Vietnam’s Implementation of WTO Commitments and Investing in Vietnam

1. Vietnam’s Implementation of WTO Commitments and Investing in Vietnam Practical Issues, Updates and Some Case Studies By Katrina Alday March 26, 2010

2. Investment Procedure • (1) Selection of an investment project What type of investment? Direct or indirect? What type of business sector? • Specially encouraged investment projects • Encouraged investment projects • Geographical regions in which investment projects are encouraged • Sector in which licensing of investment is conditional • Sectors in which investment will not be licensed/prohibited

3. Investment Procedure • Also check Vietnam’s WTO Commitments i.e., Schedule on Services to find out specific requirements • 11 sectors in GATS include: • 1) business services; • 2) communication services; • 3) construction and related engineering services; • 4) distribution services; • 5) educational services; • 6) environmental services; • 7) financial services; • 8) health related and social services; • 9) tourism and travel related services; • 10) recreational, cultural and sporting services; • 11) transport services.

4. Understanding Vietnam’s Services Schedule under WTO • Therefore, if a service sector is not listed in the Services Schedule, then Vietnam has not made any commitments under the WTO regime to open up this sector . • The first column will often use numerical "CPC" entries. This is a reference to the Central Product Classification System of the United Nations. The detailed structure and explanatory notes of the CPC system can be found at http://unstats.un.org/unsd/cr/registry/regcst.asp?Cl=16&Lg=1.

5. Understanding Vietnam’s Services Schedule under WTO COLUMN 1: The 1st column contains the sector or sub-sector which is the subject of commitment of the GATS principle

6. Understanding Vietnam’s Services Schedule under WTO • In the Services Schedule, commitments will be specified as ‘none’ or ‘unbound’. "None" means that Vietnam cannot make any limitations on market access (that is, Vietnam has committed to give full market access). "Unbound" means that Vietnam is free to introduce or maintain measures inconsistent with full market access.

7. Understanding Vietnam’s Services Schedule under WTO COLUMN 2: Contains the limitations on Market Access under Article XVI of GATS

8. Understanding Vietnam’s Services Schedule under WTO • Again in the Services Schedule, commitments will be specified as ‘none’ or ‘unbound’. In this context, these terms having the following meanings: • "None" means that Vietnam cannot make any limitations on national treatment (that is, Vietnam has committed to treat foreign investors and local investors equally, at least after market entry). • "Unbound" means that Vietnam is free to introduce or maintain measures vis-à-vis foreign investors which are different to those imposed on local investors

9. Illustration

10. Illustration CPC 871 • Group: 871 - Advertising services • This Group is divided into the following Classes: • 8711 - Sale or leasing services of advertising space or time • 8712 - Planning, creating and placement services of advertising • 8719 - Other advertising services

11. Illustration

12. Illustration • Group: 642 - Food serving services • 6421 - Meal serving services with full restaurant service Subclass: 64210 - Meal serving services with full restaurant service Explanatory note Food preparation and serving services and related beverage serving services furnished by restaurants, cafes and similar eating facilities providing full service consisting of waiter service to individual customers seated at tables (including counters or booths), with or without entertainment. Included are such services provided by restaurants, bars, nightclubs and similar facilities, operated in hotels or other lodging places or in transport facilities, e.g. in trains or aboard ships. Exclusion: Serving services of beverages without prepared food are classified in subclass 64310, if without entertainment, and in 64320, if with entertainment. • 6422 - Meal serving services in self-service facilities • 6423 - Caterer services, providing meals to outside • 6429 - Other food serving services

13. Illustration • Group: 864 - Market research and public opinion polling services • Class: 8640 - Market research and public opinion polling services • Subclass: 86401 - Market research services • Explanatory note • Investigation services designed to secure information on the prospects and performance of an organization's products in the market. Included here are market analysis (size and other characteristics of a market) and analysis of consumer attitudes and preferences, which may utilize personal interviews, telephone and mail surveys, historical data, etc. Economic and social intelligence services not in connection with merchandised products, such as industry analysis, econometric modelling, demographic analysis, etc., are also included.

14. Investment Procedure: Conditional Business Sector • Conditional Business Sectors • 1. Broadcasting and television. • 2. Production, publishing and distribution of cultural products. • 3. Exploitation and processing of minerals. • 4. Establishment of infrastructures for telecommunications networks, transmission and provision of Internet and telecommunications services. • 5. Establishment of public postal networks and provision of postal services and delivery services.6. Construction and operation of river ports, seaports, airports and airfields. • 7. Transportation of goods and passengers by rail, air, land and sea and inland waterways.

15. Investment Procedure: Conditional Business Sector • Conditional Business Sectors • 8. Catching of marine resources. • 9. Production of cigarettes. • 10. Real estate business. • 11. Investment in import, export and distribution. • 12. Education and training. • 13. Hospitals and clinics. • 14. Other investment domains in treaties to which Vietnam is a contracting party and which restrict the opening of the market to foreign investors

16. Investment Procedure:How to set up a company in Vietnam • (2) Obtain the investment license What are the requirements for setting up a company? • Licensing – steps required to obtain the investment license • Post licensing – steps required after obtaining the investment license

17. Investment Procedure:How to set up a company in Vietnam • Requirements for obtaining an investment license (trading sector) • Application for investment license • Draft charter • Letter confirming the financial capacity of the investor • Corporate approvals (board resolution and meeting minutes) • Certificate of incorporation of the investor and copy of the charter of the investor • Identification documents of the legal representative of the company to be established

18. Investment Procedure:How to set up a company in Vietnam • Requirements for obtaining an investment license (trading sector) • Explanatory statement on satisfaction of business conditions regarding the nationality of the legal entity, investment form, business services and operational scope; • Registration document for exercise of import-export rights. • MOU for the lease of the head office

19. Case Study 1 • Scenario: investor wants to acquire 80% of the shares of a local company in the distribution services (retailing) business (2008) • Challenge: trading and distribution is a conditional business sector in Vietnam. Obtaining an investment certificate appears to be less straightforward in practice

20. Case Study 1 • At present, the definition of “trading rights” is commonly understood to mean the right to import and export goods. • Decree 23 defines distribution as activities of goods whole-sale, retail, purchase and sale agency, and commercial franchise as provided for by Vietnamese law.

21. Case Study 1 • Retail Services and Retail Outlets: • Can 100% FOC with a trading license for importing equipment for selling to a factory/end user? • Does end user mean an individual or company? • Economic Needs Test (ENT) • What does this mean?

22. Case Study 1 • Currently, under Decision 10 foreign investors are allowed to establish 100% foreign owned companies to engage in trading and distribution services (i.e., retail) • Actual scenario is… • Not easy to obtain an investment certificate in this sector.

23. Case Study 1 • The investor submitted the application to the licensing authority • The licensing authority replied: “The case of foreign investors making investments in or supplementing the business of goods trading (except export and import activities) and activities relating directly to goods trading (retailing) shall only be licensed upon approval in writing by the Ministry of Industry and Trade”.

24. Case Study 1 • In this case, the MOIT stated that: “According to the WTO’s commitments relating to distribution services (Appendix 1 of Decision 10), from 1/1/2008 there is no restriction relating to the percentage of capital contribution in the joint venture between a foreign investor and Vietnamese partner; from 1/1/2009 foreign investors are allowed to establish a 100% foreign owned company for carrying out distribution of goods according to the road map in Decision 10.”

25. Case Study 2 • Scenario: investor seeks to establish a 100% FOC in the form of a one-member LLC (to do trading i.e., import/export of industrial equipment & machinery with no distribution rights) • Challenge: trading and distribution service business is a conditional business sector. In certain localities,it is not easy to obtain an investment certificate in this business sector

26. Case Study 2 Application requirements under Circular 09 • Request for issuance investment certificate in accordance with the law on investment; • Explanatory statement on satisfaction of business conditions regarding the nationality of the legal entity, investment form, business services and operational scope; • Registration document for exercise of import-export rights.

27. Case Study 2 The licensing authority required the investor to explain: • the capability of meeting the total investment capital for the project size; (investment capital) • investor’s experience to ensure the performance of the import-export business;

28. Case Study 2 • list the details of items with HS code (4 digits) corresponding to the Import-Export Tariff Schedule and the List of Exports and Imports in accordance with the applicable regulations of the Ministry of Finance…”

29. Case Study 2 • maximum term of 10 years for projects with operational objectives directly relating to pure goods trading business, with no construction of material – technical facilities for the project.”

30. Case Study 2 • Submitted an explanatory letter to the HCMC DPI and explained in a straightforward manner the following: • Investment capital • Business lines • Experience of the investor • Description of the goods and the tariff code • In this case, the investor followed the additional requirements of the DPI and the investor’s application was approved.

31. Case Study 3 • Investor wishes to acquire the entire capital (100%) of domestic company company; business activities of the target included: • Manufacturing cattle feed, domestic fowls feed and aquaculture feed. • Manufacturing veterinary medicines • Service on disposal of liquid waste and environment. • Consultancy service on breeding • Examining, diagnosing, treating, caring and prescribing medicine for animal health. • Processing, bottling, packing, making up materials for aquaculture. • Selling and purchasing veterinary medicines • Selling and purchasing medicines, bio-preparations for aquaculture • Selling and purchasing machines for activities of breeding cattle, domestic fowls, aquaculture • Selling and purchasing equipments, production line for slaughter of cattle, domestic fowls • Warehouses and commodity storage in refrigerated warehouses (excluding bonded warehouses

32. Case Study 3 • Under the WTO schedule, a foreign owned company (“FOC”) may import and trade in the products under HS Codes 3002, 3003 and 3004, but may not distribute/retail these products (“Target’s Products”); • an FOC cannot retail the Target’s Products regardless of the percentage of foreign equity in the FOC. 

33. Case Study 3 • in the case of a 49% FOC, the incorporation procedures with respect to a “domestic” company apply, while, in the case of a company with higher foreign equity, the incorporation procedures with respect to a “foreign owned” company apply.  • It is currently unresolved whether this “49% rule” concerns only licensing procedures or also other aspects.  It’s especially unclear if the “49% rule” can apply to the products the company may sell. 

34. Representative Offices • RO permitted to carry out activities specified in its license • Permitted activities include: • Non-revenue generating activities such as market research, customer support and marketing or feasibility studies for investment projects. • Foreign companies are not permitted to use the RO as a vehicle to carry on actual business in Vietnam • Cannot be used to conclude or execute commercial contracts • But chief representative of the RO may be authorised by the parent co. on its behalf, under a power of attorney on a case by case basis provided that such contract is performed by parent company itself.

35. Options for foreign investor • No commercial presence • Enter into a distribution agreement with a local distributor • With commercial presence • Representative office • Branch office • 100% Foreign-owned company • Joint Venture Company (between a foreign investor and Vietnamese Party)

36. Options for foreign investor • Representative Office • No profit making activities; just acts as liaison office for “marketing activities” • Branch Office • allowed to conduct activities of goods purchase and sale and other commercial activities in compliance with their establishment licenses, the laws of Vietnam and treaties (i.e. WTO) • Purchase of shares in local company • 100% Foreign-Owned Company • With trading rights (i.e., right to import and export) but no right to directly distribute • May appoint distributors • Joint Venture Companies • Trading and distribution rights

37. THANK YOU • Ho Chi Minh City Office # 505, Saigon Tower, 29 Le Duan, Dist. 1 Tel. (848)38277300 Fax: (848)38277303 Emal: vilaf-hongduc@hcm.vnn.vn • Hanoi Office # 603, HCO Building, 44B Ly Thuong Kiet Tel. (844)39348530 Fax: (844)39348531 Email: vilaf@hn.vnn.vn