Vietnam: New FDI foreign exchange control

On June 26 2019 the State Bank of Vietnam issued Circular 06/2019/TT-NHNN on foreign exchange control of foreign direct investment (FDI) activities in Vietnam (Circular 06). It replaced Circular 19/2014/TT-NHNN (Circular 19) and amended certain articles in Circular 05/2014/TT-NHNN on the opening and use of foreign indirect investment capital accounts, and in Circular 16/2014/TT-NHNN on the use of foreign currency and Vietnamese Dong (VND) accounts for residents and non-residents. The issuance of Circular 06 has led to some important regulatory changes relating to the foreign exchange control of FDI activities in Vietnam.

Before Circular 06 was issued, the foreign exchange control of FDI activities in Vietnam had been regulated by Circular 19. However, following the enforcement of the new Law on Investment in 2015, Circular 19 was no longer compatible. This led to a number of challenges and difficulties in implementation, especially in relation to direct investment capital accounts (DICA).

Under Circular 19, the following major issues have been witnessed in practice:

• Circular 19 required foreign invested enterprises (FIE) to open a DICA, but the scope of an FIE was not entirely clear. Under Circular 19, an FIE was defined as an enterprise in which foreign investors contribute their capital to establish and assume their role in management and carry out their investment activities in Vietnam. As there was no guidance to clarify what was considered 'assuming a role in management', it was difficult to determine exactly what an FIE was under Circular 09's definition.

• Circular 19 further required that if an enterprise was granted an investment certificate due to its acquisition by foreign investor(s), such an enterprise must open a DICA and payment of the transfer price must go through that DICA. This requirement became problematic after the issuance of the new Law on Investment under which an investment certificate/investment registration certificate (IRC) was no longer required for certain M&A transactions. As such, in an M&A transaction where a foreign investor bought/sold its equity interest in an FIE from/to another investor, foreign investors were often concerned about (i) whether a DICA should be opened if there was no existing DICA, and (ii) whether the transaction price had to go through a DICA instead of going straight from the purchaser's account to the seller's account.

Circular 06 also requires an FIE to open a DICA, but clarifies the scope of an FIE. According to Articles 3.2 and 5 of Circular 06, the following entities are defined as FIEs:

• Enterprises newly established by foreign investors and required by Vietnamese law to obtain an IRC;

• Enterprises having 51% or more foreign ownership comprising (i) enterprises in which foreign investors purchase 51% or more of the charter capital; (ii) companies derived from demerger, merger, or consolidation whose 51% of charter capital is owned by foreign investors after such events; and (iii) enterprises newly established under specialised laws; and,

• Project companies established by foreign investors to implement public-private partnership projects (PPP Companies).

In addition to an FIE, Circular 06 requires the following investors to open a DICA:

• Foreign investors entering into BCCs (that is, business co-operation) contracts (BCC Investors); and

• Foreign investors directly entering into PPP projects without setting up a project company (PPP Investors).

In line with the above definition, under Circular 06, in addition to the IRC, approval of an M&A transaction can be used to open a DICA. The latter resolves the issue that previously existed under Circular 19.

Furthermore, according to Circular 06:

• Payment for the transfer price of the charter capital of an FIE (i) between non-residents or between residents is not required to be made through a DICA, and (ii) between non-residents and residents is required to be made through a DICA.

• Payment for the transfer price of a BCC and a PPP project between non-residents or between a non-resident and a resident is required to be made through a DICA.

Another important change introduced by Circular 06 is the flexibility regarding the reimbursement of unused pre-establishment costs to foreign investors. Previously, Circular 09 required unused pre-establishment costs to be remitted within 30 days from the date that unused pre-establishment costs were converted from VND to foreign currency. This timeline, however, has been abolished under Circular 06.

The issuance of Circular 06 has been acknowledged as a step forward in the regulation of foreign exchange control in FDI activities in Vietnam, which may resolve a number of unclear issues relating to the opening and use of a DICA in investment transactions. However, there are still some concerns arising from this new regulation. The most important issue could be the requirement for the closure of a DICA and the opening of an indirect investment capital account (IICA).

In accordance with Circular 06, among other things, a DICA must be closed and an IICA opened in an M&A transaction where foreign ownership in an FIE decreases to less than 51%.

The above requirement may cause difficulties for an FIE whose ratio of foreign ownership fluctuates around the threshold of 51%. In such a case, when the foreign ownership ratio dips below 51% (for example, during a transfer of charter capital from the existing foreign investors, the issuance of new shares, or an increase in charter capital in limited liability companies that results in the dilution of foreign ownership), the FIE itself has to close the DICA and the foreign investors of the FIE must open an IICA. However, due to business demands, such companies that have diluted their foreign ownership might subsequently need to increase their foreign ownership to 51% or more (through a transfer of charter capital, increase in charter capital, and so on). In such a case, the company would have to close the IICA and re-open a DICA.

Taro Hirosawa	Phan Thien Huong	Jumpei Nagaoka