a. Introduction to Vietnam and manufacturing
According to the World Bank, in 2021, the manufacturing sector contributed 24.26% to the GDP of Vietnam. This figure is expected to be significantly higher due to what The Economist in February 2023 referred to as a “global shift in [the] supply chain” based on geopolitical factors. Supply chain security and a lack of dependence on any single source of supply have made Vietnam a critical piece in the global supply chain puzzle.
And the shift is happening. Many multinational corporations, such as Unilever, Procter & Gamble (P&G), IBM, Foxconn, Honda, and Samsung. have opened factories in Vietnam. Many more, including Lego, Sharp, Nintendo, Komatsu, and Lenovo, have announced plans to move to or expand their presence in Vietnam.[1]
Manufacturing has challenges that require structural improvements, such as a lack of skilled labour, poor infrastructure, inefficient logistics, and bottlenecks at the port. However, Vietnam’s investment opportunities are still very promising. Vietnam still has an abundant labour force with competitive labour costs. Furthermore, Vietnam has embraced multilateralism and entered into many multilateral and bilateral trade agreements, including the Accession to the World Trade Organization, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the EU-Vietnam Free Trade Agreement, the ASEAN Free Trade Agreement, and the Regional Comprehensive Economic Partnership.
This Vietnam manufacturing publication provides a legal overview of the manufacturing sector in Vietnam. The purpose is to provide foreign investors with a highlight of the key issues that they will need to consider including licensing issues, access to land and employment issues.
b. Key manufacturing hubs and locations
Vietnam’s manufacturing is centralised in four key economic regions: the Northern, Central, Southern, and Mekong Delta regions. Binh Duong and Dong Nai are considered two of the most important manufacturing hubs in Vietnam, one hour from Ho Chi Minh City. Other key manufacturing hubs include Bac Ninh, Bac Giang, and Hai Phong.
Foreign investors can conduct manufacturing in Vietnam’s industrial zones. Currently, there are approximately 500 industrial zones across the country. Each zone is permitted for certain products and types of manufacturing. The types of industrial zones include
- Industrial Park (“Khu công nghiệp”),
- Processing Industrial Park (“Khu chế xuất”),
- Supporting Industrial Park (“Khu Công nghiệp hỗ trợ”),
- Specialising Industrial Park (“Khu Công nghiệp chuyên ngành”),
- Eco-industrial Park (“Khu Công nghiệp sinh thái”),
- High-tech Industrial Park (“Khu Công nghiệp công nghệ cao”),
- Coastal Economic Zone (“Khu Kinh tế ven biển”),
- Border Economic Zone (“Khu Kinh tế cửa khẩu”), and
- Specialising Economic Zone (“Khu Kinh tế chuyên biệt”).
Foreign investors should conduct due diligence on the industrial zones to ensure that the targeted industrial zone master plan permits the types of manufacturing and products they wish to manufacture.
Investors who want to produce goods in Vietnam only for export can consider obtaining export processing enterprise status. An export processing enterprise will not have to pay import tax for imported materials for production or VAT for exported products.
c. Licensing and regulatory authority
For very large-scale investment projects or request to be allocated land use rights to implement the investment project, the investor may first be required to obtain an investment policy approval (“IPA”) from either the National Assembly, Prime Minister, or the provincial people’s committee. (E.g., for manufacturing projects that require land use rights for their implementation, the investor may request a land lease or land allocation from the people’s committee, and in such case, an IPA from the people’s committee will be required).
In most cases, manufacturing projects do not require an IPA if carried out in an industrial zone.
An Investment Registration Certificate (“IRC”) is the principal license required for a manufacturing project. This license not only verifies the status of a foreign investor in Vietnam but also defines the scope of business activities, provides the legal ground for the registration of the project company, and provides access to land for implementing investment projects in Vietnam.
An IPA application requires the submission of the following documentation:
(a) a completed application form for project registration;
(b) an investment project proposal, which sets out, among others, the proposed project name, investor information, project objectives, location, scale, investment capital, project’s social economic, and labour demand;
(c) documents evidencing the proper project location (such as a lease agreement or a lease MOU with the landlord);
(d) documents evidencing the financial capacity of the investor (such as audited financial statements in the last two years of the investor, bank balance statement issued by the bank showing the account balance of the investor, or commitment for financial support of the investor’s parent company or a financial institution); and
(e) incorporation documents of the investor, which must be legalised. The legalised copy must also be translated into Vietnamese and notarised for submission.
The authority that issues the IRC is (i) the provincial Department of Planning and Investment if the project location is outside the industrial zones or (ii) the provincial Industrial Zones Authority if the project location is in an industrial zone.
An IRC provides the following information: the project name, project code, investor information, project location and land area, project objectives and scale, investment capital (including contributed capital and loan capital), project term, project proposed schedule, incentives applicable, and other conditions applicable to the investor (if any).
The licensing authority is required to issue the IRC within 15 days after the submission of a complete application. Typically, it takes 2–4 months to obtain the IRC.
For obtaining the IRC, the investor should take the following notes from a practical perspective:
· Financial capacity. The recent practice of the Vietnamese authority has been to require documents evidencing the investor’s financial capacity for the total investment capital (including the charter capital and loan capital) when applying for the IRC – not just the charter capital or equity. Therefore, if the investor is a special purpose vehicle that does not have available funds to prove the total investment capital, the investor may submit a combination of (i) a commitment for financial support from the investor’s parent company, (ii) a bank balance statement showing the balance of the investor’s parent company for the entire total investment capital, and (iii) incorporation documents showing the relationship between the parent and the SPV. Otherwise, the investor should register appropriate investment capital at the beginning and subsequently increase the investment capital when required.
· Equity and loan ratio. The total investment capital amount comprises the charter capital and loan capital. Although there is no explicit thin capitalisation rule in Vietnam for an investment project, the licensing authority may typically require not less than 10%–20% of the total investment capital to be contributed as equity. We have seen this request from a number of licensing authorities when applying for an IRC.
· Loan capital. Loan capital is not compulsory and can be registered as zero. However, even where loan capital is registered, using the debt is not required. Vietnamese law provides that any medium- and long-term loans (with a term of longer than 12 months) may be taken out by the project company only if it has registered loan capital under the IRC. Therefore, registering loan capital is recommended to remain flexible if any loan funding is required in the future. Otherwise, only short-term loans can be drawn down but will need to be repaid within 12 months.
· Project term. The project term can be approved for up to 50 years. However, if the project company is established in an industrial zone, the maximum project term under the IRC will be limited by the remaining term of the lease term of the industrial zone land from the State. The investor should still apply for 50 years, which is commonly approved for investment in manufacturing, unless there is any limitation on this, as discussed based on the circumstances of the particular industrial zone. Upon expiration of the approval, the investor can file for an extension of the project term, but not for more than 70 years in aggregate.
· Legalised process. The incorporation documents of the investor (e.g., certificate of incorporation, business profile, and constitution) must be legalised for submission to the licensing authority. The standard legalisation process comprises the following steps: (i) First, a document is certified as a true copy by a notary public in the home jurisdiction; (ii) second, it is certified by the Ministry of Foreign Affairs of the investor’s home jurisdiction; and (iii) third, it is authenticated by the Embassy of Vietnam in the home jurisdiction. This process can take up to 3–4 weeks to complete.
After the issuance of the IRC, the investor will incorporate a Vietnamese project company by applying for an Enterprise Registration Certificate (“ERC”). An ERC is issued by the local Department of Planning and Investment; this is a straightforward process that may take 5–7 working days to complete. The project company must also fulfil certain post-establishment requirements in relation to company seals, tax declarations, and bank account opening (including an investment capital account, as applicable). The charter capital of the project company must be fully contributed within 90 days from the date of ERC issuance.
d. Foreign ownership
100% foreign ownership is permitted in the manufacturing sector. Unlike in China, where joint ventures are common, a foreign investor does not need to joint venture with a Vietnamese partner. The ease of access to land in industrial parks means that joint ventures are no longer a viable structure for establishing a manufacturing business in Vietnam.
However, there are certain restrictions depending on the products manufactured. These restrictions are described below.
Prohibited products: Products prohibited from manufacturing and production in Vietnam include narcotic substances, certain chemicals and minerals provided by Vietnamese laws, certain specimens of wild flora and fauna provided by Vietnamese laws, pornographic materials, human tissues, and firecrackers.
Restricted products: Products restricted from being manufactured or produced by foreign-owned companies include weapons, military equipment and gear, and related products.
Conditional products: Products manufactured or produced by foreign-owned companies subject to certain conditions include paper, vehicles with 29 or more seats, aircraft, railway trains, cigarettes and cigarette-related products, construction materials, and any products permitted to be produced under a sandbox mechanism. The conditions may include a foreign ownership threshold, investment form (e.g., joint venture or business cooperation contract), operation scope (e.g., regional restriction) and/or investor capacity (e.g., years of experience in the same or similar business).
e. M&A in manufacturing
The recent top M&A deals in Vietnam have been in the manufacturing sector. They include (i) the US$1.015 billion acquisition of the bottling factories of Coca-Cola in Vietnam by Swire Beverage Holdings, (ii) the US$700 million acquisition of the animal-feed sector of Masan MEATLife by De Heus Group (Netherlands), and (iii) the US$300 million acquisition of 70% interest in Duy Tan Plastics by SCG (Thailand).[2]
Share sales are the most common form of M&A in Vietnam for manufacturing projects. Though we have seen increasing use of asset sales as the land use terms of many manufacturing projects are reaching their expiration date. The common legal issues for an M&A transaction are listed below.
M&A approval: The Law on Investment 2020 requires the buyer and the target company to obtain M&A approval from the provincial-level department of planning and investment. The application process requires the foreign buyer to submit legalised documents and provide details of the foreign buyer’s ownership after completion. This M&A approval process typically takes 2–3 months to complete.
Merger control clearance: According to the Law on Competition 2018, parties to an economic concentration must obtain a merger control clearance from the National Competition Committee if the below-mentioned thresholds are met. An economic concentration includes the acquisition of an enterprise, which means the purchase by one enterprise of all or part of the capital contribution or assets of another enterprise sufficient to control or dominate the acquired enterprise or any of its business activities.