The EU-Vietnam Free Trade Agreement (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) provide numerous benefits for foreign investors doing business with Vietnam or are in Vietnam, from better market access conditions to the ability to enforce foreign courts’ judgment in Vietnam.
Provisions on investment and trading are provided under Chapter 9 and 10 of the CPTPP and Chapter 8 under the EVFTA. Both Agreements highlight the principles of National Treatment (foreign investors are treated alike to domestic ones), Market Access (remove specific limitations to foreign enterprises), Local Presence (foreign enterprises do not need to establish local presence to supply cross-border service), etc.
We summarize key points that foreign investors are interested in when doing business in Vietnam:
Tariff reductions:
Both agreements apply the elimination of the majority of tariff lines once become effective and after an agreed schedule. For example, under the CPTPP, very sensitive goods such as beer, wine, chicken, iron and steel, cars under 3000 Cc will only be eliminated import duties starting from 2029. Vietnam already published preferential export tariff and special preferential import tariff schedules for products under EVFTA (Decree No. 111/2020/ND-CP) and under CPTPP (Decree 21/2022/ND-CP and Decree 57/2019/ND-CP). Do note that the named Decrees do not apply after 2022. We expect to see the tariff schedules for the period 2023-2025 by the end of this year.
EVFTA:
Banking services:
Vietnam commits to favorably allow EU credit institutions to raise foreign ownership to 49% of charter capital in two Vietnamese joint stock commercial banks. However, this commitment is only valid for 5 years (after the expiry of 05 years Vietnam will not be bound by this commitment), and not applicable to the four joint stock commercial banks in which the government is holding the dominant stocks, namely BIDV, Vietinbank, Vietcombank and Agribank. In addition, the implementation of this commitment will comply with all regulations on merger and acquisition procedures as well as safe and competitive conditions, including the limitation on the share ownership ratio applied for each investor presents as an individual or organization on the basis of national treatment, according to the provisions of Vietnamese law
Insurance services:
Vietnam commits to allowing cross-border cession of reinsurance and voluntary health insurance services according to domestic law. Regarding the commitment to allow the establishment of a branch of reinsurance company, Vietnam allows only after a transition period.
Telecommunication services:
Vietnam is committed to the same level as in the CPTPP Agreement. Especially for value-added telecommunications services without network infrastructure, Vietnam allows EU investors to set up a wholly foreign-owned enterprise after a transition period.
Services of transportation:
For empty consolidation and container transport services, immediately after the Agreement enters into force, Vietnam allows EU shipping lines to perform these services on Quy Nhon-Cai Mep route; after 05 years, Vietnam will allow the provision of empty container transportation services on all routes. With the dredging service, Vietnam allows EU businesses to set up joint ventures with foreign equity up to 51% to provide services in Vietnam. For ground services at the airport, the Ministry of Transport also agrees that after 05 years since Vietnam is open to the private sector, EU businesses will be allowed to enter joint ventures with Vietnamese partners in which foreign capital does not exceed 49% to bid to provide this service. 03 years later, the limit of foreign capital will be 51%
Distribution service:
Vietnam agrees to abolish the requirement of economic needs test five years from the date of entry in force of this Agreement. However, Vietnam reserved the right to implement distribution system planning on a non-discriminatory basis. Vietnam also agreed to non-discriminatory treatment for alcoholic beverage production, import and distribution, allowing EU enterprises to reserve their operating conditions under current licenses and to be required only one license to perform import, distribution, wholesale and retail activities.
CPTPP
The Chapter on Trade in Services, Chapter on Investment of CPTPP provide the following major obligations:
– Minimum standard of treatment: Each Party shall accord to covered investments treatment in accordance with applicable customary international law principles, including fair and equitable treatment and full protection and security.
– Expropriation: When necessary, for example, for a public purpose, government of one country has the right to expropriate foreign investors. Nonetheless, such right must be applied on a non-discriminatory manner and on payment of prompt, adequate and effective compensation in accordance with due process of law and provisions of CPTPP.
– Transfer: Foreign investors have the rights to freely transfer their capital contributions or profit of investment. Nonetheless, in some cases, governments of CPTPP member countries can prevent or delay such transfers of foreign investors for the purpose of control capital in case of balance of payment crisis or economic crisis.
– Not impose “performance requirement” (PR): One country shall not maintain performance requirements as a condition for investors to gain investment licenses or other preferential investment treatment.
– Not impose requirement on appointing senior management position (SMB): One country shall not require an enterprise to appoint to a senior management position a natural person of any particular nationality.
Investor-State Dispute Settlement (ISDS)
To protect interests of foreign investors, CPTPP allows foreign investors to initiate a lawsuit in International Arbitration center in case interests of foreign investors are infringed by one member country (for example, expropriation, nationalization, minimum standard of treatment…), except in case disputes arising from the implementation of commitments or obligations of investment agreements and investment authorization.
This is also covered in the EU-Vietnam Investment Protection Agreement. The EVIPA is pending ratification by EU member states before it can come to force, expectedly by 2023. In disputes regarding investment (for example, expropriation without compensation or discrimination of investment), an investor is allowed to bring the dispute to the Investment Tribunal for settlement. To ensure the fairness and independence of the dispute settlement, a permanent Tribunal will be comprised of nine members: three nationals each appointed from the EU and Vietnam, together with three nationals appointed from third countries. Cases will be heard by a three-member Tribunal selected by the Chairman of the Tribunal in a random manner. This is also to ensure consistent rulings in similar cases, thus making the dispute settlement more predictable. The EVIPA also allows a sole Tribunal member where the claimant is a small or medium-sized enterprise, or the compensation of damaged claims is relatively low. This is a flexible approach considering that Vietnam is still a developing country.
In case either of the disputing parties disagrees with the decision of the Tribunal, it can appeal to the Appeal Tribunal. While this is different from the common arbitration proceeding, it is quite similar to the two-level dispute settlement mechanism in the WTO (Panel and Appellate Body). We believe that this mechanism could save time and costs for the whole proceedings.
The final settlement is binding and enforceable from the local courts regarding its validity, except for a five-year period following the entry into force of the EVIPA (please refer to further comments in the Legal Sector Committee’s chapter on Judicial and Arbitral Recourse).
Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.