On 6 September 2019 significant changes come into effect regarding Capital Accounts and capital flows for foreign investors in Vietnam, including transitional arrangements for certain existing investors. This Client Alert looks at the changes, and details actions that investors should undertake to remain compliant.

Background – capital accounts

Current Vietnamese regulations require foreign investors to open a Capital Account at an authorised bank in Vietnam to receive and repatriate investment funds when undertaking investments in Vietnam. This includes when investors establish a company, acquire part or all of the issued capital/shares of an existing company, or acquire new equity/shares issued by an existing company. Depending on the specific investment form, the foreign investor (or the company receiving the investment) will need to open either:

1. a Direct Investment Capital Account (“DICA”), governed by Circular 19/2014/TT-NHNN (“Circular 19”), or
2. an Indirect Investment Capital Account (“IICA”), governed by Circular 05/2014/TT-NHNN (“Circular 05”).

Circular 06 – changes effective from 6 September 2019

In June 2019, Circular 06/2019/TT-NHNN was released by the State Bank of Vietnam, updating requirements and obligations on foreign exchange management for Foreign Direct Investment in Vietnam (“Circular 06”). Circular 06 replaces Circular 19 and amends Circular 05, with a substantial changes resulting to current and future foreign investment flows into Vietnam. These changes take effect from 6 September 2019, with a 12 month transitional period for certain existing investors.

The changes arising from the Circular include:

Parties required to open a direct investment capital account (DICA)

Circular 06 requires the following parties to open a DICA

1. Foreign Direct Invested (FDI) companies
   • Companies established with members or shareholders who are foreign investors, and which are granted an Investment Registration Certificate (“IRC”) in accordance with Law on Investment.
   • Enterprises not meeting the above, but which have foreign investors owning 51% or more of their charter capital, including:
     • Enterprises with foreign investors owning 51% or more of its charter capital, arising from contribution of capital, purchasing of shares, or from the contribution of capital to enterprises that operate in conditional business lines or without conditions applicable to investors from certain foreign countries;
     • Enterprises established after splitting or merging, resulting in foreign ownership of 51% or more of its charter capital; or
     • Newly established enterprises in accordance with specialised laws.
   • Project enterprises established by foreign investors to implement Public Private Partnerships (“PPP”) projects according to investment laws.
2. foreign investors in business co-operation contracts (BCC) or implementing PPP projects without establishing a project enterprise

All other foreign investors will require an indirect direct investment capital account (IICA)

As a result of the above changes, regulations concerning Indirect Investment Capital Accounts (“IICA”) are also amended by Circular 06. When Circular 06 takes effect, events and entities resulting in an IICA will include:

• Capital contribution, purchase or sale of shares or stakes by foreign investors into companies which are not yet listed or registered for transactions on stock exchanges in Vietnam, and not otherwise meeting the DICA requirements in Circular 06.
• Capital contribution, purchase or sale of shares or stakes by foreign investors into companies which have been listed or registered for transactions on stock exchanges in Vietnam.
• Sales or purchases of bonds and other securities on the securities markets of Vietnam.
• Sale or purchase of other “valuable papers” in Vietnam Dong which are permitted to be issued within the territory of Vietnam.
• Investment Trust activities (in Vietnam Dong) through fund management companies, securities companies and organisations that are permitted to conduct Investment Trust operations under the legal provisions on securities, or through credit institutions and branches of foreign banks that are permitted to conduct Investment Trust operations under the provisions of the State Bank.
• Capital contribution or transfer of stakes of foreign investors in securities investment funds and fund management companies according to legal provisions on securities, and
• Other indirect investment forms according to legal provisions.

Implications of changes to DICA & IICA eligibility

Following the Circular taking effect, foreign invested companies and foreign investors are required to follow Circular 06 to open appropriate capital accounts to receive and repatriate funds into and out of Vietnam. A DICA or IICA that was opened for investment under previous regulations will need to be converted to the corresponding account in accordance with Circular 06, if they no longer meet the requirements specified.

In addition, this Circular states that an IRC is no longer the only investment form approval eligible for a DICA, with other investment approvals acceptable for opening a DICA, including: a notice of the foreign investor’s eligibility to contribute capital or purchase shares/stakes, and a license of establishment and operation in accordance with specialised legislation.

Payment flows for transfer of shares/stakes in FDI companies through DICA and IICA

Circular 06 states that payment for the transfer of shares/stakes between two non-resident investors, or between two resident investors, are not permitted to go through the DICA.

Other transfers, between a non-resident investor and a resident investor, are to be processed through the DICA.

Payments for transfers of investment projects between investors in BCC’s, or investors who directly implement a PPP project are to be made as follows:

• Payments between investors who are non-residents or between a non-resident investor and a resident investor in a BCC are to go through the DICA;
• Payments between investors who are non-residents or between a non-resident investor and a resident investor who directly implement a PPP project are to go through the DICA.

It should be noted that Clause 3, Article 36 of the Law on Enterprises states: “Payments for transfer of shares/stakes, and receipt of dividends of foreign investors must be made through their capital accounts opened at banks in Vietnam, except for payment with assets”, which partially conflicts with the application of this regulation (Article 10 of Circular 06). As amendments to the Law on Enterprises are currently being drafted, we expect it to be changed to match the approach in the Circular.

In addition, this Circular also stipulates usage of foreign currency for valuation and payment of investment capital, in particular:

• Foreign currency is permitted to be used for valuation and payment for the transfer of stakes and investment projects between non-residents, and
• VND must be used for valuation and payment for the transfer of stakes and investment projects between a resident and a non-resident or between residents.

Mandatory capital account conversion requirements following implementation of circular 06 for foreign investors and existing foreign invested companies

Circular 06 will result in certain investors or companies being required to convert their Capital Account:

1. Companies, and non-resident foreign investors holding shares/stakes in Companies, will have 12 months from Circular 06 taking effect to convert their Capital Accounts as prescribed by Circular 06, in particular:
   1. Where companies whose foreign investors have opened and used an IICA to contribute or purchase shares/stakes leading to the investors holding at least 51% of its charter capital, the company will need open a DICA in accordance with regulations of this Circular.
   2. Companies are required to close their DICA, and their non-resident foreign investors holding their shares/stakes to open an IICA transactions in relation to their investments in Vietnam, where:
      • Foreign investors hold less than 51% of charter capital of the company, except where the company has members or shareholders that are foreign investors and was granted an IRC in accordance with the Law on Investment;
      • A company that was not required to obtain an IRC but has been granted one as requested in accordance with the law on investment.
      • Foreign direct invested company with stocks listed or registered for transactions on stock exchanges.

      However, where companies mentioned above have foreign borrowings through its DICA, there are permitted to continue with the DICA for the purpose of borrowing and repayment of foreign debt in accordance with regulations on foreign borrowing and debt repayment of enterprises.

2. During the conversion period, companies and non-resident foreign investors holding shares/stakes can continue using their existing Capital Accounts to perform transactions concerning their investment activities in Vietnam.

Recommended actions for all foreign investors or companies with foreign investment

Foreign investors in Vietnam, and companies with foreign investment, should review their current compliance with Circular 06, and put in place plans for conversion of Capital Accounts (where applicable) to ensure they remain compliant.

Non-compliance where conversion was required will likely make it difficult for the repatriation of profits, capital and loans for foreign investors in the future, and may cause considerable operational and capital constraint implications for ongoing companies.

Please contact Vieter if you would like us to undertake a review of your current Capital Account structures and ongoing requirements, together with recommendations to ensure compliance with Circular 06, investment laws, and your future corporate needs.