Introduction

Vietnam is now a member of around 16 free trade agreements (FTAs).[1] As market openness generally increases over time, foreign investors may enjoy varying levels of market access depending on the specific FTAs to which their home countries are parties alongside Vietnam.

The variation in market openness between different FTAs has led to “treaty-shopping” practices, where foreign investors engage in corporate restructuring to acquire a nationality that allows them to benefit from the advantages of a specific FTA. To counteract this abusive practice, most FTAs include a denial of benefits (DoB) clause, which permits the host country to deny benefits to entities that are not the legitimate beneficiaries of the advantages under the relevant FTA.

This article provides a practical assessment of the challenges and prospects associated with enforcing DoB clauses in Vietnam.

Denial of Benefits

Take part of the DoB clause under Chapter 9 (Investment) of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) as an example:

“…A Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of that other Party and to investments of that investor if that enterprise:

(a) owned or controlled by persons of a non-Party or by persons of the denying Party and

(b) has no substantial business activities in the territory of any Party other than the denying Party.” [2]

Accordingly, if a Singapore-based company (SG Company) is owned or controlled by a BVI investor (BVI Company) and has no substantial business operations in Singapore other than acting as a vehicle for the BVI investor to invest in Vietnam, Vietnam may technically have the right to deny the benefits of CPTPP to the investment from the SG Company into Vietnam, by virtue of the DoB clause under the CPTPP.

However, currently, it is highly unlikely for Vietnamese authorities to enforce the DoB clause against the SG Company’s investment made into Vietnam. The reasons are as follows:

1.  Legal Constraints:

Legally, a treaty clause may only be applied directly if it has either been incorporated into domestic law or its direct application has been ratified by competent state authorities.[3] Currently, there is no domestic law elaborating on the concept of DoB, and the DoB under the CPTPP and many other FTAs is generally not allowed for direct application.[4] Therefore, there is currently no legal basis for state authorities to apply the DoB as a measure against investments made by foreign investors.

2.  Complexity of Activation:

The activation of the DoB clause is subject to various tests. In the case of the extracted DOB clause above, these tests include determining the "ownership" or "controlling" rights of the BVI Company over the SG Company, as well as what constitutes "substantive" business of the SG Company in Singapore. Neither the treaty nor Vietnamese laws provide detailed criteria for these tests. While there is a risk that Vietnamese authorities might apply these tests at their discretionary view, the likelihood of this occurring is quite remote, since the DoB is a treaty clause and it is unusual for Vietnamese authorities interpret and apply a treaty clause at its discretion.

3.  Intended Purpose and Precedent:

The DoB clause in FTAs was originally designed to prevent investors from non-member states from taking advantage of the investment protections granted to investors from member states.[5] While the scope of the DoB could technically extend beyond investment protection to include market access benefits, there has been no significant precedent where the DoB has been used to prevent leveraging market openness. This leaves the possibility of the DoB being employed to tackle nationality planning in terms of market access benefits uncertain.

As of now, there have been no instances where the DoB has been applied to reject investments by Vietnamese authorities.

A Future Prospect

While the DoB has not yet been applied to general investments, it is worth noting that, in taxation matters, the DoB under double taxation avoidance treaties (DTAs) has been incorporated into domestic laws.[6] This allows the tax authorities in Vietnam to reject applying DTA benefits to a taxpayer if the DoB is triggered. Thus, the DoB is not an unfamiliar concept to the Vietnamese regulators.

While there has not yet been any legal mechanism to enforce DoB on foreign investment, the evolving landscape of international trade and investment law could potentially bring changes. The increasing sophistication of nationality planning strategies may prompt Vietnamese authorities to consider more robust mechanisms to enforce DoB clauses, particularly as the country continues to integrate more deeply into the global economy through various FTAs.

For now, investors should remain aware of the potential risks and the evolving legal environment in Vietnam.

[1]  Reference: https://trungtamwto.vn/fta/174-da-ky-ket/1

[2] Article 9.15.1, CPTPP.

[3] Article 6.2, Law on International Treaties.

[4] CPTPP: Resolution 72/2018/QH14;

     ATISA: Resolution 131/NQ-CP;

     EVFTA: Resolution 102/2020/QH14;

[5] Eunjung Lee (2015), “Treaty shopping in international investment arbitration: how often has it occurred and how has it been perceived by tribunals?”, Working paper series 2015, London School of Economics and Political Science.

[6] Article 6.3, Circular 205/2013/TT-BTC

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Disclaimer: This Legal Update is intended to provide updates on the Laws for information purposes only, and should not be used or interpreted as our advice for business purposes. LNT & Partners shall not be liable for any use or application of the information for any business purpose. For further clarification or advice from the Legal Update, please consult our lawyers: Mr Nguyen Quoc Bao at quocbao.nguyen@lntpartners.com.