence, the Subsidiary to be established by the Investor (and the local partner, if any) must register the business line of “real estate business”.

Additionally, the Subsidiary is required to comply with the following conditions[7]:

1. The Subsidiary is not subject to any court’s judgment or decision, or a competent authority’s decision, on prohibition or suspension of real estate business;
2. The Subsidiary must maintain safe ratios of outstanding credit balance and outstanding bonds to the owner's equity;
3. The Subsidiary must ensure that its owner's equity is not lower than 20% of the total investment for projects using less than 20 hectares of land; or 15% of the total investment for projects using 20 hectares or more.

It is also required to ensure the ability to mobilize capital to implement investment projects. In addition, if the Subsidiary is involved in multiple real estate projects simultaneously, its owner's equity must be sufficient to cover the required percentage for all projects.

2. Conditions for being allocated land, leasing land, and changing land use purposes by the State to implement the Project under the laws 

The Investor is entitled to being allocated land, lease land, request for changing land use purpose by the State for implementing the Project if the following conditions are met[8]:

1. Deposit or other form of security

In principle, the Subsidiary must provide a deposit or other forms of security to ensure the investment in accordance with the applicable investment laws. The deposit or security payment is calculated as a percentage of the project's investment capital, following a progressive scale ranging from 1% to 3%, depending on the total investment capital[9].

However, deposit or other forms of security payment is not required in the following cases[10] (“Security Exemption Cases”):

• The Subsidiary is the successful winner of a LUR auction with land  being leased out by the State for a lump-sum rent to implement an investment project using land;
• The Subsidiary wins bidding for execution of an investment project using land;
• The State allocates or leases out land to the Subsidiary on the basis of the Subsidiary’s receipt of an investment project transfer for which a deposit has already been paid, or for which the capital has been fully contributed or raised following the schedule specified in the written approval for investment guidelines or the investment registration certificate;
• The State allocates or leases out land to the Subsidiary for execution of an investment project on the basis of receipt of the land use right and assets on land from another land user.

Thus, except where a Subsidiary falls in one of the Security Exemption Cases as stated above, the Subsidiary shall be required to make a deposit or take other measures to ensure the Project’s investment implementation.

2. Financial capacity[11]:

The Subsidiary must demonstrate adequate financial capacity to ensure the land is used according to the Project timeline and other legal requirements.

Currently, the existing provisions have not yet provided clear guidance on financial capacity of the Subsidiary as the IZ investor. As a result, the lack of detailed regulations regarding the criteria for assessing financial capability may lead to difficulties in evaluating the conditions during the process of land leasing. Accordingly, the approval decision will depend on the assessment of the competent authorities based on the Subsidiary's explanation and capacity profile.

3. Compliance with land laws[12]:

The Subsidiary must not be in violation of land laws. If there has been any violation, it must have been fully complied according to the decision or judgment of a competent authority before applying for land lease. This compliance is assessed across all land the Investor is using nationwide within Vietnam.

3. Evaluation criteria applied in case of bidding to select investors according to the provisions of law

In case where bidding process is involved to select the investor for the Project, the criteria below will be applied to assess the Subsidiary's capacity, unless the conditions for a land use rights auction or direct investor approval are met.

1. Subsidiary's capacity: as per the conditions specified in Sections 2.a and b above;
2. The Subsidiary’s experience: based on the scale, implementation progress, and performance of industrial infrastructure construction and business investment projects or other real estate projects that the Subsidiary has implemented or contributed equity to implement; the owner, member, or founding shareholder of the investor's organization has implemented or contributed equity to implement the project;
3. Technical evaluation criteria: based on the content of the Decision approving the industrial zone construction plan, the Decision approving the investment policy of the industrial infrastructure construction and business investment project from the competent authority (the Project), and other relevant legal regulations; and
4. Financial and commercial evaluation criteria are developed based on the content of the Decision approving the investment policy of the industrial infrastructure construction and business investment project from the competent authority and other relevant legal regulations related to the selection of investors to implement land-use projects.

3. Conditions applicable to the Project

In addition to the conditions applicable to the Subsidiary as the Investor of the Project, there are specific conditions that must be ensured by the Project itself. Specifically, the conditions for investment in IZ infrastructure are as follows[13]:

1. The Project must align with the following planning and plans:

1. Regional planning and provincial planning;

Regional planning includes the direction of building industrial and economic zone[14]. Provincial planning includes the development plan of industrial zone systems[15]. These planning shall be issued by the Prime Minister[16].

2. Being in the list of industrial zones within the province or centrally governed city, or in the master plan for the construction of economic zones that has been approved by a competent authority for IZ located within the boundaries of economic zones; and
3. Compliance with the IZ construction plan approved by a competent authority.

2. The Project must be implemented in phases if the Project’s total land area exceeds 500 hectares, or if there is a requirement to convert the use of land for at least two rice crops with an area exceeding 200 hectares, 150 hectares, or 100 hectares, depending on the region and location of the IZ; 

3. Allocating a minimum of 5 hectares of IZ or at least 3% of the total industrial land area of the IZ (including factories, offices, and warehouses) for leasing or subleasing to small and medium enterprises, supporting industry enterprises, innovative enterprises, entities eligible for investment incentives, and other businesses prioritized and supported with production and business premises in accordance with the law;

However, if investing in ecological industrial parks[17], supporting industrial parks[18], specialized industrial parks[19], or high-tech industrial parks[20], this condition is exempted.

4. Ability to meet the conditions for land use conversion in accordance with the provisions of the law on land, forestry law, and other relevant legal regulations.

In principle, the land used for implementing the Project must be classified as industrial land (land designated for non-agricultural production and business). Therefore, if the land that the Investor intends to lease from the State for the Project is not industrial land, the Investor must apply for a conversion in land use purpose in accordance with the law. The conditions for such a change will vary depending on the origin of the land and are governed by the land law, forestry law (in the case of forest land), and other relevant laws.

5. At the time of submitting the application for approval of the investment policy for the Project, the average occupancy rate of IZ already established within the province or centrally governed city must be at least 60%, except for certain cases such as:

1. IZs that were previously established but have been terminated or have their licenses revoked;
2. the total area of ​​IZs in the province or centrally governed city is 1,000 hectares or less;
3. the location of the Project is in an area with investment incentives as prescribed, or in an established economic zone; and
4. in the case of investment in industrial park infrastructure according to the types of ecological industrial parks, supporting industrial parks, specialized industrial parks, and high-tech industrial parks as prescribed.

Hence, the Investor is advised to accurately determine the area intended for the Project to assess whether it qualifies for the establishment of a new IZ; and

6. A housing plan and construction plan for service facilities and public amenities for employees working in the industrial zone must be approved by a competent state authority in accordance with the law on housing and other relevant legal regulations.

In particular, during the planning process for industrial park construction, the provincial People's Committee is responsible for arranging at least 20% of the commercial and service land fund of the IZ for worker accommodation, except in cases where the provincial land use planning, plan, and provincial housing development program or plan have arranged sufficient land fund to meet the accommodation needs of workers in that industrial park.[21]

In conclusion, the implementation of the Project must comply with numerous legal requirements, including those related to investment procedures, land use rights, bidding, and sector-specific industrial zone management laws. Therefore, the Investor should carefully assess the feasibility of meeting these conditions before deciding to invest in establishing and operating an IZ in Vietnam.

4. Flow chart summarizing the key steps of implementing the Project by the Investor via its Subsidiary

Please note that Project’s investment scale in this case is under the Prime Minister’s approval, and the lead-time indicated in each step of the above flowchart is regulated by the relevant laws, and in practice it can be longer than expected depending on specific case and handling of competent state authorities.