An Insight into the Legal Considerations for Land Leasing in Industrial Zones

Hao Tran, BW Head of Legal and Host Nhi A.N at BW Expert Talk Series Eps 1

[5 min read]

Land lease in an industrial zone is a major concern of manufacturers investing in Vietnam. This short Q&A with Ms. Hao Tran, Head of Legal of BW, will provide us with an insight into the legal considerations for leasing land in industrial zones.

THE MACRO CONTEXT

In recent years, the Vietnamese government has been actively investing in infrastructure. This includes seaports, highways, and airports to facilitate business expansion in Vietnam. The 20% tax rate in the country is lower than other countries in the region (over 24%), which attracts many international investors.

The government signed the RCEP into force in 2022, and it is the second-factor attracting the industrial land investors in Vietnam. According to The Ministry of Planning and Investment (MPI), Vietnam attracted 2,036 newly registered FDI projects in 2022, up 17.1% compared to 2021.

What are the key factors for land lease in Vietnam?

There are five key factors manufacturers need to consider when they come to Vietnam to lease land for their business in Vietnam:

1. Location: Manufacturers need to make sure that the zoning and environmental requirements of the target location allow their type of business. For example, if your business is in a sector that may cause pollution, you can not lease in an area near residential zones. To get this information, manufacturers need to look into the zoning and environmental requirements of the specific Industrial Zone (IZ) to see what businesses can be for a particular location.
2. Construction master plan: A construction master plan provides details about what you can build on a specific location. This includes what construction parameters are, how many floors you can build, and the site’s coverage. You should carefully research this information and list it in the detailed master plan for the IZ you are interested in.
3. Land title: Manufacturers must notice the land title when leasing the land from an IZ developer. The IZ developer must get their title so that the manufacturer can get the title for the land and building when construction is complete.
4. Lease term: The Land Law 2013 and Decree 43/2014 ND-CP clearly state that the land lease cycle in industrial zones is calculated based on the investment period of the project. The total period of industrial land lease must not exceed 50 years. However, the IZ Developer may have leased the land a long time ago from the government authority, so the remaining term of the land could be, for example, about 30 years. Manufacturers need to know how many years the remaining terms are, because the term will impact land value. Manufacturers can find information in the land agreement between the IZ developer and the government authority.
5. Rent payment: In Vietnam, there are two types of lease: annual payment and advanced payment. If the IZ developer pays the rent to the government upfront, manufacturers can get an upfront land title for the land. In that case, the land is considered a fixed asset and can be mortgaged at a local bank for business financing. These do not apply for annual payment, but the price is much cheaper compared to an advanced one. However, recently, the Vietnamese government provides annual land, so the upfront payment method may not be available for new industrial zones.

BW 2 Storey Ready-built Warehouse – Tan Dong Hiep B project

Location, construction and licensing—Which part of the process takes more time?

The key challenge with land leasing is licensing. To secure land plots for a factory, manufacturers need to sign a land reservation agreement with an IZ developer before they can apply for an investment registration certificate for the project. After that, they can establish the company in Vietnam. This process normally takes anywhere from 6 to 12 months, depending on how fast negotiations with the IZ developer take and how fast manufacturers can complete the internal and licensing processes. Manufacturers can then start pre-licensing works, applying for a master plan, feasibility study, environmental assessment, design approval, and a construction permit. This process can take 6 or 9 months or longer. The entire process can take at least a year and a half before construction can begin.

As for construction timing, it depends on the progress. Operation can begin immediately after the project’s construction is complete. There are some additional approvals to acquire in order to certify that construction is complete and ready to be put into operation, such as the fire fighting certificate and the completion certificate from the government authority. In total, this procedure can take about two years or longer.

In conclusion, the land lease process would require investors to take a lot of things into consideration, including location, construction master plan, land title, lease term and rent payment.