TRAN Anh Hung (Managing Partner)

DINH Cao Thanh (Senior Associate)

BROSS & Partners LLC (Vietnam)

The National Assembly of Vietnam has recently passed three new laws that are the backbone of real estate market namely Law on Land 2024, Law on Housing 2023 and Law on Real Estate Business 2023. As these laws will come into effect from 1 January 2025, there are two points that foreign investors interested in the real estate market of Vietnam should be aware of.

1. Expanded scope of propriety and business rights of foreign-invested companies

Traditionally, private corporate entities in Vietnam enjoy different scopes of propriety and business rights depending on their foreign/domestic status. The treatment differs between purely domestic companies and foreign-invested companies.[1] In this regard, ratio of foreign ownership in foreign-invested companies are not relevant from the three land-related law perspective. This is incompatible with the Law on Investment 2020 where only companies whose direct or indirect foreign-ownership reaches a critical threshold are discriminated. These companies include:[2]

• those of which more than 50% of charter capital is held by foreign investors or of which the majority of partners are foreigners (“F1 companies”); and
• those of which more than 50% of charter capital is held by F1 Companies, and those of which more than 50% of charter capital is commonly held by foreign investors and F1 Companies (“F2 companies”).

While the Law on Housing 2023 continues restricting all foreign-invested companies in the same way regardless of their foreign ownership ratio,[3] the Law on Land 2024 and the Law on Real Estate Business 2023 now only distinguish F1 and F2 companies from other domestic companies.[4] These changes extend the scope of propriety and business rights of foreign-invested companies that are not F1 or F2 companies to encompass the following:

1. They can purchase land-use right (“LUR”)[5] outside industrial zones, industrial clusters, and high-tech zones. F1 and F2 companies can only purchase LUR in these special zones.[6]
2. They can obtain LUR via donation or inheritance. F1 and F2 companies cannot obtain LUR via these modes.[7]
3. They can mortgage the LUR and properties attached to land in favor of credit institutions in Vietnam, Vietnamese citizens and other domestic economic organizations in Vietnam that are not F1 or F2 companies. F1 and F2 companies can only mortgage LUR in favor of credit institutions in Vietnam.[8]
4. They can conduct the following real estate business while F1 and F2 companies cannot:[9]

1. purchase or buy on hire purchase residential houses, construction works and areas of construction works in order to re-sell, lease out or sell on hire purchase;
2. purchase LUR equipped with infrastructures in real estate project in order to re-sell or lease out; and
3. lease LUR equipped with infrastructures in real estate project in order to re-lease out.

It should be noted that by virtue of the new classification of the new laws, foreign-invested companies other than F1 and F2 companies can immediately enjoy these new rights as from 1 January 2025.

2. New Governmental policy on land rental

The Law on Land 2024’s new approach to rent is that annual payment would be the main option for private entities leasing land from the State. Unlike the Law on Land 2013 where private entities can choose to make either a one-off payment for the whole term of lease (“One-off Lease”) or multiple annual payments over the period (“Annual Lease”),[10] the new Law on Land 2024 enumerated specific cases where one-off payment is applicable and require all other cases to be subject to annual rent. From 1 January 2025, only the following land leased from the State is eligible for one-off payment:[11]

• land leased from the State to implement projects in in agriculture, forestry, aquaculture, and salt making;
• land leased from the State that is situated in industrial parks, industrial clusters, high-tech parks, worker accommodation areas in industrial parks; land used for public purposes with business purposes; commercial and service land used for tourism and office business activities; and
• land leased from the State to build social housing for rent.

This change’s implication is twofold. First, unlike One-off Lease where the rent of the whole term is determined at the outset when State authorities issue decisions on land lease, for Annual Lease, the rent is determined for each 5-year period. Rent for the next cycle is calculated based on a land price table issued by State authority. If the rent increases, the amount payable will be adjusted but not exceeding a rate prescribed by the Government for each period. Such adjustment rate will not exceed the CPI of the previous 5-year period.[12] Considering that a lease term is normally 50 years (and 70 years for special cases),[13] adjustment of land rent for each 5 years will affect foreign investors’ financial projection for their investments in Vietnam.

Second, from 1 January 2025, companies would more often obtain LUR from the State under Annual Lease hence enjoying less propriety rights. In particular:[14]

• One-off Lease LUR holder can lease out the LUR whereas Annual Lease LUR holder can only sub-lease out the LUR on the condition that the land is equipped with infrastructures.
• One-off Lease LUR holder can transfer the LUR, mortgage the LUR and contribute the LUR as capital in kind whereas the Annual Lease LUR holder cannot.