An Overview of the Legal Framework
Vietnam’s common law system has been largely influenced by Chinese, French and Soviet system. Following the open-door policy of 1986, Vietnam has promulgated the Constitution of 1992 (amended in 2001) to strengthen legal institutions and to pave the way for its party-led economic reform.
To create a favourable environment for the development of a multi-sector market economy as well as more open and stable investment environment, Viet Nam is making efforts to improve its legal system. During recent years, many laws and regulations have been enacted to establish the legal framework for the open-door policy, to comply with the integration requirements of international agreements, and especially to prepare for Vietnam’s WTO membership. The most important laws include:
- The Civil Code (2005);
- The Labor Code (1994, as amended in 2002);
- The Commercial Law (2005)
- The Law on Enterprises (2005)
- The Law on Investment (2005)
- The Law on Credit Institutions (1997, as amended in 2004)
- The Land Law (2004)
- The Law on Business Income Tax (2004)
- The Law on Accounting (2004)
Infrastructure
Highway system
The road system consists of a 210,000 km network, including 10,732 bridges and 178 ferries. Vietnam has no expressways, and only 26% of national highways have two lanes or more. In recent years, the Government has mobilized a significantly large amount of capital to upgrade the highway system with financial support from international lending agencies. These include a number of the more important highways, such as Highway No. 1, which links Hanoi and Ho Chi Minh City, and Highway No. 5, which links Hanoi and Hai Phong.
Railway
The rail network consists of about 3,260 km of six single–track lines covering several routes. There are about 260 stations in the network. The longest and most important route is the Hanoi–Ho Chi Minh City line, which stretches for 1,730 km. This line is now serviced by an express train, which makes the journey in approximately 29.5 hours. The authorities in Hanoi and Ho Chi Minh City have long-term plans for rapid mass-transit systems. In Hanoi there are plans for the construction of a 25-km elevated railway, and the authorities in Ho Chi Minh City have been given approval to build a 19.7-km underground rail line, construction of which will begin in 2010, at an estimated cost of US$1.1bn.
Inland Waterways
The two major inland waterway systems serve as major transportation outlets. The first major inland waterway system is in the Red River area in the north which stretches for approximately 2,500 km. Along this system are five main ports, of which Hanoi is the largest. The second major inland waterway extends 4,500 km along the Mekong River and its tributaries in the South and boasts about 30 ports, including Ho Chi Minh City.
The larger river vessels are tug-drawn barges. Official estimates put the fleet capacity at about 420,000 tons with speeds ranging from 2 to over 20 km an hour. Smaller, wooden barges are mostly privately owned.
Ports
Vietnam has more than 80 ports, of which 11 are major ones. While Ho Chi Minh City serves most of the South and now boasts modern container-loading facilities, Hai Phong port is the key port in the North. The Government has decided to build Cai Lan port, 80 km away from Hai Phong, which will play a critical role in the development of the North. Danang, at the north of Han River, serves the central highlands and much of the transit traffic to and from Laos. The tonnage-km of freight carried on the inland waterway systems, which stretch for around 8,000 km, chiefly on the Mekong River, its tributaries and canals and the Red River and its tributaries, is nearly double that transported by rail. In 2007 some 6.2bn tonnes-km of cargo was transported on the waterways.
Airports and Civil Aviation
There are three international airports: Ho Chi Minh City, Hanoi and Danang. The Government has significantly upgraded international airports to handle the increase in the volume of traffic associated with Viet Nam's invigorated economy. Particularly, Noi Bai airport in Hanoi was upgraded, enlarged and opened for operation in 2002. Four new international airports are planned, to be constructed in Phu Quoc, Dong Nai, Lao Cai and Quang Ninh provinces. Long Thanh International Airport in Dong Nai Province is being constructed and intended to be operational by 2011 and handle over 100 million passengers annually at its peak capacity. In addition, there are 16 other domestic airports around the country.
Energy
During 2007, the electricity output supplied for Vietnam’s economy was 66.8 billion kWh. The Electricity of Vietnam Group (“EVN”) aims to generate about 70-78 billion KWh in 2010 and as high as 167-201 billion kWh in 2020. This requires development of approx 32-37 new power generation projects, totaling 12,400 MW in capacity, including up to 20 hydropower plants with 4,000 MW capacity; eight gas-based or oil-based power plants (5,200 MW); and seven coal-based power plants (3,200 MW). Implementation of these projects also requires construction of about 15,000 km of 110–500 kV transmission lines, together with 300,000 km of low to medium voltage distribution lines. The annual investment required to achieve the set target is estimated to be US$1.5 to US$2 billion.
Over the last few years, an array of large-capacity power plants were built and put into operation, such as Pha Lai Thermo Power Plant with a capacity of 440MW, Tri An Hydroelectric with a capacity of 400MW and Hoa Binh Hydroelectric Power Plant with a capacity of 1,920 MW. Further large power plants are under construction or to be constructed, such as the Phu My Thermo Power Center with a total capacity of 3,000 MW, and Yaly Hydroelectric with a capacity of 720 MW. In addition, a 3,600 MW hydropower complex at Son La in the North is also under construction. Viet Nam also plans to complete its first nuclear power plant by 2020 as an alternative means for meeting electricity demand. Additionally, Vietnam has great potential for developing renewable energy sources, and its consumption is on the rise.
Telecommunications
Vietnam has made great strides in upgrading its telecommunications systems, although much remains to be done. In the last six years, Vietnam’s telecom industry is growing at a high speed, reaching an average annual growth rate of 30%. At present, with five telecom service providers (VNPT, Viettel, Saigon Postel, EVN Telecom and Hanoi Telecom), Vietnam has more than 40 million telephone subscribers, including 22 million of VNPT. As of August 2008, there were approx. 48 mn mobile phone users.
With a population of over 84 million and around 47% of them using telephone services and over 17% using Internet services, Vietnam is a potential market for foreign investors. The Vietnamese government approved the plan to develop telecom and Internet to 2010, which aims to build and develop telecom infrastructure at the same level as other countries in the region and to obtain total revenue from telecom and Internet services of around US$3.5 billion by 2010. Under this plan, Vietnam aims to reach a teledensity of 32-42 lines per 100 residents (currently it is 47 lines/100 residents, exceeding the target) and Internet density of 8-12 subscribers per 100 people by 2010
Banking and Finance
Vietnam’s credit institutions comprise state-owned banks, joint-stock banks, joint venture banks, 100% foreign-owned banks, branches of foreign banks, credit cooperatives, finance leasing companies and finance companies. Currently, there are six state-owned banks (five commercial banks and one policy bank - the Bank for Social Policy), 37 joint-stock banks, five joint-venture banks, 31 licensed foreign banks operating 38 foreign bank branches, six finance companies and 10 finance leasing companies. Under the WTO commitments, Vietnam committed to permit the establishment of 100% foreign-owned banks from 1 April 2007. The scope of operations of foreign bank branches, joint venture banks and 100% foreign-owned banks are also being gradually expanded to comply with Vietnam's commitments under WTO and other bilateral/multilateral international agreements. After five years from the date of accession to WTO, Vietnam has to lift all restrictions on the right of a foreign bank branch to accept deposits in Vietnamese Dong from Vietnamese citizens with whom the bank does not have a credit relationship.
Currently, foreign credit institutions are allowed to hold up to 30% of the charter capital of a joint stock bank, in which the maximum shares held by one foreign institution is 10%. The Government is drafting a new regulation to expand the limit of shares held by a foreign credit institution that is a strategic shareholder of a joint stock bank to 20% of the charter capital of such joint stock bank.
The Law on Credit Institutions, which came into force on 1 October 1998, as amended in 2004, provides a wide range of products and services which a bank may offer, from traditional financial products to funds management and insurance services. The regulations on the securities market also permit domestic banks to establish securities companies to participate in the securities market. This is the legal basis for the convergence of the financial industry sectors (banking, capital markets, insurance and funds management) in the future with the development of the stock market.
Since 1998, with support from multilateral donor institutions, the Government has outlined a comprehensive reform and restructuring program to improve the efficiency of the commercial banking system. The program includes four components: (i) restructuring joint-stock banks through mergers and closure to reduce the number of joint stock banks by half; (ii) transforming state-owned commercial banks into independent businesses; (iii) improving and strengthening the supervision and inspection of commercial banks and creating a “level playing field”; and (iv) establishing assets management corporations as a tool for resolving non-performing loans. As part of the restructuring program, since 2005, two state-owned commercial banks (Bank for Foreign Trade of Vietnam - Vietcombank and Mekong Housing Bank) have been in the process of equitisation on a pilot basis. It is intended that after the pilot implementation, all other state-owned commercial banks will be equitised in the coming years.
New monetary instruments have been introduced, such as repurchasing agreements (“Repos”), discounting and swaps, etc., narrowing the gap between the Vietnamese and international financial markets.
Foreign Exchange Management
All buying, selling, lending and transfer of foreign currency needs to be made through credit institutions and other financial institutions authorized by the State Bank of Vietnam ("SBV").
Outflow of foreign currency by transfer is authorized for certain transactions such as payment for imports and services abroad, refund of loans contracted abroad and payment of interest accrued thereon, transfers of profits and dividends, and revenues from transfer of technology.
As a general rule, all monetary transactions in Vietnam must be undertaken in Vietnamese Dong. Exceptions are applicable for payments for exports made between principals and their agents, and payments for goods and services purchased from institutions authorized to receive foreign currency payments, such as payments for air tickets, shipping and air freight, insurance and international communications.
The obligation of residents to sell a part of their foreign currency revenues from current transactions to a local authorized bank was abolished in 2003 and foreign-invested enterprises may, subject to certain conditions, buy foreign currency from the banks to fulfill certain foreign currency obligations from their transactions.
Foreign-invested enterprises may open an offshore bank account only with the prior approval of the SBV. Where the foreign party to a BOT, BTO or BT requires an offshore account to successfully implement the project, such an account may be opened.
Foreign investors and foreigner working in Vietnam are permitted to transfer abroad capital investment profits and income legally earned in Vietnam and – as mentioned above – invested capital remaining after the liquidation of an investment project.
Capital Market
The Securities Trading Centres were opened in Ho Chi Minh City in 2000 (“HCMC STC”) and in Hanoi in 2005 ("HASTC"). Both trading centres are now upgraded to an official Stock Exchange.
By the end of 2007, there are 249 share and fund certificate items listed on the HCM City Stock Exchange and Hanoi Securities Trading Centre (138 on HOSE and 111 on HASTC). The number of listed companies just account for 2% of total joint stock companies now operational in Vietnam. There are 5.5bil shares listed on the official bourse, double that of 2006 and 15 times higher than 2005. Total market capitalization value has reached US$30.7 billion. This figure is equal to 43% of GDP, a relatively high level for the stock market, which was born just seven years ago. However, the figure of $30.7 billion proves to be very small when compared to the regional and global market.
There are 74 operational securities companies now, while there were 55 in 2006 and 14 in 2005. There are 24 investment fund management companies now, while there were 18 in 2006 and 6 in 2005. These securities centres create a new channel for long-term capital mobilization, which will boost the equitisation of Vietnamese and foreign-invested enterprises and, thus, the economic reform process.
Currently, foreign investors may acquire up to 49% of a listed company and 30% of a non-listed company. Bonds may be freely held. The Government is drafting a new regulation to stipulate the limits of shares held by foreign investors in listed and non- listed companies based on Vietnam's commitments under bilateral and multilateral international treaties. Under Vietnam’s WTO commitments, after one year from the date of accession to the WTO, the 30% foreign equity limitation for acquisition of Vietnamese enterprises shall be eliminated (except for the acquisition of shares of joint stock banks and a number of certain sectors).
In the territory of Vietnam, the purchase and sale of securities by foreign investors must be implemented in Vietnamese Dong. In order to purchase shares in an unlisted company, the foreign investor has to open a special Vietnamese Dong account at a bank permitted to operate in Vietnam, and register such account with the State Bank of Vietnam. All transactions relating to the purchase and sale of shares, receipt of dividends and remittance of profits must be carried out through such special account.
With respect to foreign investors investing in listed companies, they must obtain a transaction code from a securities company, and open a specialised Vietnamese dong securities trading account at such securities company in order to service the activities of purchasing and selling securities at the Securities Trading Centres.
The country’s securities market environment has been further improved in recent years by the speeding-up of the process of equitisation of state-owned enterprises and foreign-invested enterprises. The first regulation on equitisation of foreign-invested enterprises on a pilot basis was issued in 2003. To date, 12 foreign-invested enterprises have been equitised. With the issuance of the new Law on Enterprises and Law on Investment that came into force from 1 July 2006, foreign-invested enterprises may now be established in the form of a joint stock company.
Land
In Vietnam, land is considered to be the property of the people, and subject to the exclusive administration of the state. The latter, represented by the central and local land departments, is responsible for the management of land use rights and leases to individuals, households, and domestic and foreign-invested economic, political and social organizations. There is no private ownership of land.
Subject to certain conditions, domestic land users have the right to use, transfer, lease, inherit (individuals only), or mortgage their land use rights (“LUR”), or use the LUR as capital contribution to a joint venture.
Foreign land users are entitled to lease land from the state in general or from Vietnamese or foreign-invested enterprises authorised to sub-lease land in industrial and export-processing zones. For foreign land users, the maximum lease period is generally 50 years, although in special cases this term may be extended to 70 years. Foreign-invested enterprises may only use the land for the permitted purpose. Where the entire land rent under the lease for the LUR has been paid for the whole land lease duration, foreign-invested enterprises may mortgage their LUR with banks licensed to operate in Viet Nam (including foreign bank branches, joint venture banks and 100% foreign-owned banks), sub-lease, transfer the LUR, or use the LUR as capital contribution to a joint venture.
Labour
A large, skilled and inexpensive labour force is one of the main attractions for foreign investors in Vietnam. Vietnam’s population was estimated at approximately 83.1 million in July 2005, and it is expected to grow to 90 million by 2010 with an annual growth rate of 1.6%. Over 61.6% of the population is under 25 years of age. Approximately 15.5% of the population are considered trained or skilled workers (with elementary qualifications or higher). This situation is improving as a result of updated training programs in training and education centres. There are currently substantial interests and new investments in quality training and education, a priority concern for the Government.
The Labour Code issued in July 1994 (as amended in 2002) has created a legal framework which sets out the rights and obligations of employers and employees, in relation to working hours, labour agreements, payment of social insurance, overtime work, strikes, and termination of employment contracts, among other things. In addition, there are several specific implementing decrees and circulars related to the provisions of the Labour Code.
The law provides for an eight-hour working day and 48-hour working week. An employer and an employee may agree that an employee can work overtime, but this must not exceed 200 hours a year (in special cases, such limit may be extended to 300 hours subject to the approval of the relevant state competent authority). With effect from 2 October 1999, a number of organizations such as Government offices, administrative agencies and socio-political organizations have implemented a 40-hour working week. Businesses in other economic sectors, including businesses with foreign-invested capital, are also encouraged to adopt a 40-hour week.
In any employment, contract wages and salaries should be defined clearly in Vietnamese Dong (except for employees working for foreign representative offices and branches: their salaries are still quoted in US dollars and paid in Vietnamese Dong). The wages of employees working in foreign-invested enterprises are subject to minimum rates determined by the Ministry of Labour, War Invalids and Social Affair . The current weekly minimum wage is as follows:
- VND870,000 (approximately US$54) for unskilled workers in urban districts of Hanoi and Ho Chi Minh City;
- VND790,000 (approximately US$49) in rural districts of Hanoi and Ho Chi Minh City; urban districts of Hai Phong; Ha Long City in Quang Ninh province; Bien Hoa City in Dong Nai province; Vung Tau City in Ba Ria - Vung Tau province; Thu Dau Mot Town and Thuan An, Di An, Ben Cat and Tan Uyen districts in Binh Duong province;
- VND710,000 (approximately US$44) for other provinces.
Currently, an employer is also required to contribute 15% of total wages to a social insurance fund administered by the state, and 2% for health insurance purposes. The employee contributions are 5% and 1%, respectively. Expatriates are not required to contribute to the health and social insurance funds.
As of 1 January 2007, the new Law on Social Insurance will come into force. The salary subject to social insurance contribution requirements will be capped at 20 times that of the minimum salary applicable to domestic enterprises (currently, VND 450,000/month). Before 2010, the rates of contribution to the social insurance fund by the employers and the employees remain unchanged (i.e., 15% and 5%, respectively). From 2010, such rates will increase 1% every two years, until they reach 18% for employers and 8% for employees. In addition, from 1 January 2009, employers and employees are required to contribute 1% of the salary (subject to the above cap) to the unemployment insurance fund.
On a case-by-case basis, and depending on the nature of the FDI project for which the application dossier is made, the investment licensing body may request the investor to provide a number of supplementary and related documents.
Domestic and Foreign Trade
Vietnamese enterprises are free to carry out trading activities in Viet Nam and are allowed to directly export and import all goods, except for certain restricted goods for which a special business licence must be obtained from the relevant state authority. Foreign-invested enterprises in Viet Nam may directly distribute or set up a distribution network to sell the products they manufacture in Vietnam, and can export their products directly. However, the establishment of pure trading businesses (unassociated with manufacturing activities that have foreign-invested capital) is still restricted, subject to Vietnamese commitments under bilateral and multilateral international agreements to which Vietnam is a party.
Under Vietnam’s WTO commitments, for commission agents' services/wholesale and retailing services, upon accession, Vietnam will allow the establishment of joint venture companies in which the foreign capital contribution shall not exceed 49%. As of 1 January 2008, the 49% capital limitation shall be abolished. 100% foreign-owned company licences will be permitted from 1 January 2009. Upon accession, foreign-invested companies engaging in distribution services will be permitted to engage in the business of wholesaling and retailing legally imported and locally produced products, except for cement, tyres (excluding airplane tyres), paper, tractors, motor vehicles, cars and motorcycles, iron/steel, audiovisual devices, wine and spirits, and fertilisers. From 1 January 2009, the business of wholesaling and retailing tractors, motor vehicles, cars and motorcycles will be allowed. These limitations will be removed three years after the accession date. The establishment of outlets for retail services (beyond the first one) shall be allowed on the basis of an Economic Needs Test.