The 2023 Real Estate Business Law in Vietnam introduces three significant amendments compared to its predecessor, with a particular emphasis on the rights and responsibilities of foreign investors in the Vietnamese real estate sector. These changes underscore the evolving landscape of real estate transactions in the country.
Under the provisions of the new law, foreign-invested companies are granted the ability to conduct real estate transactions on par with domestic firms in certain scenarios.
In a significant departure from the previous legislation, the 2023 Real Estate Business Law in Vietnam has revised the treatment of foreign-invested companies (FICs) in the real estate sector. Previously, all FICs, irrespective of whether a foreign investor held a 0.1% stake or a 100% stake, were subject to the same restrictions on real estate trading activities. The new law, however, adopts a more nuanced approach, categorizing FICs based on the percentage of ownership and layers of ownership. This results in varying rights and obligations for each FIC, reflecting their respective levels of investment. This change signifies a more sophisticated and equitable regulatory framework for foreign investment in the Vietnamese real estate market.
The new legislation distinguishes foreign-invested companies based on their adherence to conditions and investment procedures stipulated by investment laws. This differentiation results in two distinct scenarios: in the first scenario, the operational scope of the FIC is confined to a specific set of activities (4 activities, to be precise); in the second scenario, there are virtually no restrictions, and the FIC is permitted to engage in a wide range of activities, akin to their domestic counterparts.
The 4 activities reflect investments in: construction of residential buildings or constructions associated with land use rights; technical infrastructure construction in real estate projects to transfer, lease, or sublease land use rights with technical infrastructure; leasing residential buildings, constructions, built-up floor area in constructions for subleasing; and receive transfer of all or part of real estate projects to continue investment construction, business.
This approach provides a more tailored regulatory environment, aligning with the specific circumstances and contributions of each foreign-invested company.
To elaborate, the new legislation stipulates that “economic organizations with foreign investment capital” (FICs) that are not subject to the specified conditions are treated on par with local companies in terms of real estate trading. The scope of permissible real estate trading activities for these FICs has been expanded as follows:
1. Investment in the construction of residential buildings or structures for sale, lease, or lease-purchase.
2. Investment in the construction of technical infrastructure in real estate projects to transfer, lease, or sublease land use rights along with the technical infrastructure.
3. Purchase or lease-purchase of residential buildings, structures, or built-up floor area in structures for sale, lease, or lease-purchase.
4. Receipt of the transfer of land use rights along with technical infrastructure in real estate projects for transfer or lease.
5. Leasing of residential buildings, structures, or built-up floor area in structures for subleasing.
6. Leasing of land use rights along with technical infrastructure in real estate projects for subleasing.
7. Receive transfer of all or part of real estate projects to continue investment construction, business.
This comprehensive list of activities provides FICs with a broad operational scope, similar to their local counterparts, thereby fostering a more equitable business environment.
Determining whether a company is required to comply with the conditions and procedures applicable to foreign investors is a critical aspect that should be guided by the stipulations of the Investment Law. As per the Investment Law, “economic organizations must meet the conditions and carry out investment procedures for foreign investors” if they fall under one of the following categories:
1. Foreign investors hold more than 50% of the charter capital, or the majority of partners are foreign individuals in the case of economic organizations that are partnerships.
2. Economic organizations, as referred to in point (1) above, hold more than 50% of the charter capital.
3. Foreign investors and economic organizations, as referred to in point (1) above, collectively hold more than 50% of the charter capital.
Conversely, a Foreign-Invested Company (FIC) can be assessed as not falling under the above categories in specific instances, such as companies where foreign investors own 50% or less of the charter capital. This nuanced approach allows for a more accurate evaluation of a company’s status and obligations under the Investment Law.
The stipulations significantly influence the strategic approach to the market, the initiation and execution of real estate projects, and the evaluation, acquisition, and disposal of real estate projects in Vietnam by foreign investors. Consequently, it is imperative for investors to formulate detailed business strategies. These strategies should encompass an appropriate plan for the division of ownership, the establishment of subsidiaries, investment methodologies, and the distribution of capital and profits derived from the project. Such a comprehensive approach will optimize the business scope and ensure a more efficient and effective operation in the Vietnamese real estate market.
Broadening the Criteria for Companies Engaged in Real Estate Trading.
In addition to delineating the operational scope for Foreign-Invested Companies (FICs) in real estate projects, the new legislation also redefines the prerequisites for companies involved in real estate trading. This is achieved by introducing new, more intricate quantitative conditions. This development signifies a more comprehensive and nuanced approach to regulating the real estate sector.
The new legislation imposes a series of additional prerequisites, including:
• The company must not be prohibited from conducting real estate trading, nor should it be suspended or have its operations ceased as per court judgments, decisions of courts, or decisions of competent state agencies.
• The company must ensure the ratio of credit debt and corporate bond debt over ownership capital, the specifics of which will be detailed by the Government in due course.
• Not only limited to cases selected as project developers, any real estate trading company involved in real estate projects must maintain ownership capital of no less than 20% of the total investment for projects with land use under 20 hectares, and no less than 15% of the total investment for projects with land use exceeding 20 hectares. The company must also ensure the ability to mobilize capital to execute the investment project. If a real estate trading company is implementing multiple projects simultaneously, it must have sufficient ownership capital allocated to ensure the above ratio for each project. The criteria for determining ownership capital or capital allocation will be guided by the Government at a later date.
These new conditions heighten the requirements for a real estate trading company, be it a Foreign-Invested Company (FIC) or a local entity, by imposing regulations on legal status, credit/bond debt, and addressing previous ambiguities in determining ownership capital to meet financial requirements with multiple projects from the same investor. However, these conditions could pose a risk to businesses if any condition is not met during project implementation, such as being suspended by a court decision or an imbalance in debt management leading to increased ratios. Such scenarios could have a profound impact not only on the company or project but could also potentially lead to disputes with operational projects, particularly with clients, contractors, and other developers in the Build-Operate-Transfer (BOT) project.
Imposition of a Deposit Limit (5%) and Prohibition of Developer Authorization for Signing Deposit Agreements in Future-Formed Real Estate Transactions
Prior regulations on real estate trading and associated laws did not address deposits or deposit agreements in future-formed real estate transactions. As a result, a real estate project developer could demand buyers to deposit up to 95% of the sales price under the Civil Code. This could be attributed to the developer’s potential lack of financial resources to execute the real estate project, leading to a desire to mobilize capital from the buyer. However, standard capital mobilization agreements with other investors did not allow developers to distribute profits by real estate products. Another contributing factor could be that the project may not have met the sales requirements stipulated by law, but the developers were keen to expedite the sales process for turnover and reinvestment into other projects. In addition to the deposit of 95% of the sales contract, to circumvent direct responsibilities with the buyers under such deposit agreements, developers allowed real estate brokers or agencies to sign such deposit agreements under authorization contracts, cooperation contracts, or distribution contracts, etc. This practice posed numerous risks for the buyers regarding the deposit under previous laws, as evidenced by recent criminal cases in Vietnam.
Therefore, the new laws specify that the deposit limit must not exceed 5% of the sales price in future-formed property transactions, and developers must directly enter into deposit agreements with the buyers. Both foreign-owned developers and foreign buyers should take note of this point when participating in future-formed property transactions.
In conclusion, the newly enacted real estate trading law in Vietnam appears to be a significant advancement for foreign investors and Foreign-Invested Companies (FICs). It provides numerous benefits, including an expanded investment environment predicated on the foreign ownership ratio and the corporate structure. This creates a wealth of opportunities in the dynamic real estate market and ensures equitable treatment based on their level of investment. However, the introduction of numerous new regulations also presents certain challenges, as further guidance from the Vietnamese authorities is still forthcoming.
Consequently, foreign investors are advised to meticulously evaluate their business plans and strategize their corporate structures to capitalize on the market’s flexibility and potential. While the future trajectory of foreign investment in Vietnam remains uncertain, the new law represents a promising stride towards a more transparent and accessible real estate sector.
Rizwan Khan – Managing Partner – r.khan@Vieter.com