There are many ways to enter the Vietnamese market. As we know, entering the market means one investor find the way to operate and collect the benefit from a certain area. In order to enter the Vietnamese market, foreigners may conduct some major formation, included: export goods, licensing, franchising, turnkey project, venture and directed investment.
If a business wishes to engage in import and export activities as well as domestic distribution (i.e., retail, wholesale,…) in Vietnam, the most common method chosen is establishing a trading company.
Generally, a trading company is inexpensive to establish and can be of great assistance to foreign investors by combining both sourcing and quality control activities with purchasing and export facilities, thus providing more control and quicker response times compared to sourcing purely while based overseas.
Trading companies are also the ideal choice for foreign companies that need to source in Vietnam in order to resell in Vietnam. Without a Vietnamese trading company, the alternative would be to buy from overseas, and have the goods shipped out of Vietnam before then reselling back into Vietnam via local distributors (which would mean additional logistical costs, customs duties, and VAT).
Trading in Vietnam include two formations for the foreign investors
- Import and export: Under commitments made by Vietnam as part of its accession to the WTO, Vietnam gave foreign-invested enterprises the general right to import products and sell them to licensed distributors from the date of accession. Certain products, however, remain prohibited or restricted for trading by foreign-owned enterprises, while others are subject to a scheduled phasing-in. While such trading is permitted, it remains a ‘conditional’ investment sector. Therefore, the processes, require documentation for and consideration of an application for an investment certificate to undertake these activities and it may take time. That said, the process to apply for and obtain an investment certificate for a wholly owned foreign company engaging in trading is now fairly well defined and several foreign companies have set up subsidiaries in Vietnam to engage in trading activities.
- Distribution: ’Distribution’ refers to the sale of products (imported and/or sourced locally) to organisations (i.e wholesale) and to end-users (i.e retail). Retail distribution was opened to wholly owned foreign enterprises from 1 January 2009, and certain products remain subject to a schedule for later market opening. Given this relatively recent change, investors may expect some delays in licensing and establishing enterprises in this sector. Moreover, a wholly owned foreign enterprise that is permitted to engage in retail may only open more than one retail outlet subject to an ‘economic needs’ test. As such, foreign retailers may consider franchising their retailing operations to a Vietnamese party. However, some business lines may be restricted to foreign investors because they are not in the scale of Vietnam’s WTO commitment and the State may priority the inward enterprises over the foreigners by their legal policies.
To set up a trading company (distribution company) without a retailing outlet or a trading company with its first retailing outlet, the investor must prepare an application dossier to apply for an Investment Certificate and submit to the licensing authority at the provincial level. The application dossiers after that will be submitted by the provincial licensing authority to the Ministry of Industry and Trade (MOIT) for approval. Once receiving the approval by MOIT, the provincial licensing authority will grant the Investment Certificate to the investors. In case the licensed foreign trading company want to have a second retailing outlet or more, they will be required to complete the procedure for setting up a retail establishment.
Licensing is that licensor approve licensee to use in exactly term a visible or invisible resource and it must be registered for protection (in order to avoid copying). These items are called the subject of industrial ownership or intellectual property, including: invention, utility solution, industrial design, brand, business secret, new plant varieties, software and copyright. Transfer process of these subject called technology transfer (except transfer brand, trade name and service name).
The legislation for technology transfer is including The Civil Code passed by the National Assembly on 14 June 2005 is now the principal legal basis for technology transfer activities in Vietnam. Guiding the Civil Code, on the technology transfer, are now Law on Transfer of Technology passed by the National Assembly on 29 November 2006, and its implementing Decree No.133/2008/ND-CP issued by the Government, on 31 December 2008, as amended and supplemented by Decree No.103/2011/ND-CP dated 15 November 2011 (“Decree 133”).
The scope of technology transfer is quite broad. Technology to be the transfer must not fall within the lists of technologies of which transfer is restricted or prohibited as stipulated in Appendices 2 and 3 of Decree 133. Technology objects which shall be eligible for transfer shall be a part or the whole of the following technologies:
- (i) Technical know-how;
- (ii) Technical information about technology shall be permitted to be transferred in the form of the technological plans, technological processes, technical solutions, formulae, technical specifications, drawings, technical maps, computer programs and information files;
- (iii) Solutions for production optimisation and for renovation of technology; and
- (iv) Franchising.
Technology objects shall permitted to be transferred whether attached or unattached to industrial property objects.
Franchising is a special circumstance of Licensing. Vietnam has emerged as a key potential market for international franchises and global brands. Rapid economic growth, a rise in disposable income, large population, and rising domestic consumption, among other things, have all contributed to making Vietnam an increasingly attractive place for franchising to thrive..
The laws relating to franchising in Vietnam have been officially in force under the Law on Commerce which took effect as of 01 January 2006. Subsequently, Decree 35/2006/ND-CP dated 31 March 2006 as amended by Decree 120/2011/ND-CP dated 16 December 2011 and Circular No. 09/2006/TT-BTM were issued to complete the legal framework for franchising activities. The above-described legal framework applies to foreign franchisors who grant franchises to franchisees in Vietnam.
Pursuant to these laws, both franchisors and franchisees must satisfy certain conditions to be eligible for granting or receiving a franchise in Vietnam. The key eligibility requirements are as follows:
- (i) The business system intended for franchise has been in operation for at least one year. Where a Vietnamese trader is the primary franchisee of a foreign franchisor, such Vietnamese trader must conduct business by mode of franchising for at least one year in Vietnam before sub-franchising;
- (ii) The goods/services subject to the franchise must not be those in which business is prohibited, restricted, and subject to further conditions; and
- (iii) A trader shall be permitted to receive commercial rights when having the registration of business lines subject to commercial rights.
Furthermore, any franchise agreement must be in writing. The Ministry of Industry and Trade, which is the primary regulatory authority regarding franchise activities, must approve franchising from overseas into Vietnam.
With this legal framework firmly in place, the popularity of franchising in Vietnam is likely to increase. Franchising is also well-suited to entrepreneurs, of which Vietnam has many. Moreover, franchising can be implemented in a wide variety of sectors, from food and beverage to services such as logistics and more. As such, franchising is an excellent investment vehicle for both foreign investors and local business people.
In Vietnam, turnkey contract is mainly under the EPC contract form. Engineering, procurement and construction (EPC) contracts are the most common form of contract used to undertake construction works by the private sector on large-scale and complex infrastructure projects. Under an EPC contract a contractor is obliged to deliver a complete facility to a developer who need only turn a key to start operating the facility, hence EPC contracts are sometimes called turnkey construction contracts. In addition to delivering a complete facility, the contractor must deliver that facility for a guaranteed price by a guaranteed date and it must perform to the specified level. Failure to comply with any requirements will usually result in the contractor incurring monetary liabilities. Under the decree 37/2015/NĐ – CP details the construction contracts, the right and duty of the bidders for EPC contract are stipulated, as the fundamental content to make an agreement in order to carry out and operation the infrastructure projects in Vietnam.
On 12 March 2014 the State Bank of Vietnam enacted Circular No. 05/2014/TT-NHNN guiding the opening and use of indirect investment accounts to implement transactions relating to indirect investment activities in Vietnam. Circular No. 05/2014/TT-NHNN only governs the indirect investment activities of foreign investors who are non-residents. Resident foreign investors may conduct their indirect investment activities in accordance with current regulations on securities and other relevant law.
According to Circular No. 05/2014/TT-NHNN, forms of foreign indirect investment in Vietnam comprise:
- Capital contribution to, and purchase and sale of, shareholding and capital contribution portions in Vietnamese enterprises without directly participating in management and executive operation. Such Vietnamese enterprises may be on the transaction registration market and the listed securities market or be unlisted [or] not registered for trading on the Vietnamese securities market;
- Purchase and sale of bonds and other types of securities on the Vietnamese securities market;
- Purchase and sale of other valuable papers denominated in VND issued by a resident being an organisation licensed to issue [such valuable papers] within the territory of Vietnam;
- Entrustment of investment in VND via a fund management company, securities company, credit institution and foreign bank branch or other institution licensed to conduct professional activity of investment entrustment;
- Capital contribution or transfer of capital contribution by a foreign investor (not directly participating in management) via a securities investment fund or fund management company; and
- Other forms of indirect investment stipulated by law
- All indirect investment activities of foreign investors in Vietnam must be conducted in VND. In case of remitting capital, profit and other lawful income overseas gained from indirect investment activities, foreign investors are entitled to use VND in their Account to purchase foreign currency to remit overseas.
Direct investment is defined as the investor invests capital and participates in the management of the investment (eg the establishment of a corporate enterprise) to carry out the investment project and collect the profit. A foreign investor can directly engage in the Vietnamese market in several ways. Foreign investors must determine whether they wish to invest alone or with other foreigners, or partner with one or more Vietnamese investors. In accordance with Law on Investment 2014, there are forms of direct investment permitted:
- Investment in establishment of a business organisation;
- Making investment by contributing capital, buying shares, or buying capital contributions of business organisations;
- Investment under PPP (public – private corporation) contracts; and
- Investment under BCC (business corporation contract) contracts
When investing in Vietnam, the foreign investors must pay attention to the provisions about business lines for investments. There are certain sectors in which investment is prohibited, for both foreign and domestic investors, including:
- Trade in the narcotic substances specified in Appendix I hereof;
- Trade in the chemicals and minerals specified in Appendix I of this Law;
- Trade in specimens of wild flora and fauna specified in Appendix 1 of Convention on International Trade in Endangered Species of Wild Fauna and Flora; specimens of rare and/or endangered species of wild fauna and flora in Group I;
- Human trafficking; trade in human tissues and body parts;
- Business pertaining to human cloning.
In addition, there are a number of sectors in which foreign investment is ‘conditional’. These include:
- Broadcasting and television and production, publishing and distribution of cultural products;
- Transport and ports/airports;
- Real estate business;
- Import, export and distribution;
- Education and training;
- Post and telecommunications;
- Tobacco; and
- Hospitals and clinics.
Representative offices and branches of the foreign investors in Vietnam
Under the Commercial Law, foreign traders can open their representative offices and branches in Vietnam and also establish foreign investment-funded enterprises in Vietnam. Then the Ministry of Planning and Investment is responsible for managing the issuance of licenses to allow foreign traders to invest in Vietnam. The Ministry of Industry and Trade is responsible for the issuance of licenses of establishing representative offices and branches of foreign traders in Vietnam.
- Representative offices of foreign traders are not authorised to perform direct profitable business in Vietnam but carry out trade promotion activities within the constraints of the Law only.
- Branches of foreign traders in Vietnam are allowed to (i) perform goods’ trading business and other commercial activities in accordance with their establishment licenses under the laws of Vietnam, and (ii) open accounts in Vietnam and transfer their profits abroad.
Decree 07/2016/ND-CP details Commercial Law about regulations on the establishment, operation, rights and obligations of representative offices and branches of foreign traders in Vietnam under the law on Commerce. Representative offices and branches of foreign-invested enterprises established in Vietnam shall not be governed by this Decree.
Rising Stars in Southeast Asia – Business Opportunity Analysis