Risks relating to “sham” nominee transactions under 2020 law on investment

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Risks relating to “sham” nominee transactions under 2020 law on investment

With its deep integration with the global economy, Viet Nam is becoming one of the best destinations attracting investment from investors all over the world. Over US10 billion flowns in Viet Nam in the first quarter of 2021 despite the adverse impact of the COVID-19 pandemic. The new Law on Investment (“LOI”), which is one of the primary domestic laws governing the investment activities of foreign investors in Viet Nam, introduces significant changes in comparison with the former Law on Investment 2014. One of the most key outcomes is the regulation relating to restrictions to “sham” nominee transactions.

1. What is a nominee transaction?

Simply stated, a common structure of a nominee transaction consists of a foreign investor and a local nominee. Due to certain legal limitations, the foreign investor cannot carry out the investment tracsaction to a Vietnamese company by himself. Thus, he will appoint (or hire) a Vietnamese person (or entities) to hold the investor’s invesment in the Vietnamese company. The real owner of the investment is still the foreign investor. In major investment deal, a nominee transaction may be strutured in many stages by numberous different agreements. 

2. Why do foreign investors determine a nominee transaction?

In current years, nominee transactions are increasingly popular. Foreign investors pay attention to and consider choosing this transaction to invest in Viet Nam in some following sectors:

(i) For business lines like foreign currency payment service, e-commerce exchange, pawn service, etc., These services have not been opened to foreign investors under the Vietnam’s WTO commitments. In general, foreign investors may implement such business lines because these sectors are not listed as prohibited business lines. However, foreign investors have to take more time to prepare and explain to the competent state authorities in the approval procedure. Based on the explanation, the competent state authorities may approve or refuses on case by case basis with unpredictable outcomes.

(ii) For business lines in which the foreign ownership ratio is limited or which require foreign investors to create a join venture with Vietnamese partners like logistic services, travelling service, motion picture production and distribution,etc. 

(iii) For conditional business lines applied for foreign-invested economic organizations. For example, when a foreign-invested economic organization wishes to carry out retail activities, they must obtain for a business license or even a establishment license of the retail outlet for each retail outlet opened in accordance to Decree 09/2018/ND-CP. As a result, the expansion of investment activities may face many burdens. 

3. Current regulations relating to “sham” nominee transactions?

The new LOI allows the investment registration authority to terminate the investment project if the investor conducted the investment activities on the basis of an sham civil transaction under the Civil Code 2015.  It can be seen that, under the new LOI, the nominee investment transactions closely link to the sham civil transaction under the Civil Code 2015. The investment registration authority may make a decision to terminate the investment project and withdraw the investment registration certificate issued for such investment project. Accordingly, the investment registration authority, together with the court, has powers to terminate the investment project. 

However, the new LOI does not provide detailed criteria to consider if a nominee transaction is a sham civil transaction. Instead, it refers to the regulations on sham  Civil Code instead. Therefore, it remains ambiguous for relevant parties about how a sham investment transaction is deemed to be a sham transaction.

A sham transaction under the Civil Code 2015 is the transaction aiming at hidening another transaction. Under civil laws, there is only the court that has the power to declare a transaction invalid. Thus, the foreign investors may face risks that the sham nominee transaction may be invalidated by the court if there is any dispute between foreign investors and local nominees arising. The foreign investors may only receive the funded amount transferred to the local nominees while the investment project’s properties will belong to the local nominees. On the other hand, a sha nominee transaction structured under the loan transaction is also the subject to be monitored by the state bank.

If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.

This article is for general information only and is not a substitute for legal advice.