Dr. Oliver Massmann – Page 38 – Duane Morris Vietnam

November 18, 2016November 18, 2016 by Dr. Oliver Massmann

Corporate Governance – Issues and Solutions

X.1 OVERVIEW

Corporate governance is “the system through which those involved in the company’s management are held accountable for their performance, with the aim of ensuring that they adhere to the company’s proper objectives.”[1] In its strict sense, it is a set of regimes, policies and regulations in order to regulate, organize, manage and supervise operation of a company. The broadest meaning of this concept even expands to how the company interacts with suppliers, customers, creditors or the government agencies. In both senses, effective corporate governance and a sound legal framework on the same are critical for development of not only companies but also the business community in a relevant jurisdiction.

The Law on Enterprises of Vietnam in 2005 can be considered the first ever comprehensive set of legal framework that addresses corporate governance in Vietnam. Over time, the law has been tailored for specific targets (e.g. – Circular No. 121/2012/TT-BTC dated 26 July 2012 of the Ministry of Finance on corporate governance of public companies) or totally replaced with a more detailed and comprehensive law (e.g. – the Law on Enterprises dated 26 November 2014 (EL).

Despite such efforts, problems, always, still exist when it comes down to a better and workable legal framework for corporate governance, especially in light of well-established international standards. This poses investors and their management to a high level of risks which may cost them an ill business, possible claims for compensation and even criminal charges.

We consider some key, not an exhaustive list of, points that need to be addressed for a better legal framework on corporate governance in Vietnam.

X.2 Unclear about how owner of a single-member limited liability company (SMLLC) exercises its power

Relevant Ministries: Ministry of Planning and Investment

Issue description

Most of foreign investors in Vietnam choose the corporate form of SMLLC thanks to obvious advantages of this vehicle. The improvement of corporate governance of this corporate form would definitively add values to their investment in particular and the investment environment of Vietnam generally.

Article 75 of the EL gives owner (analogous to the single shareholder) of an SMLLC supreme power to manage its company. Key examples would be the right to make the most importance decisions of the company’s business affairs, appointment of key officers, restructuring of the entity, etc.

From a legal perspective, it is implied that the EL does not allow the owner to directly exercise these rights. Instead, it must act through either the members’ council (Article 79) or the company’s president (Article 80), depending on how many persons the owner wishes to authorize, to act on its behalf. In other words, though the owner is given the ultimate power, it has no option but to authorize other persons to exercise such power. In fact, what the owner can do is to ‘ratify’ company related decisions already approved by either the members’ council or the company’s president without directly deciding or approving them.

Potential gains/ concerns for Vietnam

Unfortunately, the language of the EL is not that clear and causes confusion for the investors, the management and even the licensing authority. This is even more critical because some guiding regulations of the EL, especially Decree 78 dated 14 September 2015 on enterprise registration (Decree 78) still requires decision of the owner on, for example, the change of the legal representative of the relevant SMLLC.

From a pure business perspective, this status quo may somewhat affect normal operations of an SMLLC in that decisions of offshore owners, which may not be easy to obtain, are always required for a number of decisions of the SMLLC. This also fails to create a level playing field between an SMLLC and a multi-member limited liability company (MMLLC)/joint stock company (JSC) because the latter’s owners may exercise via its authorised representative sitting in either the general meeting of shareholders (in case of a JSC) or members’ council (in case of MMLLC)

Recommendations

The EL should be more specific on only decisions of the members’ council or the company’s president are legally sufficient for approving most important issues of an SMLLC. Guiding regulations such as Decree 78 should be changed accordingly.

X.2 Scope of authorisation of the Members’ Council in an SMLLC

Relevant Ministries: Ministry of Planning and Investment

Issue description

Article 79.1 of the EL provides that the members’ council may act on behalf of an SMLLC to implement rights and obligations of that SMLLC other those granted to the general director.

This provision may not be consistent with the Civil Code of Vietnam (both 2005 and 2014 versions – collectively the ‘Civil Code’). Specifically, the Civil Code only allows an individual or a legal entity to act on behalf of their counterparts with respect to implementing civil transactions, which arguably include the aforementioned rights and obligations. These person/entity can be either the legal or authorised representative (via power of attorney or authorisation contract). It is obvious that the members’ council cannot be treated as any of the above concept and therefore cannot act on behalf of the company.

Potential gains/ concerns for Vietnam

From a legal making’s perspective, the Civil Code serves as the ‘parent’ law the spectrum of which covers other laws including the EL. The above inconsistency indicates shortfalls in law making process in Vietnam which is always among the biggest concern with foreign investors. More critically, such consistency may expose companies’ transactions to the risk of being challenged in terms of their legal validity.

Recommendations

Article 79.1 of the EL and any other similar provisions which grant the authorisation to bodies which are neither individuals nor corporate entities must be changed to reflect provisions of the Civil Code.

X.3 Authorisation Authority of an SMLLC’s (general) director

Relevant Ministries: Ministry of Planning and Investment

Issue description

Pursuant to the Civil Code, only legal representative or authorised representative can act in the name of a legal entity including a corporate entity. Regarding legal representative of an SMLLC owned by an organisational owner, its charter will clearly state who is/are the legal representative(s) of a company. Without such statement, either the chairman of an MC or the company’s president will be the natural legal representative of that SMLLC.

Nevertheless, Articles 64.2e and 81.2.e of the EL allows the (general) director (GD) of an SMLLC to enter into contract in the name of that company.

Potential gains/ concerns for Vietnam

There should be no challenge to this right if the GD is also the legal representative of the company. However, there can be a situation that the charter is totally silent on who is the legal representative of a company or refers person other than the GD of an SMLLC to this position. In such case, the GD’s execution of contracts on behalf of the company may trigger a possible challenge on legal validity of such contract on the ground that the GD should not have such representation authority under both the company’s charter and provisions of the Civil Code.

Foreign owners, who pour their money into Vietnam, are always concerned about the ‘principal – agency dilemma’. This explains why they are given the ultimate power to shape the company’s management by deciding who should be the one to act on behalf of their domestic business. As such, the above power of the GD not only violates principles of Vietnamese law on representation but also affect the freedom to manage its venture.

Recommendations

Articles 64.2(e) and 81.2(e) must be removed to ensure their consistency with the Civil Code of Vietnam.

X.4 Liabilities of Shadow Director(s) or De-factor Directors

Relevant Ministries: Ministry of Planning and Investment

Issue description

Shadow directors (SD) are generally understood as those (possibly shareholders) whose instructions or directions are often followed by the management personnel of the company. A de-facto director (DD) who actually acts as a director of the company without formally being appointed to this position. The reason why laws of many jurisdictions identify SDs and DDs is that they should be held liable for loss and damage caused to the company and third parties due to their influence. Vietnam is not an exception where many current disputes and criminal cases involve with the influence of, very often, SDs and, to a lower extent, DDs. Unfortunately, the EL does not tackle this issue in a clear and comprehensive manner.

Potential gains/ concerns for Vietnam

This lack of clear and comprehensive set of rules on who will be SDs and DDs and their respective liabilities would distort the good practice of transparent corporate governance on one hand. On the other hand, this fact would prompt an unexpected and improper conducts of people whose acts would negatively affect the company. This is critical because these people know that such acts will not be severely punished by the laws. Meanwhile, other duly-appointed directors who do not have actual authority to decide company’s matters may be at the risk of being challenged in terms of liability due to their failure to, among others, exercise their fiduciary duties.

Recommendations

The EL should (i) define who will be considered SDs and DDs and (ii) how they should be held liable on loss caused to the company and third parties.

Please do contact the author Oliver Massmann under omassmann@duanemorris.com if you have any questions on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

ABBREVIATIONS

EL	Enterprise Law
SMLLC	Single Member Limited Liability Company
MMLLC	Multi-Member Limited Liability Company
JSC	Joint Stock Company
GD	General Director
SD	Shadow Director
DD	De facto Director

[1] Parkinson JE, “Company law and stakeholder governance”. in E Kelly, D Kelly & A Gamble (eds), Stakeholder Capitalism, 1997, Macmillan Publishers Limited, pp. 142 – 154.

November 18, 2016 by Dr. Oliver Massmann

Rechtsanwalt in Vietnam Oliver Massmann Investitionsrecht und Lizensierung

Handel und Vertrieb von Wirtschaftsorganisationen mit ausländischen Investments – Was Sie wissen müssen:

Status

Nach dem Erlass des Investmentgesetzes (2014) beschleunigt die Regierung Vietnams die Ausarbeitung einer neuen Verordnung (Verordnungsentwurf) für den Handel und den Vertrieb von ausländischen investierten Wirtschaftsorganisationen (FIEOs) in Vietnam. Der Verordnungsentwurf wird sobald er in Kraft tritt „Verordnung 23 für Handel und Vertrieb ausländischer Unternehmen vom 12. Dezember 2007“ (Vorschrift 23) ersetzen.

Was ist neu im Verordnungsentwurf?

Im Folgenden einige neue Besonderheiten, die durch den Verordnungsentwurf eingeführt werden:

[Wirksame] Ausweitung der Geschäftsfelder, die der Erteilung Spezialgenehmigungen unterliegen; 2. Ausgliederung von Spezialgenehmigungen aus dem Investitions-Anmelde-Zertifikat (IRC); 3. Betrauung der Provinz-Behörde für Industrie und Handel (DOIT) mit der Genehmigungszuständigkeit in Bezug auf die Erteilung der Spezialgenehmigung; 4. Festlegung von Umständen, unter denen FIEOs von der Spezialgenehmigung ausgenommen sind; 5. Klarstellung der Voraussetzungen zur Errichtung von Einzelhandelsgeschäften einschließlich der Überprüfung des wirtschaftlichen Bedarfs (ENT); 6. Detaillierterer Anmeldeprozess.

Ausführliche Bemerkungen zum Verordnungsentwurf

Allgemeine Grundsätze der Voraussetzungen Spezialgenehmigungen

Grundsätzlich verlangt das Investitionsgesetz, vor dem offiziellen Markteintritt, von bestimmten Branchen ausländischer Investoren und ihrer lokalen Unternehmen zwei Ebenen von Bedingungen zu erfüllen. Die erste ist Investitionsbedingungen (điều kiện đầu tư) und der zweite Geschäftsinvestitionsbedingungen (auch als Geschäftsvoraussetzung oder Spezialgenehmigung bekannt), (điều kiện đầu tư kinh doanh). Ihre Hauptunterschiede sind in der folgenden Tabelle dargestellt:

Kriterien Investitionsbedingungen Geschäftsinvestitionsbedingungen Funktion Marktzugangsbedingungen für ausländische Investitionen Notwendige Voraussetzung, um tatsächlich Geschäfte oder

Investitionen zu tätigen

Zeitpunkt der Investition

Vor der Investition in Vietnam Nach der Investition in Vietnam

Zielgruppe Ausländische Investoren und FIEOs mit 51% oder mehr Eigentümern aus dem Ausland (wenn diese als Investor in einem anderen Unternehmen agieren)

Grundsätzlich alle FIEOs und lokale Unternehmen

Formulare Investitionszulassungsbescheinigungen oder “Genehmigung” des DPI im Falle der Gründung neuer Gesellschaften oder Erwerb bestehender lokaler Gesellschaften

Unterlizenzen wie Lizenzen, Zertifikate, etc. Im Falle von Handel und Vertrieb durch FIEOs, ist es die „Genehmigung zum Verkauf und Kauf von Waren“ des DOIT.

Zuständige Behörde

DPI / Behörde der Industriegebiete auf Provinzebene

Staatliche Organe vieler Ebenen. Im Falle von Handel und Vertrieb, die DOIT

Erweiterte Anwendung der Anforderungen Spezialgenehmigung

Der Verordnungsentwurf enthält eine spezifische Liste des “Kaufs und Verkaufs von Waren” und von “Tätigkeiten, die direkt mit dem Kauf und Verkauf von Waren zusammenhängen” von FIEOs, nämlich:

Handelsrecht (Import und Export); 2. Vertrieb; 3. Kommerziellen Werbemaßnahmen; 4. Kommerziellen Vermittlungsdienstleistungen; 5. Warenverleih Dienstleistungen; 6. Internethandel Dienstleistungen; 7. Logistik Dienstleistungen; 8. Wirtschaftlichen Beratungsdienstleistungen; 9. Warenversteigerungen, 10. Waren- und Dienstleistungs-Ausschreibungen Bieterservice; 11. Warenbörse; 12. Sonstige Tätigkeiten, die direkt mit dem Kauf und Verkauf von Waren zusammenhängen.

Für die Zwecke dieser Anmerkung werden diese genannten Dienstleistungen und Tätigkeiten gemeinsam als “Bedingte Unternehmungen” bezeichnet.

Im Vergleich zu der Verordnung Nr. 23, obwohl diese sich auf eine Vielzahl handelsbezogener Tätigkeiten bezieht (z. B. Werbung, Verkaufsförderung usw.), sind die FIEOs vorwiegend für den Handel und den Vertrieb von Spezialgenehmigungen bestimmt. Daher ist es aufgrund der dargelegten Tätigkeiten wahrscheinlicher, dass Genehmigungsbehörden für alle Bedingten Unternehmungen Spezialgenehmigungen verlangen. Sollte dies der Fall sein, kann dies als Rückschritt bezüglich der Vereinfachung der Lizenzierungen für ausländische Investitionen gesehen werden. Insbesondere würde Genehmigungsbehörden bei der Erteilung von Spezialgenehmigungen ein Ermessen gegeben

werden für Bedingte Unternehmungen, die eigentlich bereits vollständig für ausländische Investitionen geöffnet sind.

Abgrenzung von Spezialgenehmigungen aus der Investitionszulassung (IRC);

Bisher müssen Investoren, die sich für die Einrichtung eines Handels / Vertrieb FIE nur ein IRC beantragen, welches gleichzeitig als Spezialgenehmigung wirkt. Allerdings ist mit der Verschiebung der IRC Lizensierungszuständigkeit, von den Provinz-Volkskomitees hin zu DPIs nach dem Investitionsgesetz, der Genehmigungsprozesses für die Erteilung der Spezialgenehmigungen noch unklar.

Der Entwurf der Verordnung erläutert dies. Die DPIs und die DOITs sind für die IRCs bzw. die Spezialgenehmigungen zuständig. DOITs sind erforderlich, um Genehmigungen der MOIT und den unter bestimmten Umständen zuständigen staatlichen Stellen zu erhalten. Dieses neue Lizenzierungsverfahren wird, wenn es implementiert wird, effektiv ein dreischichtiges Zulassungsverfahren für FIEs schaffen, welches (i) IRCs bei DPI; (ii) Spezialgenehmigung bei DOIT und tatsächliche Zulassungen bei MOIT; sind. Dies ist umso problematischer, denn damit die DPI IRCs einschließlich der der Bedingten Unternehmungen ausstellen, wird in der behördlichen Praxis oft die Zustimmung der DOIT / MOITs eingeholt. Daher würden für einige Dienstleistungsbereiche vier Instanzen für die Erteilung der Genehmigungen erforderlich sein, die in Vietnam für ausländische Investoren seit Jahren im Rahmen ihrer jeweiligen internationalen Verträge bereits geöffnet sind.

Erlass eines Dekrets über Handelsrechte und Vertriebsaktivitäten von ausländischen investierten Wirtschaftsorganisationen (FIEOs) in Vietnam.

Verschiebung der Zuständigkeit für Genehmigungen in Bezug auf das Spezialgenehmigungen der Provinzabteilung für Industrie und Handel (DOIT);

Wie gesagt ist die DOIT verantwortlich für die Ausstellung von Spezialgenehmigungen. Dabei muss es zuerst die Zustimmung des MOITs einholen.

Freistellung von Spezialgenehmigungen

Es gibt möglicherweise vier Szenarien, in denen FIEOs von den Spezialgenehmigungen befreit sind:

FIEOs importieren / exportieren / verarbeiten oder veräußern Produkte nach ihren eingetragenen Geschäften oder in Verbindung mit ihren eingetragenen Dienstleistungen;
FIEOs, die bereits für die Durchführung von Handels- und Vertriebsrechten zugelassen sind;
FIEOs bereits lizenziert, um Logistik-und kommerzielle Assessment-Dienstleistungen; und
FIEOs mit ausländischem Eigentümer mit höchstens 35% stimmberechtigten Aktien (im Falle von Aktiengesellschaften) oder 35% Charterkapital oder einem niedrigeren Stimmrechtsverhältnis in der Satzung (bei Gesellschaften mit beschränkter Haftung).

Hinsichtlich der genannten FIEOs nach b. und c. ist unklar, ob diese Freistellung für FIEOs gilt, die vor oder nach dem Inkrafttreten des Verordnungsentwurfs gegründet wurden.

Einzelverkaufskriterien

Einzelhandelsgeschäfte von FIEs unterliegen nach wie vor den ENT Voraussetzungen, mit Ausnahme von:

dem ersten Einzelhandel;
Einem Einzelhandel, der anders als der Erste eine Fläche von weniger als 500 m2 in Handelszentren beansprucht; oder
Einzelhändlern, die anders als der Erste eine Gesamtfläche von weniger als 500 m2 in denselben Handelszentren beanspruchen.

Der Verordnungsentwurf führt spezifischere Messgrößen ein, um die ENT Voraussetzungen zu messen, einschließlich der Größe des relevanten Gebiets, der Zahl der bestehenden Einzelhandelsgeschäfte, der möglichen Auswirkungen des Einzelhandelsgeschäfts auf die Stabilität des Marktes, der Bevölkerungsdichte und der möglichen Einwirkungen der Einzelhandelsgeschäfte auf die sozio-ökonomische Entwicklung der Region.

Lizenzierungsprozess

Die FIEOs reichen die Antragsunterlagen an die Genehmigungsbehörde für die Ausstellung von Baby-Genehmigungen per Post, online oder direkt vor Ort ein.

Die Lizenzierungsdauer variiert je nach Nationalität der Anleger bzw. FIEOs. Zum Beispiel wird für Investoren aus Staaten, in denen völkerrechtliche Verträge mit Vietnam über den Marktzugang bestehen, der Zeitraum für die Abgabe der Stellungnahme durch MOIT und andere staatliche Gremien, lediglich sieben Werktage dauern. Andere Anleger (z.B. Anleger aus BVI oder anderen Steueroasen) können einen 15-tägigen Lizenzierungszeitraum erwarten. Die zuständige Zulassungsbehörde (z.B. die DOIT) erteilt die Babyzulassung innerhalb von fünf Tagen ab dem Zeitpunkt an dem vom MOIT und gegebenenfalls anderen zuständigen staatlichen Einrichtungen grünes Licht gegeben wird. Im Falle einer Ablehnung ist dies gegenüber der antragstellenden Körperschaft zu begründen.

Bitte kontaktieren Sie den Autor Oliver Massmann direkt unter omassmann@duanemorris.com wenn Sie Fragen haben. Oliver Massmann ist der Generaldirektor von Duane Morris Vietnam LLC.

VIELEN DANK!

November 10, 2016November 10, 2016 by Dr. Oliver Massmann

Position paper on expectation of foreign investors willing to invest in Vietnam and recommendations to improve foreign investment in Vietnam

Considering Vietnam’s recent deep integration into regional and world’s economy, foreign investors are very optimistic about their business development in Vietnam in the upcoming time. Despite having said that, there remain hurdles that discourage foreign investors when deciding to invest in Vietnam or other countries in the region, for example, Thailand, Indonesia and Myanmar. These hurdles are discussed in details below.

Integrity

It is an area of great concern despite recent Government efforts to combat it. Our recent small-scale surveys shows that ratio of unofficial payment or facilitation payment in a firm’s revenue is increasing over the years. Government officials are still causing a lot of troubles in case of refusal to pay the facilitation fee by enterprises. Most of the cases result in delay in receiving Government’s services or even being refused to be provided the services. Enterprises are deeply concerned about these issues, as they have to suffer from loss of business opportunities, which in turn becomes financial loss. Unfortunately, some enterprises participating in our survey express their losing of confidence that the situation will be improved before the next 10 to 20 years.

Access to information

It is of utmost importance that foreign investors get to understand the country they are going to invest in and its surrounding factors. However, public available information is limited while it takes a lot of time and money to get such information, for example, shareholders information, corporate structure, financial status, etc. of a company. In addition, the fact that information is not always available in English or other common languages causes discomfort to investors. While the websites of many Government authorities are in both Vietnamese and English, the English interface is very limited in its contents compared with its Vietnamese one. The same applies for legal documents.

Compliance

Compliance is a burden for not only Vietnamese but also foreign-owned enterprises. The bigger the size of an enterprise is, the more likely and frequently that it is subject to examination and supervision procedures from many levels of several Government authorities. One enterprise could receive at least 2-3 delegations per year to check its operation status, for example, tax, labour, firefighting and prevention, police, etc. In some cases, the scope of examination repeats.

Foreign invested enterprises also face a burden of having to comply with many administrative procedures, especially those in real estate, customs, fire prevention and safety, environment protection, labour and tax sectors.

Infrastructure

Energy production is of key concern, especially renewable energy. There is so much delay by the Prime Minister in issuing guiding documents for foreign investors to develop renewable energy in Vietnam, despite Vietnam’s urgent need of electricity for growth. Feed-in-Tariff rates are not attractive enough to investors. EVN’s monopoly is still a big hurdle.

Intellectual Property (IP)

Enforcement of IP rights is not assured and remains a concern for foreign investors. Legal sanctions must be much more severe and strengthened.

Enforcement of foreign arbitral awards

The reality is that the arbitration law is being ignored in Vietnam. The percentage of annulled foreign arbitral awards is high due to the matter of practice that the recognition and enforcement of foreign awards in Vietnam are almost impossible. When arbitration is being used more frequently in disputes, it is disappointing that the arbitrators’ decisions have not yet been duly respected. It must be made clear in terms of fundamental principles based on which arbitration awards could be set aside.

Investment in education sector

Legal capital for investing to establish high schools and universities are heavenly high (VND50 billion and VND300 billion respectively). This discourages many investors from countries with high educational reputation. This is not good for Vietnam especially when the young now needs better education than ever before.

House ownership and land use right of foreign invested enterprises and foreign individuals

The law is very unclear and inconsistent as to land regime applicable to residential houses sold to foreign invested enterprises. In addition, while the Law on Residential Housing already allows foreign individuals to purchase property in Vietnam, there is no clear procedure to grant the red book to such individuals. We have seen a huge demand from foreigners to buy houses in Vietnam, but their intention is damaged due to lack of procedures to acknowledge their ownership right.

Vietnam’s restrictions on imports of used machinery and equipment

Restrictions on imports of machinery and equipment based on any arbitrary time standard must be removed, administrative procedures to ensure compliance with international standards of safety, energy savings and environmental requirements must be simplified and incorporated into the National Single Window project, and any quality standards must be based on international standards. Otherwise, it would cause delays in customs processing, impact the modernization and industrialization process of supply industries and be not in accordance with the WTO Technical Barriers to Trade Agreement (Article 2.2) or the TPP Chapter on Technical Barriers to Trade.

Privatization of state-owned enterprises – in name only

State-owned enterprises have long played an important role in Vietnam’s economy. These enterprises have operated in an inefficient manner compared with private companies, many enterprises operating at loss for several years. Therefore, the Government has conducted several rounds of state-owned enterprises reform. However, setting aside the ambitious target of 289 state-owned enterprises to be privatized in 2015, the privatization process has been very slow and only by name. Only 5%- 20% of the shares are offered for sale, which is too low to attract foreign investors. They will be reluctant to invest in these enterprises as long as they have no chance to gain decision-making power by purchase of shares. The Government must then show stronger effort and commitment in reforming state-owned enterprises to attract more foreign investment in the process.

Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

October 11, 2016 by Dr. Oliver Massmann

Supporting Regime for Small and Medium Enterprises (SMEs) in Vietnam

In the context of Vietnam’s deeper integration into regional and world’s economy, domestic firms, especially the SMEs, are now facing fierce competition from foreign enterprises. If not timely and sufficiently supported, these SMEs will not grow proportionately to their existing capacity and drive the country’s growth as expected. In an attempt to ease restrictions for SMEs, pave the way for their further development, the Ministry of Planning and Investment has actively coordinated with the Ministry of Finance and other relevant authorities to draft the Law on Supporting SMEs. This Law, being supposed to be officially adopted next year, will introduce a comprehensive set of supporting measures for SMEs based on the country’s development targets, strengths of each province and the national resources, with a final aim of increasing the number as well as operation quality of SMEs sector. Details of the Draft Law can be found below.

SMEs – Who are they?

SMEs are enterprises which meet a criterion on total capital OR an average number of working employees, and can be classified into 3 categories: super small enterprises, small enterprises and medium enterprises.

Category Sector	Super small enterprises	Small enterprises		Medium enterprises
Category Sector	Average number of working employees per year (person)	Total capital (VND)	Average number of working employees per year (person)	Total capital (VND)	Average number of working employees per year (person)
Agriculture, forestry and fisheries	<10	<20 billion	10 – 200	20 billion -100 billion	200 – 300
Construction and industrial	<10	<20 billion	10 – 200	20 billion – 100 billion	200 – 300
Trade and services	<10	<20 billion	10 – 50	20 billion – 50 billion	50 – 100

Supporting mechanism – What are specific measures?

Supporting the entry into and exit from the market

The authorities will adopt measures to improve business environment, administrative reforms, ensure transparency and compliance for the business of SMEs. SMEs will be able to access business resources in a fair manner compared with other types of enterprises.

Access to bank loans

SMEs will have access to various types of bank loans according to their demands at interest rate and terms suitable for their payment capacity and financial status of the banks. With the Government’s support, SMEs will improve the feasibility of their business plans, management capacity and transparency in corporate operations, resulting in better ability to access bank credit.

Access to fund credits

The Fund for developing SMEs will have the function of lending, investing in, sponsoring for SMEs to conduct innovation, putting them in sustainable value chain. In case the activities of the mentioned Fund are caused losses due to force majeure in the business operations of the borrowing entities, relevant persons and organizations will be exempted from criminal penalty.

Corporate income tax

SMEs are entitled to a tax rate of 3% lower than that stipulated in the Law on Corporate Income Tax. Meanwhile, super small enterprises will enjoy a much lower rate, i.e., 5% lower than that in the Law on Corporate Income Tax.

Access to locations for business operation

The Government encourages the development of industrial zones, high-tech zones, economic zones, industrial complex for SMEs to lease. In doing so, enterprises who develop such infrastructure are entitled to a waiver or reduction of land rental according to the Government’s regulations. The more area in the industrial zones, high-tech zones, economic zones, industrial complex the SMEs lease, the more preferential treatment in terms of corporate income tax and land rental is granted to the developers.

Market promotion and expansion

The Government invests in the form of PPP by allocating land and other resources to establish a national supply chain, which prioritizes goods and products by SMEs. These products will enjoy preferential treatment if falling into the list of innovation goods stipulated by the Government. The Government also supports the establishment and operation of organizations supporting export activities to promote and expand market for SMEs.

Participation in public procurement

Small and super small enterprises are granted exclusive access to construction bid of maximum VND 5 billion and goods/ services bid of maximum VND 3 billion with state budget. For bids having greater value, small and super small enterprises are also prioritized over others pursuant to Article 14.4 of the Law on Bidding. In addition, in case the contractors sub-contract to the SMEs, the main contractors will also enjoy certain preferential treatment when bidding.

The Draft Law also introduces many other programs to support SMEs. Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

October 7, 2016 by Dr. Oliver Massmann

EU- VIETNAM FREE TRADE AGREEMENT – MARKET ACCESS OPPORTUNITIES

On 02 December 2015, after nearly 3 years with 14 rounds of negotiations, the Minister of Industry and Trade of Vietnam, H.E. Vu Huy Hoang and the European Commissioner for Trade, H.E. Cecilia Malmström have signed the Vietnam-EU Free Trade Agreement (FTA). Both parties will finalize the ratification process as soon as possible for the FTA to take effect from the beginning of 2018.

The FTA is considered one of the most comprehensive and ambitious trade and investment agreements that the EU has ever concluded with a developing country. It is the second agreement in the ASEAN region after Singapore and it will intensify the bilateral relations between Vietnam and the EU. Vietnam will have access to a potential market of 500 million people and a total GDP of USD15,000 billion (accounting for 22% of the global GDP). The other way around, exporters and investors from EU have further opportunities to access one of the fastest-growing countries of more than 90 million people in the region.

The real wages of skilled laborers may increase by up to 12% while real salary of common workers may rise by 13%. The macro economy will be stable and inflation rate is controlled. Vietnam’s business activities will be booming in the next few years once the EU- Vietnam FTA officially comes into force and Government’s policies as well as institutional reforms start showing their positive effects.

Vietnam’s GDP is expected to increase by 0.5% annually; increase in exports is 4-6% per year. If this trend continues until 2020, Vietnam’s exports to EU will increase by USD 16 billion. Until 2025, the FTA is estimated to generate an additional 7-8% of GDP above the trend growth rate.

Market access for goods

Nearly all customs duties – over 99% of the tariff lines will be eliminated. The small remaining number is partially liberalized though tariff tare quotas. As Vietnam is a developing country, it will liberalize 65% of import duties on EU exports to Vietnam at entry into force and the remaining duties will be eliminated over the next ten years. For some products, EU duties will be eliminated over a seven-year period such as motorcycles with engines larger than 150 cc, car parts, about half of EU pharmaceutical exports. The market will be opened for most of EU food products, i.e. wine, spirits and frozen pork meat after seven years and for dairy products after a maximum of five years. This is unprecedented far-reaching tariff elimination for a country like Vietnam, proving its targets of deeper integration and trading relations with the EU.

From the EU side, it agrees to eliminate duties for 85% of the tariff lines for goods imported from Vietnam immediately at the entry into force of the FTA. Within 7 years from the effective date of the FTA, there is more than 99% of the tariff lines being eliminated for Vietnam. The EU will eliminate duties for some sensitive products in the textile and footwear sector over a 5-7-year period, with a fabric-forward rule (instead of a strict yarn-forward rule as in the TPP) and allowing Vietnam to import fabrics from South Korea. The EU also offers access to some Vietnamese sensitive agricultural products via tariff rate quotas (TRQs), in addition to a number of main Vietnamese exports such as mobile phones, computer accessories, and sport shoes. Vietnamese exports of textile, clothing and footwear to the EU are expected to more than double in 2020 as a result of the FTA.

We note that besides Vietnam in the region, Singapore also concluded an FTA with the EU in 2014. However, this does not affect the competitiveness of Vietnam in trading with the EU. This is due to the fact that Vietnam mainly exports textiles, footwear, agricultural products, etc. while Singapore’s main exports are machines, chemical products and transport equipment. Moreover, while the EU is accelerating procedures to negotiate FTAs with different countries in the ASEAN region, Vietnam should take advantage of this golden time before FTAs with others in the region are concluded and become effective.

Market access for EU service providers

Although Vietnam’s WTO commitments are used as a basis for the Chapter on Trade in Services and Commitments, Vietnam has not only opened additional (sub)sectors for EU service providers but also commits deeper than in the WTO, offering its EU partners best possible access to Vietnam’s market. (Sub)sectors that are not committed under the WTO but under which Vietnam makes commitments are, for example: Interdisciplinary R&D services; Nursing services, physiotherapists and para-medical personnel; Packaging services; Trade fairs and exhibitions services; Building-cleaning services. Moreover, it is noteworthy that the FTA contains a provision that allows one party to grant the other party the best treatment that the former is negotiating with other partners under other framework (for example, TPP, Regional Comprehensive Economic Partnership, Vietnam – European Free Trade Association) on 17 July 2015.

We set out below certain Vietnam’s commitments in key sectors with reference to its commitment in the WTO.

Distribution sector

WTO requires an Economic Needs Test (ENT) for establishment of outlets for retail services (beyond the first one). EVFTA requires the same but adds cases for ENT exemption and timeline for ENT abolishment.

processed oil and crude oil by foreign investors are still prohibited

WTO

EVFTA

The establishment of outlets for retail services (beyond the first one) shall be allowed on the basis of an Economic Needs Test (ENT)

In case of establishing an outlet less than 500m² within the area planned for trading activities and already completed construction of infrastructure, ENT is not required.

5 years from the date of entry into force of the Agreement, the requirement of the ENT will be abolished.

Power/ Energy

WTO	EVFTA
N/A	Commitments are made in 3 sub-sectors: (i) Production of electricity; transmission and distribution of electricity on own account; (ii) Manufacture of gas; distribution of gaseous fuels through mains on own account; and (iii) Production of steam and hot water; distribution of steam and hot water on own account.

Maritime Transport

Sub-sectors

WTO

EVFTA

Maritime transport services

Mode 3 Market Access (MA): joint venture with maximum 49% foreign ownership

Mode 3 MA: joint venture with maximum 70% foreign ownership

Internal Waterways transport

+ Passenger transport

+ Freight transport

Mode 1: No commitment

Mode 3: joint venture with maximum 49% foreign ownership

Mode 1: No restriction

Mode 3: joint venture with maximum 51% foreign ownership

Securities services

WTO

EVFTA

Commitments on 6 sub-sectors

Mode 3:

foreign securities service suppliers are permitted to establish representative offices and joint ventures with maximum foreign ownership of 49%.

After 5 years from the date of accession, securities service suppliers with 100% foreign-invested capital shall be permitted.

Same commitments in 6 sub-sectors

Commitments on 2 additional services: Provision and transfer of financial data processing; and credit reference and analysis.

Mode 3: Same as the WTO

Telecommunication Services

Non facilities-based services: WTO/ AFAS: maximum 65% foreign ownership forever but in the EVFTA after 5 years, this could be 75%.
Other services – Virtual Private Network (VPN): maximum 70% foreign ownership forever but in the EVFTA after 5 years, this could be 75%.

Conclusion

Vietnam is a country of changes and currently offering increasing opportunities for foreign businesses. The underlying strength of the economy is reflected in, among others, controlled macroeconomic indicators, strong productivity gains and extensive integration into regional and global economy. It is now exactly time for foreign investors to start their business plans and grasp the upcoming clear opportunities.

***

Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com; if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC. THANK YOU !

October 6, 2016 by Dr. Oliver Massmann

Vietnam – Building better Investor Protection Framework – What you must know:

Vietnam stock exchange already gained significant milestones in developments, but why it still does not attract big domestic companies to list so far?

Tightened monetary policies leading to limited capital inflow to the securities market, its low liquidity and significant decrease in stock price partly contribute to the low attractiveness of Vietnam’s stock exchange. In addition, although Decree No. 60 loosens foreign ownership in public companies, detailed foreign ownership applicable for conditional business sectors has not been issued. This makes Decree No. 60, which is said to be rather promising to the market, invalid in whole or in part.

Another reason is Vietnam’s stock exchange lacks good stocks. In other words, the number of listed state owned enterprises seems to outweigh private entities. It is the fact state owned enterprises still do not attract foreign / private investment due to their history of bad performance. Meanwhile, successful private entities have not been listed. It seems like a vicious circle, when not many companies want to be listed due to low attractiveness of the securities market and unlikely increase in price of stocks after being listed.

Finally, investors and owners are held back to list at the Stock Exchange in Vietnam as Vietnam has not adopted international Corporate Governance Standard and effective means of implementation and enforcement of those. But latest in mid-2017 Vietnam is obliged to adopt these rules.

Vietnam is currently working with the IFC/World Bank on establishing Corporate Governance standards for investors interests. Thus we believe the situation will improve within the next year once Vietnam has fulfilled this task.

What benefits for companies if they list on Singapore or Hong Kong? But how high is the cost they would endure to comply with stricter regulations?

Singapore and Hong Kong are large capital markets where companies in Vietnam could find it much easier to call for capital. Investors in these countries already have certain knowledge about investment in Vietnam and the companies themselves, so if successfully listed, these companies will become more attractive to the investors there.

However, the cost to comply with very strict listing requirements is relatively high, especially when the Vietnam’s companies have never implemented similar requirements in Vietnam. The barriers are, among others, international standard audited financial statements, detailed foreign ownership, proven record of corporate management and complex tax rules. Considering that the cost could be as high as up to USD 1 million, it is recommended that only big companies with high financial capacity list their stocks on Singapore or Hong Kong stock exchange.

But at the moment, we don’t see any Vietnam firms listed successfully abroad. May be the procedure is a huge obstacle for them to move abroad? What do Vietnam companies need to do for completing listing on Singapore stock exchange?

Procedure and strict requirements as mentioned in Point 2 are huge obstacles for companies who want to list abroad. The first and foremost condition is Vietnam companies must understand very well structure of Singapore stock exchange. Next, be prepared for complying with requirements on financial capacity, assets, corporate management, number of shareholders, etc. It is highly advisable that Vietnam companies seek advice of international lawyer with good local legal knowledge so that Vietnam companies could implement their plans successfully.

September 28, 2016 by Dr. Oliver Massmann

Vietnam – Investment opportunities for German firms in high-tech manufacturing fields

Vietnam is on the up and up and will be a magnet for FDI

Vietnam’s economy in 2015 bounced back and exceeded expectations with the GDP growth rate reaching an estimated 6.7%- the highest rate in five years. The number also surpassed the Government’s target GDP growth rate of 6.2%. The average GDP per capita also rose by US$57 from last year, reaching about US$2,109 per person. Inflation this year, on the other hand, stayed far below the red line of 5% as issued by the National Assembly. It merely reached 0.6%, marking it as the lowest inflation rate in a decade.

Together with macroeconomic stability and controlled inflation, the Government of Vietnam is fiercely improving the business and investment environment and making great attempts to achieve key economic indicators of top regional countries, including reforms in administrative procedures; enhancement of governmental offices’ transparency and accountability; substantial reduction of tariff barriers and offering of tax incentives. By end of 2015, the total time for tax compliance by tax payers is reduced by 420 hours, meeting the target set by Resolution No. 19 and bringing Vietnam closer to ASEAN 6’s average tax compliance of 122 hours.

In addition, Vietnam has concluded the Trans-Pacific Partnership (“TPP”) and the EU- Vietnam Free Trade Agreement (“EVFTA”). Meanwhile, the ASEAN Economic Community (“AEC”), which Vietnam became a full member in 1995, has been established since the end of 2015. Vietnam is among the only 4 countries that are both members of the TPP and the AEC, meaning Vietnam will benefit from these amazing markets, bringing it to be a future production hub in the region.

Human resource is another advantage of Vietnam. It has the fastest growing middleclass in Asia according to Boston Consulting Group. Many under-30s have been selected by Forbes in 2016 as those having great influence in their working area. This group of young but talented people provides huge potential for investment, innovation and development.

Considering the above, confidence in Vietnam’s economy has reached high, and predictions for the near future remain positive. The Vietnamese economy is considered to be in a festive mode.

German investors – Come now or it will be too late!

Germany has 1307 out of 2700 of the world’s hidden champions, which are ranked number 1, 2 or 3 in the global market, or number 1 on its continent. They are backbone of the economy and especially strong in the manufacturing sector, like electrical engineering and industrial products. They also enjoy strong positions in foreign markets. These companies should pay particular attention to Vietnam’s market.

The global automotive supplier industry, and especially the after-market industry is one of the options. The reasons are obvious: important trade pacts and the thriving domestic automobile market, which is expected to rise from 300,000 to 1.5 million sold cars by 2025, fortify Vietnam’s investment attractiveness. Young and ambitious generation enjoys the modern lifestyle, and according to a recent report by Euromonitor, young consumers increasingly seek products that express their individuality, including their individual mobility by owning a car. Demand for automobiles is at no other time set to surge like this moment.

These facts are very well-known to the Vietnamese Government. In July, a special Council of the National Assembly for supporting industry demonstrated the importance of its development by inviting around 150 decision-makers of Vietnam’s respective sector to discuss the problems of the past and give their opinion to improve in the future. Frank Schoeninger, founder of SOPEC LLC was invited as the only foreigner to share his expertise and opinion at the event.

Conclusion

The upcoming free trade agreements (EVFTA, TPP, etc.) give Vietnam unique advantages in South East Asia, but also impose high pressure on the economy. In other words, this is a once-in-a-lifetime chance for Vietnam’s political and economic leaders to fix the issues of the supporting industry. Consequently, the Vietnamese Government is highly welcoming foreign investors, who leverage new technology. Foreign SMEs and multinationals that enter Vietnam therefore experience a “red carpet” treatment and receive attractive incentive programs. For example, within a special industrial cluster, investors will receive inducement on Corporate Income Tax (CIT average of 4.3% on a 5-10 year project) and benefits on Personal Income Tax for employees. Together with further development strategies in other important areas such as logistics by building new deep sea harbors or facilitating the cross border road traffic, Vietnam is going to be the new production hub in Asia for the machinery and especially automotive tier two manufacturing industry where several German and European automotive companies already experienced their own success story.

***

Please do not hesitate to contact Mr. Oliver Massmann under omassmann@duanemorris.com; if you have any questions on the above or should you request our assistance. Mr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

September 27, 2016September 27, 2016 by Dr. Oliver Massmann

Successful business in Vietnam – What you must know and do :

What are the benefits for foreign enterprises when they buy goods in Vietnam?

Vietnam offers young workforce and the wages that are roughly half those in China. Therefore, it is reasonable for Vietnamese goods to be far cheaper than other nations in the world. Moreover, not only are the prices low, the quality of Vietnamese goods is considerably high. With several Free Trade Agreements signed, including the Trans-Pacific Partnership, Vietnam has been improving its goods’ quality in order to increase its competitiveness in the global market. As a result, Vietnamese goods should be attractive to foreign enterprises.

What is special about Vietnamese companies and what makes them outstanding in comparison to other Asian companies?

In addition to young workforce and low wages as mentioned in the above answer, Vietnam also offers the long coastline from the North to the South of the country, which no other country in Asia has. This does not only provide the nation with excessive resources but also opportunities to promote the tourism industry. Moreover, unlike many developed countries in Asia such as China or Singapore, Vietnam is still at its developing stage. This also contributes to the attractiveness of the market here.

What is special about the Vietnamese market and its structure?

Although Vietnam is an effervescent market, the production of some types of goods still does not meet the demand. If the investors study this market well and focus on investing into these sectors, it is likely that they will succeed.

How can foreign companies get in contact with Vietnamese companies? Do you think it is necessary to use the support of a consultant company for example?

Foreign companies should search for contacts of Vietnamese ones online or via some reliable webpages such as https://dangkykinhdoanh.gov.vn/. Through this website, information regarding the founders, chief executive officers, their business lines and other information regarding companies in Vietnam could be found.

What do Vietnamese companies expect from their foreign cooperation partner?

Vietnamese companies, like the majority, seek for profit. As long as the cooperation follows the contract and results in profit, the Vietnamese companies’ expectations should be fulfilled. In order to do this, foreign investors should be able to fully understand the Vietnamese market as well its culture, strictly follow the law and provide great business plans.

If the right partner is found, the cooperation should be maintained in form of a contract or is a handshake enough?

It depends on the level of cooperation you wish to have. If you want to enter into a serious cooperation, for example, to do a business in Vietnam via an entity, although oral contracts are just as valid as written ones, a cooperation contract should be in writing, or that a contract be evidenced in writing (although the contract itself may be oral). Therefore, it is recommended that all cooperation should be signed under a legally binding contract.

Of what value is a contract in Vietnam in general and what options are available to enforce the content legally?

According to Article 401 of the Civil Code, a contract legally entered into shall take effect from the time when it is entered into, unless otherwise agreed or otherwise provided by law. From the effective date of the contract, contracting parties must mutually exercise rights and perform obligations as agreed. A contract may be amended or terminated as agreed by the parties or prescribed by law.

To enforce your contract in Vietnam, you should start by contacting the other party to see if she intends to perform and fulfill her part of the agreement. If the other party has not substantially performed on the contract after being provided notice, you may institute legal action for breach of contract. Before taking legal action, check the terms of your contract to see if arbitration, mediation or court proceeding is required. Even if not required, you may opt to enter settlement negotiations with the other party or see if the problem can be settled through mediation or arbitration.

Which place of jurisdiction should be included in the contract, should it be Vietnam or another country?

If one signing party is a foreign entity or partly owned by another foreign entity, the parties could opt to use foreign law as the governing law of the contract. In addition, regardless of whether one party is a foreign entity or not, the parties could decide to settle any dispute arising out of the contract by a foreign settling body. Having said that, implementation of the contract must still comply with Vietnam laws.

The legal situation in Vietnam is somewhat obscure for a foreign investor. What do you recommend foreign investors in this matter, so that they can focus on their business content?

It is a must that foreign investors ask all consultants in Vietnam whether they have a professional liability insurance according to international standards. Most of Vietnamese law firms have not. Their professional liability insurance is capped at low levels and subject to Vietnamese courts, that’s useless because Vietnamese courts aren’t reliable.

Before you sign any services agreement with any legal advisor / law firm/ consulting firm in Vietnam, please do the following: COPY PASTE THIS REQUEST IN YOUR EMAIL TO THEM AND WAIT FOR THE REPLY:

“Dear Ms/Mr ….,

Please send us the valid evidence that your company has an international standard and enforceable offshore professional legal liability insurance with dispute resolution offshore Vietnam and not subject to Vietnamese court or Vietnamese arbitration.

We would be happy to cooperate and retain your services if you can prove that your company is professionally insured to provide legal services to international clients according to international standards.

Thank you very much

Best regards”

Do you recommend an intercultural training to foreign entrepreneurs in advance?

Every market has its own distinctive features and the Vietnamese market is not an exception. Moreover, as the Vietnamese and foreign cultures are considerably distant, it can be expected that there may be several differences between the two markets. Therefore, familiarize oneself with the market before investing through intercultural training programs can always be a great solution to foreign entrepreneurs. In this way, not only will these people learn about the Vietnamese culture, but they will also learn about how to do business in this country.

A good friend of you wants to produce in Vietnam and export Vietnamese products into the foreign market. What are your recommendations? Whatshould he consider in order to succeed?

First of all, it should be noted that the Vietnamese market is open to foreign investors. Also, although the free trade agreement between Vietnam and EU has not been signed, the negotiation has already been finalized. Therefore, this could be another advantage to foreign SMEs. However, as mentioned, the Vietnamese law could be considerably ambiguous. Consequently, it is recommended that these SMEs strictly follow the law and consult legal agencies for appropriate advices. Also, cultural features can either be an advantage or a disadvantage. If a company knows how to utilize the cultural differences appropriately, that company is likely to succeed in the Vietnamese market. Otherwise, these differences can become obstacles to them. As a result, intercultural training programs should also be considered.

Please contact Oliver Massmann under omassmann@duanemorris.com; in case you have questions on the above. Oliver Massmann is General Director of Duane Morris Vietnam LLC.

August 31, 2016 by Dr. Oliver Massmann

Lawyer in Vietnam Oliver Massmann LEGAL ALERT ON EMPLOYMENT ISSUES

This Legal Alert is prepared based on recent official and unofficial discussions with the Ministry of Labor, Invalids and Social Affairs of Vietnam (MOLISA) and its in-charge persons in various meetings/seminars on labor laws of Vietnam.

We highlight below key employment-related issues discussed for your information and specific actions, where necessary.

Proposed Amendments of the Labor Code

The MOLISA is working on a draft that amends a number of articles of the Labor Code to reflect TPP and other international treaties and correct shortcomings of the current Labor Code. New issues including setting up independent trade unions, calculation of minimum salaries, working time. It is anticipated that the new Labor Code will be issued in late 2017.

Recommendations/Notes: We will keep you updated of proposed changes to the Labor Code.

Minimum Salaries

According to the MOLISA, there will be an increased range from VND180,000 to VND250,000 (equivalent to approximately US$8-12) of minimum salaries in 2017.

Recommendations/Notes: Please prepare for this inevitable situation, especially with respect to your business plan for the year of 2017.

Work Permits (WP) for Foreign Employees

Under the Labor Code, only experts; managers, executive directors and technical employees are permitted to work in Vietnam.

One of key considerations is that the concept of managers who are permitted to work in Vietnam are now limited to the narrowly defined ‘managerial positions’ under the Enterprise Law of Vietnam (EL). As such, only few people qualify for managerial positions (e.g. – members of the Members’ Council, general directors or other individuals have authority to enter into transactions on behalf of the relevant enterprises) pursuant to these enterprises’ charter (or the articles of association in other jurisdictions).

According to the MOLISA, a new circular guiding WPs will be issued soon.

Recommendations/Notes: In order to recruit a foreign manager who unfortunately disqualifies the managerial position criteria, the employers often expand managerial position definition in its charter or persuade the DOLISA, the issuing body of WPs, to accept them as ‘expert’ who in turn need only to satisfy general conditions (e.g. – acknowledged by the head quarter as expert; having obtained bachelor degree or equivalent; and having had at least 3 years of experience in relevant industry).

Overtime

In response to request for additional overtime hours, the MOLISA confirms that the amended Labor Code will deal with this issue. The specific overtime hours vary by industry and subject to agreements between employees and employers.

Social Insurance

As of 1 January 2018, all employees having labor contract term from 1 month or more including foreigners working in Vietnam must pay compulsory social insurances. However, according to the MOLISA, Vietnam is negotiating with some countries to relax the above rule given more financial burden to be shouldered by foreign invested enterprises. For example, Vietnam and Germany have basically reached in-principle agreements on possible exceptions to the above rule.

Recommendations/Notes: From a financial perspective, the payment of social insurance of expatriates may increase more burdens for enterprises. Please take into account this type of payment when calculating benefits payable to foreign employees and building up your business plan for the year of 2017.

Payments of Compensations under Training Contracts

As a matter of practice, a number of foreign invested enterprises send their local staff abroad for training. In exchange, the relevant employee agrees to enter into a training contract which requires him/her to work for the employer for a fixed period of time following his/her completion of the training courses.

In this regard, the Labor Code makes it pretty clear that any employees who terminate labor contracts illegally (either not having termination grounds or failing to send termination notice on time). Nevertheless, the law is silent on whether an employee who has terminated his/her labor contract in accordance with the laws will still be subject to reimbursement of training fees.

According to the MOLISA, employees are still required to reimburse training costs under training contracts regardless of whether they terminate labor contracts legally or not.

Recommendations/Notes: It is of utmost importance that the employer must have a well-drafted and detailed training contract at the outset. Actual [and reasonable] costs that the employer may incur for the benefits of the employee during the training period should also be clearly stated in the training contract. If not, the employee will stick to the fixed amount as agreed in the training contract to limit its reimbursement only.

Employment of Local Staff by Offshore Entity

As a matter of practice, many offshore entities including parent companies of FIEs in Vietnam seek to employ local staff to work on either a seasonal or long-term basis. The Labor Code is silent on whether a labor contract governed by Vietnamese law can be entered into between parties. In such absence, a provision of Circular 30 guiding the Labor Code on labor contracts dated 25 October 2013 makes a list of persons who can act on behalf of the employers. Unfortunately, there is no reference to a person who can act on behalf of the offshore entities. According to a senior expert of the MOLISA, such absence would mean a No for a direct labor contract between offshore employers and local employees.

Recommendations/Notes: A number of offshore entities seek to circumvent the above restrictions by entering into:

(i). an individual service/consultancy contract with the local employees;

(ii). a professional service contract with a local partner under which the local employees will work for the offshore entity; or

(iii). a labor outsourcing contract with a labor outsourcing company.

Each of the above options presents its pros and cons and care should be taken in adopting specific plan. For example, direct involvement of local employee may result in a permanent establishment status under tax laws.

Change of Types of Labor Contract

Vietnamese law prohibits employers to enter into more than two fixed term labor contracts with each not exceeding 36 months from the signing date. The third labor contracts in such case must be a non-fixed term.

A number of employers seek to avoid this restriction (i.e. – entering into non-fixed term labor contracts with employees) by first terminating fixed term labor contracts upon their expiry, giving a temporary suspension of works for employees and then signing a new fixed term labor contracts.

In this respect, the MOLISA and the Supreme Court of Vietnam opine that such an arrangement can be challenged because a real termination must result in completion of all related works including return of social insurance books, employees’ books and settlement of all benefits, etc.

Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if you have any questions on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

THANK YOU VERY MUCH!

August 26, 2016 by Dr. Oliver Massmann

Lawyer in Vietnam Oliver Massmann – Legal Alert TRADING AND DISTRIBUTION BY FOREIGN INVESTED ECONOMIC ORGANIZATIONS WHAT YOU MUST KNOW:

Status

Following the issuance of the Investment Law (2014), the Government of Vietnam is speeding up the drafting of a new decree (the Draft Decree) guiding trading and distribution of foreign invested economic organizations (FIEOs) in Vietnam. The Draft Decree, once issued, will replace Decree 23 on trading and distribution of foreign invested enterprises dated 12 December 2007 (Decree 23).

What is new in the Draft Decree?

Below are some new features introduced by the Draft Decree

[Effective] expansion of business lines to be subject to baby permits;

Demerger of baby permits from the investment registration certificate (IRC);

Delegation of the licensing authority with respect to issuance of the baby permits to provincial department of industry and trade (DOIT);

Setting out circumstances where FIEOs are exempt from baby permits;

Clarification of criteria for establishing retail outlets including economic needs test (ENT);

More detailed licensing process.

Detailed comments on the Draft Decree

General understanding of baby permit requirements

For a general understanding, for some specific business sectors, the Investment Law requires foreign investor and their local companies to satisfy 02 layers of conditions before officially entering the market. The first one is investment conditions (điều kiện đầu tư) and the second being business investment conditions (also know as business condition or baby permit), (điều kiện đầu tư kinh doanh). Their major differences are presented in the below table:

Criteria	Investment Conditions	Business Conditions
*Function*	Market access conditions applicable to foreign investment	Professional conditions in order to actually conduct business or investment activities
*Time of application*	Before investment in Vietnam	After investment in Vietnam
*Applicable Entities*	Foreign investors and FIEOs with 51% or more foreign ownership (if acting as an investor in another entity)	Basically, all FIEOs and local companies.
*Forms*	Investment registration certificates or ‘approval’ of the DPI in case of formation of new entities or acquiring existing local companies respectively	Sub-licenses such as licenses, certificates, etc. In case of trading and distribution by FIEOs, it is the approval for sale and purchase of goods of the DOIT.
*Relevant Authority*	DPI/industrial zone authorities at provincial levels.	State bodies of many levels. In case of trading and distribution, the DOIT

Expanded coverage of baby permit requirements

The Draft Decree makes a specific list of ‘purchase and sale of goods’ and ‘activities directly related to the purchase and sale of goods’ by FIEOs, namely:

Trading (import and export) rights;
Distribution;
Commercial promotion services
Commercial intermediary services
Goods leasing services
E-commerce services
Logistics services;
Commercial assessment services
Goods auction services
Goods and service bidding services
Commodity exchange
Other activities directly related to the purchase and sale of goods’.

For the purpose of this note, the above services/activities are collectively referred to as ‘Conditional Businesses’

Comparing with Decree 23, albeit referring to a variety of trading related activities (e.g. – advertisement, promotion, etc.), mainly subjects trading and distribution by FIEOs to baby permits. Hence, with activities being specified as above, it is more likely that licensing authorities would request all Conditional Businesses to be subject to baby permits. If this is the case, this fact can be seen as a ‘one step back’ in terms of relaxing licensing process for foreign investment. Specifically, licensing authorities will be given discretion in granting baby permits for Conditional Businesses which are in fact fully opened to foreign investment.

Demerger of baby permits from the investment registration certificate (IRC);

Previously, investors applying to setup a trading/distribution FIE need only to obtain an IRC which simultaneously serves as a baby permit. However, with the delegation of the IRC licensing authority from the provincial people’s committees to DPIs under the Investment Law, it is still unclear as to licensing process for issuance of baby permit.

The Draft Decree gives the answer. DPIs and the DOITs are responsible for the IRCs and baby permits respectively. DOITs are required to obtain approvals of the MOIT and, under some circumstances, relevant State bodies. This new licensing process, when implemented, will effectively create a 03-layer approval for FIEs which are (i) IRCs at DPI; (ii) baby permits at DOIT and actually approvals at MOIT. This is even more critical because in order for the DPI to issue IRCs including Conditional Businesses they, as a matter of practice, often seek the DOIT/MOIT’s greenlight. As such, 04 rounds for approvals would be required for some service sectors that Vietnam has been open to foreign investors for years under its respective international treaties.

Issuance of a decree on trading rights and distribution activities of foreign invested economic organizations (FIEOs) in Vietnam.

Delegation of the licensing authority with respect to the baby permits to provincial department of industry and trade (DOIT);

As said, the DOIT will be responsible for issuing baby permits. In doing so, it must first seek greenlights of the MOIT.

Baby Permit Exemption

There are roughly 04 possible scenarios where FIEOs are exempt from baby permits

a.FIEOs import/export/process or dispose products in accordance with its registered businesses or in combination with their registered services;

b.FIEOs already licensed to conduct trading and distribution rights;

c.FIEOs already licensed to provide logistics and commercial assessment services; and

d.FIEOs with foreign owner holding not more than 35% voting shares (in case of joint stock companies) or 35% charter capital or a lower voting ratio stipulated in charter (in case of limited liability companies).

With respect to FIEOs in item (b) and (c) above, it is not clear as to whether such exemption applies to FIEOs established before or after the effective date of the Draft Decree.

Retail Outlet Criteria

Retail outlets by FIEs are still subject to ENT criteria except for:

a.The first retail outlet;

b. A retail outlet other than the first one having area of less than 500m2 in commercial centers; or

c.Retail outlets other than the first one having total area of less than 500m2 in the same commercial centers.

The Draft Decree introduces more specific metrics to measure ENT criteria including geographic size of the relevant area, number of existing retail outlets, possible impacts of retail outlet to be applied on the stability of market, population density and possible contribution of the retail outlets to the socio-economic developments of the area.

Licensing Process

FIEOs send the application file to the licensing authority for issuance of baby permits per post, online or direct submission.

The licensing period varies by nationalities of the investors/FIEOs. For example, investors from jurisdictions which have entered into international treaties with Vietnam on market access, the period for the MOIT and other State bodies to give opinions will be 07 working days only. Other investors (e.g. – investors from BVI or other tax heavens) may suffer a 15-day licensing period. The direct licensing authority (e.g. – the DOIT) will issue baby permits within 05 days from the date of receipt of greenlights of the MOIT and other relevant State bodies, if any. In case of refusal, explanations must be given to the applying entities.

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Please contact Oliver Massmann under omassmann@duanemorris.com; in case you have questions on the above. Oliver Massmann is General Director of Duane Morris Vietnam LLC.