28 June 2021

Decree 31/2021/ND-CP (“Decree 31”), which provides guidance for the implementation of the Law on Investment No. 61/2020/QH14 (“LOI 2020”), was issued by the Government of Vietnam and came into effect on 26 March 2021.

This article discusses the new guidance on foreign investment set out in Decree 31. An article on the LOI 2020 is available here.

1.      Sectors in which foreign investment is prohibited or conditional

Under the LOI 2020, foreign investors are not allowed to invest in sectors that fall within the list for which foreign investment is prohibited (“Prohibited List”). In addition, where the foreign investment is made in a sector that falls under the list for which foreign investment is subject to market access conditions (“Conditional List”), such investment is allowable provided that the relevant market access conditions are satisfied. The Prohibited List and the Conditional List are commonly referred to as the “Negative Lists”.

In furtherance of these principles, Appendix 1 of Decree 31 sets out the Prohibited List and Conditional List in detail. In particular:

  • The Prohibited List comprises 25 sectors. Some notable sectors are (i) press activity, news collection and public opinion polling, (ii) service of sending Vietnamese workers to work in foreign countries under contract, (iiii) services of industrial property representation and intellectual property assessment, and (iv) tourism services (except for international tourism services for inbound tourists). Foreign investors are not allowed to invest in these sectors. 
  • The Conditional List comprises 59 sectors, including both manufacturing and service sectors. The specific market access conditions for these sectors are, however, not specified under Decree 31. Such conditions shall be gathered and reviewed by the Ministry of Planning and Investment (“MPI”) in co-operation with other relevant Ministries, and will be published on the National Portal on Investment. Provided that the relevant market access conditions are satisfied, foreign investment in these sectors is permitted.

Foreign investment in sectors that do not fall under the Negative Lists will be subject to the same market access rules that apply to domestic investment (i.e. national treatment).

We would note, however, that in addition to the Negative Lists that only apply to foreign investment, foreign investors are also subject to the nationwide list of prohibited and conditional sectors set out under the LOI 2020, which are applicable to both domestic and foreign investors (“General List”).

The objective of the General List differs from the Negative Lists in that, while the Negative Lists aim to prescribe restrictions (in terms of foreign ownership ratio, participation of domestic partners, limited scope of service) applicable to foreign investors that wish to enter the Vietnam market, the General List seeks to ensure that all business entities comply with the regulatory requirements relating to the business in which they are engaged (such as having sufficient legal capital, facilities and technical conditions, and obtaining required licenses and certificates).

The General List and the Negative Lists will be updated from time to time to reflect changes in or issuance of laws, resolutions of the National Assembly, ordinances or resolutions of the Standing Committee of the National Assembly, decrees of the Government (collectively, “Local Laws”) and international treaties on investment of which Vietnam is a member (“International Treaties”).

2.      Licensing requirement for unbound sectors 

Under the previous Law on Investment 2014 (“LOI 2014“), foreign investors wishing to engage in sectors which are unbound or not committed under International Treaties (“Unbound Sectors”) were required to obtain an industry approval from the relevant Ministries as part of the investment approval process administered by the local Department of Planning and Investment (“DPI”). Such industry approval is granted on a case-by-case basis subject to the sole discretion of the relevant Ministries. 

Decree 31 provides as follows:

  • In relation to Unbound Sectors for which Local Laws provide clear market access restrictions, such market access restrictions will apply. That said, if any Unbound Sector appears in the Negative Lists, then foreign investors will be subject to the relevant restrictions accordingly. 
  • In relation to Unbound Sectors for which Local Laws do not provide any market access restriction, the foreign investment will be subject to same market access rules that apply to domestic investment.

As such, foreign investment in Unbound Sectors is now no longer subject to the relevant Ministries’ industry approval on a case-by-case basis, but instead is only subject to the market access restrictions as clearly regulated under Local Laws as part of the investment approval process administered by the local DPI.

Further, Decree 31 makes clear the non-retroactive effect of the new market access conditions prescribed for any Unbound Sector. If at any time Local Laws provide new market access conditions in respect of a specific Unbound Sector (“New Conditions”), then the investors who have obtained their approvals under the market access conditions that were effective before these new conditions came into force (“Existing Conditions”) are entitled to continue their existing investment activity under the Existing Conditions.

The New Conditions will only apply when foreign investors and/or foreign invested company:

  • Establish a new enterprise; 
  • Implement a new investment project;
  • Receive a project transfer;
  • Purchase shares/capital of, or make capital to, another enterprise;
  • Embark on a new investment under the form of contract; or
  • Change or supplement their investment objectives or business lines that are subject to the New Conditions.

In such cases, the business lines (i.e. the sectors) that have been previously approved will not need to be re-approved by the licensing authorities.

3.      Foreign ownership limitations in case of multiple foreign investors

The LOI 2014 did not provide a clear principle to determine the foreign ownership limitation (“FOL”) applicable to a specific sector of an enterprise where such enterprise is acquired or owned by multiple foreign investors that enjoy different market access conditions under multiple International Treaties.

This issue is now addressed under Decree 31 as follows:

  • If the foreign investors have the same nationality, their aggregate ownership in the target enterprise shall not exceed the FOL regulated in the International Treaty applicable to them; 
  • If the foreign investors are the subject of one or more International Treaties, their aggregate ownership in the target enterprise shall not exceed the highest FOL set out by the applicable International Treaties. 

4.      National defence and security review

National defence and security review (“NDSR”) is one of the most notable points raised under the LOI 2020. In particular, an approval from the Ministry of National Defence and Ministry of Public Security must be obtained for foreign investors to:

  • Implement an investment project which is located in a National Security Sensitive Area; or 
  • Acquire share/capital in an enterprise which has the land use right of land located in a National Security Sensitive Area.

For these purposes, Decree 31 stipulates that National Security Sensitive Areas comprise: 

  • Islands, coastal or border communes, wards or towns; 
  • Any area with national defence and security works, military zones, restricted or protected zones, safety corridors of national defence works or of military zones; 
  • Any area that borders works which are important political, economic, diplomatic, scientific and technical, cultural or social targets and are guarded by the police force;
  • Important works related to national security and their safety corridors;
  • Eco-defence zones;
  • Any area with military or defence value pursuant to a decision of the Prime Minister; and
  • Any area in which foreign organisations and individuals are not permitted to own residential property. 

The NDSR process can result in a rejection of the proposed investment or the imposition of certain investment conditions and thus may significantly affect foreign investment into projects and/or enterprises located in the National Security Sensitive Areas. For these purposes, the Ministry of National Defence and Ministry of Public Security will have the sole discretion to determine which area is a National Security Sensitive Area as well as to approve the foreign investments in these areas.