The State Bank of Vietnam released Circular 06/2019/TT-NHNN on June 26, 2019 in response to concerns regarding Circular 19/2014/TT-NHNN.
In the circular, a clear definition of Foreign Invested Enterprises (FIE) is given along with the requirements for the opening of a Direct Investment Capital Account (DICA) while conducting international transactions.
It is imperative that foreign investors remain cognizant of the latest amendments, especially the changes with respect to currencies permitted for an FDI firm.
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Updated Definition of Foreign Invested Enterprises (FIEs) in Vietnam
A clarification has been made based on Circular 19 which states the definition of a Foreign Invested Enterprise (FIE) as follows:
1. Any business enterprise established via investment whose shareholders are foreign investors and who obtained an Investment Registration Certificate (IRC).
2. For foreign investors owning at least 51% of charter capital, the following clauses apply:
(i) foreign investors owned charter capital through contributions or purchases of shares or interests;
(ii) companies (resulting from splits, purchases, mergers, or consolidation) in which foreign investors own 51% of charter capital
3. Businesses that undertake Public Private Partnership (PPP) projects as per the law on investment.
What is a direct investment capital account (DICA)?
As per the rules stated in Articles 5, 6, and 7 of this Circular, a “direct investment account” is opened using Vietnamese dong or foreign currency by foreign business owners at authorized banks.
Conflicting regulations due to the updated Law on Investment (2015)
Prior to adopting Circular 06, the foreign exchange regulation of FDI operations in Vietnam had been governed by Circular 19. However, Circular 19 had been incompatible with the revised Law on Investment (2015). As a result, investors started to face many challenges, especially those associated with direct investment capital accounts (DICAs).
Following are some of the most significant concerns Circular 19 has encountered in its implementation:
- Circular 19 needed foreign-invested enterprises (FIE) to open a DICA, but the parameters of an FIE were not clearly defined. As per Circular 19, FIE was a company wherein foreign investors allocated their capital for the establishment of the business and their involvement in management. However, there was a lack of clarity on what ‘involvement in management’ meant.
- In accordance with Circular 19, if a company is provided with an investment certificate when acquired by a foreign investor, then opening DICA is mandatory.
However, under the revised Law on Investment, investments certificates/investment registration certificates (IRCs) are no longer needed for some Merger and Acquisition(M&A) transactions, which became problematic.
- Foreign investors involved in M&A deals were confused when they bought or sold equity interests in FIEs. It became difficult for investors to figure out whether:
(i) a DICA should be opened or not, and
(ii) the transaction price should go through a DICA or directly from the buyer’s to the seller’s account.
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Who needs to open a DICA?
According to Circular 06, in addition to companies that are considered foreign-invested, as discussed earlier, offshore entrepreneurs participating in Business Cooperation Contracts (BCCs) and foreign companies that carry out PPP projects should register for a DICA.
When is a DICA used?
As per Circular 6, when a Vietnamese and a non-resident foreigner are transferring shares or funds of an FDI company, the transaction must be registered through a DICA. By using DICA, investors can make payments for loans, receive capital, and transfer profits. There is no need for a DICA when capital is transferred between two foreigners and two locals. Essentially, this type of account is a bridge to connect foreign investment capital (in a foreign currency) to the company’s Vietnamese bank account (in VND).
Foreign investors are permitted to engage in transactions from other countries or their accounts in foreign currency or Vietnamese dong. However, the account holder should have an authorized bank account in Vietnam.
Required documents that FDI companies need to prepare
In order to apply for a direct investment capital account, companies expanding to Vietnam must work with their respective banks on the specific paperwork. Usually, the documents that they need to submit include:
- Investment Registration Certificate (IRC)
- Enterprise Registration Certificate (ERC, also known as Business Registration Certificate or BRC)
- Personal documentation of the investor
- An application form issued by the bank and filled out by the investor
Occasionally, the financial statements of the investor or the chief accountant’s records will also be needed.
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