This was first appeared on the printed copies of thesaigontimes (English) in July 2014.
The newly enacted Land Law and Decree 43/2014/ND-CP on the law’s implementation are valid as of the first of July. This article explores several points mentioned in the two documents concerning mergers and acquisitions in which foreign investors take part.
Mergers and acquisitions (M&A) can be conducted by purchases of either stocks or assets-for instance, factories-of the enterprises involved, which is in fact a way for foreign investors to acquire land-use right in Vietnam.
Land-use right in case foreign investors buy stocks
According to the new Land Law, foreign-invested enterprises (FIEs) incorporate 100% foreign-owned businesses, joint ventures and Vietnamese businesses which are merged or bought, or whose stocks are bought by foreign investors, in accordance with investment laws. That being said, a “purely Vietnamese” enterprise will become an FIE once foreign investors have a stake in it. The new law also stipulates that such an enterprise will be subject to rights and obligations to the land in use like an FIE (which also means a certain limitations) if the foreign investor holds a controlling stake. Otherwise, if the controlling stake is still in the hands of the Vietnamese partner, the enterprise is to use the land the way a domestic entity does. Although it has yet to know exactly what “a controlling stake” really means, the new stipulation may help in one way or another identify more easily the jurisdiction of an enterprise whose stocks have been acquired by foreign buyers.
Land near border, coastline or on island
Decree 43 stipulates further that in case projects on islands, or in communes or towns near the border or coastline, which do not need to be endorsed by the National Assembly or the Prime Minister, the provincial people’s committee is to send a letter seeking feedback from ministries of Defense, Public Security and Foreign Affairs before scrutinizing the investment approval. This requirement applies only to new investments. However as Decree 43 has yet to incorporate all cases, foreign investors upon acquiring stocks in Vietnamese enterprises using land in these areas should assume that their stake transaction should be endorsed by the ministries mentioned above.
From the national interest point of view, such an application is justifiable given the current context in which land in many areas sensitive to national security is managed by foreign investors.
Purchases of assets attached to land
The new Land Law still bars FIEs from receiving land-use right transfers, or to put it simply, purchases of land, from existing land users. However, the law does not prohibit purchases of assets attached to land, for instance, factors. This can be tackled as follows: the FIE buys assets on the land; the landlord returns the land to local authorities; and then the FIE leases the land from the authorities. Some FIEs are concerned that authorities may not grant them the land lease contract. This problem is partly addressed by a stipulated in Decree 43 which rules that in case land users without the right to transfer their land, after the assets associated with the land have been purchased, the State will expropriate the land and re-lease it to the new tenant. Nonetheless, this stipulation specifies only the case if a seller unable to transfer land-use right and not the case the buyer not authorized to receive the land-use right, FIEs should arrange their cases with local governments to ensure that they will be leased the land after the expropriation.
Decree 43 also stipulates that land to be used for production or business via purchases of assets attached to land has to comply with the principle that no fund of cleared land for the appropriate use of production or business is available in the locality, except for projects falling in the investment category promoted by local authorities. Does this mean that prior to buying assets associated with land, the buyer has to make sure there is no appropriate land available in the locality? If so, it would turn out to be extremely complicated because land might determine an enterprise’s positional advantage. Let’s wait to see how this principle will be practically applied.
Investment capital transfer
The new Land Law rules that FIEs are entitled to receiving investment capital in form of land-use right value in accordance with government regulations. This ruling is further elaborated in Decree 43 as follows: FIEs are allowed to receive investment capital in the form of land-use right value from another enterprise whose land having to pay land-use fee is assigned by the State, or leased and paid one-off for the whole leasing duration and has become part of the enterprise’s capital, except for cases the investment capital transfer is the land-use right of agricultural or forest land. Such a statement is so ambiguous!
First, the concept of “investment capital transfer reception”. If such a transfer relates to corporate stock purchases, it would be confusing as the law specifies only the right of FIEs, but not of domestic enterprises and individuals, nor of foreign institutions and individuals although they all are entitled to buying corporate stocks.
Second, the transferred investment capital being also land-use right value having become part of the enterprise’s capital. The capital contribution being land-use right value can be asserted during the time stockholders contribute their capital to the enterprise. After this capital contribution process has finished, such capital is now the enterprise’s assets, and contributors possess only stocks and have no right on the land they have contributed. If this is the case, which art of the transferred capital can be considered land-use right value?
In addition, the stipulation also rules that enterprises and members who are enterprise proprietors, after transferring their investment capital, have to determine the capital which is land-use right value in the total transferred value and are subject to taxes in compliance with the law. That way, it seems that the Government wants to impose estate transfer taxes on land-use right transfers. If so, more detailed instructions are needed so that value can be asserted. At the same time, tax regulations have to be provided accordingly because current taxes on capital selling and estate transfers are different.
Truong Huu Ngu (translated by thesaigontimes)
