Luong Van Ly
Luong Van Ly has been an advisory member at VLT Lawyers. In July 2016, VLT Lawyers was merged officially with Phuoc & Partners. Currently, he focuses on education consulting and foreign investment in Vietnam.
By Luong Van Ly and Tran Thanh Tung
In the context of a Government always advocating a favourable business environment for the private sector, which serves as a major driving force to economic growth, what are the factors which might impede growth in this sector?
Caught in the crossfire
In the course of practicing law, we have been lucky enough to work with many foreign and domestic traders who have been doing business in Vietnam. Through the interactions with them, we have been able to gather insights which may answer the said question.
Overall, the Vietnamese economy can be divided into three sectors: state invested enterprises, FDI enterprises and domestic private enterprises. The statistics indicate
that FDI enterprises grow fairly well in Vietnam and play an increasingly important role in the economy. State invested enterprises have fallen short of the expectation to bring about a powerful boost to the economy in alignment with the social resources they have been holding. Private businesses are mostly small and very small ones.
In the overall relationship, domestic private businesses are being put under pressure by state invested enterprises and FDI enterprises. State owned enterprises receive a critical advantage: the mechanism and the historical relationship with state authorities. This advantage enables state owned enterprises to access important business resources such as land, natural resources, finance, credit accessibility and many other incentives.
FDI enterprises have multiple advantages when they run businesses and invest in Vietnam. With enormous investments, they are welcomed everywhere; provinces and cities scramble to invite them in through incentives on tax, land, policies etc. Domestic private businesses can hardly dare to dream about such a red carpet, except for giant ones. FDI enterprises also have a distinct advantage, perceived as the possibility of avoiding the control of Vietnamese law. They have business activities in Vietnam but their head offices are located overseas. Their operations cross Vietnamese borders, so they go beyond the control of the Vietnamese Government. In principle, Vietnamese law cannot remain in full force beyond Vietnamese borders. If a foreign employer suffers business losses in Vietnam, he definitely can leave his business and return to his country. Then the Vietnamese Government and his creditors will busy themselves with treating the leftover “garbage heap”. Therefore, FDI enterprises will still grow regardless of how the Vietnamese law changes.
What advantages do private businesses have? Almost nothing. With tiny investments, they do not dare to dream about incentives from local authorities. Without access to large resources of land and finance, they must rely on state owned and FDI enterprises to survive and grow. Since it is impossible for them to get away from their business activities to stay overseas, private businesses have no choice but to cope with difficulties in Vietnam. They eventually cannot escape from Vietnam’s business mechanism and environment. So, they remain “sustainably small”. According to Mr. Vu Tien Loc – Chairman of the Vietnam Chamber of Commerce and Industry, private businesses are just “coracles” in the ocean. Actually, most of them are not strong enough to cope with the competitive pressure of the domestic economy, not to mention “offshore fishing”.
Tran Thanh Tung
Tran Thanh Tung has become a partner of P&P from 2006 with nearly 10 years of experience as a practicing legal professional in the litigation, corporation and investment fields. He is also a keen reporter with many articles published in The Saigon Times, The Entrepreneur & Law Review, Vietnam Investment Review and other newspapers.
The State – Referee or Competitor?
In the relationship with the corporate community, the State is playing two roles simultaneously — the rule-maker and the investor. The State enacts laws as playing rules for enterprises of all types to compete with one another equally while functioning as a referee in case of a dispute amongst players. Its second role includes making investments and holding capital in state owned/invested enterprises. To become a fair referee, the State must be neutral and not for profit, but to generate profits, the State as an investor must compete with other enterprises to gain profits. So, these two roles contradict each other.
Currently, the State is not functioning well as a rule-maker. Many policies and laws are aimed at exalting state management rather than facilitating enterprises. The 2014 Enterprise Law attempts to eliminate the arbitrary issuance of business conditions which have been previously “confined” to conditional business lines — at a figure of 276 (now down to 243). However, business conditions can still be issued by other ministries or state authorities whenever they want. Struggling for the freedom of business has always been a battle since 1990 (when the Private Enterprise Law and the first Company Law were enacted) until now. The Vinasun versus Grab lawsuit is in effect a dispute between Vinasun and the State to remove unfair business conditions and to claim rights and equal business in favour of traditional taxi companies.
Moreover, unfavourable policies by the State may come upon private businesses at any time. The recent controversy about the draft National Standards on “normative practices in fish sauce production” between traditional and industrial fish sauce may be seen as an example.
Looking at the growth of FDI and private businesses, we may subconsciously think — is it right that the mechanisms and laws by the State might impede the growth of private businesses? To many of us, the answer is clear!
How to develop private businesses?
We can see from the current context that private businesses are besieged on three sides by FDI enterprises, state invested enterprises and the State itself, which squeezes the growing space of private enterprises. A policy related question can also be raised: what should the State do to develop private businesses? Bring them much more growing space!
In terms of policies, it is perhaps high time for the State to change its view about the level of priority between state owned and private enterprises, whereby it must prioritize private enterprises and consider them as a driving force of the economy.
As a matter of law, for the upcoming occasion amending the Enterprise Law and Investment Law, we think it is necessary to narrow the scope of prohibited or conditional business lines for the sake of the right to business of the enterprises. Concurrently, the State should take a bold step to abolish the Investment Law or integrate it into the Enterprise Law because the Investment Law has ended its historical role.
In the long term, the State should seek to diminish its role step by step as an investor to become a better rule-maker. Equitization is a suitable measure which should be promoted to diversify the ownership in state owned enterprises, thereby enhancing the performance of this sector.
FOREIGN INVESTORS ARE ELIGIBLE TO PAY A DEPOSIT IN A TRANSFERRED FOREIGN CURRENCY UPON JOINING AN AUCTION OF THE STATE OWNED ENTERPRISES THAT ARE EQUITIZED OR DIVESTED
As of March 29, 2019, the State Bank issued Circular No. 03/2019/TT-NHNN amending and supplementing a number of articles of Circular No. 32/2013/TT-NHNN dated December 26, 2013 guiding the implementation of the regulation on restricting the use of foreign exchange in the territory of Vietnam (“Circular 03“).
In order to promote the progress of equitization and divestment of the state owned enterprises and state invested enterprises, foreign non-resident investors are expedited to pay a deposit in any transferred foreign currency upon participating in an auction in the following cases:
- Purchasing shares at the state owned enterprises that will be equitized upon approval by the Prime Minister;
- Purchasing shares, capital contribution portions of state owned enterprises and the state invested enterprises that will be divested upon approval by the Prime Minister;
- Purchasing shares, capital contribution portions of state owned enterprises investing in other enterprises that will be invested upon approval by the Prime Minister.
Based on the auction results, Circular 03 stipulates the rights and obligations of foreign investors as follows:
- In case of winning an auction, foreign investors will transfer investment capital in the form of transfer into the direct investment capital account and comply with the law on foreign exchange management for payment of the purchase value of shares and capital contribution portions.
- In case of failure to win an auction, foreign investors remit abroad the deposit in foreign currency after subtracting related arising expenses (if any).
Circular 03 will take effect from May 13, 2019.
FRESH POINTS IN CIRCULAR NO. 05/2019/TT-BKHDT GUIDING THE SUPPORT FOR HUMAN RESOURCES DEVELOPMENT IN FAVOUR OF SMALL AND MEDIUM SIZED ENTERPRISES
As of March 29, 2019, the Government issued Circular No. 05/2019/TT-BKHDT (“Circular 05“) regulating support for human resources development in favour of small and medium sized enterprises. Accordingly, Circular 05 features the following notable fresh points:
Regulation on the support levels from the state budget
Circular 05 specifies the support levels from the state budget, namely supporting at least 50% of the total cost of organizing a training course for business start-ups, business administration and 100% tuition for attendants of small and medium sized enterprises in extremely difficult socio-economic areas and attendants of small and medium sized enterprises owned by women when participating in training courses in business start-ups, business administration and intensive business administration.
Concretizing the regulation on training courses in business start-ups, business administration, intensive business administration, direct training in manufacturing and processing enterprises, online training and training via mass media
Each specific training will provide learners with knowledge related to that training. In addition, the contents of training courses are also detailed by Circular 05, including training course name, training subject, training duration, attendants, and the minimum number of attendants and organizing processes. Particularly for online training and training via mass media, employees and managers of small and medium sized enterprises will be granted an account to participate in learning on the online systems or their mobile device.
Circular 05 takes effect from May 12, 2019.
NEW CIRCULAR TO GUIDE REGISTRATION OF COOPERATIVES AND REPORTING REGIME OF COOPERATIVES’ OPERATIONS
As of 08/04/2019, the Ministry of Planning and Investment issued Circular No. 07/2019/TT-BKHDT (“Circular 07”) to amend and supplement some articles of Circular No. 03/2014/TT-BKHDT (“Circular 03”) guiding the registration of cooperatives and the reporting regime of cooperatives’ operations. Accordingly, Circular 07 features the following key points:
Principles in conducting the cooperative registration procedure
The cooperative registration procedure must be conducted in compliance with the following principles:
- The founder of the cooperative will by himself declare information in registration dossiers and is responsible for its legality, truthfulness and accuracy.
- The cooperative registration agency is only responsible for the validity of registration dossiers, not for law breaching conduct of the cooperative or its founder.
- The cooperative registration agency does not assume responsibility for resolving disputes among cooperatives, or between a cooperative and other organizations or individuals.
Supplementing the cases of business line registration
As prescribed by Circular 07, if a cooperative wishes to register a business line more detailed than a class 4 industry, it will select a class 4 industry in the Vietnam Standard Industrial Classification System, and then fill in the details of the business line under the class 4 industry, but must ensure its consistency with the selected class 4 industry. In addition, cooperatives are allowed to register a conditional business line after fulfilling the prescribed conditions, and must satisfy those conditions throughout their operations.
The cooperative registration procedure can be conducted on-line with public digital signatures. On-line registration dossiers are similar to paper registration dossiers but must be authenticated by a public digital signature of the subject entitled to use it as prescribed by law. Circular 07 also provides detailed instructions on the order and procedure for registering cooperatives on-line with public digital signatures. In addition, Circular 07 shortens the time limit to issue certificates of cooperative registration from 05 to 03 working days from the date of receipt of valid dossiers.
Furthermore, after finishing the procedure for registering cooperatives, each cooperative will be given a unique code consisting of 10 digits as prescribed in Circular 03 but this code is also the tax code.
Circular 07 comes into effect as from May 28, 2019.
Monthly Legal Update
Ho Chi Minh City
|Nguyen Huu Phuoc, Founding Partner||Nguyen Duc Hieu, Partner||Tran Thanh Tung, Partner|
|Nguyen Gia Huy Chuong, Managing Partner|
|Dinh Quang Thuan, Partner|
|Luong Van Ly, Partner|
|Le Quang Vy, Partner|
|Duong Tieng Thu, Partner|
|Hoang Quoc Nhat Trung, Partner|
|Nguyen Van Quynh, Partner|
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