Investment in the not-so-far East. Part 1: The Incorporation
While European companies are eagerly awaiting the entry into force of the Vietnam-EU Free Trade Agreement, the legal framework for foreign investment in Vietnam is steadily improving. With improved and clearer rules for investment and foreign engagement in Vietnam, the country is becoming increasingly interesting for international investors, particularly as Vietnam is already one of the most sought-after foreign direct investment (FDI) locations in the region.
Step by step and with a special focus on the concerns of companies interested in investing, we will explain the key legal bases in Vietnam under the title “Investments in the not-so-far east”.
Part 1: The incorporation of a company
- Corporate law and investment law in Vietnam have been simplified since July 2015 and better tailored to foreign engagement.
- Vietnamese corporate forms are easy to handle, especially for European companies.
- However, the successful incorporation in Vietnam is practically challenging and requires a lot of attention during the approval process
With regard to international investment, the amendment of corporate and investment law in Vietnam plays a key role. At the end of 2014, new versions of the two basic legal acts, the Companies Act and the Investment Act, were passed. On July 1, 2015, both laws came into force.
In this respect, the legislative process in Vietnam already shows that the socialist republic strives to become more attractive for international entrepreneurial engagements, to integrate foreign investments into its own economy and to promote globalization-driven growth for the economy and society.
This article shows the legal framework conditions for founding companies that govern entrepreneurial projects in Vietnam. On the one hand, the most interesting forms of company law are presented, and on the other, the essential approval requirements and procedural steps are explained.
Company forms in Vietnam
Particularly interesting for a commitment in Vietnam are the types of company that put the entrepreneur – similar to the German GmbH – under the protection of a limitation of liability. According to the Companies Act, these include, in particular, the Limited Liability Company (LLC) and the Joint Stock Company (JSC).
The LLC, which is structurally very similar to the German GmbH, find its legal basis in Articles 47 to 87 of the Companies Act. Meanwhile, Articles 110 to 171 of the Companies Act regulate the foundations of the JSC. The latter type of company is similar to the stock corporation according to German law and may be listed on the stock exchange in Vietnam.
Founding members and foreign participation
Particularly beneficial for foreign investors and entrepreneurs is the fact that both types of companies with 100% foreign participation can be founded and held. The Entrepreneurs Act initially does not provide for any special founding conditions for such “wholly foreign-owned enterprises”. There are special rules for foreign participation, partly with regard to the permit requirements and the minimum capital requirements.
This means that no LLC in Vietnam can be founded as an affiliate by an EU company alone. The establishment of a JSC, on the other hand, assumes that at least three shareholders are involved. Whether the partners are natural or legal persons does not matter.
Capital requirements and limitations of liability
Both types of company can themselves in their articles of incorporation – according to the law – basically not set in the amount of fixed capital. For foreign companies that want to operate in certain areas, however, some special minimum capital requirements apply. This concerns, for example, the real estate business, construction, banking and other financial and collection services.
From the time of the full application of the capital stipulated in the Articles of Association by the respective acquiring shareholders, the liability of the shareholders shall be limited to the respective amount of capital invested. In contrast to German law, where for the registration and establishment of the company the payment of only a fraction of the acquired capital is required (see §§ 36 (2), 36a (1) AktG and § 7 (2) sentence 1 GmbHG) , the capital of the LLC and the JSC must not yet be gathered for registration. On the other hand, the capital must then be fully raised within 90 days after the founding of the company – ie after the so-called Enterprise Registration Certificate has been issued. For this purpose, exactly the amount shown in the statutes and the Enterprise Registration Certificate must be deposited in Vietnamese Dong on a capital account specifically set up for this purpose at a Vietnamese bank.
If the capital injection is not made on time, the company’s share capital must be adjusted downwards. At the same time, the partners are liable for any damage and costs resulting from the failure to make a deposit. In the worst case, even the Enterprise Registration Certificate can be withdrawn.
Management and representation
On the one hand, LLC and JSC have a similar organ structure as the GmbH and the stock corporation according to German law. These include the general meeting of shareholders, its chairman, a managing director and a (optional) supervisory board (see Art. 55 of the Companies Act). JSC has a general meeting, a management board and a (mandatory) supervisory board (see Articles 135, 149, 163 of the Companies Act).
It is also important that, according to Art. 13 of the Companies Act, at least one legal representative must be appointed for both types of company. This legal representative is responsible for ensuring that the company remains capable of external action and therefore regularly assumes responsibility for all basic organizational acts that the company has to perform. He is also personally liable for the fulfillment of these obligations (see Article 14 of the Companies Act). It should also be noted that the legal representative must be resident in Vietnam and may not be abroad for more than 30 days at a time without naming a representative for his position.
Approval requirements for incorporations
So far, the company forms presented have only a few surprises in store for EU companies.
In addition to the corporate legal foundations, obtaining second documents is of key importance for company engagement in Vietnam: the Enterprise Registration Certificate, and the Investment Certificate, which in many cases is a necessary as an investment permit.
The documents required for incorporation are listed in Art. 22 with regard to the LLC, and in Art. 23 of the Companies Act with respect to JSC. This includes a charter application, the articles of association of the company to be founded, a list of shareholders and copies of an identification document or proof of incorporation for each shareholder.
It should be noted that foreign companies wishing to set up a Vietnamese company must legalize their establishment record prior to submission. However, as Vietnam is not a State Party to the 1961 Hague Convention, no apostille can be given. Foreign investors also have to present their (already existing) investment approval for incorporation. Both certificates have to be requested simultaneously for first-time establishments of legal entities.
Art. 24 et seq. of the Companies Act also describe the required content of the aforementioned documents, in particular the minimum content of the articles of association. This instructive explanation in Art. 25 of the Companies Act can be particularly helpful in founding a company.
The corporate formation process ends with the granting of the Enterprise Registration Certificate (Articles 47 (2), 73 (2) and 110 (2) of the Companies Act).
In addition, foreign investors often have to apply for an investment certificate under the rules of the Investment Act and thus obtain an investment license. The relevant regulations will be presented shortly in Part 2 of the series of contributions.
At least from the formal point of view of the new company law, Vietnamese company law highly encourages European entrepreneurs to try their hand in the steadily growing economy in the Far East. Undoubtedly, the pending ratification of the free trade agreement between Vietnam and the EU following the conclusion of negotiations at the end of 2015 will simplify, stimulate and deepen trade relations with Vietnam. Vietnam’s legislative reform efforts will also help attract European investors to the Vietnamese market.
Written by Erik Ahrens from our partner Germela (https://www.germela.com/).