Entry opportunities for investing in Vietnam’s energy market

By Wang Jihong and Liu Ying, Zhong Lun Law Firm

Vietnam is a more active market for new energy investment in Southeast Asia. In recent years, the government of Vietnam has attached great importance to developing a green economy, encouraging enterprises to accelerate their green transformation and supporting the development and utilisation of new energy sources.

In November 2021, the prime minister of Vietnam pledged at the UN Climate Change Conference in Glasgow the goal of net zero CO2 emissions by 2050. According to the Vietnam Energy Outlook Report 2021, released by the Vietnam Electricity and Renewable Energy Authority on 2 June 2022, renewable energy sources must contribute more than 70% of the electricity demand in Vietnam’s electricity system by 2050 to achieve net zero CO2 emissions, for which Vietnam has introduced a series of incentives and policies.

Wang Jihong, Zhong Lun Law Firm
Wang Jihong
Zhong Lun Law Firm

Vietnam encourages foreign investment in photovoltaic (PV) and wind power projects. On 26 March 2021, the Vietnamese government issued Decree No.31, which promulgated the Catalogue of Restricted Industries for Foreign Investment (the foreign investment negative list) covering 84 industries including 25 prohibited industries for foreign investment and 59 industries allowed for foreign investment, subject to conditions. Solar and wind power projects (except offshore wind power projects) are listed as sectors where Vietnam encourages foreign investment, while hydropower, offshore wind power and nuclear energy are classified as conditional access sectors.

Vietnamese law does not restrict foreign ownership of renewable energy projects up to a maximum of 100% of the foreign investor’s shareholding in the project company. However, since the business category “power generation” registered by the solar and wind power project company includes the sub-category of offshore wind power, which includes offshore wind business, therefore no matter such project companies actually engage in offshore wind business, and the foreign investors who acquire stakes from the shareholders of such project companies will therefore be subject to M&A approval in certain circumstances. In particular, M&A approval is mandatory if the foreign investor’s acquisition of equity in a local Vietnamese company involves any of the following circumstances:

(1) The transaction results in an increase in the foreign ownership of the target company registering business lines for which the market access is conditional for foreign investors;

(2) The transaction results in (a) the foreign ownership in the target company, which previously constituted a 50% or below stake in the target company, exceeding 50%; or (b) any increase in the foreign ownership where the existing foreign ownership in the target company has already exceeded 50%; or

(3) The target company has land use right certificates in respect of land lots located in border areas, coastal areas, or areas affecting national defence or security.

In practice, some provinces in Vietnam may impose restrictions on the transfer of equity/projects before the Commercial Operation Date (COD) for project stability, such as requiring no change of project investors before the COD. Thus, during the operation of a specific project, confirmation of the project’s approval documents will also be required.

Liu Ying, Zhong Lun Law Firm
Liu Ying
Zhong Lun Law Firm

Incentives and supportive policies. Renewable energy is an encouraged investment sector, and Vietnamese law provides tax breaks and other incentives for such projects in terms of corporate income tax, import tax, land rent and financing.

Corporate income tax. The corporate enjoys a preferential 10% income tax rate (the general rate is 20%) for a 15-year period, extendable to 30 years under certain exceptional circumstances with the approval of the prime minister, and the preferential corporate income tax rate is applicable from the first year of earning income from the project.

The first four years are exempt from corporate income tax , followed by a 50% income tax reduction for the following nine years. This tax exemption or reduction shall apply continuously from the first year the project company derives taxable income (after deduction of all legal costs and expenses) from the project or, if no taxable income is available for the first three years, then from the fourth year in which the revenue generated from the project (whichever occurs first).

Import tax. The import tariffs are exempted on goods used to form the fixed assets of the project.

Land rentals. Depending on the project’s location, land rent will be exempted for three to 15 years, or for the entire period of the investment. If a project site is rent-free, the land is disallowed to secure project financing.

Project Loan. The project company will be entitled to a loan not exceeding 70% of the total project investment from the Vietnam Development Bank (VDB). The VDB’s preferential loan rate is the weighted average interest rate of a five-year government-backed bond issued by the VDB. However, in practice, it has been difficult for the project company to take advantage of this incentive due to the limited funds available from the VDB.

Investment stability protection. Investors also enjoy investment protection in the event of a change in the law. If the new law provides a more favourable investment incentive, the investor has the right to benefit from the new policy for the remaining preferential period of the project. If the new policy is less favourable, investors can stay the same except for the projects that have obtained an investment registration certificate (IRC), investment certificate or in-principal approval document (in-principal approval) before The Investment Act 2020 comes into force.

With a long accumulation of experience, Chinese enterprises have a strong competitive edge in the Vietnamese power construction and investment market, but thermal power plants dominated in the past. Given the general trend of green transformation, Chinese enterprises are now actively participating in investment activities in Vietnam’s new energy market. With both opportunities and challenges, enterprises need to take advantage of the new energy sector’s preferential policies and be mindful of the project’s risks to ensure the investment is safe and steady.

Wang Jihong and Liu Ying are the partners at Zhong Lun Law Firm

Zhong Lun Law Firm

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