Author: Dr. Oliver Massmann

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Contract Manufacturing And Tolling Agreements

I. VAT and Customs
In many cases, the principal in the contract manufacturing relationship owns some or all of the raw materials, work-in-process and finished goods throughout the manufacturing process. The principal and many of the suppliers are typically outside of the manufacturing jurisdiction.

1. Generally Speaking, What Are The VAT, Customs And Related Costs (e.g. Broker Fees) That Arise When A Foreign Principal Has Goods Dropped Shipped Into Your Jurisdiction To The Local Contract Manufacturer? In Particular, Is There Any Non-recoverable VAT? If So, Are There Strategies For Avoiding Or Reducing This VAT Cost? With Respect To Customs, Please Provide The Range For The Customs Rates That May Apply. Also Are There Any Planning Techniques That Taxpayers Typically Employ To Reduce Customs Costs? Please Address The Same Issues In Connection With The Export Of The Finished Goods Outside Of The Country.

Most regulations on the Vietnamese VAT regime are included in the Law on Value Added Tax No. 13/2008/QH12 of the National Assembly, as amended by Law No. 71/2014/QH13.

Due to Article 7.3 of the Law on Tax Management, importers are obliged to pay tax in full and in a timely manner, including the VAT.

This norm includes the concept of drop shipping, which means an arrangement between a seller and the manufacturer or distributor of a product that shall be sold. According to the arrangement the product will be shipped to the buyer directly by the manufacturer or distributor and not by the seller. This definition can be understood as an alternative form of import. The law does not make any differences on the way that goods are delivered. Therefore drop shipping is not subject to tax exemptions or reductions.

It should be noted that no VAT is raised for goods in transit or transshipment or crossing Vietnamese borders as well as goods temporarily imported and re-exported and goods temporarily exported and re-imported. There are no further special regulations for drop shipping supplies.

2. In Many Cases The Principal Supplies Equipment That The Local Contract Manufacturer Uses In The Manufacturing Process. This Equipment May Remain In The Local Jurisdiction For A Substantial Period Of Time. Any Addition VAT Or Customs Issues That Are Unique To The Capital Equipment That The Principal May Import?

Capital equipment is not subject to the catalogue of VAT exemptions. According to the Law on Value Added Tax the following objects are exceptionally not subject to VAT: “Machinery, equipment and supplies which cannot be manufactured domestically and need to be imported for direct use in scientific research and technological development activities; machinery, equipment, spare parts, special-purpose means of transport and supplies which cannot be manufactured domestically and need to be imported for prospecting, exploring and developing oil and gas fields; aircraft, drilling platforms and ships which cannot be manufactured domestically and need to be imported for the formation of enterprises fixed assets or which are hired from foreign parties for production and business activities or for lease.”

3. Have There Been Any Recent Developments That Impact The VAT, Customs And Related Costs Applicable To Such Structures?

On 25 March 2015, the Ministry of Finance issued Circular No. 38/2015/TT-BTC, according to which machinery and equipment suitable for investment field, target, and scale of the investment project, satisfying other certain conditions, imported as fixed assets of investment projects in the fields or areas eligible for preferential import tax are exempted from taxes.

4. To The Extent That There Are Significant VAT Or Customs Issues That Arise If The Factory Imports And Owns The Raw Materials And Work-In-Process That Are Contract Manufacturing Specific, Please Let Us Know.

Raw materials and supplies imported for production of goods for export shall be subject to import duties and VAT and shall be entitled to refund of import duties and VAT corresponding to the ratio of exported goods on the basis of the levels of use of raw materials and supplies [Article 114, Circular No. 38/2015/TT-BTC in respect of raw materials and other supplies for production of goods for export].

According to Point c.5) of Circular No. 38/2015/TT-BTC dated 25 March 2015, enterprises that import raw materials for productions [“importing enterprise”] and then sell their products to another enterprise to directly produce or process products for exports [“exporting enterprise”], after the actual export by the exporting enterprise the importing enterprise is entitled to request for refund of import duty tax equivalent with the materials that the exporting enterprise already used.

5. Are There Any Additional Issues Taxpayers Should Be Aware Of In Connection With Locally Procured Raw Materials And/ Or Finished Goods That Are Sold In The Local Market?

Circular No. 128/2013/TT-BTC on guiding imported goods export, import, processing, liquidation and consuming products of foreign invested enterprises dated 10 September 2013 stipulates that:

– In the case of the sale of domestic goods to an export processing enterprise, the seller shall be exempt from export duties.

– In the case of the purchase by an export processing enterprise of domestic goods for export (without conducting any production activity), the export processing enterprise must pay export duties.

– In the case of the purchase by an export processing enterprise of domestic goods for the production of goods for export, the export processing enterprise shall be exempt from export duties upon export.

II. Permanent Establishment

1. As Noted Above, The Principal May Own Raw Materials, Work-In-Process And Finished Goods In The Local Jurisdiction. Is There Any Significant Risk That The Principal Could Have A Local PE Due To The Fact That It Has Such Inventory In The Country? Does It Matter Whether The Principal Has A Local Warehouse?

In Vietnam companies overseas conducting business activities through resident establishments in Vietnam are liable to pay corporate income tax.

According to the definition in Article 2.3 of the Law on Corporate Income Tax, Resident establishment means a business establishment through which a company overseas conducts all or a part of its business activities in Vietnam which earn income. A resident establishment of a company overseas can take different forms that are listed as well in the Law on Corporate Income Tax.

This list includes a representative in Vietnam in a case where it has authority to enter into contracts in the name of a company overseas or a representative which is not competent to enter into contracts in the name of a foreign company but regularly delivers goods or provides services in Vietnam.

This very broad reference might also include principals with assets as named above. These elements are not likely to form the risk of a permanent establishment in Vietnam but the authorities decide about permanent establishments on a case by case basis.

Where a treaty on avoidance of double taxation to which the Socialist Republic of Vietnam is a signatory contains different provisions relating to resident establishments, such treaty shall prevail.

2. Does The Answer Change If The Principal Also Owns Capital Equipment That It Has Provided To The Local Contract Manufacturer?

Also the ownership of capital by the principal does not necessarily bear the risk of a permanent establishment.

3. In Many Cases The Local Contract Manufacturer Purchases The Raw Materials (Either In Its Own Name Or As A Purchasing Agent Acting On Behalf Of The Principal) Because It Knows The Production Schedule Better Than The Principal. In Addition, In Some Cases The Contract Manufacturer May Have More Leverage With The Suppliers. Please Address Any Additional PE Issues That May Arise If The Contract Manufacturer Also Acts As A Purchasing Agent On Behalf Of The Principal.

The Law on Corporate Income Tax provides that the business conducted by a company overseas can be regarded as a resident establishment if the company has an agent that has authority to enter into contracts in the name of the company overseas. Given this the situation above might likely rise a PE.

4. In Certain Cases, The Principal Will Have Its Own Employees Or Agents In The Factory To Supervise The Contract Manufacturer, Provide Quality Assurance And Sometimes Technical Information. To What Extent Would Independent Or Dependent Agents (That Do Not Have Contract Concluding Authority) Providing Such Services, Combined With The Other Facts Set Forth Above, Result In A PE For The Principal. To The Extent That Actual Employees Or Staff May Result In A PE, Can The Principal Avoid The PE By Forming A Local Subsidiary To Employee The Staff? If So, Can The Subsidiary Be Compensated On A Cost Plus Basis?

Article 1.4.b of Decree No. 24/2007/ND-CP (as amended and partially superseded by Decree No. 218/2013/ND-CP and Decree No. 12/2015/ND-CP) (“Decree No. 24/2007/ND-CP”) stipulates that a business is considered as resident establishment if it takes the form of a “location of supervisory activities for construction, construction works, or installation and assembly works.

If the principal wants to be safe regarding the avoidance of a PE, he might establish a Representative Office [“RO”] to perform the tasks named above. This is possible as long as the RO is not doing business. Article 13.1.c of Decree 45 on Representative Offices allows to “monitor and activate the implementation of signed contracts of the foreign business entity or foreign tourism enterprise for which it acts as a representative.” This covers the activities named above.

According to Article 37 of the Commercial Law and Article 5 of Decree 45 any foreign business entity or foreign tourism enterprise which has lawful business registration in accordance with the law of the foreign country and has operated for at least 05 (five) years shall be issued with a license to establish a representative office in Vietnam.

5. To What Extent Do The Answers To These PE Questions Change If The Factory’s Sole Activity Is Acting As A Contract Manufacturer For A Single Principal.

This constellation is not directly addressed in Vietnamese Laws. Contract manufacturing for only one single principal might give rise to a PE if tax authorities interpret the business activities of the overseas company according to Article 1.4.b of Decree No. 24/2007/ND-CP [pls. see above under point II.4] as a form of “installation and assembly works”.

6. Assume An Extreme Set Of Facts Where In Addition To The Factors Set Forth Above The Principal Has A High Degree Of Control Over The Operations In The Factory. Assume For Instance That The Principal Hires The Employees And Its Employees In The Factory Have The Power To Stop Production To Correct Problems. At What Point Does The Principal’s Control Over The Factory Activity Give Rise To A PE?

We refer to point II.5 above. These business activities will be even more likely be considered as PE.

7. To The Extent That A PE May Arise In Any Of The General Fact Patters Described Above, Comment On Whether Additional Income Would Be Attributable To The PE. Can The Principal Argue That It Has Paid An Arm’s Length Gee Such That There Is No Additional Income That Such Be Taxed In The Jurisdiction? If So, What Transfer Pricing Methodologies Would Typically Be Used To Determine The Amount Of Income Attributable To The PE?

If there are no special rules in tax agreements, the principal can calculate on an arm’s length’s basis.

The Ministry of Finance has released a Circular on Transfer Pricing which requires companies to make a full self-assessment of their profits, calculated on an arm’s length’s basis. According to this circular, companies will be required to declare the related party transactions in a prescribed for and submit it within 90 days from the year end. Furthermore, the Circular provides an obligation for companies to maintain transfer pricing documentation to set out the evidence that they have taken place on arm’s length’s terms.

If companies fail to comply with these terms they risk double taxation and penalties.

III. Local Incentives

In many of your jurisdictions, the government grants tax incentives or holiday for taxpayers that invest in the local economy and manufacture within the country. In many contract manufacturing structures, however, the contract manufacturer receives a cost plus return, and the contract manufacturer generally does not own intangibles.

1. Is The Taxpayer’s Ability To Obtain A Tax Incentive Or Holiday Diminished By Operating Under A Risk-Stripped Structure Where The Local Entity Receives Cost Plus Remuneration?

Exemptions from and reductions of Corporate Income Tax are based on Chapter V of Decree No. 24/2007/ND-CP on Corporate Income Tax.

Tax incentives are provided in cases of encouraged investments. This term covers enterprises located in special export processing zones, enterprises that export a certain percentage of the manufactured goods or enterprises with a certain number of Vietnamese employees or laborers.

The contract manufacturer may carry forward their losses of a financial year to offset against future profits for a maximum of 5 years after the year incurring loss. The enterprise can freely choose how to allocate the loss to the later 5 years. When the 5 years period has lapsed but the loss has not been fully carried forward, the loss is not allowed to be carried forward to the next year.

2. Is The Taxpayer’s Ability To Obtain A Tax Incentive Diminished By The Lack Of Locally Owned Intangible Property?

This case is not addressed by the Vietnamese tax law.

3. Are There Any Other Aspects In Contract Manufacturing Structures That May Impact A Taxpayer’s Ability To Obtain A Tax Incentive Or Holiday?

Chapter V of Decree No. 24/2007/ND-CP provides detailed regulations on all CIT incentives.

Investment projects in certain industries and sectors listed in an appendix to the Investment Law shall be entitled to incentives as well as projects employing average numbers of employees, that are defined in Article 41.

According to the project type and the region of its location the tax rate can be 10, 15, 20 or 50 per cent.

IV. Conversion And Transfer Pricing Issues

In many cases, U.S. and European multinationals initially establish their local manufacturing operations in Asia as buy/sell entities because they have a local income tax holiday or exemption of some kind for a period of years. The local entity may even own intangibles and bear risk. When the local holiday or exemption ends (or the CFO decides the tax rate is too high), the parent may wish to convert the local entity into a contract manufacturer for a principal in a low-tax jurisdiction to reduce the income earned locally.

1. If There Are Locally Owned Product Intangibles, Is There A Capital Gains Tax On The Sale Of These Intangibles To A Foreign Owner And If So What Is The Rate? Assume The Local Contract Manufacturer Sells The Intangibles For Cash And Then Declares A Dividend Equal To The Amount Of The Sales Proceeds. Any Dividend Withholding Tax? If So, What Is The Rate? If There Is A Capital Gains Tax Or A Dividend Withholding Tax, in Addition To Discounted Cash Flow, What Other Valuation Approaches, If Any, Are Commonly Used? Are There Other Strategies For Reducing These Costs?

The taxation of the sale of intangibles is addressed in Article 32 of Decree No. 133/2008/ND-CP as amended by Decree No. 120/2014/ND-CP on technology transfer. This norm provides that the transferor has the obligation to pay tax on the amount of money generated from the technology transfer.

2. In Some Jurisdictions, The Local Authorities May Find That The Local Entity Owns Some Goodwill Or Going Concern Value As A Result Of Its Historic Operations. The Authorities May Assert Capital Gains Tax And Possibly Dividend Withholding Tax On Value Of The Goodwill Or Going Concern Value On The Theory That The New Principal Is Somehow Acquiring The Goodwill Or Going Concern Value In Connection With The Conversion. Is This An Issue In Your Jurisdiction? If So, What Planning Steps Can Be Taken To Minimize This Cost?

This issue is not relevant in Vietnam.

3. Assume The Local Entity That Historically Manufactured Goods On A Buy/Sell Basis Also Performs R&D And Marketing Activities. In Connection With The Conversion, Should These Activities Be Moved Into Separate Subsidiaries? If So, What Additional Issues Arise In Connection With This Conversion?

Please see point IV.2.

4. In Many Cases, The Local Contract Manufacturer Is A Wholly-Owned Subsidiary Of The Principal. In Such Cases, The Principal May Wish To Compensate The Contract Manufacturer On A Cost Plus Basis, With The Uplift Being A Percentage Of The Manufacturing Costs (And Not The Value Of The End Product). Is This Approach Viable In Your Jurisdiction and What Issues/Exposures Arise In Connection With The Use Of Cost Plus Transfer Pricing?

Transfer pricing rules in Vietnam require that the enterprise pays and Vietnam receives a reasonable rate of return on its activities as if the parties were unrelated [the arm’s length principle].

Vietnamese tax law does not provide special rules regarding cost plus transfer pricing. Please see point 2.7 for further information on the Circular on Transfer Pricing.

—o0o—

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.

INTERESTED IN DOING BUSINESS IN VIETNAM? VISIT: www.vietnamlaws.xyz

THANK YOU VERY MUCH

Posted on by Dr. Oliver Massmann

Lawyer in Vietnam Oliver Massmann Biomass Power Plant Development – SMALL SCALE BIOMASS POWER PLANTS IN VIETNAM – HOW TO STRUCTURE IT RIGHT?

Vietnam’s economic dynamism over the past years has given rise to a swift increase inenergy demand. Electricity demand in the country has been growing in the double digits annually.Vietnam has experienced rapid economic growth since it made a shift from a highly centralised planned economy to a socialist-oriented market economy in the mid-80s. This also resulted in unprecedented growth in electricity demand, which has not been observed in any other regions or developing countries.Electricity demand in Vietnam is forecasted to increase by up to 14.2 pct. annually for the 2011-2015 period and 11.4 pct. for the 2016-2020 period, and the electricity demand is expected to increase 7 times to 800 billion Kwh in 2030.
In this context, the Vietnamese government identified the necessity that the available resources of renewable energies have to be exploited and expanded to meet such a big electricity demand. While hydroelectric energy, whose resource is abundant in Vietnam, shows certain potential risks, biomass energy could be a choice for development in Vietnam. This derives from Vietnam’s advantage of widespread agriculture. The capacity for sustainable power production from biomass amounts to just 150 million tons per annum, 700 – 780 MW for electricity generation alone can be reached.
Government’s policy with regards to renewable energies in general and biomass energy in particular
Vietnamese Government recognizes the importance of renewable energy in power development and reflects its objectives in the Master plan VII on energy development in Vietnam.The renewable energy is increasingly accounting for power sources (4.5% in 2020 and 6.0% in 2030 of the total power supply.The Master plan VII sets the renewable energy target rate at 5.6 pct. of total primary energy consumption by 2020 and 9.4 pct. by 2030. The Government’s target is to increasethe biomass power to 500 MW (0.6 pct. of electricity production) by 2020 and 2,000 MW (1.1 pct.) by 2030.
Further, on 24 March 2014, the Prime Minister issued Decision No. 24/2014/QD-TTg to provide mechanism to support biomass power plants. In particular, this Decision offers the following incentives to off-grid biomass power plants:
• Investment capital:
o The investor can mobilize capital from organizations and individuals in and out of the country for investing in implementation of biomass power projects
o Biomass power projects are entitled to incentives in terms of investment credits in accordance with prevailing legal provisions on investment credit and export credit of the State.
• Import tax: Biomass power projects are exempt from import tax for goods imported to create fixed assets for the projects; imported goods are materials, supplies and semi-products which have not been locally produced and imported for serving production of projects in accordance with prevailing legal provisions on export tax and import tax.
• Corporate income tax: The exemption, reduction of corporate income tax for biomass power projects will be conducted inthe same way as for projects which are subject to investment incentives under laws on taxation.
• Land use: Biomass power projects and power line and substation works for connecting to the national power grid are entitled to exemption or reduction of land use or land rent fees.
For on-grid biomass power projects, Electricity of Vietnam (“EVN”) is to buy all of the plant’s biomass energy output at the current price of 1,220 VND/kWh (excluding VAT, about 5.8 UScent). This price will be adjusted according to the fluctuation of the VND/USD exchange rate.
Market access for foreign investor
Currently, there is no foreign ownership restriction in energy sector in Vietnam. The foreign investor may choose among permitted investment forms: 100% foreign invested company, joint venture or public private partnership (“PPP”) in the form of BOT contract.
Starting up a biomass power plant
In order to construct a biomass power plant, foreign investors first need to apply for an investment certificate. The application process is quite complicated and involves many state agencies, with certain unpredictable issues occurring. However, as the new Investment Law and Enterprise Law, which mainly regulate investment environment in Vietnam, takes effect from 01 July 2015, it is expected that it will be more time saving and less complicated for foreign investors in the licensing process.
Either before or after the investor is on board (but in each case before the construction), it is necessary to establish the project enterprise and to secure investment certificates issued by competent authorities. Then, the project enterprise has to conclude negotiations with regard to a wide range of important project contracts including the land lease contract and the power purchase agreement (PPA).
Under the PPA, EVN (in case of network-dependent network) – or in rare cases also other buyers – undertake to purchase energy from a project enterprise for a definite period and at a specified rate. The PPA is probably the most important agreement to be negotiated because it determines the future income from the project. It is crucial that, according to the PPA, the project enterprise cannot be burdened with a penalty if the power supply is affected by small amounts of biomass. In view of the fact that at the moment there is only one buyer (EVN) for network-dependent power projects, the negotiations may be sometimes unilateral. Moreover, the electricity producers have to consider that the consumers (according to the Electricity Law) have a statutorily regulated right to renegotiate the purchase price in the medium term. They have to take it into account in their project planning.
The land or real estate lease contract in Vietnam should be kept rather simple, though the aspects of land sale approval and compensatory payments may be fraught with difficulties. Usually, the duration of such contracts should correspond at least to the loan repayment plan and, in addition, a considerable period for profit generation after the repayment of the loan should be agreed (as a rule 25-30 years). Furthermore, it is important to make sure that the land use rights of the project enterprise can be provided for the lender as security and are transferable.
Small scale biomass power project in Vietnam – How to structure it right?
Considering the monopoly role of EVN as well as tough negotiation of the PPA, investors could still get out of this trouble. According to Article 1.2 of Circular No. 56/2014/TT-BCT promulgating methods to determine electricity generation price and examination steps of the PPA, the important requirement to negotiate with EVN is whether it is an on-grid or off-grid project. If it is an on-grid project with capacity of more than 30 MW or under 30 MW but voluntarily participating in the power market, the investor must negotiate with EVN. This indicates that if the project is off-grid, there will be no requirement to negotiate with EVN.
Moreover, in order to operate small scale biomass power project, the investor needs to obtain a power operation permit issued by the local People’s Committee or the local Department of Industry and Trade as authorized by the local People’s Committee.To get such permit, the operator has to negotiate (or sign in principle) a PPA with a buyer. In case the project is off-grid and renewable energy project (biomass), the operator can negotiate with a local distributor/buyer assigned by the local People’s Committee.

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.

INTERESTED IN DOING BUSINESS IN VIETNAM? VISIT: www.vietnamlaws.xyz

THANK YOU VERY MUCH!

Posted on by Dr. Oliver Massmann

Why Is It Best To Start Preparing For Transactions Now In Vietnam?

Vietnam is currently at the final stage of negotiating the Trans-Pacific Partnership (“TPP”) and the EU- Vietnam Free Trade Agreement (“EVFTA”). Meanwhile, the ASEAN Economic Community, which Vietnam became a full member in 1995, is to be established by the end of 2015. With such deep integration into the multilateral and regional economy, Vietnam is expected to be an attractive investment environment for investors and witness a significant growth in the upcoming years. Samsung Electronics Company has decided to choose Vietnam as the Number 1 country to put their world largest mobile and tablet production and invested more than 6 Billion USD after a researching worldwide. Also major Japanese companies are convinced Vietnam is a top investment destination and become the largest investors in Vietnam. However, whether foreign investors should wait until the TPP and the EVFTA are concluded and the AEC has been established to enjoy their benefits then is a big question. The following section provides an overview of these free trade agreements and the AEC to help investors understand what is awaiting them ahead and choose the right time for their investment.

TPP

The TPP is one of the largest trade and investment agreements ever to be negotiated, involving some of the largest nations in the world. Countries participating in the negotiations include those throughout the Asia- Pacific region, namely Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. The TPP is touted to be the 21st century trade agreement, set a template for regional and global trade and investment and incorporate next-generation issues.

TPP Market Snapshot
• GDP: US$28,136.0 billion (2012)
• GDP per capita: US$35,488 (2012)
• Population: 792.8 million (2012)
• TPP % of world GDP: 39.0% (2012)
• TPP % of world population: 11.3% (2012)
• TPP % of world trade: 25.8% (2012)

The TPP is being negotiated across thirty chapters with deep focus on comprehensive market access, a fully regional agreement, cross-cutting issues (regulatory coherence, competiveness and business facilitation, small and medium sized enterprises, and development), new trade challenges (particularly rules on state owned enterprises and government procurement); as well as, finally, the notion of a living agreement.

The TPP would expand market access in goods and services among its signatories. The market access issues include liberalization of trade barriers protecting dairy, sugar, and rice; tariffs and origin rules affecting textiles, clothing, and footwear; and services trade reforms, especially financial services, insurance, and labor services. Vietnam would be the largest beneficiary of this trade pact, resulting from its strong trade ties with the United States, high level of protection against its main exports (i.e., apparel and footwear), and its highly competitive positions in industries such as manufacturing where China is gradually losing its competitive advantage. Statistics shows that by participating in the TPP, Vietnam’s GDP would add an additional increase of 13.6% to the baseline scenario.

Higher income will help Vietnam to invest more and grow more

Vietnam is among the largest income gains in TPP

Recently, President Barack Obama has been grated fast-track authority to negotiate the TPP with other 11 nations. This shows a step closer to its conclusion, hopefully by the end of 2015.

AEC
The AEC originates from the ASEAN Vision 2020, which was adopted in 1997 on the 30th anniversary of the Association of Southeast Asian Nations, made up of Brunei Darussalam, Myanmar, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam (ASEAN). With a population of more than 600 million and a nominal GDP of about $2.31 trillion, ASEAN is a strong economic community in Asia and also a driver of global growth.

The AEC encompass the following characteristics: (i) a single market and production base, (ii) a highly competitive economic region, (iii) a region of equitable economic development, and (iv) a region fully integrated into the global economy.
The AEC is expected to be an area where goods can circulate freely and in which custom duties on goods will be gradually reduced to 0%. It will establish ASEAN as a single market and production base, making ASEAN more dynamic and competitive with new mechanisms and measures to strengthen the implementation of its existing economic initiatives; accelerating regional integration in the prioritized sectors; facilitating movement of business persons, skilled labor and talents; and strengthening the institutional mechanisms of ASEAN.
The free flow of investment will also offer enhanced investment protection to all ASEAN investors and their investments in other ASEAN member countries, including the settlement mechanism of an investor state dispute based on a non-discrimination principle when investing in other ASEAN countries. Those principles play a very important role in providing investor confidence when making cross-border investment.

Once the AEC is completed, it will be a unified market, a common manufacturing area seeking for more dynamic and competitive development and to create new opportunities for tariff reductions as well as other trade incentives.

AEC Market Snapshot
• GDP: US$2311.3 billion (2012)
• GDP per capita: US$3748.4 (2012)
• Population: 620 million, 60% under the age of 35
• AEC % of world GDP: ~3.3%
• AEC % of world population: 9%
• AEC’s merchandise exports: US$1.2 trillion – ~54% of total ASEAN GDP and 7% of global exports
• If ASEAN were one economy, it would be the 7th largest in the world – 4th largest by 2050 if growth trends continue

EVFTA

It is estimated that Vietnam’s Gross Domestic Products (GDP) could rise by over 15% and that the value of its exports to the European Union could increase by almost 35% as a result of its entry into force.

In 2013, the EU was Vietnam’s second biggest trade partner with a total value of trade in goods of EUR 24.2 billion. In the same the EU was also Vietnam’s biggest export market with EUR 21 billion, representing 19% of Vietnam’s total export. Vietnam’s export to EU increased by 28% from 2012 to 2013. In addition, the EU is among the biggest investors in Vietnam, with 1,810 FDI projects in 2013. The EU committed to continuing to support with the foreseen assistance amount of EUR 400 million in the coming six years. EU exports to Vietnam are dominated by high-tech products including electrical machinery and equipment, aircraft, vehicles, and pharmaceutical products. Vietnam’s key export items to the EU include telephone sets, electronic products, footwear, textiles and clothing, coffee, rice, aqua products, and furniture.

The two parties have already been cooperating on various subject matters since the conclusion of the EU-Vietnam Partnership and Cooperation Agreement in June 2012. This cooperation will be brought to the next level by the conclusion of the FTA, which will tackle issues such as tariff and non-tariff barriers, regulatory issues, services, public procurement, Intellectual Property Rights, sustainable development, etc. 2015 will mark the 25th anniversary of EU-Vietnam cooperation, and it is expected to be the year the EU-VN FTA is concluded.

Conclusion: Why investment in Vietnam now – not after the trade pacts are signed and sealed?

 Vietnam ties in first place with Singapore, thus it provides highest possible protection for investment

Country Limitation of market access* Country Limitation of market access*
Malaysia medium Myanmar high
Indonesia medium Cambodia medium
Philippines medium Laos medium
Singapore low India high
Thailand medium China medium
Brunei high Vietnam low

*Typical restrictions: number of opened sectors, JV requirement, limits on foreign-owned shares, permission requirement

 Vietnam has the fastest growing middle class with a very good demographic situation: about 90 Million people of which about 50 percent are under 30 years old.

 Expectations of Vietnam parties might get unreasonable, the same as after Vietnam acceded to the WTO in 2007 and no projects could be done.

 Market opening in certain sectors, for example, media, and there could be more competing companies from the AEC with better market access to Vietnam. Thus, it is vital that investors start working on their projects now to position themselves as early as possible before the coming into effect of the trade pacts and the AEC.

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.

INTERESTED IN DOING BUSINESS IN VIETNAM? VISIT: www.vietnamlaws.xyz

THANK YOU VERY MUCH!

Posted on by Dr. Oliver Massmann

Breaking News – Vietnam – Broadcasting Market – First time Investment of foreign investors possible!

Breaking News – Vietnam – Broadcasting Market – First time Investment of foreign investors possible!

For your information, on 7 January 2015, the Prime Minister of Vietnam issued Decision 01 amending the “master plan on radio and television transmission and broadcasting through 2020” (the “Master Plan”). Decision 01 officially came into effect as of 15 March 2015.

The biggest change that Decision 01 makes is involvement of enterprises of all economic sectors, arguably including foreign invested enterprises, in the transmission and broadcasting market of Vietnam. Before Decision 01, only State owned enterprises or enterprises where State has majority ownership were given access to such markets.

As a matter of fact, VTV and its affiliates/subsidiaries hold a dominant role in the TV market. The “group” is responsible for both content provision and transmission/broadcasting. When a number of software/telecommunication giants such as (Viettel, the biggest telecomunication or FPT, the largest telecommunications and software companies respectively) start their TV business by taking advantages of their available infrastructure, VTV has sought to isolate them by offering content to its affiliates and subsidiaries first. This results in a modest expansion of newcomers like FPT and Viettel for the last two years.

The cause behind such change is, on one hand, the Government’s plan to separate the pay TV transmission/broadcasting and content provision which fall inside the sphere of the Law on Telecommunications and the Law on Media of Vietnam respectively. On the other hand, the Government wishes to form major transmission/broadcasting companies of large scale which are able to cover services nationwide.

We hope the above is useful for your consideration and will keep you updated of latest developments in this sector from time to time.

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.

INTERESTED IN DOING BUSINESS IN VIETNAM? VISIT: www.vietnamlaws.xyz

THANK YOU VERY MUCH!

Posted on by Dr. Oliver Massmann

Vietnamese Clean Development Mechanism CDM market – The perspective of an emission certificate buyer

Overview of the CDM market in Vietnam

Certain projects for the reduction of emissions in Vietnam are suitable for purchasing certified emission reductions (CERs) under the Clean Development Mechanism (CDM). The buyers sign an agreement with local project owners in order to obtain rights to CERs from the project. Purchasers are usually ultimate consumers and speculators. Most CERs are eventually used by power companies and other purchasers from the EU area that meet the requirements as well as governments of developing countries etc. The buyers of primary CERs obtain at the European Climate Exchanges a discount compared to the secondary market price because they carry considerable delivery risks and typically have met CDM related expenses. Delivery risks arise typically through project execution, but also in form of CDM registration- and validation-related risks. Validation-related risks are highlighted due to the fact that out of 85 projects which have been uploaded for evaluation in Vietnam only 8 have been registered yet. Over 40% of the projects have been under validation for a year.

Vietnam’s market potential

Vietnam could have the potential to generate up to 10 million CERs. However, it is subject to acceleration of the validation process, i.e. the publication of standard CEF for the Vietnamese grid, the encouragement of required local approvals etc. Due to delays in project validation and construction, the scope will be probably smaller. The global recession has adversely affected the access to financing, which in turn affected particularly the hydropower sector (the main CDM project type in Vietnam).

Due to uncertainties with regard to the system after 2012, projects have to be registered or ordered as quickly as possible. Although the market price of CERs has decreased due to the impact of global recession, there is still a sufficient demand for Vietnam’s CERs. Purchasers are prepared to change to new product fields and are particularly interested in projects with a high sustainable development value for the local community.

CER portfolio management

Compliance buyers have to administer their portfolio intensively in order to reflect their intended and actually provided loans. Higher prices are paid usually in connection with project types involving high registration and verification risks. Furthermore, higher costs could be incurred within projects which are well advanced in respect of construction, but it will be dependent on this and not on increased registration risks. In case of projects which have already been started, the earlier CDM consideration as part of an additionality analysis has to be proven. Distribution of risk is an important risk management instrument. For example, many buyers may have a big percentage of their portfolio in Chinese CERs, so it is recommendable to have a look at other markets, such as SE Asia etc. Distribution of risk extends right up to technology type.

Most important project types in Vietnam

– hydropower: most common project in Vietnam. Validation risks are named as medium and verification risks are low. Although in these projects are a long construction period and often numerous delays.
– wastewater used for generate energy: 7 projects are already applied for registration. Risk of validation is low to medium, construction time is low (often less than one year) and the risks of validation is medium size.
– other renewable energy types: wind is a high potential, so far only one project existing. Also bio energy project have a high potential. Risks of validation and verification are low to medium, even there is a long construction period.
– MSW-treatment- are only few projects so far, but there is a high potential for composting. Risks of validation are low to medium, medium risks of verification and medium period of construction.

Most important feasible project types in Vietnam

Case studies:

BinhThuan: 30 MW wind farm project

This project, construction of the first wind farm in Vietnam, is run by the Vietnam Renewable Energy JSC. The first turbine group has been already installed on the construction site. In April 2009, the project has been registered with the CDM EB. A production of electricity of 91.571 MWh/year is expected, whereas over 59,000 t of CO2 emissions/year are to be reduced.

Case study – Cu Chi 1000t/d MSW processing plant
This project was developed by Tam SinhNghia (TSN) and includes composting of 1000 t/d of municipal solid waste (MSW). The expected emissions reduction of CH4 avoidance is estimated at roughly 1 million tCO2e (more than seven years of credited period).

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.

INTERESTED IN DOING BUSINESS IN VIETNAM? VISIT: www.vietnamlaws.xyz

THANK YOU VERY MUCH!

Posted on by Dr. Oliver Massmann

Investments in the Energy Sector

Future market development and opportunities for foreign players
– Vietnam’s strategies and master plan with regard to the expansion of renewable energies by 2015 and visions for the years ahead…

General overview:

Vietnam’s requirement for renewable energies rises sustainably (in the past, in the present and in the future by an average of 10% per annum). The country becomes increasingly dependent on the world energy price because the growth of domestic energy sources is most likely not able to keep up with the economic growth rate. The high potential of the hydroelectric power will be consumed primarily in the next decade, with gas and coal supplies being limited, so that in the near future Vietnam will have to import coal for energy production. In this context, the Vietnamese government identified the necessity that the available resources of renewable energies have to be exploited and expanded, and the currently existing obstacles gradually removed.

Potential and current status of the expansion of renewable energies:

Vietnam has potential resources of renewable energies. These sources, which can be exploited and actually utilized, include small-scale hydropower, wind power, biomass, biogas, bio fuel, energy from domestic waste, solar energy and geothermal energy.

– Small-scale hydropower: taking into consideration the economic efficiency and profitability, it is classified as the most viable form of renewable energies. More than 1 000 locations show a potential for the development of small-scale hydropower in the range from 100 kW to 30 MW and a total capacity of more than 4 000.
– Wind power: Vietnam’s potential for wind power is classified as very high. However, as currently no reliable studies exist, the resources cannot be precisely quantified. In fact, available data on wind power potential show discrepancies. Figures from 1,785 MW up to more than 8 700 MW or even way above 100 000 MW are mentioned.
– Biomass: as the agriculture in Vietnam is widespread, so a high potential of power from biomass is available, too. The capacity for sustainable power production from biomass amounts to just 150 million tons per annum, 700 – 780 MW for electricity generation alone can be reached.
– Solar energy: Total number of sunshine hours up to 1400 – 3000 hours/year, the average total radiation amounts to 230 – 250 kcal/cm2, and strengthens towards the south. Solar energy can be used for water boiling, power production and other purposes, as e.g. drying, cooking etc.
– Geothermal energy: the recent figures show that Vietnam’s potential for geothermal energy amounts to about 200 – 340 MW.

Current status:
Currently, the consumption of renewable energies consists to the greatest extent in energy recovery from biomass in its original form. The proportion of energy from raw biomass to total energy requirement is high and amounts to roughly 38% of the entire final consumption of energy and about 30% of total initial energy consumption.

Power production for grid connection: There are only two kinds of small-scope hydropower with a capacity of over 300 MW; 30 MW from biomass (sugar cane waste) and 2.4 MW from household waste.

Network-independent power supply: Renewable energy sources have been utilized to supply rural areas, distant and remote territories as well as islands. 1.25 MW solar power, 1.2 MW wind power and more than 50 MW small and micro hydropower plants have been built and operated.

Biofuel: The government signed a decision on the approval of a project for “biofuel development”. In the country, 6 projects for ethanol production have been established, with each project showing an average capacity of 100 million liter /year. Several of the projects will start the production in 2010.

Summary of the strategies for the development of renewable energies and development targets in Vietnam

Development perspectives: – the development of renewable energy with economic feasibility is given priority; – the development of renewable energy to supply rural areas with electricity is fostered and supported; – support and investment in further development of certain technologies with regard to renewable energies which are not economically viable yet; – the development of renewable energies in cooperation with the government based on the principle of effective combination of market mechanisms; – the development of renewable energies in close relation to sustainable economic, social and environment-friendly development in order to reduce the effects of the climate change and the development of the environment.

Overall goals: – Improvement of the energy infrastructure, extension of energy sources, ensuring energy security, environmental protection and sustainable development, mitigation of damages with regard to the effects of climate changes; – to increase the national production and the national consumption of renewable energies; – Completion of the energy program in the mountainous region and contribution to the accomplishment of government objectives to provide electricity for rural areas.

Special goals: – to increase the share of renewable energies in the overall national energy production – from 1.3 billion kWh in 2008, by at least 7 billion kWh in 2015 and 20 billion in 2025; – by 2020, 100% of households in rural areas ought to be supplied with electricity; – increase of the number and the area of application of cooking devices which can be powered by solar energy, namely from the current very low percentage to 18 million m2 (in 2015) and 9 million m2 (in 2015); – increase and expansion of the area of application of biogas technologies from 0.12 million m3 of the current construction volume to 5 million m3 in 2015 and 15 million m3 in 2025; – to increase the number of households utilizing highly efficient biomass; – to increase the number of households using devices for conversion of efficient biomass (cooking devices with more than 30% efficiency) from the current low number to 1 million households in 2015 and 4 million households in 2025; – in 2015, the production of ethanol and vegetable oil should amount to 250 000 tons, which corresponds to 1% of the crude oil requirement. In 2015, the production of ethanol and bio-oil should reach 1.8 million tons and cover 5% of the crude oil requirement.

Solutions for implementation

General principles:

– all organizations, individuals, domestic enterprises, foreign enterprises and organizations have to be encouraged to participate; – promotion of projects concerning renewable energies in order to ensure better marketing;
– the government should support the national grid connection at the same or lower cost compared to avoidable economic cost of projects within the scope of renewable energies;
– the government should simplify the operation of the market; – preferential prices for renewable energies should be fixed on the basis of cost effectiveness aspects; – the government should support the use of renewable energies for the supply of rural areas with electricity;
– the government should support the initial phase for the promotion of installation and upgrading of technologies related to renewable energies for effective heat and fuel production and its use, based on the principles of standard and quality assurance.

Solutions and roadmap for implementation:
– establishing a national liaison body for the development of renewable energies; – preparation of a roadmap for organizational structure development; – preparation of a roadmap for supporting grid connection of the projects regarding renewable energies; – preparation of a roadmap for renewable energy development for heat and biofuel production; – preparation of most favorable terms of registration for CDM for projects based on renewable energies.

On financing of renewable energies in Vietnam: The basics

In order to be able to keep pace with growing requirement Vietnam’s for energy, an increase of the production capacity by approximately 4,000 MW per annum and its supply into the national grid are required.

Based on rapid shrinkage of Vietnamese gas and oil reserves (which will be exhausted within coming 20 to 30 years), the experts predict that, from 2020, in order to ensure the operation of its power plants Vietnam will have to import a volume of 100 million tons of coal per annum. Consequently, Vietnam will be dependent on the import of fossil fuels, unless it develops its enormous potential of renewable energy. Despite the negligible current capacities of renewable energy plants, Vietnam is blessed with considerable potential in this area which can be developed as alternative energy sources for the benefit of Vietnam. In spite of the fact that the current legal framework is very underdeveloped yet, the government, namely the Ministry of Industry and Trade, has adopted a constructive and supportive course which, in combination with political and financial assistance on the part of international institutions, makes this sector increasingly attractive for foreign investors.

Rich sources of clean energy

Vietnam has countless clean energy sources: Its abundance of streams, sources and nine main rivers gives Vietnam a place among the top 14 of countries with the best conditions for conversion of hydropower into electricity; its first-class coastal locations can boast a wind force of 860 to 1410 kWh/qm per annum or 800 to 1000 kWh/qm per annum; the tropical climate provides solar resources with a solar radiation between 3 and 4.5 kWh/gm/day in winter and about 4.5 to 6.5 kWh/qm/day in summer. Against this background, some experts even claim that Vietnam can completely cover its requirement for electricity by the use of renewable energies.

The government has gradually created a legal framework for the promotion of development of renewable energies in Vietnam. This new legislation does not establish any restriction for foreign investors that invest in renewable energies and introduces a favorable tariff for renewable power plants with an installed generation capacity of up to 30 kWh. According to this legislation, Electric of Vietnam (EVN), the only electric power company (and the only electricity buyer), will acquire electricity generated by such plants at approximately 11 US cent per kWh during peak load times of the dry season. The corporate income tax (CIT) for these project enterprises is limited to a rate of 10% and granted for a time frame of 15 years; in special circumstances, it can be even extended to just under 30 years. The entire equipment and machinery which are imported as inherent parts of solar or wind power plants are duty-free. Moreover, CDM projects (Clean Development Mechanism) are entitled to subventions provided that the production costs exceed the selling price.

… but challenges lie ahead …

Despite this country’s undisputable potential of resources of alternative energy, investors bringing in funds for Vietnam’s production efficiency within the scope of renewable energies are confronted with considerable challenges:

1 The lack of reliable legal framework conditions.

2 Protracted negotiations of electricity purchasing agreement with the EVN.

3 The lack of electricity supply tariffs which would be stringently required for successful renewable energy projects.

The supply tariff is a preferential price which is paid by power suppliers when purchasing electricity generated by an authorized producer of renewable energy for a timeframe from 15 to 20 years for electricity units fed into the grid. The payment for such renewable power plants is financed regularly by allocation of cost to all consumers as well as partly by government aid for renewable energies. The combination of preferential tariffs and the obligation to purchase enables feed-in tariffs to function in monopolistic or oligopolistic markets. Presently, the Vietnamese law does not provide for any feed-in tariffs. Article 31 of the Electricity Law provides principally that the producer price (i.e. the selling price ex power plant) must not exceed the tariff determined by the competent government agency.

EVN still refers to an out-dated rate according to Decision No. 2014/QD-BCN (of 2007) with a tariff for hydropower between 2 and 5 US$ cent and for combined gas turbine power plants from 3.5 to 4.7 US$ cent. Despite the fact that the preferential tariff was fixed for smaller renewable power plants, the price of 11 US$ cent /kWh is applied only during peak periods in the raining season. Energy purchasing at other times costs about 11 cent/kWh.

The main obstacle for electricity purchasing by EVN at an increased price is the low retail price. Even though from 2010 the electricity rates will be based on market prices, the prices for households being ultimate consumers remain a matter of annually determined fixed prices. Meanwhile, a fixed maximum price for consumers form the industry and service sector is applicable. Against the background of the risk of social unrest, a substantial increase of the retail price in the short term is not realizable.

The monopoly of the EVN is one of the main reasons why investors are discouraged from entering the renewable energy market. EVN is currently de facto the only buyer and controls the electricity feed-in, transmission and supply to ultimate consumers. A free competition in electricity generation can hardly be guaranteed because EVN, being the only buyer, operates also enterprises just in this sector. It was criticized that the National Load Dispatch Center or A0, a subdivision of EVN that is authorized to electricity feed-in for the entire national grid, does not draw on the capacity of expensive oil-fired or gas turbine power plants even in case of marginal underload of the power grid.

There is a great deal of administrative barriers which have to be broken down by investors when initiating a power project in Vietnam. A power plant project has to be in accord with the master plan at national level or at the level of a particular province. If a project is not listed in these master plans, it requires the approval on the part of the Prime Minister or the Ministry of Industry and Trade. Furthermore, before obtaining the investment certificate, foreign investors have to conclude a Power Purchase Agreement with the EVN. PPA negotiations and application for investment certificates as well as power plant operator’s licenses may take months if not years.

How can investors survive?

Projects in the renewable energy sector are – as long as no feed-in tariffs are introduced – not viable. Insofar, 2015 should be a good year with a prospect for implementation of a meaningful legislation in this area; namely, the national Master Plan for Renewable Energies and the Decree on power feed-in tariff. The adoption of such documents will clarify the attitude of the government towards the development in the renewable energy sector.

At this stage, a clear and feasible strategy regarding the investment form is a prerequisite for economic involvement in this growth sector. Project financing (as limited recourse financing) is a classical but effective approach to capital raising on a bigger scale. No large projects in the range of renewable energies have been realized in Vietnam so far, but there were already a number of financially intensive BOT power projects in the thermal power sector (namely Phu My 2.2 and Phu My 3) which can have a role model function also in the renewable energy sector. Moreover, on a case-by-case basis, preferential tariffs and other financial incentives as a basis for BOT projects can be negotiated.

Certified emission reductions (CER) trading can be taken into consideration because of continuing great demand for CERs from projects with high sustainability value for local community. The focus should be on CDM projects with smaller and medium financial volume as well as lower guarantee and delivery risk. However, CER trading should not be regarded as primary financing option. In view of yet very rudimentary legal framework for CDM projects as well as the lack of precise and official statistics on the basis of which future emissions would be determined, the validation necessary for such trading is much more difficult. It is to be stated that from 85 projects selected for validation in Vietnam yet only eight have been verified, and only one project (Rang Dong oilfield gas separation and utilization) was granted a CER.
In a growth market like Vietnam, well thought-out planning and thorough understanding of local legal situation and the obligatory approval procedures are basic prerequisites for successful investments. The renewable energy sector is no exception here.

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.

INTERESTED IN DOING BUSINESS IN VIETNAM? VISIT: www.vietnamlaws.xyz

THANK YOU VERY MUCH!

Posted on by Dr. Oliver Massmann

Intellectual Property Rights Enforcement in Vietnam

Vietnam is currently negotiating a Free Trade Agreement with the European Union (EVFTA) as well as the Trans-Pacific Partnership with the United States (TPP). In addition, the ASEAN Economic Community will be established by the end of 2015. Thus, Vietnam will soon expect a significant increase in foreign investment, most of which will depend on the effectiveness of intellectual property protection and enforcement in Vietnam. In this context, Vietnamese enforcement agencies and the courts have been actively issuing decisions with harsh sanctions on the infringers serving as good precedents and clear warnings on future violations.

Administrative relief or civil proceeding?

However, it should be noted that presently in Vietnam, rights holders mainly seek administrative relief and border control measures before competent authorities such as the Ministry of Science and Technology Inspectorate or the Vietnam Intellectual Property Research Institute rather than pursuing lawsuits before civil courts. They view that administrative route would take less time and money compared with civil actions, taking into account the unclear legal basis of IP disputes and lack of experience of judges. The non-binding opinions of these administrative agencies could then be included in the customs record, which effectively prevent the physical entry of infringing goods at the border. However, administrative decisions only result in the fine and destruction of infringing goods without compensating for the rights holders or even payment of legal fees. As such, there has been a recent increase in litigation in courts in patent area for the past few years. With the agriculture accounts for the majority of Vietnam’s economy (80%), it is not a big surprise that the first majors patent suits took place in this area. In these cases, the courts have issued decisions in favor of the foreign agroscience companies, which would set precedents for future judgments.

Preliminary injunctive relief and permanent injunction

In civil proceedings, especially in IP area, it is sometimes importance to seek for injunctive relief. Preliminary injunctive relief has its legal basis in Articles 99-126 of the 2004 Civil Procedures Code as amended in 2011 and Articles 206-210 of the IP Law promulgated in 2005. Rights holders can request a preliminary injunctive relief if they can prove either of the following: (i) there is a threat of irreparable damage; or (ii) there is a threat of dispersal or destruction of suspected infringing goods and related evidence if they are not protected in time. The aim of injunctive relief measure is the protection of the rights holders pending the final decision of the courts. Typical preliminary injunctions are goods seizure, sealing/ freezing, prohibition on status/ ownership change/ transfer, and other measures specified in the Civil Procedure Code. However, for the courts to render an injunctive relief, rights holders are requested to pay a deposit of at least VND20 million as a security. The courts then still take great caution in applying such measure and there is no clear guidance for the court to return the deposit to the rights holders when they have concluded against the infringers. Thus, there lies a risk for rights holders when asking for preliminary injunctive relief.

While the use of preliminary injunctive relief has a clear legal basis in Vietnamese law, permanent injunction is not that case. What is normally stipulated is a cessation of the infringement but not the court order to never commit the infringement again in the future. However, it seems that the Ho Chi Minh City Court for the first time in a case initiated by a European agrochemical company against a pesticide producer in Ho Chi Minh City has ordered the infringer not to infringe the patent until the expiry date of the patent in question. This is a precedent-setting decision for future courts decisions in patent area.

Recent typical IP court litigations in Vietnam:
 Dispute between a major French cement company and a defendant in Vietnam on domain name
 Dispute between US-based Videojet Technologies Inc., and Nam Trinh JSC on trademark infringement
 Dispute between a major European agrochemical company and a pesticide producer in Ho Chi Minh City on patent infringement.

Conclusion

The developments in the IP rights enforcement system shown in the choice of civil proceedings as well as the favorable binding decisions of the courts of foreign parties are good signals for better IP environment in Vietnam. Vietnam is taking steps to assure foreign investors of effective IP rights protection when doing business in Vietnam, especially when the EVFTA and the TPP are concluded by this year.

***
Please do not hesitate to contact Mr. 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.

INTERESTED IN DOING BUSINESS IN VIETNAM? VISIT: www.vietnamlaws.xyz

THANK YOU VERY MUCH!

Posted on by Dr. Oliver Massmann

Lawyer in Vietnam Oliver Massmann Government’s Strong Efforts to Improve Business Environment

On March 12, 2015, the Government has just issued the new Resolution 19/NQ-CP/2015 on key duties and solutions to improve business environment and national competitiveness in 2015 – 2016 (“Resolution 19”).

Resolution 19 provides several measures / objectives including decreasing administration procedure time (tax declaration, custom / port clearance, social insurance declaration, establishment of new companies, bankruptcy, etc.), removing some procedures, conditions such as legal / criminal records of foreign investors acquiring shares / equity in Vietnam, revising regulations / law to promote the business, procuring relevant State authorities to act and prepare action plans to do before 30 April 2015, report to the Government on a quarterly basis, etc.

The new Resolution also lays out strong commitments and positive changes to be made by Government bodies, which are expected to have the business environment targets of Vietnam reaching ASEAN-6 and ASEAN-4 averages in 2015 and 2016 respectively.

The new Resolution prioritizes the following:
1. In 2015, approaching and exceeding ASEAN-6 averages, notable targets are:
• Lower tax payment period to 121.5 hours/year as maximum, develop and disclose the database on tax refund;
• Rapidly decrease processing time for clearance of exports and imports of goods to 13 and 14 days respectively;
• Processing time for business establishment procedures is 6 days as maximum;
• Processing time for bankruptcy procedures is decreased from 60 months to no more than 30 months
2. In 2016, Vietnamese business environment index to approach ASEAN-4 averages on certain areas, notable areas are:
• Business establishment and investor protection to be in Top 60 and 50 countries respectively, processing time for tax payment and compulsory insurance is 168 hours/year.
• Simplify the procedure and reduce processing time for registration of property ownership and use rights to 14 days as maximum
• Access to credit index reach Top 30 countries of the World Economic Forum.
• Simplify the procedures and reduce processing time for commercial disputes to 200 days as maximum (400 days currently) and 24 months (60 months currently), especially for cases involving SMEs through court method.

Resolution 19 also calls for more active participation of business associations and professional bodies in policy review and valuations as well as closer coordination with Government bodies to support business development and resolve business issues.

***

Please do not hesitate to contact Mr. 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.

INTERESTED IN DOING BUSINESS IN VIETNAM? VISIT: www.vietnamlaws.xyz

THANK YOU VERY MUCH!

Posted on by Dr. Oliver Massmann

Lawyer in Vietnam Oliver Massmann – The New Wave of M&A in Vietnam

The 2005 Law on Investment and Law on Enterprises laid a foundation for establishing a new Vietnamese investment regime in general and creating a level playing field for foreign and local investors in particular. The legal framework for the M&A sector in Vietnam has since been developing at a rapid pace. Currently, with some limitations under both Vietnamese law and Vietnam’s WTO commitments, foreign investors can freely acquire shares in Vietnamese enterprises. The new wave of M&A sets to hit Vietnam, as Vietnam is once again perceived as an attractive investment market. The primary investors have been from Japan, Korea, Taiwan and recently from the ASEAN countries, particularly Singapore and Thailand. Once the Trans-Pacific Partnership (“TPP”) and Free Trade Agreement between EU and Vietnam (“EVFTA”), which currently enter their final rounds of negotiation, are concluded, they may also drive more interest in M&A activities in Vietnam.
We much appreciate that the recent development of the Investment Law and Enterprise Law highlighted endeavors of the Government of Vietnam on easing the procedures of M&A activity in Vietnam. The Government of Vietnam by introducing the new Investment Law and Enterprise Law at the end of 2014 has made stronger commitment on the improvement of M&A regulatory framework to re-ignite M&A activity in Vietnam.
Recent M&A deals
M&A activities in Vietnam witnessed a steady growth after Vietnam officially became a member of the World Trade Organization in 2007. Vietnam saw the first M&A wave in the period of 2008 – 2013 with a reported total value of US$15 billion when the Japanese investors kept rushing to Vietnam and made about US$1.2 billion worth deals in 2012. Japan leads the nation that bring M&A deals in Vietnam in terms of both quantity and value. This helps the M&A market in Vietnam reach of peak of US$5.1 billion in that year. According to statistics from Capital IQ, there were 92 successful M&A deals in 2008, 308 deals in 2012 and 182 deals in 2013. Fast-moving consumer goods is considered as the most attractive sector, with the total M&A transaction value up to US$1 billion, accounting for 25% of the total M&A value in Vietnam while the retail and real property have always been robust in M&A with big deal value.
Vietnam’s M&A market saw a strong recovery in 2014 when six deals are reportedly made every week. The total M&A deals in 2014 was 313 with value of US$2.5 billion, a 15% increase compared with the previous year. Notable deals in 2014 include the acquisition of all 19 supermarkets of Cash & Carry and their related real property of Metro by Berli Jucker with a deal value of US$ 879 million; Vingroup, one of the biggest local private companies in Vietnam, bought 70% of Ocean Retail Company’s capital; Mondelez International acquired 80% of Kinh Do Joint Stock Company’s capital in sweets manufacturing section at US$370 million; and Standard Chartered Private Equity acquired a significant minority stake in An Giang Plant Protection Joint Stock Company at US$90 million. The business community highly hope that total value of M&A deals could reach US$20 billion in the second wave (2014-2018).
Good news for M&A in Vietnam
Starting from 01 July 2015, foreign investors will not need to undergo lengthy investment certificate procedures when buying stakes in Vietnamese target companies. While this remains to be seen, the change, introduced by the new Investment Law, will hopefully end years of uncertainty and frustration faced by foreign investors eyeing Vietnam market entry or expansion via M&A.
We have seen a strong increase of interest from international investors, especially in the last months of 2014 continuing into 2015. The TPP (which includes the U.S. and Japan), the EVFTA as well as tariff reductions under the AFTA are all scheduled for this year. These will increase market access for foreign investors in Vietnam and lower barriers to trade in goods and services.
Why is the investment certificate question so important?
Under current law, Vietnam has different licensing procedures for foreign and domestic investors. The Investment Certificate (“IC”) serves as business registration for foreign investors. In practice, despite a 45 day maximum statutory time limit, the IC process can take 4 to 6 months or longer, while domestic business can be registered within a day.
Under the new Investment Law, the IC is replaced by an “investment registration certificate” (“IRC”) and an enterprise registration certificate (“ERC”). Obtaining ERCs should be straightforward, as they only contain basic business info and also apply to domestic investors. The IC process now statutorily takes 15 days while ERCs are issued within 3 working days. The process may be longer in practice but it is better than before in terms of clear application of time frame.
Explicitly, no IRC for M&A activity!
Foreign ownership in public companies, including listed companies or companies with 100 shareholders or more with contributed equity of VND 10 billion or more, cannot exceed 49%. Although in principle enterprises with foreign ownership of up to 49% are entitled to the same treatment as local companies, such rules appear to be disregarded in practice. For example, the Department of Planning and Investment (DPI) of Ho Chi Minh City refused to register the distribution of pharmaceutical products of a local company on the ground that 4.3% of its shares were then held by foreign investors. It is therefore very difficult for foreign investors to conclude an M&A deal.
Now, the new Investment Law expressly provides that no IRCs will be required for acquisitions of target companies. As a result, the time needed to complete purchase of stakes in Vietnamese entities is expected to be reduced tremendously. Buying into public companies listed on the Vietnamese stock exchanges will not require IRC either, but foreign ownership of listed companies is still capped at 49% (and max. 30% for financial institutions). Rumors have long abounded that the caps will soon be raised but, until that day, investors will need to buy unlisted companies to take control.
Provincial Departments of Planning and Investment (DPI) will still have to “register” (read: “approve”) plans to acquire a majority of a target or stakes in a company that is active in a “conditional” sector. Conditional sectors for foreign investors include construction, urban planning and education (Annex 4, new Investment Law). In practice, DPI officials have broad discretion to approve applications, but they should need much less paperwork then for an IRC application.
In addition, the business registration office will have to update ERCs to reflect changes in a unlisted company’s ownership, statutorily, in 3 working days.
New waves of M&A?
With positive changes that the new Investment Law brought, together with a significant equitization target of about 368 state-owned enterprises in 2015, the conclusion of the TPP and EU-Vietnam FTA as well as the formation of ASEAN Economic Community by the end of this year, Vietnam will witness another wave of M&A. Banking and finance will attract main foreign investment as the number of commercial banks are required to be reduced to 13-15 in 2017 and smaller banks under the pressure of competition and capital requirements will look for new foreign investors to achieve expansive. In addition, consumer goods and real estate also remain attractive sectors.

ABOUT THE AUTHOR
Mr. Oliver Massmann is General Director of Duane Morris Vietnam LLC, a subsidiary of Duane Morris LLP (US). He has been practicing law in Vietnam for 20 years and is influent in English, German and Vietnamese. He has been long regarded by Legal 500 and other reputable professional magazines as one of leading individuals who has been at the center of some of the most notable M&A transactions in recent years in Vietnam.
Mr. Oliver Massmann can be reached at OMassmann@duanemorris.com for any questions relating to M&A activities in Vietnam in general and this article in particular.

INTERESTED IN DOING BUSINESS IN VIETNAM? VISIT: www.vietnamlaws.xyz

THANK YOU VERY MUCH!

Posted on by Dr. Oliver Massmann

Lawyer in Vietnam Oliver Massmann Retention of Title under Vietnamese Law

Introduction

Retention of title is first mentioned in the Civil Code of Vietnam. The Civil Code of Vietnam was introduced in 1995 and it is the first Civil Code of Social Republic of Vietnam (“Civil Code”). However this issue has not yet developed into a separate concept and is regulated spread. Regulations on retention of title/reservation of ownership can be found in purchase and sale, contract for the sale and purchase of house, goods delivery.

In addition, the retention of title is also regulated in commercial laws. The Commercial Law of Vietnam was passed two years after the Civil Code (10 May 1997). It is also a landmark legal document and plays an important role in regulating commercial activities in Vietnam.

Establishment of ownership rights

According to the Civil Code, the ownership is established under many foundations. For example, establishment of ownership with respect to revenue gained from labor and legal business, in accordance with an agreement, in cases of merger or under a statute of limitations, etc.

In case of establishment of ownership in accordance with agreement, a person to whom a property has been transferred through a contract for the purchase and sale, gift, exchange or loan shall have the right to own such property as from the time of receipt of the property, if not otherwise agreed or the law does not otherwise provide.

Time of ownership transfer

According to the Civil Code, in case of sale and purchase agreement, the moment at which the ownership is transferred is defined in the following cases:

• the moment at which the buyer receives the property;
• the completion of the procedures for registering of ownership rights of such property;

However, except where the laws otherwise provide, the two parties are free to negotiate on the time of ownership transfer, provided that the agreement does not violate the law.

Therefore, the responsibility of bearing risks shall still belong to the seller until the property is handed over to the buyer; whereas the buyer shall bear the risk to the property in question as from the receipt of that property, if not agreed otherwise.

Similarly, in case of property that must be registered of the ownership rights, the seller shall bear the risks until the completion of the registration procedures; meanwhile the buyer shall bear the risk as from the completion of the registration procedures, even when the buyer has not received the property. However, it is noteworthy that the buyer and the seller have their freewill to agree upon the moment for bearing risk.

The Commercial Law also has similar regulation on the moment of transfer of ownership rights (Article 62, the Commercial Law), i.e. the moment when the seller delivers the goods to the buyer unless otherwise agreed upon by the two parties or provided by law. However, the Commercial Law also regulates that, in case where obligatory conditions are agreed upon in the sale and purchase agreement without which the seller shall be unable to deliver the goods, or the buyer shall be unable to receive the same, then the ownership of the goods in question shall be transferred from the seller to the buyer only when such conditions are met (Article 62, Commercial Law).

The obligatory conditions under Vietnam law may be understood as conditions for the transaction to become effective including the conditions on the person participating in the transaction, its purpose, content and the form, and the voluntary of the involving person.

Agreement and Retention of Title/Reservation of Ownership

Ownership is a very developed concept in the civil law branch of Vietnam, however retention of title is regulated scattered. Purchase by deferred payment or payment in installments is the most evident example for retention of title in Vietnam law.

Article 461 of the Civil Code provided that,

“…The seller is entitled to reserve his/her ownership rights to the sold object until the purchaser has made full payment, except in circumstances where otherwise agreed”.

Therefore, in case of deferred payment or payment in installments, the seller is entitled to reserve his/her ownership to sold object until the purchaser has made full payment, except otherwise agreed. The purchaser shall only be entitled to use the object purchased by deferred payment or by payment in installments and must bear the risk during the use period, except otherwise agreed.

Besides, the parties may agree upon the trial use of purchased object by the buyer for a period referred to as the trial use period. In the trial use period, the object shall still remain under the seller’s ownership. The seller shall bear all risks with respect to the object. Within the trial use period, the seller is not permitted to sell, give as gift, lease, exchange, mortgage or pledge of the property or offer it as a guarantee, while the purchaser has not yet replied.

Conclusion

In conclusion, according to Vietnam law, the ownership can be reserved in the following cases:

• the agreement of the related parties;
• the type of the agreement; and
• the prescribed law.

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Please do not hesitate to contact Mr. 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.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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