At present, it is difficult to say with certainty what constitutes a foreign invested enterprise under Vietnamese laws. Some legislation currently in effect suggests that any amount of foreign ownership constitutes a foreign invested company. Meanwhile, other legislation, also currently in use, is taken by many to mean that an enterprise with a threshold of 49 per cent and upwards constitutes a foreign invested enterprise (FIEs).

Why it is important to know what constitutes an FIE

Many articles and discussion papers have been written by lawyers on this topic. These articles have been written because knowing where this threshold lies, and knowing when a company established in Vietnam becomes an FIE, determines many things – for example, the applicable licensing procedures, the type of licence, the ability to carry out business in certain sectors, whether the company has an obligation to have its annual financial statements audited, and so on.

For example, there are a number of business sectors which are only open to Vietnamese investors and in which the operation of FIEs is restricted. If FIEs cannot carry out business or the amount of foreign ownership is capped in such sectors, it is obviously very important to know exactly at what point the company becomes classified as an FIE.

Similarly, this question arises in M&A transactions. Domestically owned Vietnamese companies commonly have a long list of business activities they are licensed to engage in under their business registration certificates. When a foreign investor buys into such a domestic company, the question often arises whether or not the company can continue to carry out all its various business lines, or whether some of them might be subject to restrictions in terms of foreign ownership. If some of the target company’s business lines are subject to foreign ownership limitations, the foreign investor’s ownership of the target company will be limited to the lowest applicable cap.

Please click Changing legal landscape_VIR_Veera Maenpaa_PwC Legal Vietnam for more information.

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