Foreign Exchange Management in Vietnam: Circular 6
- Circular 6 governs foreign exchange management for FDI activities in Vietnam.
- The circular provides a clear definition of FDI enterprises and offers some less cumbersome procedures for remitting profits.
- FDI enterprises are required to open a direct investment capital account to conduct transactions.
Vietnam’s Circular 6 (Circular No 06/2019/TT-NHNN) on foreign exchange was introduced last year and business entities had until September 6 of this year to implement the changes as per the regulations.
Circular 6 governs foreign exchange in foreign investment activities in the country.
As per Vietnam law, any transaction that is related to direct or indirect investment transaction by a foreign investor must be implemented by an investment capital account opened in a licensed bank which is permitted to trade and supply foreign exchange.
Foreign direct invested enterprise
FDI in Vietnam means the transfer of capital for investment and participation to manage investment activities in Vietnam as defined by Circular 19/2014/TT-NHNN. This includes residents that are entities and receive direct foreign investment, non-residents involved in a business cooperation agreement (BCC), and non-residents who are foreign investors of FDI entities.
To conduct FDI activities, investors are required to open their foreign currency and Vietnamese Dong account at a licensed bank.
According to the new Circular 6, the definition of ‘foreign directed invested enterprise’ has been broadened. This now includes:
- An enterprise or company that is established by a foreign investor required to obtain an investment registration certificate (IRC);
- An enterprise or company with a foreign investor owning 51 percent or more of charter capital in an M&A transaction or has been established by specialized laws like insurance and law firms; and
- Project enterprises or companies established by foreign investors to implement PPP project as per the investment law.
FDI enterprises are required to open a Direct Investment Capital Account (DICA). A DICA is a current account in either a foreign currency or the local Vietnamese Dong. A DICA is typically in the name of the FDI entity, the foreign investor in a business cooperation contract or private partnership contract (PPP).
As per Circular 6, if a transaction of share transfer in an FDI entity is between a non-resident and resident, the transfer of funds must be done through a DICA. The same applies to fund transfers for investment project transfers.
A DICA can be used for:
- Receiving capital contribution;
- Making payment of loans including foreign; and
- Remitting profits to foreign investors
The new regulations also allow for further flexibility for foreign investors that want to transfer funds using a DICA. The regulations now allow them to remit funds for pre-establishment costs before obtaining the IRC. This can be done directly from the foreign country into Vietnam to contractors or third parties.
In addition, payments for capital transfer between a foreign seller and foreign purchaser as well as between a local seller and local purchaser do no need to be done via a DICA.
As per Circular 6, any of the below documents can be used to open a DICA. These are:
- Investment Registration Certificate (IRC);
- Establishment and operation certificate;
- M&A approval;
- PPP contract signed with authorized state body; and
- Any other documents showing that the investment by the foreign investor is permitted.
As per the Circular, in an M&A, transactions have to be done through a DICA if done between a foreign investor and a domestic investor. Further, capital cannot be transferred directly to the party’s overseas account but has to be done through the DICA account. Businesses that do not open a DICA, risk being subject to the capital assignment tax (CAT) in Vietnam, which would amount to 20 percent of the transaction.
In addition, foreign loans have to be paid using a DICA except for specific exceptional cases.
Indirect investment capital accounts
Foreign-invested enterprises (FIEs) that have ownership of less than 51 percent due to an M&A transaction or are registered with a stock exchange must close their DICA if they have one. However, if the DICA is being used for the payment of loans it can continue to operate.
Once they close their DICA, non-resident foreign investors are required to open an Indirect Investment Capital Account (IICA) to continue investment activities in Vietnam. IICAs are used for indirect investments such as purchasing shares or sale of bonds in Vietnam. Profits that are obtained from indirect investment activities must also be remitted to the foreign investor using the IICA.
Foreign indirect investment means that foreign investors make an investment into Vietnam by buying securities, capital and purchase of shares, and investment funds without direct participation in the management of investment activities. Transaction related to indirect investments must be done through an IICA at a licensed bank in Vietnamese Dong.
Implementation necessary for compliance
Business entities should have already implemented the changes as per the regulations if not already done so.
While not perfect, the new regulations give business enterprises clearer regulations on FDI and the type of account required when investing in Vietnam. This will allow for a more transparent business environment in Vietnam allowing foreign investors, banks, and individuals to understand compliance requirements for foreign investment activities.
Note: This article was first published in September 2019, and has been updated to include the latest developments.