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Confusion Lingers Over Foreign Investor Account

September 13, 2014

– Foreign investors in Vietnam are confused because of the inconsistencies is how basic concepts are interpreted. In particular, investment laws revolve around direct and portfolio foreign investors while forex management laws focus more on the distinction between residents and non-residents, with the latter being subject to the lion’s share of regulations.

Portfolio investment account opening

Clause 2, Article 2 of Circular 05/2014/TT-NHNN pertains to setting up and using portfolio investment accounts for foreign investors in Vietnam. It states that it does not apply to foreign investors who are residents of Vietnam as these people are required to manage their portfolio investment in line with prevailing regulations on securities and other documents.

Clause 1, Article 7 of Circular 213/2012/TT-BTC deals with activities by foreign investors on Vietnam’s stock market. It states that each foreign investor is allowed to open one portfolio investment account at a bank licensed to trade in foreign currencies for the purpose of embarking on portfolio investment activities in Vietnam.

The problem is that Circular 05/2014/TT-NHNN does not apply to residents, but cities Circular 213/2012/TT-BTC, which in turn cites Circular 05/2014/TT-NHNN on the opening of portfolio investment accounts.

Two issues that are extremely challenging to address arise.

First, if foreign investors are residents and embark on portfolio investment activities on the stock market, where should they open portfolio investment accounts for doing so?

Second, if foreign investors are residents and embark on portfolio investment activities not on the stock market but through, for example, the purchase of the capital contributed by a member or owners of a limited liability company, what are the basis and procedure for doing so? After all, Article 5 of Circular 131/2010/TT-BTC makes it mandatory for foreign investors to set up investment accounts at commercial banks in Vietnam.

Direct investment account opening

Article 3 of Circular 19/2014/TT-NHNN guides the management of foreign currencies when it comes to foreign direct investment activities in Vietnam. It states that there are two categories of foreign investors pouring funds into Vietnam through share purchase or capital contributions. Under the first category, when a Vietnamese firm receives an investment certificate in line with prevailing regulations, it has to set up a direct investment account. Under other circumstance, Circular 05/2014/TT-NHNN and related amendments or supplementary documents should take precedence.

Clause 4, Article 1 of Decision 88/2009/QD-TTg and Article 5 of Circular 131/2010/TT-BTC hold that when foreign investors, regardless of whether they are residents or not, contribute capital or purchase stake (as a form of direct or portfolio investment), they are to set up investment accounts at commercial banks in Vietnam.

Two scenarios need to be considered in this case.

First, if the foreign investors are residents and embark on direct investment activities, what is the legal basis for the investment account specified above? It should be noted that Circular 19/2014/TT-NHNN applies to non-resident foreign investors only.

Second, if the foreign investors are non-residents and embark on direct investment activities, Circular 19/2014/TT-NHNN requires the opening of a direct investment account while Circular 131/2010/TT-BTC holds that an investment account be set up, with no specification on its legal basis or definition. How can this difference be addressed?

Money flow

When foreign investors purchase shares or capital contributed to help firms expand their charter capital, direct investment flows into these companies, which have to set up direct investment accounts in accordance with Clause 1, Article 11 of Circular 19/2014/TT-NHNN.

However, when foreign investors purchase shares or capital contributed by, say, shareholders of joint-stock firms, with the distinction between direct and portfolio investment is not clear-cut, a firm’s charter capital remains unchanged. In this case, money will flow into the seller’s account and foreign investors will indirectly own the shares or capital that belongs to the seller (after the necessary administrative procedure has been carried out). This means there will not be any money flowing from foreign investors to the firms. Will it then be necessary to set up direct investment accounts? Are firms still required to set up such accounts for foreign investors to channel their money into before the fund is transferred to the sellers?

Suggestions

Direct and portfolio investment should be clearly defined. Direct investment refers to investment that establishes a new firm or arises through the signing of a cooperation or business agreement. Portfolio investment, on the other hand, refers to the stake purchase in an established firm.

In such a case, when the firm is set up in Vietnam and has some stake owned by foreign investors, it needs to set up a direct investment account to receive funds, regardless of its foreign stake ownership ratio. In addition, it should be clearly stipulated that when foreign investors do not directly invest in a company (the investment is in the form of purchase of, say, shares from existing shareholders), the company needs to set up a direct investment account through which it can channels dividends or allows foreign investors to withdraw capital.

If foreign investors are residents, they need not set up portfolio investment accounts, but can rely on payment accounts set up at local commercial banks to embark on investment activities. If foreign investors are non-residents, only portfolio investment accounts need to be set up; direct investment can be done via payment accounts set up at local banks or an overseas bank account through which money can be transferred to the account of the newly established company.

(By Tran Van Tri – Lawyer from FUJILAW)