‘NOMINEE’ INVESTMENT IN VIETNAM: OPPORTUNITIES, LEGAL RISKS AND A SAFE PATH FOR FOREIGN INVESTORS
Authors: Hoang Minh Duc & Nguyen Thu Quynh
In recent years, many foreign, especially Chinese investors have silently participated in sensitive business sectors in Vietnam such as pawnbroking, real estate, content creating on digital platform, or business restricted to foreign capital. Such ‘silence’ stems from the fact that their names are not expressly indicated, but they often authorize Vietnamese individuals or enterprises to represent them — a mechanism commonly referred to as nominee.
Although arising from the need to seek business opportunities in attractive yet restricted sectors, this mechanism harbors a risky legal ‘gray area’. So, what is the true nature of a nominee agreement? Is it legal in Vietnam? And what are the specific risks the parties might face?
The below analysis will provide a comprehensive overview, help you fully grasp the issue and serve as a basis for you to make the best decisions.
The analysis will be divided into three parts. Part 1 provides an analysis of the concepts of nominees, the practical use of the nominee in Vietnam, and Vietnamese legal regulations concerning nominees. Part 2 focuses on analyzing the legal consequences, risks, and the practice of Vietnamese courts in resolving disputes related to nominee agreements. Part 3 provides solutions to mitigate these risks.
Part 1
1 – How are Chinese investors currently engaging or asking Vietnamese people to act as nominees?
It is currently not difficult to find companies and projects owned by Vietnamese people on paper, but their capital sources and executive rights are actually under the hands of Chinese investors. They operate in many business sectors where Vietnamese law does not provide regulations on market access; has restrictions or prohibition for foreign investors; or operate in sensitive areas for foreign investors, for example:
- Sensitive areas for security and national defense such as borders and islands.
- Digital content creation on media platforms (Tiktok, YouTube): Establishment of a ‘Vietnamese’ company for the purpose of leasing premises or employing creators.
- Purchase and receipt of the transfer of a house, land and other assets attached to land.
- Opening a pawnshop.
- Conditional business activities: Sectors reserved only for domestic investors or domestic investors holding controlling shares such as transportation, telecommunications, etc.
In practice, however, it appears that Chinese investors have been using Vietnamese nominees not only in restricted sectors but also in some sectors that are open to foreign investors. Particularly in manufacturing, Chinese investors would like to make use of two major advantages:
- Easy land acquisition. Authorize Vietnamese individuals or 100% domestically-owned companies to facilitate the land acquisition for production or construction of works in energy sectors.
- Scrutiny reduction. 100% domestically-owned companies are subject to less strict inspections by any regulatory authorities regarding environment, fire prevention, or
or other types of sub-licenses.
In reality, nominee’s activities represent a ‘gray area’ that is quite common and pose many legal risks for both foreign investors who have invested their capital and nominees themselves.
2- What is a nominee?
First, it’s necessary to understand what nominees and nominee agreements are.
Simply put, nominees are Vietnamese individuals, or, to a limited extent, legal entities, who are recorded in the legal documents (i.e., enterprise registration certificates, land use right certificates) as the owners, capital contribution members… however, they are not the persons who actually provide the funds, control, and benefit from such investment.
The persons who actually provide their capital and management (the Chinese investors) are called the actual beneficial owners.
There are usually power of attorney agreements or implied agreements between both parties (which are not disclosed to any government authorities) with respect to any capital contribution, profit sharing, and executive rights. The beneficial owners, whose names are not recorded, still control the nominees through:
- Agreements and power of attorney: Execution of power of attorney agreements, custody agreements, undated share purchase and sale agreements or pre-signed land/house transfer agreements;
- Collateral: Pledge/holding of shares, certificates and seals; such agreements are also pre-signed but undated and can be registered with the Vietnamese registration authorities for secured transactions.
- Financial control: Control of bank accounts, profit transfer agreements.
- Liability binding: Penalty clauses, promissory notes.
- Actual management: Direct management of operations despite of holding names
Diagram illustrating a nominee agreement
3 – What are the differences between nominee, trust, and special ownership structure (VIE)?
To better understand the nature of the nominee, we will compare it with two other institutions and variations: Trust (Section 3) and special ownership structure – VIE (Section 4).
First of all, Trust. Simply put, it is a legal mechanism in which the settlor transfers its assets to the trustee to manage for the benefit of the beneficiary. In some cases, there is an additional protector to control or approve the trustee’s decisions.
Diagram illustrating a trust agreement
Unlike many countries, Vietnamese law does not recognize the trust regime because it does not separate legal ownership and benefit rights. However, in practice, there are still some similar mechanisms, which are applicable to the limited extent, for example:
- Securities investment trust: Fund management companies are allowed to hold the titles and manage investment portfolios on behalf of clients. This form is similar to the ‘trust’, however, it is only applicable in the securities sector.
- Investment fund: Fund management companies manage assets for investors, with some characteristics similar to the trust.
- Commodity trading trust: It is regulated in the Commercial Law.
- Household assets: An individual can be authorized to represent an entire household in accordance with the Land Law.
In summary, Vietnam does not recognize trust in the international sense, but there are limited alternative mechanisms in some sectors.
4 – If Chinese investors want to set up a VIE structure, whether such structure is considered a nominee agreement?
VIE is a model commonly used in China. Accordingly, a foreign company (usually registered in the BVI or Cayman) sets up a 100% foreign-owned enterprise (WFOE) in China. The WFOE does not own shares directly, but signs many contracts (services, share pledges, options, etc.) to control and benefit economically from the Chinese companies.
This model helps Chinese companies in sectors that are limited to foreign capital (such as technology, education, media) to raise international capital and list abroad without violating ownership limits.
Diagram illustrating the special investment structure
In comparison with the nominee, VIE is also intended to overcome any restrictions on investment, however, the differences are: nominee only relies on one person, while VIE relies on a complex chain of contracts. China implicitly recognizes VIE, but basically does not accept nominee.
In Vietnam, some chains of pawnshops supported by Chinese investors have applied the VIE structure.
5 – How does Vietnamese law regulate nominees?
Vietnamese law currently does not provide specific regulations on the nominee mechanism. However, if the nominees are understood as the persons who have been recorded as the owners, but not the actual beneficiaries, and concurrently there are only implied agreements between the parties, which are not disclosed with any third party (especially any government authorities), then it can be determined that such form is not recognized by Vietnamese law.
The reason is that under Vietnamese law, ownership rights – explicitly represented by the names recorded in documents, which recognize ownership rights such as the Red Book or the Shareholder Registration Book – are absolute. That means the owners have full rights to such assets, and execution of agreements to waive such rights does not automatically give the actual beneficiaries the relevant legal status.
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Image source: https://garant.ae/en/insights/trusts-in-the-uae
Image source: https://www.chinalawinsight.com/2012/02/articles/foreign-investment/variable-interest-entity-structure-in-china/
