A few weeks ago I wrote about Vietnam’s Outward Investment Problem. This was in relation to Axies Infinity which is an increasingly successful NFT based online game that is owned and operated by Vietnamese founders through a Singapore holding company. The problem, as I stated, is that Vietnam has rules for its citizens to invest overseas. I’ve looked at this before in my article How to Make an Outward Investment as a Vietnamese Citizen, but that was under the old Investment Law and without context. This week, I want to look at the legally promulgated process for a Vietnamese startup to setup an offshore holding company with a Vietnamese subsidiary and the possibility for additional subsidiaries in other jurisdictions.

There are four forms of outward investment for which Vietnamese citizens (including corporations) can invest:

1. Establishment of an economic organization in accordance with the law of the investment recipient country;
2. Investment on the basis of an offshore contract;
3. Capital contribution, purchase of shares or purchase of a capital contribution portion in an offshore economic organization to participate in management of such economic organization;
4. Purchase or sale of securities or other valuable papers or investment via securities investment funds or other intermediary financial institutions in a foreign country;

Within these four forms, Vietnamese citizens are further proscribed in that they cannot invest in any sectors which are prohibited to Vietnamese investors in the Investment Law or in an international treaty (basically illegal sectors). But they are also prohibited from investing in sectors for which the technology or products are prohibited from being exported. They may invest in such sectors as banking, insurance, securities, media, and real estate business if they satisfy the Vietnamese state’s conditions.

A major issue facing Vietnamese investors who are interested in investing offshore is the question of foreign currency. While they may be responsible for providing the capital necessary to conduct the investment, they are also responsible for purchasing the foreign exchange necessary to make the investment, and if they obtain any loans from foreign banks or entities to conduct the investment that fall within the medium and long-term loan definitions of the laws on banking, then they must register such loan with the state bank of Vietnam and submit regular reports on its repayment.

Just like for investment within Vietnam, there are policies for large scale projects to be approved by the National Assembly or the Prime Minister, but the lowest value trigger for such approval is 400 billion VND and that is if the investment is in a sector with conditions.

Procedure for Obtaining Approval for Offshore Investment

As with all things Vietnamese, an application dossier is required. An investor seeking to conduct offshore investment must lodge this dossier with the ministry of planning and investment (MPI) and include data regarding the nature of the investment, the nature of the investor, the source and ability to obtain funds and foreign exchange, the authorization of the investor (or management entity if an enterprise), and written certification from the tax authority that all tax obligations have been met.

Upon receiving a valid application for an offshore investment registration certificate, the MPI will issue such certificate to the investor within 15 days. If the amount of foreign currency to be remitted overseas is equal to or greater than 20 billion VND then the MPI will obtain a written opinion from the state bank of Vietnam.

Assuming the investment project is small, which would be the case of setting up a nominally invested offshore holding company (for example S$1 for a Singapore holding company), then the process should be simple and the MPI should have no complaints.

Unfortunately, the historical fact of the matter is that the MPI is extremely hesitant to issue offshore investment registration certificates and many small startups do not have the capabilities or capital to go through the process of getting official approval to setup an offshore holding company. Especially if foreign venture capital is interested in investment but insists on an offshore holding company to hold the investment. Worse, many times the investment decision is time limited and it becomes necessary to set up a holding company within a matter of days or a week. Going through the approval process with the MPI may take a considerable amount of time and make the possibility of obtaining funding from foreign Venture Capitalists difficult if not impossible.

While we do not advise our clients to circumvent these procedures, and in fact include them in our advise on structuring of corporate vehicles, we have seen many startups and other companies simply make the investment in the offshore holding company without first obtaining an offshore investment registration certificate. This happens especially when the invested capital of a company can be as little as one dollar in some jurisdictions. Many investors wonder why go through the hassle of getting approval from the MPI for one dollar?

The problem comes a few years down the road. The startup has obtained several rounds of funding into the offshore holding company, the company has expanded and has subsidiaries in several jurisdictions and the Venture Capitalists who invested are suggesting preparations for an exit strategy that involves either M&A or a public listing. In either case there will be a legal due diligence investigation and it is likely that as part of that process there will arise one specific question: did the founders have legal authorization to form the company?

The question may not arise in this exact form, it may simply fall within an area of “other concerns of a material nature”, but either way, the fact that the Vietnamese investor did not obtain official approval from the MPI for investing in an offshore company means that he was acting extra-legally and did not, in fact, have the legal authorization to form the company. At that point, the company will be required to spend lots of money on lawyers to fix the problem and negotiate with the government to resolve the issue.

Better in all ways to avoid the problem in the first place and obtain an offshore investment registration certificate. It may not be the easiest or nicest process, and it may delay funding rounds considerably, but for a clean bill of health when it comes time for the capital to exit a startup or enterprise, it is best to abide by the law, and the law requires an MPI approval.