Investment Law: Traffic Warden Or Road Builder?

Laws - Following the article “Investment Law: Murky Regulations Remain” (the Weekly No. 27-10, dated July 3, 2010), we would like to introduce a new angle on the objective of the Investment Law.

Originally, the Investment Law was supposed to pave the way for foreign investment into Vietnam in 1987. If that is the case, then the Investment Law has put three vehicles: business cooperation, joint venture and 100% foreign capital, on that very path to do three things: (i) considering the purpose of pouring in capital of foreign investors and its social benefits; (ii) protecting their capital invested in Vietnam and brought home later on; (iii) giving them certain incentives. The method of doing those three things is through investment projects. As soon as a project is approved, investors will assemble the money-earning vehicle. That is project investment or direct investment.

If foreign investors have such vehicles, domestic enterprises should have some, too. Thus, the Company Law was born in 1990.

Foreign investors enjoy benefits, how about domestic businesses? That is why the Investment Promotion Law came into effect in 1994. This law does only the third job of the Investment Law but it also needs a vehicle, which is investment project.

Project investment requires business people to sit in the vehicle from start to dissolution. Nonetheless, there are a number of those who would not want to be stuck inside, but want to get into or out of the vehicle depending on its moneymaking status. That is called foreign portfolio investment, or a more familiar term: indirect investment. By financial investment, foreign investors firstly buy in convertible bonds of businesses, and then buy securities of listed companies and shares of unlisted companies.

The Investment Law was modified twice in 1996 and 2000. Meanwhile, the Enterprise Law was expanded in 2000 with four kinds of vehicle: partnership, single and two-member limited liability, and private limited. With these changes, the Corporate Income Tax Law, Customs Law and Land Law were also adjusted in order to create a sense of fair play; the incentives offered in the Investment and Investment Promotion Law were put together as well. That was the springboard for the formation of the new Investment Law and Enterprise Law in 2005.

The 2005 Investment Law is still doing the same core jobs as the 1987 law, but since the situation has changed, it (i) no longer pinpoints the vehicles but does as told in the 2005 Enterprise Law; (ii) does not list special provisions of investment but follows the general rules; on the other hand, it (a) combines all the capital contribution methods (direct, indirect, into Vietnam, out of Vietnam, foreign investors and domestic entrepreneurs) and (b) continues to do the first two jobs of the old law but in a more detailed manner (lists of promoted, prohibited and conditional areas). The new law still uses the same method of investment projects, thus an investment certificate can be issued in a specific procedure.

Regarding the investment certificate, the 2005 Investment Law draws a clear line between domestic entrepreneurs and foreign investors. This distinction is necessary because the former will not bring money out of the country while the latter will. Hence, the control needs to be in place now for future capital flow management.

The differences in issuing investment certificates for the two groups are:

• Domestic entrepreneurs only need to apply for an investment certificate if their project exceeds the value of VND300 billion. Those with projects under this value can hand in necessary documents if they want to be entitled to investment incentives. The same applies when they adjust their projects.

• Foreign investors need to apply for an investment certificate when they want to start or adjust a project regardless of its.

Therefore, the Investment Law is necessary because it not only controls money coming out but also (i) constructs a road which has uneven parts, thus vehicles on it are entitled to different treatment; (ii) enables the Government to build a road where they want enterprises to invest. The Investment Law deals with the vehicles but the Enterprise Law handles where the roads are built. Thus, if there is ever a problem, the Enterprise Law is responsible, not the Investment Law.

For instance, if a company of a foreign investor wants to branch out, it will be treated differently. If the company has changed into another type mentioned in the 2005 Enterprise Law, it can only be registered at relevant bodies; if not, the investment certificate needs to be altered. That is the deduction from Decree 139/2007, as the above case is not explained, thus the original law should be referred to.