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Nov 13, 2012 | DFDL Alert: Myanmar New Foreign Investment Law

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Burma’s Union Parliament has finally passed a much awaited foreign investment law, which has now been signed into law by President Thein Sein (the “MFI Law”) and published in local newspapers on November 3, 2012.   
The review of the MFI Law by parliament has drawn to the fore a number of issues in particular in respect of the share in a venture that can be held by foreigners.

Resolution of this issue has not been set in the MFI Law, and the relevant percentage to be held by foreigners will now be decided in Foreign Investment Rules (“FI Rules”) that will be issued by the Ministry of National Planning and Economic Development within 90 days of the bill being signed into law.


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We trust that this Client Alert is helpful for you. If you have any questions or require further clarification, please do not hesitate to contact:

James Finch

Partner; Head of Office Myanmar
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Jack Sheehan

Regional Director, Tax & Customs Practice Group
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Nov 22, 2012 | DFDL - Vietnam Legal & Tax Pointer November 2012

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During the 6 years since the enactment of the Law on Enterprises No. 60/2005/QH11 dated 29 November 2005 and the Law on Investment No. 59/2005/QH11 dated 29 November 2005 (Law on Investment), DFDL has assisted a large number of foreign clients in the establishment of foreign invested enterprises in Vietnam as well as in the acquisition of shares or contribution of capital in previously 100% owned local Vietnamese companies. In the process of advising our clients as to the official licensing regulations and procedures, we, and of course our clients, have been confronted with several inconsistences in the interpretation and application of the relevant licensing regulations.

Specific problems

In this article, we will discuss some of the practical issues surrounding the licensing regulations pertaining to foreign investment in local companies. Based on our experience, such issues have and will continue to disadvantage foreign investors whose objective is to invest in Vietnam in the form of an acquisition of shares in, or a contribution of capital to, an established local company.

Specifically, pursuant to the Law on Investment and Law on Enterprises, a wholly Vietnamese owned company is issued with a business registration certificate (BRC) upon its establishment. In contrast, a company with any degree of foreign ownership is issued with an investment certificate (IC). However, in circumstances where a foreign investor contributes capital to or acquires shares in a previously wholly Vietnamese owned company, the regulations do not clearly address the question as to how the foreign investment is to be recorded and thus officially recognized on the IC.

Accordingly, there have been various interpretations adopted by the licensing authorities, typically, the Department of Planning and Investment (DPI) of Ho Chi Minh City and of Hanoi respectively;

(a) In Ho Chi Minh City, where a foreign investor contributes capital or acquires shares in a local company, the current practice, based on an interpretation of the regulations, is as follows:

  • The local company is required to amend its BRC in order to record the new investor at the business registration office of the DPI (except in circumstances where the law does not require any approval of the licensing authority for the registration of the investor’s ownership of shares, such as where the acquisition of shares in a joint stock company takes place after the first 3 years of the company’s operation). At Article 46.1, the Law on Investment provides “With respect of foreign invested projects which have an invested capital of below three hundred (300) billion Vietnamese dong and which are not included in the list of sectors of investment subject to conditions, the investors shall perform the procedures for investment registration at a provincial State administrative body for investment for issuance of an investment certificate.”
  • Subsequently, such local company, having complied with the relevant procedures for registration and now being comprised in part by foreign ownership, will be issued with an IC, and thereafter must comply with the regulations and procedures pertaining to IC’s, engaging in its investment project(s) in accordance with the terms and spirit of the Law on Investment.
  • However, pursuant to the current practice of the DPI of Ho Chi Minh City, the BRC of the now foreign-invested local company will not expressly be replaced, and consequently that company will possess two different kinds of licence, namely the BRC and the IC. Importantly, an IC issued to a local company by the DPI of Ho Chi Minh City records the name of such local company as the sole investor in the investment project even though ownership of the local company is shared between both local and foreign parties.


(b) In Hanoi, where a foreign investor contributes capital or acquires shares in a local company, the current practice, based on a  different interpretation of the same regulations, is as follows:

  • The local company is required to submit an application dossier to the Foreign Investment Office of the DPI for the issuance of a consolidated IC recording in addition the details of the foreign investor;
  • The new IC once issued will replace the current BRC of such local company. In this way, the local company will operate under only one license, being an IC which is not simply a certificate to record information on the investment project(s) of the company, as is currently the case in Ho Chi Minh City.


Practical consequences and impact of this issue on the legal rights of foreign investors

The disparate approaches adopted by the DPIs of Ho Chi Minh City and of Hanoi naturally present some practical issues for foreign investors seeking to acquire shares in or to make a contribution of capital to a local company.  The varied interpretation of the current legal framework inevitably impacts on the rights and obligations of foreign investors in relation to such indirect investment activities.

The most obvious practical issue confronting prospective foreign investors is the currently adopted practice of the DPI of Ho Chi Minh City to issue ICs that do not recognize or record the details of the participation of the foreign investor in the company. Ostensibly therefore, such a foreign investor has no proprietary interest in the company in which it has invested, and must rely on an executed share purchase or capital contribution agreement in protection of its interests. Another obvious issue is the practical outcome that upon completion of the required licensing for acquisition of shares/contribution of capital by a foreign investor, the domestic company will possess two licenses, the  BRC granted to the company on its formation, and an IC relating to  the project(s) undertaken by the company. Maintaining two licenses for the operation of one enterprise would seem an unnecessary and confusing encumbrance on the administration of the company and concerned stakeholders, in addition to the licensing authority itself.

Possible resolution of this issue?

It seems that Vietnamese law makers have recognized the inconsistent application of the regulations by the various licensing authorities, and hence have published the Draft Decree Implementing the Law on Investment (Draft Decree) in order to collect opinions with the intention of clarifying the applicable laws and thereby removing the many inexplicit issues arising therefrom.

In order to resolve the issue of non-uniformity amongst the various licensing authorities, the recent Draft Decree has proposed explicit procedures for the licensing of foreign investment in local companies. Pursuant to the latest Draft Decree, the relevant procedure for the approval of an acquisition of shares/contribution of capital by a foreign investor more reflects the approach as adopted and implemented by the DPI of Hanoi.

The Draft Decree has proposed that a local company operating under a BRC proposing to either sell shares or receive capital from a foreign investor must submit to the licensing authority (the Foreign Investment Office of the DPI) two sets of an application dossier comprising the following documents:

  • A request for issuance of an investment certificate under which the satisfaction of the various conditions on the foreign acquisition of shares or contribution of capital is demonstrated;
  • A legally executed share purchase agreement or an agreement on the contribution of capital, certified by the legal representatives of the company;
  • Current Charter or proposed amended  Charter of the local company;
  • The BRC of the local company;
  • A resolution of the Member Council or Board of Management of the local company, accepting the investment of the foreign entity and resolving to apply for the IC.


The licensing authority after consideration and acceptance of the above dossier will then issue a new IC for the local company, in which the details of the foreign investor will be officially recognized. Accordingly, there will be only one consolidated IC issued to the local company in replacement of the BRC. Ostensibly, the Draft Decree provides the uniformity required to resolve the issues in question, but there remains a lack of regulation dealing with the original BRC as granted to the local company, such as whether the local company is legally required to continue carrying-out the procedures for amendment to the BRC, and to comply with the annual reporting requirements under the BRC.

Summarily, it must be said that the issuance of the Draft Decree has sounded a welcome note for foreign investors in particular and for the legal-investment environment in general. We will keep a close eye on the progress of this innovation in the following months.

For any further advice, please contact:

Mr. Jerome Buzenet
Partner, Managing Director, Vietnam
Tel.: +84 8 3910 0072
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Mr. Huynh Dai Thang
Partner, Senior Legal Adviser
Tel.: + 84 904 178 704
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Mr. Matt Matheson
Senior Adviser
Tel.: +84 8 3910 0072
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Ms. Tran Thi Than Niem
Junior Legal Adviser
Tel.: +84 908 893 987
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Ms. Nhu Nguyet Nguyen
Legal Assistant
Tel.: +84 904 155 754
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To find out more about legal & tax updates in Vietnam, please visit our Legal & Tax Blog.

 

Nov 21, 2012 | KPMG Transfer Pricing Alert

On 20 November 2012, the National Assembly has passed the amended Tax Administration Law which introduces, amongst others, the application of Advance Pricing Agreement (“APA”). This amended Tax Administration Law takes effect from 1 July 2013. The official law is yet to be announced under the prescribed formality.

Should you require further information, please contact one of the transfer pricing professionals listed here or your usual KPMG advisor. 

 

Nov 6, 2012 | DFDL Alert: Amendments to the Vietnam-Singapore double tax treaty

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Client Alert:Amendments to the Vietnam-Singapore double tax treaty
September 2012

The Vietnam-Singapore DTT has generally been considered to provide advantageous benefits compared with other treaties. This favorable treatment has made Singapore a preferred location for investment vehicles for investment into Vietnam.

The changes under the second Protocol reduce the existing advantages available under the Vietnam-Singapore DTT. These changes include the restriction on the availability of the capital gains tax exemption, the criteria for the length of period for the determination of a permanent establishment for the provision of services, and certain other confirmations and clarifications.

Capital gains tax protection is now subject to a “land rich” restriction


Under the new Protocol, Vietnam shall have the right to tax gains generated from a capital transfer (other than shares of a company quoted on a recognized stock exchange of Vietnam) by a tax resident of Singapore if the immovable property of the Vietnamese company is valued at more than 50% of its total value. The relevant paragraph of Article 13 as revised by the new Protocol now reads:

“Gains derived by a resident of a Contracting State from the alienation of shares, other than shares of a company quoted on a recognized stock exchange of one or both Contracting States, deriving more than 50% of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State”.
The change will have a material impact to Singaporean investors for their tax efficient exit options for investments in Vietnam where they have substantial land or property holdings.

Permanent establishment (“PE”) clarification for service providers


The second Protocol now provides clarity for determining when service providers are considered to have a PE in Vietnam. The text reads as follows:
“The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 183 days within any twelve month period.”

Other confirmations/clarifications


- In line with changes in Vietnam’s taxation system/regulations, the taxes covered in Vietnam are revised to include (i) personal income tax and (ii) business income tax (corporate income tax).
- There are other amendments in respect of dividends, interest or royalties which would not impact from a Vietnam tax perspective, given that the domestic tax rates of Vietnam are less than that under the treaty.

The Protocol is not ratified for enforcement as yet. We will closely monitor this issue and provide updates.

Singaporean structured investors into the Vietnamese property market and service providers of contracts greater than 183 days in a twelve month period should consider how to restructure their arrangements to minimize the negative impacts of the DTT changes.


DFDL Tax & Customs Practice Group


Rolf Winand

Partner
Tax & Customs Practice Group
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Bernard Cobarrubias

Tax Director
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Lieu Phan

Senior Tax Manager
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