In Vietnam’s rapidly evolving technology and startup ecosystem, cross-border fundraising has become a vital catalyst for growth. However, foreign investors frequently encounter a structural barrier: Foreign Ownership Limits (FOLs) imposed on conditional business lines, such as e-commerce, telecommunications, and digital media. To navigate these regulatory hurdles, international venture capitalists and local founders often turn to a sophisticated corporate architecture: the Variable Interest Entity (VIE) structure.
While famously utilized by Chinese tech giants listed on global stock exchanges, the application of a VIE structure in Vietnam remains a highly complex legal grey area. Following notable market movements—such as VinFast’s recent cross-border corporate restructuring—the debate around the viability of this model has resurfaced.
Below is a technical legal analysis by IVLF Advisors LLC regarding the operational mechanics, inherent regulatory risks, and strategic compliance pathways for executing a VIE structure in Vietnam.
1. How the VIE Model Operates in Vietnam’s Foreign Investment Landscape
The core objective of a VIE framework is to allow foreign investors to gain economic exposure and operational control over a domestic company operating in a restricted sector, without holding direct equity ownership.
The Offshore Holding Company and Local Operating Entity (OpCo)
A typical VIE structure in Vietnam involves three main components:
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The International Investors: Global venture capital funds or angel investors.
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The Offshore Holding Company (HoldCo): Usually incorporated in a tax-neutral or investor-friendly jurisdiction with robust capital markets, such as Singapore or the Cayman Islands.
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The Domestic Operating Company (OpCo): The actual Vietnamese entity that holds the necessary operating licenses (e.g., an ICP license or E-commerce marketplace permit) and runs the business locally.
Contractual Agreements vs. Equity Ownership
Instead of the HoldCo owning shares in the OpCo (which would violate Vietnam’s foreign investment activities restrictions), control is established through a bundle of highly specialized, interlocking Contractual Agreements. These typically include:
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Exclusive Service Agreements: The HoldCo (or its wholly-owned subsidiary in Vietnam) provides technical, consulting, or intellectual property services to the OpCo in exchange for fees equivalent to substantially all of the OpCo’s net profits.
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Call Option Agreements: Granting the HoldCo the exclusive and irrevocable right to purchase all or part of the equity in the OpCo from the local founders at the lowest legally permissible price whenever regulations relax.
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Proxy Agreements / Voting Rights Entrustment: The local Vietnamese founders transfer all their shareholder voting rights, board representation rights, and corporate governance powers in the OpCo to individuals designated by the HoldCo.
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Loan and Equity Pledge Agreements: The HoldCo provides interest-free funding to local founders to capitalize the OpCo, while the founders pledge their OpCo equity back to the HoldCo as collateral.
2. Critical Legal Risks of Implementing VIE Structures Under Current Regulations
Despite its strategic utility, implementing a VIE structure in Vietnam triggers substantial exposure across foreign exchange, judicial enforcement, and tax compliance frameworks.
Foreign Exchange Management and Inbound Capital Control
The State Bank of Vietnam (SBV) maintains strict oversight over cross-border cash flows. Under current foreign exchange laws, capital contribution and profit remittance must flow transparently through a Direct Investment Capital Account (DICA).
Because a VIE structure bypasses direct equity, transferring investment capital into Vietnam and repatriating profits out of the country under the guise of “consulting fees” or “service charges” faces immense scrutiny. If the commercial banks or the SBV deem these transactions as simulated loans or unauthorized capital transfers, the disbursement channel could be permanently blocked.
The Enforceability of Contractual Controls in Vietnamese Courts
The ultimate point of failure for a VIE structure lies in the courtroom. If a dispute arises and a local Vietnamese founder decides to “revoke” the proxy agreement or seize control of the OpCo, the offshore investors must seek enforcement through Vietnamese courts or the Vietnam International Arbitration Centre (VIAC).
⚠️ Critical Legal Danger: Under Article 124 of the Civil Code of Vietnam, a transaction can be declared null and void if it is deemed a “simulated transaction” (giao dịch dân sự ảo) formulated to conceal another transaction or to evade statutory prohibitions. If a court rules that the contractual agreements were designed solely to circumvent foreign investment activities limits, the entire VIE structure will be declared invalid. In such a scenario, foreign investors risk losing both corporate control and their invested capital.
Tax Exposure and Transfer Pricing Risks
The transfer of profits from the domestic OpCo to the offshore entity via service fees will inevitably attract the attention of the General Department of Taxation. Tax authorities closely monitor cross-border transactions under Transfer Pricing regulations (Decree 132/2020/ND-CP).
If the service fees paid by the OpCo do not align with the arm’s length principle (i.e., if the fees are artificially inflated to drain profits without corresponding market-value services), the tax authorities have the right to disallow these expenses, recalculate Corporate Income Tax (CIT), and impose heavy penalties for tax evasion.
3. Strategic Lessons for Foreign Investors and FIE Startups
For tech startups seeking international capital, a VIE framework remains a viable path provided it is structured with extreme precision and robust corporate governance.
Perfecting Corporate Governance and Proxy Controls
To mitigate the risk of local founder defection, offshore investors must implement rigid internal controls. This includes maintaining physical and legal control over the Vietnamese OpCo’s corporate seals (company stamps), bank accounts, and digital signatures. Furthermore, the corporate charter of the OpCo must be meticulously synchronized with the offshore shareholder agreements to restrict unilateral actions by local directors.
Preparing for IPO Compliance and Capital Markets Requirements
If the ultimate goal of the startup is an IPO compliance launch on international exchanges such as the SGX (Singapore) or NASDAQ, the legal structure must withstand intense institutional due diligence. Global regulators and auditors demand absolute clarity on how the VIE contracts guarantee control. Startups must work with specialized legal counsel early in the pre-incorporation phase to ensure the contracts are structured to satisfy international accounting standards (such as IFRS or US GAAP) regarding consolidated financial statements.
4. Key Recommendations from IVLF Advisors LLC
The VIE structure in Vietnam is a high-reward but high-risk legal mechanism. It functions as a sophisticated bridge for global capital to enter restricted domestic tech sectors, but it requires continuous legal maintenance and expert structuring.
To ensure long-term structural integrity, IVLF Advisors LLC recommends that foreign investors and founders:
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Conduct comprehensive regulatory mapping to verify if alternative structures (e.g., business cooperation contracts or specific WTO commitments) can achieve the business goals without resorting to a full VIE.
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Draft highly granular, localized Contractual Agreements that comply with the formal requirements of Vietnamese contract law to minimize the risk of being classified as a “simulated transaction.”
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Establish transparent, market-justified pricing mechanisms for all cross-border service agreements to safeguard against transfer pricing audits.
ABOUT IVLF ADVISORS LLC
IVLF Advisors LLC is a specialized boutique advisory firm based in Hanoi, focusing on: Project Investment, Foreign Investment, International Investment, Project Finance, M&A, Capital Markets, and Financial Restructuring. With a team of experts possessing a profound understanding of foreign exchange management practices and cross-border transactions, we are dedicated to delivering the most optimal and secure capital structuring solutions for our Clients.
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Website: www.ivlf-advisors.com
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Email: nghia@ivlf-advisors.com
Disclaimer: This article is prepared by the expert team of IVLF Advisors LLC for informational and academic analysis purposes only. It does not constitute formal legal advice for any specific case. Readers are advised to consult with legal professionals before entering into any related transactions.