When a non-Vietnamese citizen wants to invest in Vietnam there are a few questions which come up at the very beginning. One of them–and I’ve worked on several informational memos about this–is how they repatriate their investment, and any profits, from Vietnam when they are finished with the investment. The answer to that question depends on whether they are participating in indirect investment or direct investment (I’ll get to definitions of those in a moment). This post is the first of two parts covering both types of investment and how a foreigner can get his money out of Vietnam after a successful investment. Today I’ll discuss repatriation of foreign indirect investments.
What is an indirect investment?
Vietnamese law separates direct and indirect investment by the amount of control obtained by the investor in the entity in which she invests. Specifically, an investment is categorized as to the investor’s involvement in the management of the enterprise. If, for example, a Swedish individual buys shares in a Vietnamese enterprise but does not appoint a board member or get involved with the selection of the managing director then she is an indirect investor. The investment can be in shares, capital contribution, bonds, or even a contribution to an investment fund legally existing in Vietnam so long as the investment does not grant the investor the function of management in the enterprise.
There are, in fact, seven enumerated investments which a foreign investor can participate in and still be categorized as conducting foreign indirect investment. They include:
- Capital contribution to, and purchase and sale of shares or capital contribution portions in enterprises
not specifically established to receive foreign investments of more than 50% of the shares, or with shares not listed or registered for trading on the Stock Exchange. - Capital contribution to, and purchase and sale of shares or capital contribution portions by foreign
investors in enterprises with shares listed or registered for trading on the Stock Exchange. - Purchase and sale of bonds and other types of securities on the Vietnamese securities market.
- Purchase and sale of other valuable papers denominated in VND issued by a resident being an
organization licensed to issue such valuable papers within the territory of Vietnam. - Entrustment of investment in VND via a fund management company, securities company or other
institution licensed to conduct the professional activity of investment entrustment by the law on
securities; or entrustment of investment in VND via a credit institution or foreign bank branch
licensed to conduct the professional activity of investment entrustment by State Bank regulations. - Capital contribution to and assignment of capital contributions by foreign investors in securities
investment funds and fund management companies in accordance with the law on securities. - Other forms of indirect investment stipulated by law.
If a foreign investor is contemplating one of the above investments then they are conducting foreign indirect investment. In order to protect their investment, and to reap the benefits of it, they must proceed with certain procedures in order to repatriate their investment and any revenue from that investment further down the road.
How to properly make an indirect investment
FOREX
Transactions in Vietnam are made in Vietnamese Dong (VND) and all funds invested directly or indirectly in Vietnam must be in VND. At some point, then, even for indirect investments an investor must change their domestic currency into VND. This post isn’t about FOREX, but understand that in order to transfer–through the banks–funds in a foreign currency into Vietnam an investor must open a foreign currency bank account in Vietnam. Not all banks in Vietnam are approved to offer this product so an investor should check with his preferred bank to make sure they are authorized to offer foreign currency accounts. Another hitch is the question of FOREX authorization. Again, not all banks in Vietnam are authorized to conduct FOREX. Finally, before getting into more details, know that the bank must also be authorized to offer Indirect Investment Capital Accounts.
So, before selecting a bank for making an indirect investment in Vietnam, an investor should make sure they are authorized for these three products: 1. Foreign currency accounts, 2. FOREX, and 3. Indirect Investment Capital Accounts. Knowing the requirements before selecting a bank in Vietnam, then, an investor can move forward to understanding the process of making an indirect investment.
Indirect Investment Capital Accounts
Once an investor deposits the foreign currency in his foreign currency account and exchanges the currency for VND, there remains one step before he can invest that money in his chosen indirect investment. That step is to open an indirect investment capital account. An IICA is a purpose-built account that allows a foreigner to disburse and receive funds related to indirect investments. It is different from current accounts or accounts designed for direct investment activities (which I’ll discuss in the next post).
An investor may only open one IICA account at a time. If he wants to open a second IICA he must close the first account prior to opening a second. He may have both an IICA and a direct investment account at the same time if he is conducting both direct and indirect investments simultaneously, otherwise, a conversion from an IICA to a direct investment account requires that the IICA be closed. It would be helpful to enumerate the types of funds receivable into the IICA and the types of funds disbursable from it.
The following types of funds can be received into an IICA:
- Proceeds from the sale of foreign currencies to authorized credit institutions;
- Proceeds from transfer of capital contribution portions and shares, from the sale of securities
and other valuable papers, and from receipt of dividends and interest on bonds and other
valuable papers denominated in VND from foreign indirect investment activities in Vietnam; - Amounts transferred from payment accounts denominated in VND of foreign investors opened
at an authorized bank; - Remittances from an account of a fund management company, securities company, credit
institution or foreign bank branch licensed to conduct the professional activity of investment
entrustment on behalf of the foreign investor (applicable when the foreign investor conducts
indirect investment in Vietnam in the form of entrustment of investment); - Other lawful revenue transactions in VND of foreign investors relating to their foreign indirect
investment activities in Vietnam.
And now the types of funds that can be disbursed from an IICA:
- Disbursements in order to conduct an indirect investment activity in Vietnam in a form
as outlined above; - Disbursements being the purchase of foreign currency at an authorized credit institution in
order to remit capital, profit or other lawful income overseas; - Disbursements for payment of lawful expenses arising in Vietnam;
- Amounts transferred to a payment account denominated in VND of an investor opened at an
authorized bank; - Amounts transferred to an account of a fund management company, securities company or
other institution licensed to conduct the professional activity of entrustment of investment for
the foreign investor (applicable when the foreign investor conducts indirect investment in
Vietnam in the form of entrustment of investment); - Other lawful disbursement transactions relating to foreign indirect investment activities in
Vietnam.
That’s what an investor can do with an IICA. Once they’ve got the money into the IICA they can make indirect investments with it and receive the profits and proceeds from the sale of those indirect investments. But what happens when an investor has received a dividend or sold his shares in an enterprise and wants to remit the funds received into his IICA to an account overseas?
How to repatriate funds
Here the investor simply reverses the process at investment, with a caveat. In general, the investor will convert the VND in the IICA to his domestic currency and transfer it into his foreign currency account. Then he will simply transfer the money from that account to his account overseas. However, if the investor is an individual and she is repatriating profits from dividends, then she must pay a five percent withholding tax.
While not a capital gains tax, per see, it acts as such and the individual investor seeking to repatriate dividends from an indirect investment must provide documentation to the bank that the enterprise issuing the dividends has withheld the five percent tax. This documentation should be available from the enterprise issuing the dividends and should be presented to the bank upon making a request to transfer funds.
But what if the individual investor isn’t in Vietnam? How do they go about presenting such evidence to the bank when they conduct their transactions online? This is a holdover from the heavy red tape that still sometimes plagues activity in Vietnam. Most banks–especially those servicing high-income clients–have an option to communicate with the bank via email or some other form of e-communication. Failing that, a law firm or business advisory firm could be approached to shuttle the proof of withholding tax to the bank. It is a relatively easy obstacle to overcome, unfortunately, it is still an obstacle and requires a bit of a think-around before it can be handled correctly. The banking sector is one of the most heavily regulated sectors in Vietnam and, as such, there tends to be more red tape there than in many other areas.
That said, the above is what an investor needs to do if they want to invest indirectly in Vietnam and to ensure that they can, legally, repatriate their investment capital and profits overseas. Next time I’ll address the more onerous requirements for repatriation of foreign direct investments. Until then . . .
You can read part 2 of this series, all about repatriating investments and profits from foreign direct investment, here.
