Vietnam - Land Use Rights Limitations for Foreigners – Outlook On The European Union Vietnam Free Trade Agreement (EVFTA).
Legal - Asia Pacific - Vietnam - Construction & Real Estate
9 February, 2017
The real estate market in Vietnam has constantly been growing since the Law on Real Estate Business 2014 (LREB) and the Law on Residential Housing (LRH) were adopted. Initial barriers for foreign investors were partially removed with the new legislations and Decree No. 76/2015/ND-CP guiding the LREB dated 10 September 2015 and Decree No. 99/2015/ND-CP guiding the LRH dated 20 October 2015.
Nevertheless, enterprises’ expectations concerning access to properties and business development are not entirely satisfied.
Restriction on sources of capital
For residential housing projects, only the sources of capital enumerated in Article 69 of the LRH or Article 19 of Decree 99 are considered legitimate such as loans from Social Policy Bank, credit institutions and financial institutions currently operating in Vietnam or capital contribution, cooperation in investment, business cooperation, joint-venture and affiliation of organizations. As there is no mention of overseas capital except for the capital owned by the developer, raising capital then appears to be more complicated for real estate developers. Therefore, as there is no need to limit the developers’ ability to raise capital for legitimate sources, the Government adopt restrictive measures for illegitimate sources only and control the legitimacy of sources. Opening capital to off-shore credit institutions and non-credit institutions would greatly improve access to the real estate market.
An uncertainty remains as to define foreign invested enterprises (FIEs). Indeed, neither in the LREB nor in Decree 76 do we find a provision explaining the notion of FIEs. But the Law on Land (Land Law) 2013 states that FIEs are joint venture enterprises and enterprises wholly or partly owned by a foreign company without detailing ownership percentage. Under the Law on Investment 2014, the status of economic organization with foreign capital implies a foreign ownership of 51% or more. Therefore some details must be given as whether enterprises with less than 51% of foreign ownership are regarded as local investors or not.
Considering the lack of details, we can understand that any percentage of foreign ownership prevents enterprises to be local ones. This issue is of great importance for foreign investment transactions in the real estate market and must be clarified promptly.
The difference of treatment between foreign and Vietnamese real estate developers can be found in several aspects. First of all, Article 11 of the LREB does not permit foreign developers to transfer their land use right into creating plots for sale whereas Vietnamese developers are permitted. Article 57 of the same law limits FIEs to collect a maximum of 50% of the value of sale and purchase contracts while Vietnamese companies are entitled to 70% of the value. Finally, Article 10 of the LREB prohibits foreign developers to sell, lease or offer a lease-purchase and only opens the possibility of sub-leasing.
This form of business is, however, open to Vietnamese developers.
Those differences between local and foreign developers should be removed as they create unfair competition and restrain the real estate sector in Vietnam.
Restrictions on land use right of foreign organizations and individuals
The LREB authorizes organizations and individuals to lease properties for use and to purchase or lease-purchase residential houses in accordance with the LRH. Article 160 of the LRH repeats the authorization but adds a few conditions.
Organizations who want to own residential houses, must establish and maintain their presence in Vietnam although foreign individuals only need to have a valid passport affixed with entry stamp. The stricter requirement for foreign organizations should be up-lifted as it is unnecessary to fix conditions to own residential houses to organizations and not to individuals.
A very concerning contradiction must be solved as it deals with notarization of sale and purchase contracts. Article 93.3(b) of the LRH allows contracts for residential housing signed with a real estate business enterprise not to be notarized.
However, Article 122 of the LRH stipulates that all contracts in relation to sale and purchase of residential houses must be certified or notarized. We could then understand that sale and purchase contracts for residential housing signed with real estate business should be notarized. However, Article 17.2 of the LREB states that real estate business contracts do not have to be notarized except contracts signed between two individuals/households.
A clearer provision should establish that notarization is not required in case a real estate business enterprise is a party to the sale and purchase contracts.
Limitation on foreigners’ purchase and ownership of real estate
Foreign individual and organizations are allowed to own a maximum of 250 individual residential houses in a ward according to Article 161.2(a) of the LRH. However, Article 76.4 of Decree 99 guiding the LRH, limits foreign individuals or organizations to possess maximum 10% of individual housing in each residential housing project. The Decree provision is then not consistent with the LRH.
In addition, pursuant to Article 159.2(b) of the LRH, foreign individuals and organizations are only prohibited from purchasing houses in national defense and security area. But pursuant to Article 75 of Decree 99, the prohibition is extended to all areas where foreigners are restricted from residing or travelling as provided under the Law on Residence and Travel. Once again, the Decree is restricting the conditions under the LRH.
In addition, Articles 77.1(b) and 77.2(b) provide additional restriction when granting the possibility of one-time expansion of residential houses owned by foreigners. Such restriction can have a serious impact on business development of developers and in the meantime on Vietnam’s competitiveness. Unlimited extensions should be granted with the exception of national defense and security areas only.
Another issue which causes many difficulties for developers concerns capital reserve. Indeed, Article 108.1(b) of the LREB requires that developers contribute 2% of apartment’s value for unsold apartments at the time of commissioning. Value is calculated based on the highest selling price of an apartment in the building regardless of the differences between the apartment of reference and the commissioned one. The requirement is not practical and should therefore be amended to refer to an apartment of the same category. Furthermore, establishing a mechanism to deal with such payments when apartments are sold at a later stage is necessary for the efficiency of the requirement.
Outlook on the EVFTA
Signed on December 2nd 2015 and expected to enter into force by 2017, the EVFTA offers great opportunity to access new markets for both the EU and Vietnam. Not only Vietnam will foster more foreign investors but also welcome more enterprises in order to develop the European-Vietnamese Cooperation.
The Vietnamese Government has already started to amend the legislation with the Law on Enterprise 2015 and the Law on Investment 2014. Yet some further changes must still be made and we can expect the influence of the EU on opening the real estate market to facilitate enterprises’ establishment.
Most important issues
- Requirements of sources of capital are too restricted and prevent real estate developers from easily raising capital. In addition, the definition of foreign invested enterprise is not clear enough to determine the sources and the nature of transactions in the sector.
- Vietnamese and foreign developers are treated differently which creates unfair competition and restrains the real estate sector.
- The contradiction that sale and purchase contracts signed with real estate business enterprise have to be authorized must be up-lifted.
- Restrictions on foreigners’ purchase and ownership rights regarding the percentage of possession, the restricted areas and the possibility of extension are not consistent in the whole Vietnamese legislation and should be standardized.
For further information, please contact:
Oliver Massmann, Partner, Duane Morris