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Restrictions on Foreign Direct Investment in Vietnam

GBS - Foreign investors have been flocking to Vietnam in recent years. Close to global supply chains, the country is seen as an attractive alternative to manufacturing in China, where wages are on the rise. Other benefits include its relative political stability and inclusion in the Trans-Pacific Partnership.

Thanks particularly to Vietnam’s accession to the WTO, market access for foreign companies in the country is being liberalized. That said, in certain sectors foreign direct investment continues to be restricted.

Unlike other countries in the region, such as China or some of the other ASEAN member states, Vietnam does not maintain a Negative List of industries with foreign equity ownership caps. However, several industries in the services sector have foreign equity caps as part of Vietnam’s WTO commitments.

With the enactment of the Law on Investment and the Law on Enterprises however, the country is moving in the direction of such a Negative List system. The two laws, in addition to various other laws and regulations, feature lists with industries that are termed ‘conditional’. When investing in conditional industries, the government examines the investment proposal and may choose to impose additional requirements.

Investing in conditional industries

To set up a company in Vietnam, the foreign investor needs to obtain an Investment Certificate from the local government. When the investor applies for an Investment Certificate, one of two procedures is followed.

The evaluation procedure is used when an investment covers one of the conditional industries, or the investment amount exceeds 300 billion Vietnamese dong. This procedure involves both the provincial and central government, and is more time-consuming and cumbersome than its counterpart.

In all other cases, the registration procedure is conducted. A shorter procedure that does not involve the central government, it too checks whether an investment is feasible. In spite of what the name implies, it is more than a simple registration of the investment.

With the entry into force of the Law on Investment however, this distinction is set to be removed. Instead, certain types of investment now need a decision from the Prime Minister. These include:

  • Investments of over 5 trillion Vietnamese dong
  • Projects that require the relocation of over 10,000 people in the highlands, or 20,000 in other areas
  • Construction and operation of air and sea ports
  • Air transport
  • Gambling
  • Petroleum exploration, extraction and refinery
  • Cigarette production
  • Development of infrastructure in economic zones
  • Construction and operation of golf courses

Foreign investment into sea transport, provision of telecommunication services, afforestation, journalism, publishing and the establishment wholly foreign-owned science and technology companies

Nonetheless, a list of conditional industries remains as distinct from those mentioned above. While there will no longer be a separate incorporation procedure for investments into these industries, projects in these sectors may still be subject to additional requirements from the Vietnamese government. The Law on Investment provides over 250 conditional business lines. These include financial and professional services, trading in and exploration for energy and minerals, certain types of education, the operation of ports, railroads and airports, construction, trading in medical devices and land surveying.

Restrictions under the WTO Agreement

As part of its agreement with the WTO, Vietnam is allowed to restrict or close access to certain sectors by foreign investors.

Equity restrictions apply in the following sectors:

  • Advertising
  • Courier services
  • Equipment repair and maintenance (excluding ships)
  • Travel agencies and tour operators
  • Film production, distribution and screening
  • Services incidental to mining and manufacturing
  • Telecom services
  • Distribution
  • Education
  • Electronic games
  • Maritime transport, container handling and related services
  • Road and rail transport
  • Aircraft maintenance and repair

Some sectors are also closed to foreign investors under the WTO agreement, including the provision of architecture or legal services by natural persons. The operation of hotels and restaurants by foreigners requires that the foreign entity build, restore or acquire the premises.

Fewer prohibited sectors

With the new Law on Investment, the number of industries prohibited by national law has been reduced from 51 to 6. These are:

  • Trade in narcotics;
  • Trade in hazardous chemicals and minerals
  • Trade in endangered flora and fauna
  • Prostitution
  • Human trafficking, trade in human tissue and body parts
  • Human cloning

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