Common Legal Pitfalls in Establishing Foreign-Invested Companies in Ho Chi Minh City

Establishing a foreign-invested enterprise (FIE) in Ho Chi Minh City is a strategic investment decision for many international individuals and organizations seeking to penetrate the Vietnamese market. However, this process requires strict compliance with legal regulations, not only at the central level but also regarding local administrative specificities. In practice, many investors encounter serious errors during the document preparation and procedural implementation phases, directly impacting the timeline, legitimacy, and long-term legal standing of the business. This article analyzes several common mistakes from a legal perspective

Selecting Business Lines Without Assessing Market Access Conditions

A frequent error is choosing business lines based solely on market demand without evaluating their legality under Vietnamese law and international treaties. In many cases, investors register for sectors restricted to foreign investment without meeting specific requirements, such as:

• Mandatory joint ventures with Vietnamese partners.

• Requirements for international operational experience.

• Proof of specialized financial or business capacity.

Sectors such as logistics, education, advertising, e-commerce, retail distribution, and real estate all have specific investment conditions. Failure to identify these correctly may result in the licensing authority refusing to issue the Investment Registration Certificate (IRC) or suspending operations later for violating WTO commitments or bilateral treaties.

Overlooking “Conditional” Business Lines

In Vietnam, “conditional” business lines require investors to meet specific criteria set by specialized laws and guiding decrees. Failing to research these requirements leads to stalled licensing and wasted costs.

• Language Centers: Under Decree 86/2018/ND-CP, investors must meet strict standards regarding charter capital, facilities, investment per student, curriculum, and teaching staff.

• Retail Distribution: Foreign investors must obtain a Retail Business License and satisfy conditions stipulated in Decree 09/2018/ND-CP.

• Hazardous Waste Treatment: Even with an IRC and Enterprise Registration Certificate (ERC), many fail at the operational stage because they do not meet specialized zoning and Environmental Impact Assessment (EIA) requirements.

Miscalculating Investment Value and Capital Ratios

The value of contributed capital is not just a financial commitment; it dictates post-establishment procedures, particularly for Work Permits and Temporary Residence Cards (TRC). For individual investors, higher capital contributions typically facilitate “key investor” status.

Furthermore, ownership limits vary by sector. While some fields allow 100% foreign ownership, others limit foreign stakes or mandate joint ventures. Incorrectly determining these ratios can lead to immediate application rejection or the inability to deploy the project.

Violating Capital Contribution Deadlines

Under the Law on Enterprises, members must contribute capital within 90 days from the issuance date of the ERC. For FIEs, this capital must be transferred through a Direct Investment Capital Account (DICA) opened at a bank in Vietnam.

Many investors fail to follow this specific banking procedure, leading to “overdue” status despite having funds. Consequences include:

• Administrative fines.

• Negative records in the national business registration system.

• Requirements to reduce capital or potential revocation of the investment license.

Selecting Inappropriate Head Office Locations

A business address is a mandatory component of the investment file. However, using residential apartments (condos), private houses in strictly residential zones, or “virtual addresses” without proper legal standing is a common mistake.

According to the Law on Housing and HCMC local regulations, residential units cannot be used as commercial headquarters. During inspections, businesses may be fined, forced to relocate, or denied sub-licenses (business licenses) due to an invalid address.

Complexities in Explaining Investment Conditions

Although the Law on Investment centralizes certain appraisals, in practice, local HCMC departments (Sở chuyên ngành) often require additional “explanatory memorandums.” This can extend processing times and create unforeseen technical requirements, especially for projects involving high technology or sensitive conditional sectors.

Using Vietnamese Nominees (Proxy Representation)

To bypass complex procedures or market access restrictions, some foreign investors ask Vietnamese individuals to stand as the “nominal” owner. This is a prohibited act under Vietnamese law and carries immense risk:

• For the Investor: You have no legal ownership rights and are unprotected during disputes. Management depends entirely on the goodwill of the nominee.

• For the Nominee: They bear full legal and debt liability for the business.

• Legal Standing: These arrangements can be declared null and void, leading to the loss of the entire investment.

Contact Us

To ensure your investment in Vietnam is legally sound and optimized, contact us for expert assistance:

• Phone: 0901 3333 41

• Email: info@bkclaw.vn

• District 1 Office: 9th Floor, Diamond Plaza, 34 Le Duan, Ben Nghe Ward, Dist. 1, HCMC.

• Binh Tan Office: 41 Ten Lua, An Lac Ward, Binh Tan Dist., HCMC.

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