Investments in the not-so-far east Vietnam. Part 3: Investment Benefits and Incentives
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 regulations for investment and entrepreneurship in Vietnam, the country is becoming increasingly interesting for international investors, especially as Vietnam is already one of the most sought after 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 3: Investment benefits and incentives
The Vietnamese Investment Law guarantees foreign investors the freest operation of the respective project as well as comprehensive protection against state intervention.
The investment guarantees also include the Vietnamese government’s default risk, which is being used to finance many projects related to investment-related contracts and liabilities.
In addition, the Investment Act also provides a number of monetary incentives, the applicability of which depends on the industry sector, area and volume of each project.
Vietnam is one of the most dynamic and fastest growing economies in the Asian economic area. With a doubling of its foreign trade volume, the Vietnamese economy has been recording a consistence in growth rates of more than 7.0% for a decade. These are strong driving forces for foreign companies, which often recognize Vietnam as a key location for export processing anyway.
With the recent reforms in corporate and investment law, the Vietnamese government continues to pursue an investment-friendly course aimed at retaining foreign capital inflows and investments in Vietnam. While we have already presented to you in two parts of this series of articles the essential issues involved in setting up a business and approving an investment project in Vietnam, this article will examine the investment guarantees and benefits available.
Articles 9 to 14 of the Investment Act contain the central investment guarantees which foreign entrepreneurs can claim against the Vietnamese State. These are the basic guarantees that are meant to signal to foreign investors that they are able to operate in Vietnam on a market free of government intervention according to their own business ideas.
This includes a property guarantee with guaranteed protection against confiscations and other compensation-free administrative measures on a property (Article 9). Although there is also the possibility of a compulsory acquisition by the state. However, this may only be carried out for particularly important reasons – such as national security, defense cases or natural disasters – and only for a reasonable purchase price.
Like the property itself, the autonomy of the respective investor is protected in his own management (Article 10). In particular, the government must not influence in any way irrelevant of what and how many products and services an investor uses, where the investor produces, services delivers or in what quantities one imports and exports goods.
Also of particular importance is the guaranteed exportability of the assets of an investment project abroad (Article 11). This repatriation guarantee relates to investment capital, liquidation proceeds, all operating income, and all other cash and cash equivalents and assets. Nonetheless, an investor can only invoke free executability if there are no public charges.
Finally, the guaranteed level of the respective investment incentives is also guaranteed in subsequent legislative changes as well as the right to be heard before Vietnamese courts in the case of investment disputes (Articles 13 and 14).
Government guarantees for investment contracts
Investment guarantees include the provision of government guarantees in Art. 12 of the Investment Act. These guarantees are indemnity insurance similar in nature, such as the Hermes Cover of the German Federal Government. Under these guarantees, the Vietnamese government assumes default liabilities for investment-related contracts and liabilities in favor of particularly important foreign investment projects of a certain amount.
Currently, government guarantees are offered with a liability limit of between 50% and 70% of the investment volume at a rate of 2% of the secured claim. In the context of legislative and fiscal efforts to better control and weigh the country’s public debt, the level of government guarantees has been gradually reduced in recent years. At the same time, the requirements for granting a guarantee are constantly being tightened and costs gradually increased.
Different categories for investment incentives
Although the Investment Act also provides for certain technical and informational support services to be provided by the Vietnamese Government (see Articles 19 to 21). However, the focus of the incentives is noticeable on the tax and tariff exemptions and the reduced use of land according to Art. 15 of the Investment Act.
As a result, foreign companies may benefit from the application of reduced corporate tax rates, a temporary or even permanent reduction of up to 50% or even exemption from any corporate tax liability. The reduced corporate tax rates currently amount to 10% or 17% depending on the area of activity (instead of the usual corporate tax rate of 20%).
In addition, the Investment Act provides for an exemption from import duties on imported products and goods used to set up the project or create fixed assets.
Finally, investors may claim a full or partial reduction in land rental or usage charges.
These incentives are open to all investment projects whose activities focus on the sectors listed in Art. 16 (1). These include in particular high-tech and IT production, the production of energy-efficient products, the development of new and renewable raw materials, mechanical and automotive engineering, infrastructure development and development of urban mass transport systems, education and services in the field of medical care.
Nevertheless, for companies that are not included in the listed industry sectors, the investment benefits will still be available if they operate in an area deemed by the government to be a special eligible area. Such areas are set closer to the government and are located away of the large industrial zones around Ho Chi Minh City and Hanoi, especially in hitherto less developed regions of Vietnam with difficult socio-economic circumstances (Article 16 (2)).
In addition, major projects with a capitalization of at least VND 6,000 billion (approximately EUR 214 million), rural projects with at least 500 employees and certain technological research projects, regardless of sector and location, can claim the investment advantages. However, this does not apply to mining companies or the production of luxury goods.
The investment law in Vietnam offers both traditional investment guarantees and attractive monetary incentives. By focusing these incentives on specific industrial sectors and certain regions of the country that are in need of economic development, it is clear that the Investment Act aims to make the Vietnamese economy and society sustainably beneficial for foreign investment.
From an international perspective, further attention will be paid to how Vietnam’s fiscal and debt policies will evolve, particularly with regard to government guarantees for investment projects, and thus the attractiveness of the business location.
In the next part of the series, we will finally explain how the benefits are shown here can be put to practical use. In doing so, we will focus on the key aspects of trade, distribution, import, and export and provide pointers on what to look out for when organizing your business in Vietnam.
Written by Erik Ahrens from our partner Germela (https://www.germela.com/)