In the previous section of the article series: [here], we discussed legal risks arising from limited access to legal changes and legal blind spots. In this section, PLF will delve deeper into permanent legal risks and risks stemming from the regulatory framework. By understanding and proactively addressing these risks, foreign investors can minimize potential damages.
1. Permanent legal risks
Foreign investors often perceive themselves as facing more legal risks compared to domestic investors, particularly concerning double taxation in both Vietnam and their home countries. Many investors believe that the tax rates applied to foreign investors are somewhat harsh. However, if considered objectively, the legal provisions are transparent and publicly available. Foreign investors have the right to access and familiarize themselves with the laws of the host country through legal service providers in Vietnam. Furthermore, monetary and tax policies, along with other state management tools, are also taken into consideration. Every nation tends to establish limitations to safeguard its domestic economy and political stability while participating in the global market. Therefore, viewed objectively, these are not risks but rather regulatory measures and requirements that foreign investors must adhere to when benefiting from opportunities abroad. In certain industries attracting foreign investment, the Vietnamese government offers preferential policies such as reduced corporate income tax rates or favorable land lease terms. However, in sectors deemed sensitive to national security and defense, there are limitations imposed on foreign ownership ratios. These measures are implemented to uphold a stable political environment, manage the economy in line with market principles, and facilitate integration into the global economy within the bounds of the legal framework. Taxation, therefore, is regarded as an effective instrument for the state to generate revenue necessary for its functioning.
The most obvious example is personal income tax levied on taxable income arising in Vietnam for foreign individuals who are residents or non-residents. This results in increased tax liabilities for foreign individual investors. However, depending on bilateral agreements between countries and territories, foreign investors may still benefit from tax exemption policies outlined in double taxation avoidance agreements, such as those between Vietnam and the United States, Vietnam, and Japan,…
To attract investment and foster economic growth, Vietnam actively engages in free trade agreements (FTAs) aimed at enhancing the rights and privileges of member states in conducting economic and business activities. These agreements, such as the EU – Vietnam Free Trade Agreement (EVFTA) or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), serve to adjust and modify these permanent legal risks depending on the diplomatic relationships established between nations.
2. Risks from management mechanism
Maintaining a healthy developing economy within the legal framework has never been an easy task. The state needs many tools to perform its management role through monetary policy and the legal system along with an accompanying management team. In 2023, Vietnam faced a difficult economic situation due to the effects of the Covid 19 pandemic, the war between Russia and Ukraine, the interest rate fluctuations of the US Federal Reserve (Fed), and the stagnation in the domestic real estate market. Confronted with this situation, Vietnamese regulatory bodies not only focused on stimulating economic growth but also conducted thorough investigations and implemented policies and measures to mitigate profiteering behaviors by certain individuals. Notably, there were instances of misconduct involving prominent businesses and individuals in sectors such as real estate, banking, and securities over the past year. These issues have affected the stock market, leading to heightened risk aversion among both domestic and foreign investors. However, taking a broader perspective, these measures are contributing to a more transparent and regulated economy under state oversight.
In fact, State management tools have existed and been maintained throughout the management process. However, the selection and utilization of these tools may vary over time.
In addition, the presence of legal blind spots, stemming from an inability to anticipate all relevant social relationships requiring adjustment, can also pose management risks. In such instances, law enforcement agencies may rely on directives from higher specialized bodies, causing concern among both domestic and foreign investors. A prime example is evident in the realm of import and export, where documents issued by the General Department of Customs serve as official guidelines to elucidate legal regulations. While theoretically, these documents may not hold the status of legal documents and lack binding force, their practical application can provide certain advantages to foreign investors, serving as a precedent for similar cases and curbing inconsistent enforcement practices by law enforcement agencies.
Thus, real permanent risks are risks that can be thoroughly identified in advance. Addressing risks associated with management mechanisms necessitates a profound understanding of the law enforcement process in Vietnam, complemented by the assistance of seasoned legal professionals. While challenging situations may still arise, proactive control and prevention measures will assist foreign investors in ensuring compliance while advancing their investment and business endeavors.
