LEGAL RISKS OF REAL ESTATE BUSINESS ACTIVITIES BELOW THE SMALL-SCALE THRESHOLD FOR FOREIGN-INVESTED ECONOMIC ORGANIZATIONS

In recent years, Vietnam has emerged as a vibrant market in the real estate sector, drawing significant interest not only from domestic investors but also from many foreign investors. Notably, on November 28, 2023, the Law on Real Estate Business 2023 was officially promulgated, followed by the issuance of Decree 96/2024/ND-CP, which took effect on August 01, 2024. Accordingly, several new provisions regarding the rights and scope of real estate business activities have been added to more strictly regulate the activities of foreign entities in the Vietnamese real estate market.

This article will discuss the rights of foreign-invested economic organizations in the real estate sector, the legal provisions for real estate business activities below the small-scale threshold, and identify potential legal risks these investors may encounter when engaging in this area in Vietnam.

1. Real estate business rights of foreign-invested economic organizations

1.1. Types of foreign-invested economic organizations engaged in real estate business

The Law on Real Estate Business 2023 (“LOREB”) introduces important changes regarding “foreign-invested economic organizations” and clearly distinguishes them based on the foreign ownership percentage as per the Law on Investment 2020, including:

• Foreign-invested economic organizations that must meet conditions and undergo investment procedures applicable to foreign investors if the organization has:

(i) foreign investors holding over 50% of charter capital;

(ii) economic organizations as outlined in (i) holding over 50% of charter capital; or

(iii) foreign investors and economic organizations as outlined in (i) collectively holding over 50% of charter capital.

• The other foreign-invested economic organizations are entitled to engage in real estate business activities within a broad scope, similar to domestic organizations and individuals.

This article focuses on foreign-invested economic organizations that are required to meet conditions and follow procedures as stipulated for foreign investors according to the Law on Investment 2020.

1.2. Real estate business rights of foreign-invested economic organizations

Under Article 10 of LOREB, foreign-invested economic organizations do not have the full of real estate business rights as domestic entities, and their rights are limited to certain activities, including:

• Investing in construction of housing or building structures attached to land for sale, leasing, or lease-purchase through real estate projects in compliance with the form, purpose, and duration of land use as stipulated by land laws;
• Investing in construction of infrastructure facilities in real estate projects for transfer, leasing, or sub-leasing land with completed infrastructure, in line with land laws;
• Leasing housing, building structures, or floor areas in buildings for sub-lease;
• Acquiring entire or partial real estate projects to continue construction and business activities.

In practice, however, foreign-invested economic organizations have encountered numerous challenges in implementing these activities, especially when seeking to lease office spaces or warehouses. Despite their lawful ownership, they may not lease these assets due to the restriction that prevents foreign entities from “Purchasing, lease-purchasing housing, building structures, or building floor space to sell, lease, or lease-purchase.” This restriction makes it difficult for them to utilize the value of assets that are not being used.

1.3. Foreign-invested economic organizations conducting real estate business activities below the small-scale threshold

According to Article 9.4 of LOREB, foreign-invested economic organizations are permitted to engage in real estate business activities without being subject to the provisions of LOREB if the activities fall below the small-scale threshold. This means that such organizations are not limited by the scope of Article 10 of LOREB.

This regulation is further clarified in Article 7 of Decree 96/2024/ND-CP (“Decree 96”), which defines below-small-scale real estate business activities based on two conditions:

(i) The value of each contract for sale, lease, or lease-purchase does not exceed 300 billion VND; and

(ii) The number of transactions does not exceed ten per year. In cases where only a single transaction occurs within a year, the 300-billion-VND limit does not apply.

This provision is a new development in real estate law, explicitly stated within LOREB and further defined in decree. It not only establishes an exception for the real estate business activities of foreign-invested economic organizations in Vietnam but also provides a clear legal regulation – a “threshold” for a limitation that aligns with LOREB regulations.

2. Legal Risks in Conducting Real Estate Business Activities Below the Small-Scale Threshold for Foreign-Invested Economic Organizations

Previously, Decree 02/2022/ND-CP permitted organizations and individuals to sell, transfer, lease, or lease-purchase housing or building structures on a small scale. However, this regulation did not clearly define the term “small scale,” leading to difficulties for many businesses in determining its applicability. While Decree 96 addresses some of these issues, the practical effectiveness of this new framework remains uncertain for foreign-invested economic organizations, which may still need time to adapt to the new rules.

Outlined below are some legal risks that foreign-invested economic organizations may encounter when conducting real estate business activities below the small-scale threshold:

2.1. Risks related to licensing procedures

As previously mentioned, real estate business activities below the small-scale threshold are limited to ten transactions per year, with a maximum value of 300 billion VND per contract. For enterprises not primarily engaged in real estate but only seek to utilize their assets, whether they need to register the “real estate business” code remains a critical question.

Article 9.4 of LOREB clearly states that organizations “selling, leasing, or lease-purchasing housing, building structures, or building floor space below the small-scale threshold are exempt from LOREB’s provisions…” This implies that such activities below the small-scale threshold do not require registration under the “real estate business” business line, which is consistent for companies without an intention to professionally or routinely engage in real estate.

However, consultations with the Departments of Planning and Investment and Industrial Zone Management Boards indicate that authorities require businesses to register for “real estate business” before beginning operations. Failure to register in advance may result in fines of up to VND 100 million for not amending the Investment Registration Certificate to reflect the project changes, and up to VND 30 million for failing to notify business registration changes .

This creates considerable concern among foreign-invested companies. While their operations are not primarily focused on real estate, they are compelled to undertake the registration process to avoid legal complications or business interruptions. This requirement not only burdens businesses but also risks a lack of consistency in applying legal provisions.

2.2. Risks in implementation

Aside from administrative risks, another critical factor affecting the real estate business activities below the small-scale threshold is the cautious mindset of both businesses and licensing authorities. Previously, when regulations regarding real estate business were unclear and vague, businesses tended to be cautious and often chose the approach of "waiting" rather than proceeding with their real estate operations.

Although Decree 96 has clarified many issues, addressing past difficulties to some extent, hesitation remains. Article 58.3.b of Decree 16/2022/ND-CP stipulates administrative fines up to VND 600 million for “conducting real estate business activities outside the permissible scope.” This violation not only financially impacts companies but could disrupt or even terminate their business operations. These high penalties has made foreign-invested enterprises hesitant to launch their business activities, despite more favorable legal conditions.

In conclusion, Decree 96 brings substantial improvements by regulating real estate business activities below the small-scale threshold for foreign-invested economic organizations, and establishing an important exception that permits transactions previously prohibited under the law. However, inconsistency between legal provisions and practical implementation by authorities raises significant concerns regarding transparency and enforceability of the new regulations. The cautious mindset, combined with fear of penalties, remains a major obstacle, even with clearer regulations. To effectively apply this new rule, businesses should consult legal experts and relevant authorities to ensure they fully understand and implement the legal provisions.

Ms. Van Thi Xuan Dieu (Grancie), Senior Consultant

ADK Vietnam Lawyers