The definition of a foreign-invested company generated enormous debate
from regulators, lawyers and enterprises at a recent VIR-hosted forum. Huynh
Dai Thang, partner of DFDL Vietnam Law Firm, presents his view on whether the
definition should be re-defined.
Since Vietnam started receiving
foreign direct investment in the early 1990s, the concept of “Enterprise with
foreign-invested capital” (“EWFIC”) has been widely used to refer to those
enterprises in which foreign investors invest and own capital either in whole
or in part.
Under the old Foreign Investment
Law which was repealed in 2005, EWFIC means “any foreign invested joint venture
enterprise or enterprises which are invested in and wholly owned by foreign
investors”.This concept has, however, become uncertain and problematic since a
few new definitions relating to EWFIC were introduced by the Investment Law and
certain legal guidance from the competent authority of Vietnam.
Despite the fact that this
concept has been the subject of various debates and efforts have been made with
a view to clarifying the concept, it still remains ambiguous and controversial
and has triggered concerns with its application in practice.
Why a definition of “EWFIC” is needed
Despite EWFICs currently
operating on the same legal ground with Vietnamese domestic enterprises which
include notably the Investment Law and the Enterprise Law, EWFICs are treated
differently. EWFICs are subjected to certain restrictions (the “Restrictions”)
which are imposed as a part of Vietnam’s commitments to World Trade
Organization (WTO) members on market access (“Vietnam’s WTO Commitments”) and
which are specified in specialised management regulations of Vietnam. Such
restrictions are usually limitations in terms of maximum foreign ownership and
authorised scope of business of EWFICs.
More specifically, depending on
the specific business sector in which an EWFIC operates, foreign investors may
not own more than a certain percentage of the EWFIC’s registered charter
capital (notably 49 or 51 per cent) or the EWFIC is not allowed to engage in
certain business activities such as retailing and/or opening and operating
sales outlets.
Given the restrictions, one may
assume that a definition of EWFIC is needed in order to determine whether an
enterprise with foreign investor(s) is a EWFIC and thus be subject to the
restrictions.
How “EWFIC” is currently defined
Generally, EWFIC is understood to be an enterprise of which foreign investor(s)
hold 49 per cent or more of its registered charter capital (the “49 per cent
Cap”). Such understanding originates from Article 29.4 of the Investment Law
which stipulates that “The same investment conditions which are applicable to
domestic investors shall be applied to foreign investors where Vietnamese
investors hold more than 51 per cent of the charter capital of an enterprise”
and Article 11.3 of Decree 102# providing that “the same investment and
business conditions as those applicable to domestic investors shall apply to an
enterprise already established in Vietnam with foreign ownership not exceeding
49 per cent of the charter capital of such enterprise”.
In addition, such understanding
was also partially developed from Article 2(b) of Decision 88 stating that an
enterprise of which foreign investors hold 49 per cent or more of the charter
capital is EWFIC. Despite the above, on a different approach, EWFIC may also be
understood to be an enterprise which has a foreign investor regardless of the
foreign investor’s portion of ownership in the enterprise. The ground for such
a different interpretation is the definition of EWFIC under Article 3.6 of the
Investment Law which states that EWFIC means “any enterprise established by a
foreign investor in order to carry out investment activities in Vietnam or a
Vietnamese enterprise in which a foreign investor purchases shares, with which
it merges or which it acquires”.
Problems
Since EWFIC is not consistently
defined in Vietnam’s current laws, the concept has been discreetly applied in
practice and has caused numerous difficulties to the process of establishment
and operations of enterprises which have foreign-invested capital in Vietnam.
Generally, by having a foreign
investor regardless of its portion of ownership, an enterprise may be deemed to
be an EWFIC and is required to comply with those administrative procedures
which should apply to EWFICs only. On a more serious level, such enterprises
may be deprived of certain legitimate rights and interests by being treated as
EWFIC.
One of the most vivid examples
relates to Mekophar, one of the leading pharmaceutical dealers in Vietnam.
Mekophar has been asked to remove one of its key business lines, retailing of
pharmaceutical products, from its current scope of business on the grounds that
by having foreign shareholder(s) holding approximately 4.2 per cent of its
charter capital, Mekophar is now an EWFIC and not allowed to engage in
retailing of pharmaceutical products which, pursuant to Vietnam’s WTO
commitments and relevant regulations of Vietnam, is reserved for Vietnamese
domestic companies only. This case still remains unresolved. For these specific
problems, there have recently been calls for a new and consistent definition of
EWFIC.
Recommendable approach
In recent debates on the subject,
different methods for re-defining an EWFIC have been introduced which take
certain foreign ownership thresholds as a benchmark for determining an EWFIC
for the purpose of applying the restrictions. The 10 per cent foreign ownership
cap under OECD’s EWFIC definition has been welcomed as a practical approach to
this issue.
Nevertheless, one can easily
realise that the 10 per cent cap is problematic in itself since it will catch
all enterprises within the range without taking into account their current
status and relevant particularities. It is foreseeable that 10 per cent cap
will drive hundreds of enterprises which are, pursuant to the 49 per cent cap,
currently enjoying the status of a Vietnamese domestic enterprise into the
position that the restrictions would apply on them.
In our view, an enterprise would
naturally be an EWFIC so long as it has a foreign investor no matter how much
the foreign investor owns the enterprise and the definition of EWFIC under
Article 3.6 of the Investment Law need not be revised, but maintained. We
believe that if the main purpose of having a definition in place is to apply
restrictions on such enterprise, it may be more efficient to approach this
matter in the following way: The regulators will set forth in specialised
management regulations specific criteria which, if an EWFIC satisfies/falls
within such criteria, the restrictions will apply. For example, if foreign
investors own more than a certain percentage of an EWFIC or if the EWFIC is
located in any specific location, such EWFIC may not engage in pharmaceutical
retailing activities or will not be allowed to operate more than a certain
number of sale outlets.
Moreover, whether an EWFIC should
be subjected to any restrictions will be determined by taking into account the
relevant management regulations, the relevant business that the enterprise
engages in and also other facts relating to such enterprise. We believe that
the application of restrictions by taking into account specific contexts in
which EWFIC falls under as set out in the above approach is more prudent and
selective and would help avoid cases like Mekophar’s.
vir.com.vn
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