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Forex regulations for FDI activities create transparency

Update: July, 15/2015 - 08:55

Pham Thi Thanh Lan, Associate – Indochine Counsel

Cash flows into or out of Viet Nam relating to foreign direct investment (FDI) activities are always of significant interest to not only foreign investors, but state agencies also.

The issuing of specific regulations on foreign exchange transactions will bring transparency in management activities, facilitate capital transfer of foreign investment in compliance with the law, and make DI activities more effective.

Currently, the government controls foreign exchange via investment capital accounts. Regarding FDI activities, foreign investors are allowed to transfer revenue and disbursements via direct investment capital accounts (DICAs) in both foreign currencies and the Vietnamese dong, according to Circular 19/2004/TT-NHNN (Circular 19), issued by the State Bank of Vietnam on August 11, 2014, and effective from September 25, 2014. According to Circular 19, there are a number of points relating to DICAs as follows:

Kinds of DICAs

As per previous regulations, foreign-invested enterprises (FIEs) were allowed to open only one specialised capital account in a foreign currency for the purpose of making related-capital payments into or out of Viet Nam. Presently, FIEs can open DICAs not only in foreign currencies, but also in Vietnamese dong, so long as the purpose of use is clear. Particularly, such DICAs are opened and used for payment transactions relating to charter capital and loan capital taken out by FIEs. In addition, if FIEs borrow in a different currency from the currency in which it opens its DICA, then such FIEs are allowed to open an additional DICA in the currency of the loan at the same authorised bank where it opened the first (foreign currency) DICA in order to conduct lawful revenue and disbursement transactions relating to such foreign loan. In other words, the current forex rules allow FIEs to open two or more DICAs to make payment transactions more flexible.

Capital transfers for investment preparation phase

Circular 19 includes an independent regulation to stipulate clearly how foreign investors' capital enters or leaves Viet Nam for preparation purposes before the issuance of an investment certificate.

Previously, foreign investors had to use (foreign) offshore accounts to transfer money directly into accounts of local service providers in order to pay for expenses in relation to service contracts with such providers. In other cases, foreign investors empowered Vietnamese partners (in the form of establishment of a joint-venture company) on behalf of the foreign investor to pay for the expenditures arising prior to issuance of the investment certificate. Now under Circular 19, the foreign investors are permitted to open payment accounts in foreign currency at an authorised bank in Viet Nam. Through this account, the foreign investors will transfer money to Viet Nam in order to conduct pre-investment activities, such as market research and legal advisors. After the investment certificate is issued, such money used for the preparation phase will be legally converted into capital contribution or foreign loan capital according to a unanimous agreement between the parties involved.

Capital contribution and purchase of shareholding in existing Vietnamese enterprises (target company)

Circular 19 clearly says if the target company is issued an investment certificate by the competent licensing authority, such target company has to open DICAs in compliance with Circular 19, and the foreign investors who acquire capital contribution or purchase shareholding in such target company will use the existing DICAs of the target company to transfer money into Viet Nam for such transaction. In other words, the foreign investors do not need to open more bank accounts of their own. In other cases where the target company is not issued an investment certificate, the foreign buyers shall open an indirect investment capital account (IICA) in Vietnamese dong only and implement their investment activities via the IICA, in accordance with the guidelines of Circular 05/2014/TT-NHNN of the State Bank of Viet Nam, dated March 12, 2014 (guiding the opening and usage of IICA to conduct indirect investment activities in Viet Nam).

INDOCHINE COUNSEL

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