Critical Missteps: What Foreign Investors Get Wrong About Vietnam's Legal Landscape

Introduction

Vietnam's economic trajectory continues to attract substantial foreign capital, with the market presenting compelling opportunities across manufacturing, technology, and services sectors. However, the enthusiasm that drives investment decisions can obscure critical legal complexities embedded within Vietnam's regulatory framework. After advising numerous foreign investors navigating Vietnam's investment landscape, a pattern of recurring mistakes has emerged—errors that are entirely preventable with proper legal guidance.

This article examines the most consequential missteps foreign investors make when entering the Vietnamese market, drawing from the Law on Investment 2020 (LOI 2020) and the Law on Enterprises 2020 (LOE 2020), which form the cornerstone of Vietnam's foreign investment regime.

Mistake #1: Misunderstanding Market Access Restrictions

The Assumption Trap

Many foreign investors operate under the assumption that Vietnam's WTO commitments guarantee unfettered market access across all sectors. This presumption proves costly. While the LOI 2020 establishes that market access conditions for foreign investors are generally equivalent to those for domestic investors, critical exceptions remain.

The Legal Reality

The LOI 2020 maintains two distinct categories that constrain foreign investment:

Prohibited Sectors: Eight enumerated sectors where all investment—foreign and domestic—is entirely banned, including trading in certain chemicals and identified narcotics.

Conditional Sectors: Numerous sectors where foreign investment faces restrictions or requires satisfaction of specific conditions. These restrictions may include:

• Foreign ownership caps (common in sectors such as telecommunications, aviation, and certain financial services)

• Requirements relating to national defense and security

• Conditions concerning the use of islands, border areas, and locations affecting national security

The Practical Consequence

Foreign investors who fail to conduct thorough due diligence on sectoral restrictions often discover late in the investment process that their planned business activities are either prohibited or require significantly different structuring than initially contemplated. This results in wasted time, aborted transactions, and in some cases, investments in non-compliant structures that must later be unwound.

Recommendation: Before committing resources, investors must verify that their intended business activities are permissible under current Vietnamese law and understand any applicable foreign ownership limitations or operational conditions.

Mistake #2: Neglecting the "Foreign Investor" Definition

The 50% Threshold

The LOI 2020 amended the definition of a "foreign investor" in a manner that catches many investors off-guard. A business organization is now classified as a "foreign investor" if foreign investors hold 50% or more of the charter capital (reduced from the previous 51% threshold). 

Why This Matters

This seemingly technical definition carries profound implications. Once an entity qualifies as a foreign investor, it becomes subject to:

• All market access restrictions applicable to foreign investors

• Enhanced regulatory scrutiny

• Potential limitations on business activities

• Additional compliance obligations

The Overlooked Scenario

Investors frequently overlook the cascading effect of this definition. For example, a Vietnamese company with 50% foreign ownership that subsequently invests in another Vietnamese entity may cause that second entity to also be classified as foreign-invested, thereby triggering foreign investment restrictions where none previously existed.

Recommendation: Structure your investment with full awareness of how the 50% threshold operates, particularly in multi-tier corporate structures. Consider whether keeping foreign ownership below 50% in certain vehicles serves your strategic interests.

Mistake #3: Inadequate Attention to Capital Contribution Deadlines

The 90-Day Rule

The LOE 2020 mandates that charter capital must be contributed within 90 days from the issuance date of the enterprise registration certificate. While this timeframe may appear straightforward, it conceals practical complexities.

The Hidden Complications

The 90-day period must accommodate:

• International fund transfers (which may face banking delays)

• Complicated procedures at various banks during the bank account opening process

• Transportation and importation of in-kind capital contributions

• Completion of administrative procedures necessary to transfer ownership of assets

• Valuation requirements for non-cash contributions

The LOE 2020 does provide that the time required for transportation, import, and administrative procedures to transfer asset ownership will not be counted toward this 90-day limit—but only if properly documented and justified.

The Risk of Non-Compliance

Failure to meet capital contribution deadlines can result in:

• Penalties imposed on the company and its members

• Potential dilution of ownership interests

• Grounds for involuntary dissolution proceedings

• Damage to the company's credibility with regulators and business partners

Recommendation: Initiate capital contribution processes immediately upon entity formation. For in-kind contributions, begin administrative procedures well in advance and maintain comprehensive documentation of timelines and delays beyond your control.

Mistake #4: Overlooking Corporate Governance Requirements

The Governance Frameworks

The LOE 2020 establishes detailed corporate governance requirements that vary by entity type and size. Foreign investors accustomed to governance frameworks in their home jurisdictions often fail to appreciate the specific requirements imposed by Vietnamese law.

Critical Requirements Frequently Missed

Legal Representatives: Multiple legal representatives are now permitted, but the LOE 2020 clarifies that each legal representative has full authority to represent the enterprise before third parties and bears joint liability for damages caused to the enterprise by the acts of any legal representative. This joint liability provision is frequently misunderstood.

Board Structure for Joint Stock Companies: Companies with 11 or more shareholders must have either:

• A Board of Directors and a Control Board (two-tier structure), or

• A Board of Directors with at least 20% independent members and an internal audit committee (one-tier structure)

Many foreign investors fail to properly constitute these bodies or ensure compliance with independence requirements.

Related Party Transactions: Vietnamese law imposes strict disclosure and approval requirements for related party transactions. Shareholders related to the parties to a contract or transaction are prohibited from voting on approval of such transactions - a provision often overlooked in practice.

The Consequences

Governance failures expose investors to:

• Invalidity of corporate decisions

• Personal liability for directors and officers

• Regulatory sanctions

• Shareholder disputes that could have been avoided through proper procedures

Recommendation: Design your corporate governance structure with Vietnamese legal requirements in mind from the outset, rather than retrofitting compliance later. Ensure that Articles of Association clearly delineate the authority and responsibilities of multiple legal representatives when appointed.

Mistake #5: Underestimating Land Use Rights Complexities

The Fundamental Misunderstanding

Perhaps no aspect of Vietnamese law causes more confusion for foreign investors than the land regime. Vietnamese law provides that all land is state-owned; private ownership of land is not permitted. Instead, investors obtain land use rights (LURs) from the state.

The Practical Challenges

This state ownership model creates several layers of complexity:

Acquisition of LURs: Foreign-invested enterprises generally cannot acquire LURs directly from the state in the same manner as domestic individuals. Instead, they typically must:

• Lease land directly from the state (common in industrial zones)

• Lease land use rights from Vietnamese entities that hold LURs

• Receive land use rights as capital contributions from Vietnamese partners

Duration Limitations: LURs are granted for defined periods (typically 50 years for production activities, renewable in certain circumstances). As the expiration date approaches, the value and utility of the land use right diminishes significantly.

Transfer Restrictions: LURs obtained in different ways carry different transfer rights. Investors often fail to verify whether the LURs they are acquiring can be freely transferred, mortgaged, or used as capital contributions in the future.

The High-Stakes Impact

Land-related issues can:

• Render a manufacturing investment operationally impossible

• Prevent or delay project commencement for months or years

• Expose the investor to disputes with the state or third parties over land rights

• Limit financing options if LURs cannot be effectively mortgaged

Recommendation: Engage experienced local counsel to conduct comprehensive due diligence on any land use rights before acquisition. Verify the legal status, duration, permitted uses, and transferability of LURs. For joint ventures where Vietnamese partners contribute land use rights as capital, ensure proper valuation and legal documentation of the contribution.

Mistake #6: Failing to Secure Necessary Licenses and Certificates

The Multi-Layered Licensing Regime

The LOI 2020 establishes investment registration requirements, but these represent only one component of the licensing framework. Depending on the nature of business activities, foreign investors may require:

• Investment registration certificates (IRC) or investment policy certificates for certain projects

• Enterprise registration certificates (ERC)

• Business licenses or practice certificates for regulated activities

• Import/export licenses for trade activities

• Sector-specific operational permits (construction, manufacturing, food safety, environmental permits, etc.)

The Sequencing Error

A common mistake involves misunderstanding the relationship between these various permissions. Investors may secure an IRC and ERC but fail to obtain conditional business licenses required before commencing actual operations. The result: a legally established entity that cannot legally conduct its intended business activities.

The Conditional Business License Trap

Many sectors in Vietnam are designated as "conditional business lines," meaning operation requires satisfaction of specific conditions and obtaining additional licenses. These sectors might include:

• Education and training services

• Healthcare and pharmaceutical services

• Security services

• Import/export of certain goods, retail activities

• Real estate business

• Food production and trading

• Environmental services

The conditions can be substantive (e.g., minimum capital requirements, technical qualifications of personnel, facility standards) and time-consuming to satisfy.

Recommendation: Map out the complete licensing pathway for your specific business activities before commencing operations. Work with legal counsel to understand not only what licenses are required, but in what sequence they must be obtained and what conditions must be satisfied for each.

Mistake #7: Inadequate Tax Planning and Transfer Pricing Documentation

The Transfer Pricing Reality

Vietnam has adopted comprehensive transfer pricing regulations aligned with OECD guidelines. Related party transactions between foreign-invested enterprises and their foreign affiliates face intense scrutiny from tax authorities.

The Documentation Burden

The Law on Tax Administration requires taxpayers engaged in related party transactions to prepare and maintain:

• A master file containing standardized information about the multinational group

• A local file providing detailed information about material related party transactions

• Country-by-country reporting for multinational groups above specified revenue thresholds

The Common Failures

Foreign investors frequently:

• Fail to prepare transfer pricing documentation contemporaneously with the transactions (attempting to create documentation retroactively after a tax audit commences)

• Apply transfer pricing methodologies without adequate local market analysis

• Neglect to update documentation as business operations evolve

• Underestimate the tax authority's sophistication in detecting transfer pricing issues

The Financial Exposure

Transfer pricing adjustments can result in:

• Significant tax assessments and penalties

• Cash flow disruptions

• Double taxation (if corresponding adjustments cannot be obtained in the related party's jurisdiction)

• Reputational damage with tax authorities affecting future compliance

Recommendation: Implement robust transfer pricing policies from the commencement of operations. Engage tax advisors to prepare comprehensive transfer pricing documentation and conduct regular reviews to ensure ongoing compliance. Consider advance pricing agreements with tax authorities for significant or complex related party transactions.

Mistake #8: Neglecting Labor Law Compliance

The Employee-Protective Framework

Vietnam's Labor Code establishes an employee-protective legal framework that differs significantly from labor regimes in many investors' home jurisdictions. Foreign investors accustomed to at-will employment or more flexible labor regulations often struggle to adapt.

High-Risk Areas

Employment Contracts: Written employment contracts are mandatory. The Labor Code distinguishes between:

• Indefinite-term contracts

• Definite-term contracts (12-36 months)

• Contracts for specific tasks (under 12 months)

Each type carries different termination rights and obligations. Employers who improperly classify contracts or fail to convert definite-term contracts to indefinite-term contracts after the second renewal face significant liability.

Termination Restrictions: Unilateral termination by employers is permitted only in specifically enumerated circumstances. Even in cases of employee misconduct, employers must follow precise procedural requirements, including:

• Written notice and opportunity to explain

• Documentation of the violation

• Establishment of internal labor regulations

• Written termination decisions with specific content requirements

Social Insurance and Mandatory Benefits: Employers must contribute to compulsory social insurance, health insurance, and unemployment insurance. Compliance failures result in administrative penalties and potential employee claims.

The Consequences of Non-Compliance

Labor violations frequently result in:

• Unfair dismissal claims requiring reinstatement and back pay

• Severance payment obligations that can reach 12+ months of salary

• Administrative fines

• Negative publicity affecting recruitment and operations

Recommendation: Implement compliant employment contracts, internal labor regulations, and termination procedures from day one. Conduct periodic audits of labor compliance and provide training to managers on Vietnamese labor law requirements.

Mistake #9: Mismanaging Intellectual Property Protection

The Registration Imperative

Vietnam operates a first-to-file system for most intellectual property rights. Unlike common law jurisdictions where use may establish certain rights, Vietnamese law generally requires registration to obtain protection.

Critical Vulnerabilities

Trademark Squatting: Foreign brands entering Vietnam often discover that their trademarks have already been registered by unrelated Vietnamese parties. Recovery of these registrations through opposition or cancellation proceedings is expensive, time-consuming, and uncertain.

Technology Transfer Regulations: Vietnam imposes mandatory registration requirements for certain technology transfer agreements. Foreign investors who:

• License technology to their Vietnamese operations

• Provide technical assistance

• Grant rights to use proprietary technology

may be required to register these arrangements with the Ministry of Science and Technology. Unregistered agreements may be unenforceable and can create tax complications.

Trade Secret Protection: While Vietnamese law recognizes trade secret protection, enforcement requires demonstrating that:

• The information provides competitive advantage

• The information is not generally known

• Reasonable measures were taken to maintain secrecy

Many foreign investors implement inadequate confidentiality measures, undermining their ability to enforce trade secret protection.

The Strategic Imperative

Recommendation: Register intellectual property rights in Vietnam before market entry or public disclosure. Conduct comprehensive IP searches to identify potential conflicts. Implement robust confidentiality and data protection measures to support trade secret claims. Ensure technology transfer agreements comply with registration requirements where applicable.

Mistake #10: Overlooking Exit Strategy Planning

The Optimism Bias

Foreign investors typically enter the Vietnamese market focused on growth and success. Exit planning receives insufficient attention until circumstances necessitate it—by which time options may be limited.

The Legal Constraints

Vietnam's legal framework imposes specific requirements and restrictions on exit strategies:

Capital Assignment: The LOI 2020 provides investors with the right to assign capital or investment projects, but such assignments may be subject to:

• Pre-emptive rights of other shareholders or members

• Consent requirements from government authorities

• Foreign ownership restrictions affecting potential purchasers

• Tax obligations on capital gains

Dissolution and Liquidation: Voluntary dissolution of a foreign-invested enterprise requires:

• Resolution by the company's governing body

• Notification to regulatory authorities

• Appointment of liquidators (if applicable)

• Settlement of all tax obligations and liabilities

• Return or transfer of land use rights (if applicable)

• Cancellation or return of licenses and certificates

The process typically requires 6-12 months even absent complications.

Dispute Resolution Provisions: Investors who fail to establish clear dispute resolution mechanisms in founding documents and commercial contracts may find themselves forced to litigate in Vietnamese courts—a prospect that concerns many foreign investors due to language barriers, procedural unfamiliarity, and concerns about enforceability.

The Practical Reality

Exit-related issues that seem manageable in theory prove challenging in practice:

• Finding qualified purchasers who satisfy foreign ownership restrictions

• Valuation disputes with tax authorities on capital assignment

• Protracted negotiations with co-investors who hold blocking rights

• Difficulty enforcing foreign arbitral awards against Vietnamese assets

Recommendation: Address exit planning at the investment stage by:

• Incorporating clear exit rights and mechanisms in shareholders' agreements

• Establishing international arbitration for dispute resolution (Singapore and SIAC are commonly accepted)

• Structuring investments to maximize exit flexibility

• Maintaining compliant corporate records and tax documentation to facilitate due diligence by future purchasers

Conclusion: The Value of Preventive Legal Strategy

The recurring theme throughout these common mistakes is that foreign investors often approach Vietnam's legal framework reactively rather than proactively. They address legal requirements as obstacles to be managed rather than as foundational elements of sustainable business operations.

The LOI 2020 and LOE 2020 have modernized Vietnam's legal framework and enhanced regulatory clarity, but complexity remains. Success in the Vietnamese market requires more than compelling commercial opportunities—it demands rigorous legal due diligence, comprehensive compliance structures, and ongoing legal counsel.

The mistakes outlined in this article are not inevitable. With experienced legal guidance, foreign investors can navigate Vietnam's regulatory landscape effectively, structure their investments to optimize both opportunity and protection, and establish operations that thrive within the country's legal framework rather than struggle against it.

How We Can Help

At Van Pham LLC, we are drawn in advising foreign investors throughout the investment lifecycle—from initial market entry analysis through operational compliance and eventual exit. We combine deep knowledge of Vietnamese law with practical understanding of international business requirements.

If you are considering investment in Vietnam or currently operating in the market, we invite you to contact us for a consultation on how to avoid these common pitfalls and structure your investment for long-term success.

This article provides general information on Vietnamese investment law and should not be construed as legal advice. Specific legal counsel should be sought for individual circumstances.