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Vietnam, with its strategic geographic location, large population, and rapidly growing economy, has become a potential investment destination for foreign enterprises. Beyond its diverse sectors and economic fields with high potential, Vietnam offers numerous investment incentives that can attract and facilitate the expansion of foreign investors. This article provides a general overview of the sectors, fields, and areas in which Vietnam offers investment incentives for foreign enterprises and discusses the challenges Vietnam faces in 2024 to maintain its appeal to oversea investment.
Investment Incentives in Vietnam
To attract foreign capital, Vietnam has introduced a range of investment incentives as stipulated in the Investment Law 2020 No. 61/2020/QH14 (“Investment Law 2020”), including incentives for specific sectors and areas detailed in Decree 31/2021/ND-CP (“Decree 31”), which provides detailed regulations and guidelines for the implementation of the Investment Law 2020, effective from March 26, 2021.
The list of sectors eligible for investment incentives and special investment incentives is outlined in Appendix II of Decree 31. The list of areas (geographical locations) eligible for investment incentives is detailed in Appendix III of Decree 31.
The Necessity of Investment Incentives for Foreign Investors
Currently, Vietnamese law does not have a unified definition of investment incentives, even though this term is frequently used in legal documents, such as the Investment Law 2005 No. 59/2005/QH11, Investment Law 2014 No. 67/2014/QH13, and Investment Law 2020, along with related decrees and guiding documents.
However, the forms of investment incentives are detailed in these documents. This is crucial in helping foreign investors understand and carry out their investments in Vietnam.
In essence, investment incentives are regulations issued by Vietnam to create favorable conditions, manifested as practical benefits for both domestic and foreign investors. This is to attract investment capital from these investors into Vietnam, especially in the context of competition for investment incentives among multiple economies.
Investment incentives are established based on a harmonious balance of interests between the Vietnamese government, the socio-economic environment, and investors. This is to facilitate economic restructuring in line with Vietnam’s economic development policies and strategies, most notably through the inflow of investment capital.
Establishing and providing investment incentives for foreign investors is a critical strategy in a country’s economic policy. The necessity of foreign investment capital becomes even more apparent in developing countries like Vietnam, creating essential liquidity for the economy to operate.
With foreign direct investment (FDI) capital, Vietnamese enterprises can operate, employ, and pay workers while providing goods and services to keep society functioning, thereby ensuring social stability in line with the government’s objectives. During times when FDI capital is disrupted due to international fluctuations or other causes, such as the Covid-19 pandemic, Vietnamese citizens are the most affected, facing reduced working hours, fewer overtime opportunities, and even layoffs if the shortage of orders persists.
In difficult times, Vietnamese enterprises that rely too heavily on foreign investment capital will struggle to manage when the capital flow is disrupted. This is a challenge that Vietnam and all other countries worldwide face as international trade flourishes, making the dependence on importing raw materials from other countries increasingly common.
However, unlike developed countries with better capabilities to respond to unpredictable changes, Vietnamese enterprises are often passive and overly reliant on oversea investment capital, leading to insufficient resources and the ability to respond to significant fluctuations.
Nevertheless, comparing the drawbacks of not relying on FDI capital to the drawbacks of proactively developing in the international trade market, attracting and effectively utilizing foreign investment capital still brings greater benefits.
In the Asia-Pacific region, where competition among countries to attract investment capital is becoming increasingly fierce, the issuance of competitive, detailed regulations on investment incentives, special investment incentives, and investment-preferred areas is essential.
Specially Incentivized Sectors for Foreign Enterprises in Vietnam
Section A of Appendix II of Decree 31/2021/ND-CP specifies 32 specially incentivized sectors, including 8 sectors in high technology, information technology, and supporting industries; 8 sectors in agriculture; 6 sectors in environmental protection and infrastructure construction; and 10 sectors in culture, society, sports, and health. Specifically:
HIGH TECHNOLOGY, INFORMATION TECHNOLOGY, SUPPORTING INDUSTRY
- Application of high technology listed in the High Technology List.
- Production of products listed in the High Technology Products List.
- Production of products listed in the Supporting Industry Products List.
- High-tech incubation, high-tech enterprise incubation; …
- Production of software products, digital content products, key information technology products, and software services according to the law on information technology; …
AGRICULTURE
- Afforestation, care, nurturing, protection, and development of forests, including production forests on barren lands, hills, and mountains, large timber plantations, and conversion of small timber plantations to large timber plantations; …
- Aquaculture, processing, and preservation of agricultural, forestry, and fishery products, and processing of non-wood forest products.
- Production, breeding, and hybridization of crop varieties, livestock breeds, forestry plant varieties, and aquaculture varieties, and development of high-tech forestry plant varieties.
- Production, extraction, and refining of salt.
- Offshore fishing combined with the application of advanced fishing gear methods; fishery logistics services; …
ENVIRONMENTAL PROTECTION, INFRASTRUCTURE CONSTRUCTION
- Collection, treatment, recycling, and reuse of concentrated waste.
- Construction and operation of infrastructure in industrial zones, export processing zones, high-tech parks, and functional zones within economic zones.
- Investment in the development of water plants, power plants, and water supply and drainage systems; …
- Development of public passenger transportation in urban areas.
- Investment in the construction, management, and operation of rural markets.
CULTURE, SOCIETY, SPORTS, HEALTHCARE
- Construction of social housing and resettlement housing.
- Investment in and operation of facilities for disease prevention and control.
- Scientific research on pharmaceutical technology, biotechnology for the production of new medicines, new veterinary medicines, vaccines, and biological products used in veterinary medicine.
- Production of pharmaceutical raw materials, essential medicines, medicines for the prevention and treatment of social diseases, vaccines, medical biological products, traditional medicines, and oriental medicines; …
- Investment in Methadone production facilities.
Priority Sectors for Oversea Investment in Vietnam
Section B of Appendix II of Decree 31 outlines 67 sectors eligible for investment incentives, including 20 sectors in science and technology, electronics, mechanics, material production, and information technology; 11 sectors in agriculture; 23 sectors in environmental protection and infrastructure construction; 9 sectors in education, culture, society, sports, and healthcare, and 4 other sectors. Specifically:
SCIENCE AND TECHNOLOGY, ELECTRONICS, MECHANICS, MATERIAL PRODUCTION, INFORMATION TECHNOLOGY
- Investment in research and development (R&D).
- Production of steel billets from iron ore, high-grade steel, and alloys.
- Production of coke, activated carbon.
- Production of energy-saving products.
- Production of petrochemicals, pharmaceuticals, basic chemicals, and rubber.
AGRICULTURE
- Cultivation, harvesting, and processing of medicinal plants; protection and conservation of genetic resources and rare, endemic medicinal species.
- Production and processing of animal feed and aquaculture feed.
- Scientific and technical services in crop cultivation, livestock breeding, aquaculture, and plant and animal protection.
- Construction of new or upgraded slaughterhouses; industrial-scale processing of poultry and livestock, wholesale markets, livestock auction houses, and processing facilities.
- Development of concentrated raw material areas serving the processing industry.
ENVIRONMENTAL PROTECTION, INFRASTRUCTURE CONSTRUCTION
- Construction and development of infrastructure in industrial clusters.
- Construction of worker housing in industrial zones, export processing zones, high-tech parks, and economic zones; …
- Response to oil spills, mountain landslides, dike breaches, riverbank and coastline erosion, dam and reservoir failures, and other environmental incidents; …
- Investment in and operation of exhibition centers, logistics centers, inland ports, warehouses, supermarkets, and shopping centers.
- Production and supply of environmental monitoring equipment, on-site wastewater treatment equipment, and environmentally friendly products and services certified with the Vietnam Eco-label according to the law on environmental protection.
EDUCATION, CULTURE, SOCIETY, SPORTS, HEALTHCARE
- Investment in and operation of infrastructure in educational and vocational training institutions; …
- Production of medical equipment, construction of pharmaceutical storage facilities, and reserves of medicines for disaster, catastrophe, and dangerous epidemic response.
- Production of raw materials for veterinary medicines and plant protection products, pesticides, and animal and aquaculture disease prevention and treatment products.
- Production of veterinary medicines, raw materials for veterinary medicines, and storage of veterinary medicines; production of veterinary equipment and tools.
- Investment in facilities for biological testing, bioavailability assessment of medicines; pharmaceutical facilities meeting good manufacturing, storage, testing, and clinical trial practices.
OTHER SECTORS
- Activities of people’s credit funds and microfinance institutions.
- Activities related to the publication of electronic publications.
- Investment in and operation of product distribution chains for small and medium-sized enterprises; investment in and operation of incubation facilities for small and medium-sized enterprises; investment in and operation of technical support facilities for small and medium-sized enterprises; investment in and operation of co-working spaces for innovative start-ups according to the law on supporting small and medium-sized enterprises.
- Investment in innovative start-ups.
Priority Investment Areas for Foreign Enterprises in Vietnam
Appendix III of Decree 31 details specific locations across more than 55 provinces and cities in Vietnam that are prioritized for investment. These areas are categorized into regions with “particularly difficult socio-economic conditions” and those with “difficult socio-economic conditions.”
Details about districts, towns, and provincial cities where foreign enterprises are eligible for investment incentives can be reviewed in these appendices.
The determination of areas with difficult and particularly difficult socio-economic conditions, as well as border and island regions, is governed by Decision No. 30/2012/QĐ-TTg, Decision No. 2405/2013/QĐ-TTg, Decision No. 539/2013/QĐ-TTg, and Decision No. 495/2014/QĐ-TTg.
Current Investment Situation in Vietnam
Since its promulgation, Decree 31 has established the necessary legal framework for foreign enterprises to invest in Vietnam.
With the addition of a restricted market access list for foreign investors and detailed regulations on investment incentives in specific sectors and regions in Vietnam compared to previous decrees and regulations, foreign investors have found solutions to difficulties and obstacles during the investment process in Vietnam. This includes the right to raise concerns, make proposals related to the application and enforcement of investment laws, and file complaints, denouncements, and administrative lawsuits when there is evidence of infringement on their legal rights and interests.
The resolution of psychological and legal obstacles for foreign enterprises has contributed to improving foreign investment indicators in Vietnam in recent years.
According to data released by the Foreign Investment Agency, Ministry of Planning and Investment of Vietnam, in the first nine months of the year, the disbursed capital of foreign investment projects reached over 15.9 billion USD, the highest in the period from 2018 to 2023.
Additionally, as of the end of September 2023, the total newly registered, adjusted capital, and capital contributions, and share purchases by foreign investors reached nearly 20.21 billion USD, up 7.7% compared to the same period. Notably, the increase in the number of new projects since the beginning of 2023 has outpaced the growth in total new investment capital, indicating that medium and small-scale investors are increasingly interested in Vietnam.
This figure also reflects that investment procedures in Vietnam have become simpler and more efficient compared to previous periods, affirming the trust and expectations of foreign investors in Vietnam’s investment environment.
However, these positive indicators could see a significant decline in the 2024 reporting periods if Vietnam does not make reasonable changes or amendments to its investment incentive policies.
Challenges in Vietnam’s Investment Incentive Policies in 2024
At the beginning of 2024, large multinational corporations worldwide will be subject to a global minimum tax of 15%. With this tax policy, low tax rate incentives—Vietnam’s main tool for attracting foreign capital when foreign investors invest in prioritized sectors or areas, particularly those with investment incentives in Vietnam—will no longer be as competitive as before.
The global minimum tax is a global tax policy agreed upon by more than 140 countries to impose a minimum tax rate of 15% on large multinational companies when they earn profits in countries with tax rates lower than 15%.
Proposed by the Organization for Economic Cooperation and Development (OECD), the main purpose of this global minimum tax policy is to enhance fairness in investment attraction policies and reduce the budget deficits of countries worldwide. The global minimum tax includes two main pillars: allowing the taxation of profits from goods and services of some multinational corporations with annual revenues exceeding 20 billion EUR, and setting a global minimum tax rate of 15% for multinational companies with total revenues of 750 million EUR or more in 2 of the last 4 consecutive years.
The second pillar on the global minimum tax is expected to eliminate the race to the bottom in investment tax incentives among developing countries, including Vietnam. This regulation will create fairness in investment incentives on the global market because developed countries like the US, UK, and France cannot impose low corporate income taxes to attract investment capital.
For many years, this situation has created a significant advantage for developing countries while squeezing the competitiveness of developed countries.
With the primary goal of ending the tax incentive competition to attract investment capital from developing countries, creating a fair and competitive economy among nations, and ending profit shifting to avoid or reduce tax liabilities by large multinational corporations, when implemented, the global minimum tax policy is expected to have many impacts on Vietnam’s investment attraction policies.
To avoid being passive in this global tax mechanism, Vietnam urgently needs to accelerate research, amend, and supplement its investment incentive policies, and come up with practical solutions for implementing the global minimum tax policy, ensuring that Vietnam’s market can still attract foreign direct investment.
Regarding alternative investment incentive measures, Vietnam may consider applying additional investment incentives, such as providing investment advisory services, offering labor quality options, infrastructure construction environments, and even financial support for foreign enterprises operating in Vietnam.
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