LAND LAW

Instead of obtaining the LUR in the form of capital contributions from the local partner to a JVC, a foreign investor may consider leasing the land directly from the Government after he/she establishes an FIC in Vietnam. This trend is becoming increasingly preferable to foreign investors given discrepancies among foreign and local partners in JVCs in recent years. Difficuties experienced by foreign investors in this option is that is not easy to find land in a desirable location or have the relevant lessor accept the lease (as opposed to the form of capital contributions).


LAND LAW

(April 2007 Update)


On 6 November 2003, the National Assembly of Vietnam passed the Land Law (the "Land Law"), effective as of 1 July 2004. The Government issued Decree 181 of the Government dated 29 October 2004 for providing guidance on the Land Law ("Decree 181”), as amended by Decree 17 dated 27 January 2006 ("Decree 17"). As those laws are not currently clear on a number of aspects, further guidelines are being drafted by the Government and relevant ministries.

1. Land Use Rights and Land Use Right Certificate

Private ownership of land is not permitted in Vietnam and the State/Government holds all ownership powers. However, the laws of Vietnam also recognise ownership deriving from holding Land Use Rights (“LUR”).

The Land Use Right Certificate ("LURC") is similar to a deed in most countries, however some differences and uncertainties should be noted. The LURC, unlike a deed, is not a certificate of ownership of land, but a certificate of ownership of the LUR. Unlike the guaranteed indefeasible deed, the cornerstone of land law in many developed legal systems, it is not clear how strong a LURC is in the face of challenges.

While the Land Law allows domestic companies to purchase the LUR from others, foreign investors are not allowed to do so. Foreign investors in Vietnam however could obtain the LUR (i) by way of capital contribution in the form of the LUR value by the local partner to a JVC or (ii) by way of land leased directly from certain permitted lessors, including the State.

LURC for Apartment Owners

LURs of the land an apartment is built on are owned jointly by the building's unit owners. Decree 181 sets out the procedure for issuing LURs to apartment owners as follows:

1.

the initial LUR certificate is issued to the developer;
2.

when the developer sells units in a building, the apartment owner receives an LURC stating the land is jointly owned and the developer's LURC is amended to reflect the joint ownership;
3.

separate LURCs may be issued to the developer or management company for common areas used by one or more apartment buildings; and
4.

when a purchaser receives an LURC for long-term use from a foreign-invested apartment, the investor must pay the difference between the amount of land already paid to the State and the land usage fee calculated by the relevant People's Committee at the time of payment.

2. Land Contribution by Local Parties to Joint Ventures

It is a matter of practice that Joint Ventures in Vietnam have been developed in which local partners contribute their portion of capital in the form of the LUR value (in this case, the land payment must not be sourced directly from the State budget). The reason behind this practice is that the relevant land, which is often located in desirable areas, have been in use by local entities (usually State-owned enterprises). Foreign investors can not obtain that land without jointly investing with the existing local user. In some practices, the foreign investors advance the land usage fees to the local party in the form of a foreign loan in order for the local party to pay the fees to the State.

Under the current Land Law, the Vietnamese party to a Joint Venture is able to make capital contributions in the form of the LUR only after it has received a land "allocation," rather than a land "lease" from the People's Committee of the relevant province or city and has paid in full the land usage fee for the "allocation" of the land. In the case where the land usage fee payment is deferred, the contribution of the LUR into foreign investment projects is still permissible as far as the deferment is allowed in writing by the relevant People's Committee (Article 98.1(b) of Decree 181).

There is, however, one exception under the Land Law where a Vietnamese party which "leases" land (as opposed to the "allocation") from the Government can make its contribution in the form of the LUR to a Joint Venture. This exception requires the two following conditions to be satisfied in accordance with Article 111.1(d) of the Land Law:

*

the Vietnamese Party has leased the relevant land before the effective date of the new Land Law, i.e. 1 July 2004; and
*

the land rentals have been prepaid in full for the whole lease term or for the majority of the term and the remaining prepaid term is of at least 5 years.

After the Joint Venture is incorporated as a result of the issuance of the investment certificate by the Licensing Authority, the LURC will be issued to and in the name of the Joint Venture.

Regarding the valuation of the LUR for the capital contribution into a Joint Venture, it appears that the current regime allows the Vietnamese party to negotiate with the foreign party on the value of the contributed LUR based on the prevailing market value. The land usage fee tariff schedule issued by the relevant provincial People's Committee will be used to determine the land usage fee payable by a Vietnamese party.

3. Land Lease

Instead of obtaining the LUR in the form of capital contributions from the local partner to a Joint Venture, a foreign investor may consider leasing the land directly from the Government after he/she establishes an FIC in Vietnam. This trend is becoming increasingly preferable to foreign investors given discrepancies among foreign and local partners in JVCs in recent years. Difficulties experienced by foreign investors are that is not easy to find land in a desirable location or have the relevant lessor accept the lease (as opposed to the form of capital contributions).

Lessors permitted to lease land to FICs

Previously, FICs in Vietnam could only lease land from the Government or sublease land from an infrastructure developer. In addition to these conventional lessors, Articles 93.3 of the current Land Law has allowed FICs, which are set up by foreign investors in Vietnam, to lease land from:

*

Vietnamese economic organisations, including State owned companies, private joint stock companies and limited liability companies;
*

overseas Vietnamese citizens; or
*

an existing FIC which leases land from the Government and develops infrastructure facilities on the land, provided that this existing FIC has paid the land rental for the whole land lease term.

It is noted that the Land Law only allows the lessor who has obtained the land under the "allocation" regime to lease his or her land to FICs. There is only one exception where the land obtained by the lessor under the "lease" regime can be subleased to FICs in accordance with Article 111.1(dd) of the Land Law. Under this regime, if the landlord has leased the relevant land before the effective date of the new Land Law, i.e. 1 July 2004, and the land rentals have been prepaid in full for the whole lease term or for the majority of the term so that the remaining prepaid term is of at least 5 years, the land can be leased to FICs.

Although the Land Law allows FICs to lease land from private lessors (such as private joint stock or limited liability companies), Decree 181 does not have any provision stipulating the procedure for such lease. Except for leases within IZs and EPZs, it is not certain as to specific procedures for FICs to lease land from domestic companies or from other existing foreign invested projects.

Lease term

The lease term must be consistent with the duration of the approved project provided that it must not exceed 50 years or, in some special circumstances, 70 years.
The extension of the lease term may be allowed by the Government upon expiry if the lessee wants to continue to use the land, provided that:

*

the lessee has complied with the land regulations during its land using period; and
*

the use of land is consistent with the approved land plan.

Foreign investors wishing to extend their lease term must obtain approval to do so under Decree 181. Foreign land users must apply for an extension six months before expiration of their LURs, and include in their applications their amended business or production plans approved by the relevant authorities. Though an investment certificate is extended, there is no corresponding guarantee that a LUR will be extended as well and extension of the LUR will still be subject to the discretion of the Government. It is not however clear what would happen to the assets owned by a land user in the event the lease term is not extended.

Rights of foreign investors to the land leased

The LUR of foreign investors shall vary depending on the payment arrangement of land rentals. Where land is being leased from the Government, the Land Law contemplates two payment arrangements of land rental:

*

annual rental payment (the “Annual Payment”); and
*

one-off payment of rental for the entire lease term (the “One-off Payment”).

Under a land lease for the Annual Payment, the rights of FICs are basically the same as the previous land laws: the FIC could use the land only and is not allowed to transfer, sub-lease or mortgage the LUR.

In addition to the LUR given under the Annual Payment regime, FICs adopting the One-off Payment regime have additional rights as follows:

*

rights to transfer LURs and assets attached to the land (foreign investors with an Annual Payment plan may only transfer assets attached to the land);
*

rights to sublease land and assets attached to the land;
*

rights to contribute LURs and assets attached to the land as capital of joint ventures;
*

rights to mortgage or guarantee LURs and assets to credit institutions in Vietnam during the term of the lease;

Another additional right of residential housing developers is to sell or lease houses to others (foreign investors with Annual Payment plans may only lease houses to residents). However, under Article 2.8 of Decree 17, with respect to urban land, the transfer of the LUR to households and individuals in the form of sales of the project site without residential houses constructed thereon would be prohibited. That project site however can be transferred to a corporate entity for the latter to continue the project. This transfer is subject to one condition, i.e. the construction of the completed infrastructure on the site has been completed in accordance with the approved project.

One drawback regarding rights for foreign investors opting to make a lump sum payment is that upfront cost may not make economic sense.

4. Land Price

Land Price is determined in three ways:

1.

by the relevant People’s Committee;
2.

via auction; or
3.

by land users upon transfer/lease, sublease of LURs or contribution of LURs as capital.

The State determines the land price based on the actual value of the land under normal circumstances. If there is a large discrepancy between their calculations compared to the market price the State must adjust the price. The provincial People's Committee issues an official land price for each specific type of land on the first of January every year. The official land price must not be 20% higher than the maximum price or 20% lower than the minimum price in the land price framework provided by law. The State determines the price for the purposes of:

1.

assessing land use tax, income tax for the transfer of LURs, land use registration fees, compensation when LURs are withdrawn by the State, penalties for those that violate the Land Law causing harm to the State, and land rentals;
2.

putting a project that involves land out to tender; and
3.

calculating LUR value when land is allocated without a land usage fee.

5. Lease of Commercial Property

As an alternative to leasing a piece of land, service or software companies may consider leasing an office in a commercial building. The procedure for the lease of such an office is quite simple and is not subject to any approval by Vietnamese authorities.

Another alternative is to lease an office or factory from another company located in an IZ or EPZ in accordance with Official Letter 4738 of the MPI dated 15 July 2005.

6. Notarisation of Land Contracts

All documents related to land must be notarised. This could cause delays and increase the complexity of some land transactions since notarisation can be a time-consuming process. When a notary reviews an agreement he may require additional changes to be made, and require the parties to submit additional paperwork for review.

7. Land Clearance

Under the old land law, foreign investors had to pay compensation for and site clearance of land withdrawn by the State for foreign investors' use. This was a heavy burden making land prices in Vietnam extremely high since foreign investors would pay for land twice (first for land clearance, and second for land rental). Further, unsatisfactory compensation provided for by the old law led to claims from the land users and unnecessary delays in the implementation of projects involving foreign investors.

This has now changed. Under the current Land Law, foreign organisations and individuals, and overseas Vietnamese investing in Vietnam do not have to pay compensation and assistance for the resettlement of residents. Land recovery by the State is quite limited for economic development, and will only be recovered in certain special cases.

The cases are for IZs, HTZs, economic zones, Group A projects and for 100% FOCs which cannot locate in IZs. The State, under Decree 197 implementing the Land Law, must take charge of site clearance and compensation to displaced land users, when withdrawing land for use by foreign organisations and individuals and overseas Vietnamese. When the State clears land for domestic parties, they are still responsible for negotiating the clearance of the current land users. It is not particularly clear how this provision applies to a JVC, though in practice, when a JVC falls under one of the special cases where clearance is available, the State will recover land and compensate land users as stated above.

8. Withdrawal of Land from Foreign Investors

The Land Law grants power to the Government to reclaim land leased or allocated to parties, including foreign investors. Among the circumstances whereby land will be withdrawn from foreign investors are where:

1.

the land is used in an inefficient way or incorrect purpose;
2.

the land user intentionally destroys the land;
3.

the land user intentionally fails to discharge financial obligations to the State;
4.

the land has not been used for 12 consecutive months from the date of handover of the land; or
5.

the land-using schedule of the project has been delayed for more than 24 months as opposed to the progress originally committed by the investor under the project documentation.

It should be noted that under the current investment law, a "severe breach" is grounds for withdrawal of an investment certificate. A breach which is grounds for withdrawal of land should be considered a "severe breach", and would also be grounds for withdrawal of an investment certificate.

Refund for Assets and Recovered Property

When the State withdraws property for the reasons stated above, the land user is entitled to a refund equal to or less than the remaining value, set by a Valuation Council, of the capital invested on the land, including land usage fees, land rent, and assets. If the land is further allocated or leased to other users, the defaulting party will receive an amount equal to the remaining value. If the land is allocated or leased after auction, the defaulting user will receive an amount equal to the net auction price or remaining value, whichever is lower.

9. Mortgage over Land Use Rights

While private ownership of land is not permitted, Vietnamese law expressly recognises mortgages over LURs in favour of credit institutions in Vietnam, including foreign bank branches in Vietnam. Unfortunately, Vietnamese laws do not have any reference to the creation of security interests over land or land use rights in favour of offshore entities and this is usually understood to mean that LURs cannot be mortgaged in favour of offshore financial institutions.

The laws of Vietnam are not entirely clear regarding whether an onshore security agent is able to take a mortgage over LURs for and on behalf of offshore finance parties. In practice, this agency arrangement has been adopted with specific approval from the Government for at least one recent financing transaction.

To be eligible for giving a mortgage over LURs, it should be noted again that a foreign invested lessee is required to pay land rental in advance for the whole period of the land lease. A mortgage over LURs is also available in the event the lease was entered into before 1 July 2004 and the prepayment of land rental has been made for at least 5 years.

In practical terms, there are limits to the value of the entitlement to mortgage land use rights due to the absence of reliable enforcement procedures. In addition, the comparatively short term of a land lease (maximum 50 years, or 70 in limited circumstances) means that it does not constitute a particularly attractive form of security for mortgage purposes, where internationally a longer term (i.e. 99 years) is the norm.

Read More......