The Communist Party's Doi moi (Renovation) policy in 1986 has been the catalyst for significant changes in Vietnam's economic growth, political stability, investment and legal environments, and international relationships in recent years. Yet despite the many changes that have already occurred Vietnam is still a country with significant growth potential. Its economy is still relatively small and regulated by regional standards, but this is expected to gradually change. Vietnamese companies and individuals are quickly acquiring the skills and knowledge they need to compete in the international market. By combining these new skills with Vietnam's abundance of natural resources (including labour) Vietnam is certain to outpace the growth of its regional neighbours for some time to come.
Other major economic events over the last few years include:
- Becoming a member of the Associations of South East Asian Nations (ASEAN) in July 1995, ASEAN Free Trade Area (AFTA) in January 1996, and Asia Pacific Economic Co-operation (APEC) in 1998.
- The passing of the Enterprise Law in 1999 has legitimised the many private business that exist within the country and is a strong signal of the government's support of private enterprises.
- Opening the country's first stock exchange in Ho Chi Minh City as the commercial hub of the country in July 2000.
- The lifting of the US Trade embargo in 1994 and the US Bilateral Trade Agreements (BTA) took effect since 11 December 2000. This agreement is expected to create major opportunities for foreign investors in the future.
The changes over the last 10 years have significantly improved the lives of many Vietnamese. However the country still has a long way to go to catch up with other countries in the region and there are still many barriers to development. In particular:
- There is an ongoing need to improve the country's State administrative mechanism (bureaucracy) which protects Vietnamese industries and monopolies to the detriment of efficiency and competitiveness.
- The legal system (including tax regulations) must be strengthened. At present there are too many gaps and inconsistencies in laws to acceptably settle disputes that arise.
- The banking system has to be restructured. The system has been weakened by the government's desire to continue supporting inefficient state owned enterprises.
Types of business presence
Foreign companies and individuals can undertake business activities in the Socialist Republic of Vietnam under several forms:
- Through the forms of foreign direct investment under the Law on Foreign Investment
- Through a separate Vietnamese entity incorporated under the Enterprise Law
- Through a representative office or a commercial branch under the Law on Trade.
The most common (and favoured) forms of foreign investment are under the Law on Foreign Investment.
Foreign direct investment
Under the Law on Foreign Investment, a foreign organisation or individual can establish business activities in Vietnam under one of three types of investment:
- a Joint Venture (JV)
- a 100% Foreign Owned Entity (FOE)
- a Business Co-operation Contract (BCC).
A JV is a legal entity established under a joint venture contract between two or more parties (at least one foreign party and one local party) to carry out an investment activity in Vietnam under the form of a jointly owned limited liability company. Each party is only liable for the JV's obligations to the extent of the amount of their committed capital.
The legal capital (contributed equity) of a joint venture company must be at least 30% of the investment capital (contributed equity plus long term debt). Furthermore, the foreign parties' contribution to legal capital cannot be less than 30% of total legal capital.
A JV's operations are managed by the General Director who is appointed by the Board of Management (BoM). The BoM is made up of representatives of all the owners in proportion to the amounts of capital contributed to the JV. If the JV is owned by two parties, each party must appoint at least two representatives to the BoM. Where a JV has more than two owners each party must have at least one representative on the BoM.
If a JV is established between a Vietnamese party and several foreign parties, or a foreign party and several Vietnamese parties, the minor party has the right to appoint at least two representatives to the BoM.
A new JV may be established by an existing JV partnering with another foreign investor or Vietnamese enterprise. In this situation the existing JV must have at least two representatives on the BoM of the new JV, one of which must be appointed by the Vietnamese party of the existing JV.
All parties may contribute legal capital in the form of cash, property and technical know-how. Vietnamese parties may also contribute to legal capital in the form of land use rights.
100% foreign owned entities
A FOE is a limited liability company that is wholly owned by foreign organisation(s) or individual(s). The minimum legal capital of a FOE must be at least 30% of its total investment capital.
FOEs are not required to have a BoM, although the existence of a BoM or Board of Directors (BoD) is encouraged. If there is no BoM or BoD the General Director is fully responsible for the company's operations and activities.
Business cooperation contracts
A BCC is an agreement between two or more parties to implement an investment activity without establishing a new legal entity. Each party is responsible for fulfilling its specific responsibilities under the agreement. BCCs are the only permitted forms of investment in areas such as telecommunications, electricity and water distribution, and major infrastructure development.
Foreign parties to BCCs must fulfil their tax obligations in accordance with the Law on Foreign Investment. While the Vietnamese parties' tax obligations are governed by the tax laws relating to domestic enterprises.
The Law on Promotion of Domestic Investment and Enterprise Law permit a foreign individual(s) possessing a Permanent Residence Certificate issued by relevant Vietnamese authorities to contribute capital or acquire shares in one of the following types of Vietnamese entities:
- Limited liability companies
- Shareholding companies
- Partnership companies
However, with regard to equitised state-owned companies, a foreign individual(s) can only own up to 30% of the prescribed capital of a state-owned company operating in the area of businesses approved by the Prime Minister.
Limited liability companies
There are two types of limited liability companies - one member companies, and two or more (but not exceeding 50) member companies. Owners are only liable for the company's obligations to the extent of their contributed capital. Limited liability companies do not issue shares. The proportions of ownership simply reflect the value of capital contributed by each owner.
One member limited liability companies must be fully owned by another legal entity. Limited liability companies with two or more members can be owned by other legal entities or individuals.
Shareholding companies are permitted to issue securities to the public. They must have at least three shareholders. There is no limit to the maximum number of shareholders.
The highest decision-making body of a shareholding company is the Shareholders' Council. The Shareholders' Council is made up of shareholders that have a right to vote in the company.
The Board of Management (BoM) of a shareholding company is the company's managing body. It can, on the company's behalf, decide on all matters relating to the company's business and rights. The BoM cannot exceed 11 members.
Shareholding companies can have two main types of shares - ordinary shares and preference shares. Preference shares are further sub-divided into voting preference shares, dividend preference shares and redeemable preference shares. Only ordinary shareholders and voting preference shareholders have the right to vote, attend meetings of the Shareholders' Council and nominate candidates to the BoM.
All shareholders, except voting preference shareholders and founding shareholders, can sell their shares to others. Founding shareholders must continue to hold at least 20% of the ordinary shares during the first three years after the issuance of the company's business registration certificate. Furthermore, they cannot sell ordinary shares to new shareholders before obtaining the approval of the Shareholders' Council (the founding shareholder is not allowed to vote on this resolution in the Shareholders' Council meeting).
Partnership companies must have at least two individual owners. These owners are jointly liable for the company's obligations (they have unlimited liability). The company may also have limited liability owners who are only liable for the company's debts to the extent of the amount of capital they have contributed. Partnership companies are not allowed to issue securities to the public.
Representative offices and commercial branches
Representative offices are sub-offices of foreign legal entities established under the Law on Trade to seek or promote commercial opportunities in Vietnam. They are not permitted to directly engage in profit making (business) activities.
Branches of foreign entities can be established to conduct limited commercial activities. They are the only forms of investment permitted for banks and legal practices in Vietnam. Branches are required to obtain operating permits from relevant government authorities every five years.