Special investment incentives for Ho Chi Minh City under Resolution 98/2023/QH15

The article is made in collaboration between VCCI-HCM and HM&P Law Firm. Furthermore, this article was published in the Legal Electronic Magazine on December 8, 2023. Through this article, Managing Partner Nguyen Van Phuc and Lawyer Nguyen Nhat Duong (HM&P) would like to highlight some special investment policies that will be applied in Ho Chi Minh City under Resolution 98. Below is the English version of this article:

In the past, the promulgation of Resolution 54/2017/QH14 ("Resolution 54") demonstrated Vietnam's emphasis on the development of Ho Chi Minh City, the economic engine of the country. However, due to the spread of the Covid -19 pandemic and the general difficulties of the global economy, the development rate of Ho Chi Minh City is currently slowing down somewhat compared to the growth rate of some other provinces and cities. Therefore, on June 24, 2023, the National Assembly issued Resolution No. 98/2023/QH15 ("Resolution 98") on piloting a number of specific mechanisms and policies for the development of Ho Chi Minh City. This resolution takes effect on August 1, 2023 and promises to create momentum for the development of Ho Chi Minh City. Through this article, we would like to highlight some special investment policies that will be applied in Ho Chi Minh City under Resolution 98.

1. Investment incentives for strategic investors

Resolution 98 establishes the list of industries that Ho Chi Minh City will prioritize to attract strategic investors, and at the same time, defines the conditions that the strategic investors must meet, including:

• Investment in the construction of innovation centers, research and development centers (R&D); investment in research and support for high-tech transfer in the fields of information technology, biotechnology, automation technology, new materials technology, clean energy with investment capital of VND 3,000 billion or more. Strategic investors must have registered capital of VND 500 billion or more when implementing these investment projects, and have experienced in investment projects in similar fields with a total investment capital of VND 2,000 billion or more.
• Investment in projects in the field of semiconductor integrated circuit industry, design technology, component manufacturing, integrated electronic circuits (IC), flexible electronics (PE), chips, new technology batteries, new materials, clean energy industry with an investment capital of VND 30,000 billion or more. Strategic investors must have registered capital of VND 5,000 billion or more or total assets of VND 25,000 billion or more when implementing these investment projects and have experience in investment projects in similar fields with a total investment capital of VND 10,000 billion or more.
• Investment in the construction of Can Gio International Transshipment Port according to the plan with investment capital of VND 50,000 billion or more. The strategic investor must have a charter capital of VND 9,000 billion or more at the time of implementation of this investment project and have experience in investing in projects in similar fields with a total investment capital of VND 25,000 billion or more.

It can be seen that the above-mentioned industries that Ho Chi Minh City prioritizes to attract strategic investors mentioned above are the industries that fit the current practical situation of the city. As the land fund is gradually depleted, it is essential to prioritize research and development activities and high-tech industries that take up less portion of land. Moreover, with its position as the center of the Southern Key Economic Region, the industries that Ho Chi Minh City prioritizes to attract investment will not only promote the development of the city but also create a driving force for the overall development of the whole region.

If a strategic investor invests in the above-mentioned priority investment sectors, it can benefit from a number of special investment incentives, such as:

• Eligibility to deduct expenses for research and development (R&D) activities from taxable income in the amount of 150% of the actual costs of such activities when calculating corporate income tax.
• Enjoying the priority regime in customs procedures in accordance with the Law on Customs, and tax procedures in accordance with the Law on Tax for exported and imported goods of investment projects implemented by strategic investors in the City, provided that when the conditions for applying the priority regime as prescribed by laws on customs and taxes are met, except for the export and import turnover conditions.

Such incentives stem from the current regulations and policies on investment incentives, which are not really compatible with the actual situation in Ho Chi Minh City, as well as the industries that the city prioritizes in attracting investment.

For example, the provisions on investment support in Article 18 of the Law on Investment 2020 list the forms of support for the development of technical and social infrastructure systems inside and outside the fence of investment projects. This support, if provided from the central budget or the city, must strictly comply with the provisions of the Law on Public Investment. However, according to Article 5 of the Law on Public Investment 2019, the form of support for the development of technical and social infrastructure systems inside and outside the fence of the investment project is not eligible for support from the state budget. Other forms of support either have no basis for implementation or are not suitable for the actual situation.

Meanwhile, for the form of special incentives specified in Clause 2 Article 20 of the Law on Investment. At present, according to the Prime Minister's Decision No. 29/2021/QD-TTg dated January 6, 2021 on special investment incentives, there are two forms of special incentives, including the application of preferential tax rates, reduction and exemption of corporate income tax, and the preferential for land rental fee and water surface rental fee. However, on November 29, 2023, the National Assembly passed a resolution to impose a global minimum tax from January 1, 2024. Therefore, the form of preferential tax rates and corporate income tax exemptions and reductions is considered to be no longer effective for strategic investors when it is likely that these projects will be subject to the global minimum tax policy.

For the above reasons, the special incentives made for the priority investment industries of Ho Chi Minh City in Resolution 98 are practically suitable.

In addition, it should be added that Ho Chi Minh City has also been very bold in piloting new investment incentive policies. In particular, in the draft resolution submitted to the National Assembly, Ho Chi Minh City also proposed a plan to support part of the cost of the investment project from the current expenditure of the city budget. The criteria, conditions, amount of support, content, form of support and specific time of support will be decided by the Ho Chi Minh City People's Council. However, such a plan was rejected. In our opinion, the rejection of the support may be due to a very specific regulation of the global minimum tax policy. In particular, according to Article 10.1 of the GloBe Model Rules[1], the QDMTT (Qualified Domestic Minimum Top-up Tax) is the minimum tax provided for in the domestic legislation of a country, which must be enforced and administered in accordance with the rules and interpretations of GloBe, provided that the country does not grant any benefits in relation to the QDMTT[2]. It is clear that under the above rules, the plan by which the City intended to cover a portion of the investment costs of the Projects may be considered to provide benefits related to QDMTT[3].

2. Forms of support for science and technology, and innovation activities

As a priority in attracting investment in high-tech industries, Ho Chi Minh City is now prioritizing support to promote science and technology, innovation and start-ups in the city's priority areas, which are:

• Exemption from corporate income tax within 05 years for the income from the date of tax liability arising from the activities of the innovative start-ups enterprises, science and technology organizations, innovation centers, and intermediary organizations supporting innovative start-ups in Ho Chi Minh City.
• Exemptions from personal income tax, corporate income tax for individuals and organizations with income from transfer of their contributed capital, right to contribute capital to innovative start-up enterprises in the City.
• Exemption from personal income tax for a period of 5 years for the income of experts, scientists, talented people, and creative start-up entrepreneurs working in an innovative start-up enterprise, science and technology organizations, innovation centers, and intermediary organizations supporting innovative start-ups in the City, applicable during the implementation of this Resolution.
• High-tech parks, concentrated information technology parks, innovation centers in the city are allowed to conduct controlled experiments of new technology solutions within the geographical boundaries.
• Non-repayable support from the current expenditures of the City budget for the incubation of innovative projects and start-ups, including costs of organizing project selection, hiring experts, direct employment remuneration, services supporting innovation and start-ups, use of technical facilities, incubators, co-working areas.

By the end of 2022, the number of innovative start-ups in Ho Chi Minh City had reached nearly 2,000, accounting for nearly 50% of the  total number of innovative start-ups in the country[4]. It can be seen that creative start-ups remain one of the potential activities in the city, especially in the field of information technology.

The City's in offering support to innovation and start-up activities as described above may be due to a number of reasons, as listed below:

First, in terms of applicable subjects, state incubators focus mostly on high-tech agriculture, high technology, biotechnology, mechanical automation. These are the fields that require long incubation periods, large investment capital, but these fields create core technologies for innovative start-up enterprises, which is an important factor for the City's start-up ecosystem to develop sustainably and have a competitive advantage. Meanwhile, private incubators mainly incubate and accelerate innovative start-up enterprises in fields such as information technology, e-commerce and financial technology, etc., with small investment cost, short incubation period and fast divestment, this is an important target group in incubating and developing innovative products and services for the City. In addition, accompanying incubators are scientific and technological organizations, organizations providing shared equipment, and other organizations related to innovative activities. These are organizations that help develop innovative start-up companies more efficiently and qualitatively. In addition, Resolution 98 also supports employers, experts participating in innovation activities, who directly carry out innovation activities.

Secondly, bringing the characteristics of innovative activities that have never been researched and tested in practice, the possibility of failure in investing in innovative start-ups is up to 95%[5]. Not only that, with high investment in the initial stage, innovative start-ups have almost income in the initial period, at the same time, in many cases, capital for investment activities is granted by organizations to persons who implement projects, which causes personal income tax for the founders. Therefore, it is essential that Resolution 98 provides forms of support for corporate income tax and personal income tax.

In conclusion, Resolution 98 can be regarded as an important policy of Ho Chi Minh City that creates favorable conditions for the City to implement pilot and breakthrough programs or regulations aimed at realizing the goals set out in Resolution No. 24-NQ/TW, Politburo Resolution No. 31-NQ/TW, and National Assembly Resolution No. 81/2023/QH15. At the same time, these pilot policies will also contribute to attracting high-tech investment to Ho Chi Minh City, thus promoting the overall growth of the Southern Key Economic Region, which is a driving force for the overall development of the country. However, in the near future, for these policies to be implemented in practice, the Government and the City People's Council must promptly issue detailed guidelines so that both investors and relevant authorities have a basis for implementation.