Forms of doing business: What types of company foreign entities can establish and what forms of investment can be applied?
The Law on Enterprises (LOE) was adopted by Vietnam’s National Assembly on 17 June 2020 and took effect on 1 January2021. The Law provides four types of legal forms of corporation for business entities, comprising:
- Limited liability company (LLC)
- Joint-stock company (JSC)
- Partnership
- Business Cooperation Contract (BCC)
- Public-Private Partnership Contract (PPP)
A foreign entity may establish its presence in Vietnam as a limited liability company with one or more members, a jointstock company, a partnership, a branch, a business cooperation contract or a representative office. Foreign investors are also permitted to purchase an interest in existing domestic enterprises, subject to ownership restrictions; this varies depending on the relevant industry sector. The main characteristics and management structures of the common business entities are summarised below:
Limited Liability Company
A limited liability company (LLC) is a legal entity established by capital contribution which is treated as equity (or charter capital) from its members. A LLC is not allowed to issue shares. The total number of members in a LLC is restricted to 50 (applied to form of a LLC with more than two members). Members of a LLC are liable for the financial obligations of the LLC within the capital contributed - or indertaken to be contributed - to the company.
A LLC may be established by foreign investors either in one of the two following forms:
i) A 100% foreign-owned enterprise (where all members are foreign investors); or:
ii) A joint-venture enterprise with at least one Vietnamese investor.
Joint Stock Company
A joint stock company (JSC) is a legal entity established by its founding shareholders on the basis of their subscription of shares of the JSC. The charter capital of a JSC is divided into shares and each founding shareholder holds a number of shares corresponding to their subscribed and paid-up shares in the JSC.
A JSC is required to have at least three shareholders (with no maximum number of shareholders). A JSC may take the form of either (i) 100% foreign-owned; or (ii) a joint venture between foreign and domestic investors.
Partnership
A partnership may be established between two individual managing partners. The managing partners have unlimited liability for all abligations of the partnership. Besides managing partners, a partnership may have contributing partners who are only liable for the financial obligations of the partnership upto the value of their contributed capital.
Business Cooperation Contract
A Business Cooperation Contract (BCC) is not normally signed between foreign investors and Vietnamese investors in order to carry out certain business activities..
BCC is executed without the creation of a new legal entity. Instead, parties to a BCC shall establish a co-ordination board to implement and oversee the BCC. The investors to a BCC mutually agree on allocation of responsibilities and sharing of profits/loses arising from a BCC. BCC's parties hold unlimited liability for the financial abligations of the BCC.
Public-Private Partnership
A Public-Private Partnership (PPP) contract is an investment form set up on the basis of a contract between relevant government authorities and project companies to perform certain regulated infrustructure works and public services, e.g. transportation system, water supply system, power plants, educational and healthcare-related infrastructure, etc.
PPP contracts comprise Build-Operate-Transfer (BOT), Build-Transfer (BT), Build-Transfer-Operate (BTO), Build-Own-Operate (BOO), Build-Transfer-Lease (BTL), Build-Lease-Transfer (BLT) and Operate-Manage (O&M) Contracts.
After signing PPP contracts with an authorized state agency, foreign investors must establish a project company in the form of a limited liability company or a joint stock company. PPP contracts clearly set out the rights and obligations of foreign investors to such contracts.
Mergers and Acquisitions
The legal framswork for M&A is set out under the Law on Enterprise and Law on Invesment and their guiding documents, which cover conditions, procedures and tax consequences of such activities.
The Competition Law also has an effect on M&A activities. Where a merger or acquisition may result in a legal entity with a market share accounting for 30% to 50% of the relevant market, the legal representative of such entity must notify the competition management body before the merger/acquisition is implemented, unless the law provides otherwise. A merger or acquisition that result in a new entity with its market share accounting for more than 50% of the relevant market is prohibited, unless otherwise stipulated in the Competition Law.
Other Investment Forms
All indirect investment activities of foreign investors in Vietnam must be conducted in Vietnamese Dong via an indirectly-invested capital account opened at a permitted bank. Balances in indirectly-invested capital accounts of foreign investors cannot be converted into time deposits, or saving deposits at credit institutions and foreign bank branches.
Below are examples of frequently-conducted indirect investment activities in Vietnam:
Capital contribution, sale/purchase of shares or contributed capital in Vietnamese enterprises without directly participating in the enterprise management and administration.
Capital contribution, transfer of contributed capital in securities investment funds and fund management enterprises in accordance with the laws on securities.
Sale/purchase of other valuable papers in Vietnamese Dong permitted to issue within Vietnam's territory by organizational residents.
Sale/purchase of bonds and other types of stocks in the Vietnamese securities market.
