When investing in an existing business in Vietnam, investors should consider carefully such existing business that investors intend to contribute capital or purchase shares or capital contributions in order to avoid the following risks.
I. Legal basics
Law on Investment No. 61/2020/QH14 dated 17/06/2020
Decree 31/2021/NĐ-CP dated 26/03/2021
II. Issues and risks that investors should consider
- Foreign ownership limitations
Law on Investment allows 100% foreign ownership of a business in most industries. However, if sectors and trades in which investors intend to invest are on the List of sectors and trades are subject to market access restrictions, the charter capital holding ratio of foreign investors is a compulsory requirement. In addition, if the foreign investor is subject to one or more international treaties on investment, the investor must comply with the ownership ratio of that treaty.
- Tax and finance
When contributing capital or purchasing shares or capital contributions of any economic organization, investors should also consider tax and finance. After buying the company, investors shall be the company’s owner or shareholders/ capital-contributing members and inherit or be jointly liable for all obligations to the third parties, including financial debts, taxes and even fines due to the company’s violations. This is also a necessary step to evaluate whether the company is making a profit or at a loss.
When investing in an existing business in Vietnam, foreign investors should focus on employment, research and consider current labour problems at the company. Since Vietnam Labor Law tends to give priority to employees, investors should consider carefully and properly evaluate if there are plans to change employees during management or labor issues that have not been resolved to avoid legal risks.
Law on Investment 2020 has offered advantaged conditions for foreign investors to invest in Vietnam. However, investors should focus on regulations or administrative procedures that they need to meet if they are subject to the application of such legal regulations and administrative procedures.
Regarding the industry and profession in which the investor intends to invest:
Firstly, investors should pay attention to checking the industry of the company in which they intend to contribute capital, purchase shares or contribute capital as committed in the WTO Schedule of Commitments or not. In case the industry has not been committed, it will be difficult to carry out legal procedures for the investor to become the owner of the company.
Secondly, if the investors intend to invest in industries and trades on the List of sectors and trades with conditional market access for foreign investors, Vietnamese law has set compulsory requirements for investors to meet such as capital ownership ratio (mentioned above), investment form, investment scope, cooperation with Vietnamese partners. In addition, there are also sectors and trades currently prohibited to invest by Vietnamese law, or industries that require other types of permits/licenses when foreign investors do business. Therefore, investors need to consider carefully to avoid violating the law when making investments without the permission of state agencies.
In order to limit the legal risks that investors may face when contributing capital, buying shares or buying capital contributions to Vietnamese companies, investors need to carry out in-depth due diligence on Vietnamese law and the overall company that you want to invest in. This is a necessary step to limit economic and legal risks when entering the Vietnamese market.
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