One crucial issue of the new 2005 Law on Investment and Law on Enterprises is to secure a smooth transition of existing foreign invested enterprises (FIEs)

The Law on Enterprises in Article 170 requires that FIEs established before 1 July 2006 are entitled to re-register their enterprises within 2 years (until 1 July 2008), or to maintain their current status to continue the operation and incentives in accordance with the granted licenses. One may wonder whether to re-register their enterprise or not and what benefits she will have after re-registration.
After more than two months from the statutory effective date of the said provisions, the Government issued Decree 101/2006/ND-CP dated 21 September 2006 guiding in detail the re-registration and conversion of FIEs. This Decree reaffirm foreign investors the right to choose to reregister to switch the company to the new system enlightened by the Law on Enterprises and the Law on Investment or to maintain their existing investment licenses with provisions on investment projects kept unchanged.
Since the enforcement of the Law on Investment in 1996, foreign investment in Vietnam had been undertaken in various forms namely joint venture companies, 100% foreign owned companies, business cooperation contract, BOT, BTO, BT contracts. All operated under investment licenses granted by competent authorities. Joint ventures and 100% foreign owned companies were all established in form of limited liability company. Few shareholding FIEs are in operation as the result of pilot conversions in accordance with Decree 38/2003/ND-CP. The Government however tested the equitization on few FIEs for listing on the stock market.
Forms of companies under the new laws are now more flexible. Decree 101 thus can be considered as a palliator to treat the defect under the defunct law on foreign and investment.
Under decree 101, foreign investors may choose to reregister their business and convert their corporations into either limited liability company or shareholding company as their local counterparts. By being reregistered, the company is granted a new certificate of investment playing the role of business registration as well under which the company is entirely entitled to all rights vested by the Law on Enterprises and the Law on Investment.
The significant difference of the new certificate of investment is that it separates provisions set for the enterprise to be established and those set for the registered projects. Under the new common laws, an enterprise may register a number of projects and the term of the enterprise is indefinite. They may register to add or to change business lines, address, capital, members of the company, legal representative and other content of the Business Registration at their own discretion. Without re-registration after 1 July 2008, old FIEs will be unable to request for change to business purposes and term of operation. They shall operate within the scope of activities and term prescribed in the granted investment license
and the current Charter, while having to obey the new provisions on other matters. Pending a guiding circular, it appears from Decree 101 that, beyond the deadline of 2 years, non-reregistered FIEs would not be possible to change its current charter basing on the defunct laws. Re-registration therefore will definitely facilitate the operation of the business in the long run.
Besides, reregistered company is entitled to apply for conversion from limited liability company with one member to that with two members or more, or vice versa; or from limited liability company to shareholding company if it meets the conditions for incorporating a shareholding company. The structure and organization of company will be more flexible and effective. Depending on the number of investors of the company and strategy of capital mobilization, investors shall apply a suitable form of enterprise. Applying for conversion of the enterprise may be undertaken after or in parallel with re-registration of enterprise.
Newly established FIEs before 1 July 2006 may enjoy a relaxed provision since there is no requirement on foreign investors’ contribution of at least 30% legal capital, and no thin capitalization rule (i.e. requirement of minimum ratio 30% equity/total capital, or 20% in special cases). Except one member limited liability company, reduction of equity are permissible to the re-registered FIEs. Some requirements of unanimous vote in joint ventures will not be applicable.
Though advantages of re-registration of the enterprises are clear, there may be certain side effects which should be noted. The new Law on Enterprises increased the simple majority vote (51%) regime under the defunct laws to supper majority vote (65%) for passing board decisions. This may cause deadlock and hardship to joint ventures with two partners, neither of whom holds more than 65% share. Managing directors of FIEs should also note the new requirement on residence in Vietnam.