“Nowadays, the issues concerning security and national defense caused by the ownership, exploitation, and use of land by Foreign Directed Investment enterprises (“FDI enterprises”) are being increasingly paid special attention by the Government, which has been reflected in many newly issued regulations aiming to strengthen the supervision and management of the Government in this regard. This phenomenon stems from the fact that many FDI enterprises located in certain geographically strategic cities and provinces, in many different ways, have acquired the ownership, the land use rights, and the management of land located in the important and strategic areas.“
The introduction of the Law on Investment 2020, with provisions on the authority to approve investment policy for the implementation of FDI projects based in “other areas affecting national defense and security”, is considered one of the very first moves of the authorities to improve the government supervision over the use and exploitation of land by FDI enterprises.
Therefore, in order to minimize the impacts of the factors that may hinder the implementation of an investment project, before making an investment decision, investors need to understand the provisions of relevant laws on the ownership, exploitation, and use of land applicable to FDI enterprises in each case.
By law, FDI enterprises can exploit and use land in Vietnam through the following forms:
In accordance with provisions of Law on Land, FDI enterprises are allocated land with collection of land use fee by the State to implement investment projects on constructing residential houses for sale or a combination of sale and lease. According to Law on Land, the State only allocates land with collection of land use fee to FDI enterprises for the purposes of “implementing investment projects on construction of residential houses for sale or a combination of sale and lease”. This provision could be interpreted that such projects must be in association with real estate trading activities prescribed by the Law on Real Estate Trading. In other words, FDI enterprises shall not be allocated land for other purposes such as building office, headquarter, factory, etc.
Compared to the former form, land leased by the State with the collection of land use fee allows FDI enterprises to use such land for various purposes, including “implementing investment projects in agricultural, forestry, aquaculture or salt production; non-agricultural land for business and production purpose; land for construction of public facilities for commercial purposes; land for implementation of investment projects on houses for lease”.
Accordingly, in addition to activities relating to “land for implementation of investment projects on residential houses for lease”, FDI enterprises have the right to exploit land leased by the State to serve a relatively diverse list of project groups varying from agriculture, non-agriculture to construction.
Issues relating to the lease of land that FDI enterprises need to pay certain attention to, including authority of granting the lease (term of lease, rental, lease area), obtaining land lease rights (land leased through auction or not through auction), methods of payment of rental (on an annual basis or a one-off payment for the entire term of lease). Such issues will be decided depending on each specific circumstance.
By laws on land, the Provincial People’s Committee has the authority to determine to grant the land use rights to FDI enterprises.
Besides the two forms above, FDI enterprises are also entitled to using land by “receiving the transfer of investment capital which is the value of land use rights”.
By law, FDI enterprises are entitled to receive the transfer of investment capital in form of value of land use rights from enterprises whose land use rights originates from (i) being allocated by the State with the collection of land use fee, (ii) being leased by the State with land use fee charged on an annual basis or collected as a one-off payment for the entire leasing period capitalized into the enterprise’s capital; and such value of land use right has been capitalized into enterprises’ capital.
During the term of land use, FDI enterprises have rights and obligations as applied to the case of being allocated or leased land by the State, depending on the original form of land use of the subject who transfers the investment capital which is the value of land use right.
In addition to the land being allocated, leased by the State, and the land use rights obtained by receiving the transfer of investment capital which is the value of land use rights, FDI enterprises are allowed to sign lease contracts with other organizations and individuals in the market to serve their investment activities by law.
In order to make steady progress when doing business in Vietnam, it is crucial that FDI enterprises need to thoroughly consider, make comparisons and understand their operational needs and goals that the FDI enterprises expect to achieve when doing business in Vietnam. On that basis, FDI enterprises should choose the appropriate land use form. One thing that we always recommend FDI enterprises is to conduct thorough research on the targeted land, which should cover the following matters: type of land, conditions that FDI enterprises need to meet to be granted with land use rights, the remaining term of the land use rights, current legal status, and more importantly the policy of the local authority in charge of managing the land. This will help FDI enterprises avoid or mitigate the risks relating to this matter.
Time: 16 April 2021