Lawyer in Vietnam Oliver Massmann The most investor friendly country in ASEAN

Vietnam is the most investment worthy place in ASEAN – this is a common response of many foreign investors when being asked about their investment plan in the upcoming years. This is not an exaggeration about Vietnam’s current investment environment as well as its potentiality but is in fact based on valid and practical grounds, where improved economic diversification, international integration, reformed investment legislation and good economic policy must be counted.

Economic recovery and stable development

According to a recent statistics by the General Statistics Office, GDP growth of Vietnam over the first six months is quite high, at 6.28%. This is the highest growth for the past five years and could be far over the targeted growth for 2015. Not only the Vietnamese Government is optimistic about the economic development of the country this year, other international organizations also provide positive forecast about Vietnam’s GDP growth in 2015. For example, ANZ maintains its forecast about Vietnam’s GDP growth to be at 6.5% in 2015 and 2016 based on positive signals such as increased domestic demand, increasing attraction of foreign direct investment of the manufacturing industry and consumer confidence index reaching a new peak in June. Vietnam is also the only country among the nine East Asian countries that World Bank raises its GDP forecast in 2015 compared with its previous forecast at the end of 2014. “The world in 2050”, a study made by PwC, concludes that Vietnam will have the second highest annual GDP-growth rate worldwide. There will be an average growth by 5.3% each year, from 2014 till 2050. That means Vietnam will have the fastest growing economy within Asia till 2050. In addition, the inflation rate is controlled by the Government with Consumption Price Index to be in the range of 3-5% for the whole year, which is far below the maximum allowed inflation rate of 5% in 2015. These two important macroeconomic indices have proved the Government’s success to a certain extent in recovering and maintaining stable development of the economy.
Government’s sound economic policy and positive results

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 until 2016. Resolution No. 19/NQ-CP/2015 of the Government dated 12 March 2015 has set out the Government’s strong commitments and positive changes to improve the business environment and strengthen the economy’s ability to compete in 2015 and 2016 by pushing for reforms to reduce time-consuming and burdensome administrative procedures; enhancing governmental offices’ transparency and accountability; and adopting international standards. Up to 01 January 2015, the total time for tax compliance is reduced to 370 hours per year, which is an impressive decrease compared with 872 hours annually according to the 2013 statistics. Time for tax declaration and payment is also reduced to 121.5 hours per year, with possibility of online tax declaration and payment. In 2014, 95% of the enterprises have conducted online tax payment compared with 65% of previous years.

With the implementation of single window regime at international sea ports, it is expected that goods clearance time would be reduced from 21 days to 14 days for exports and 13 days for imports. Enterprises would benefit from the reduction of 10-20% in costs and 30% in customs clearance time if the national customs single window regime is fully implemented.

Not only in the tax and customs sectors, the Government also managed to reform administrative procedures in insurance sector. The total time for insurance payment is decreased by 100 hours, from 335 hours to 235 hours per year.

Vietnam’s regional and international integration

Investors consider that Vietnam’s current efforts to integrate into the world economy by negotiating many Free Trade Agreements (FTAs) also brings them better investment opportunities. In particular, Vietnam, together with other 12 countries, including its major trading partners like Japan and the United States is negotiating the Trans-Pacific Partnership (TPP) with market size of 800 million people (accounting for 38% of global GDP). Vietnam would be the largest beneficiary of this trade pact as a result of its strong trade ties with the United States, 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.

Beside the TPP, the EU- Vietnam FTA will also unlock huge opportunities to Vietnam such as tariff reductions, trade facilitation, investment attraction, expansion of markets to 27 EU countries, sustainable development and economic restructuring. 99% of Vietnam’s exports to the EU will be entitled with 0% import duty, leading to an increase of 30-40% in exports and 20%-25% in imports.

Vietnam and nine ASEAN countries will establish an ASEAN Economic Community (AEC) by end of this year. This is a potential and dynamic market with over 620 million consumers, 60% of which is under the age of 35. This community, once established, would be the 7th largest economy in the world – 4th largest by 2050 if growth trends continue. AEC will be an attractive single production hub and facilitate international trade. The aim is to remove barriers to investment and enhance free movement of skilled labours. Investors can have a production base in one country and sell their products across the rest. Many foreign investors have started the trend and relocated their production base from other countries, especially from China, to Vietnam as shown in examples below.

Other FTAs that Vietnam has just concluded are Vietnam – Korea FTA and Vietnam – Eurasian Economic Union. These FTAs open the doors for Vietnam to export its textiles, leather, wood furniture, and agricultural products, etc. These FTAs are driving foreign investors to increase the investment capital and expand their businesses in Vietnam. The FTAs are expected to create a second investment wave in Vietnam after the first wave when Vietnam acceded to the WTO in 2007.

Second investment wave in Vietnam

It is no longer in theory. Vietnam is actually benefitting the most from growing wages in China, with more and more manufacturers shifting their production to Vietnam. foreign investors of a number of high-tech investment projects in Vietnam have decided to increase the investment capital and expand their production activities to timely grab the opportunities that FTAs create when they come into effect.

Recently, Bel Vietnam, a famous producer of French cheese in Vietnam has started constructing a 17,000 m2 new factory in Binh Duong with the total investment capital of US$17 million. The factory is expected to come into operation by June 2016 and full operation will be in 2020 with its capacity to be 9 times as much as the old factory. According to the General Director of Bel Vietnam, the new factory will be used as a regional supply centre, focusing on South East Asian market to take advantage of the AEC. The new factory will also serve as an R&D centre for products of the group.

LG Group is another case. Its initial investment capital was US$ 300 million to build a factory in Hai Phong. However, it then decided to increase the capital to US$ 1.5 billion. The factory is the largest complex in the region in an area of 800,000 m2, which will manufacture and assemble high tech products such as TVs, mobile phones, vacuum cleaners, etc. for export and domestic consumption.

Samsung in its export-oriented investment strategy announced its increase in investment capital by US$ 3 billion on 10 November 2014. Samsung is currently operating US$ 1 billion, US$ 2 billion and US$ 2.5 billion plants in Thai Nguyen and Bac Ninh Province. The additional US$ 3 billion is used to expand the US$ 2 billion plant to produce handsets. This is another example of production shifting away from China as a result of South Korea’s low exports to this country.

Other investors in textile sector are also preparing their entry into Vietnam’s market to grasp the advantages of the upcoming TPP. Since members of the TPP do not include China, India and Thailand, who are the direct competitors of Vietnam in the textile industry, Vietnam will have price related competitive advantage over these countries due to tax preferential treatment that TPP countries grant to Vietnam. This is critical considering the fact that China and the EU are still studying about the possibility to negotiate an FTA with each other. Up to now, Itochu Group from Japan has purchased 3% of Vinatex’s shares at US$ 9.25 million and invested in certain textile projects in Vietnam. A Taiwanese textile group has also increased its capital investment by US$ 320 million to conduct a complete production process in Vietnam. It is expected that with the TPP, Vietnam’s textile export turnover will reach US$ 30 billion in 2020 and US$ 55 billion in 2030. Not only in the textile industry, there has recently been a range of relocation of production facilities for low value goods such as footwear from China to Vietnam as investors search for lower production costs. According to 2014 statistics, more than 70% of foreign direct investment projects in Vietnam was in the manufacturing and assembly processing sectors. This number has already included low value-added textile and material manufacturing from China.

New investment legislation

At the same time, the Government is really aware of the importance of institutional reforms in improving the business climate. It is becoming more important when the new trade pacts are coming into effect very soon and institutional reforms are among conditions of these agreements. New laws considered the most liberal and investor-friendly in the region, such as the new Enterprise Law, Investment Law and a decree on Public Private Partnership, have been adopted. Barriers to business and investment are removed to pave the way for an open, transparent and full-of-opportunity environment for foreign investors. The 2014 Investment Law makes a great attempt to reduce the number of prohibited business activities and conditional business activities. More importantly, the 2014 Investment Law for the first time includes provisions regulating M&A activities. Accordingly, starting from 01 July 2015, foreign investors will not need to undergo lengthy investment certificate procedures when buying stakes in Vietnamese target companies. The change will hopefully end years of uncertainty and frustration faced by foreign investors eyeing Vietnam market entry or expansion via M&A. The second wave of M&A seems to already start in 2014 when six deals are reportedly made every week. The total M&A deals in 2014 was 313 with value of US$2.5 billion, a 15% increase compared with the previous year. Notable deals in 2014 include the acquisition of 19 Cash & Carry and their related real property of Metro by Berli Jucker with deal value of US$ 879 million; Vingroup bought 70% of Ocean Retail Company’s capital; Mondelez International bought 80% of Kinh Do JSC’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 JSC at US$90 million. The business community highly hopes that total value of M&A deals could reach US$20 billion in the second wave (2014-2018).

Meanwhile, the 2014 Enterprise Law grants certain flexibilities for investors to manage their entities in Vietnam by allowing multiple legal representatives and carry out all types of business activities provided that they are not prohibited by law.

Potential privatization market

In addition, the Government aims at privatizing 289 state-owned enterprises in 2015 and highly emphasized on substantive and efficient privatization. The number of commercial banks is forced 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 expansion. The Government is also aware that privatization process must increase the number of shares sold and ensure a win-win solution for both investors and the government. During the 2000- 2013 period, the number of state-owned enterprises fell by almost 50% from 5,800 to 3,135. Privatization was reported to be successful with over 80% growths in earnings, while 40% had growth of over 10% following privatization. These successes drive foreign investors in their investment in these very potential areas.

Relaxed foreign ownership in public listed companies

In an attempt to ease burdens on investors, on 26 June 2015, the Government issued Decree No. 60/2015/ND-CP to provide more flexibilities in foreign ownership ratio in public listed companies, up to 100% in certain cases. Decree 60 also allows foreign investors to make unlimited investment in Government bonds, bonds guaranteed by the Government, bonds of the provincial authority or enterprises. Foreign investors may also invest in securities investment fund certificates, shares of securities investment companies, non-voting shares of public listed companies, derivative securities, and depository receipts without any limit.

Government’s reduced monopoly over distribution and production of power, petrol and coal

In Vietnam’s energy market, EVN has long been known as the state monopoly in transmission and distribution of electricity. Vietnam still features the Single Buyer Model with EVN’s purchase of all electricity generated from on-grid independent power projects. Investors find it extremely hard to negotiate the Power Purchase Agreement with EVN. Meanwhile, EVN keeps operating at loss with huge debts to PetroVietnam and Vinacomin.

Although the decree is still in draft, the proposed adoption of the list of goods and services subject to state monopoly will then limit the power of EVN. The State only maintains its monopoly over the operation of multi-purposes hydropower and nuclear power plants, transmission, moderation as well as operation of the national electricity system of big power plants and those having special importance in terms of socio-economic and national defense and security. Trading in petroleum and oil is also no longer subject to state monopoly.
With an open and competitive market, foreign investors will find it more attractive to invest in this sector. They are now no longer required to sell the electricity they generate to EVN but can sell it to other distribution companies or even transmit/ distribute through their own system.

Foreign investors will also no longer face obstacles in negotiating the power price with the EVN. According to a recent report by Ban Viet Securities Joint Stock Company, although power retail price in Vietnam has doubled during the past ten years, from VND 781/kWh (3.5 US cents/ kWh) in 2005 to VND1,622/ kWh (7.3 US cents/ kWh) in 2015, this is still low compared with other countries like Cambodia, Thailand, and Singapore in the APEC. This is among major reasons that discourage investors from pooling their capital into the sector.

However, power price is planned to increase from 2016 according to power increase schedule, which aims to ensure capital recovery and reasonable profits for investors. Accordingly, power retail price may increase at 8-9 US cents/ kWh in 2020, equivalent to an increase by 18.4% within the next five years. Power price should also reflect the demand and supply in the market. Foreign investors then find more incentives when making their investment decision.

Conclusion

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

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

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.

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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.

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

THANK YOU VERY MUCH!

Vietnam Current Investment and Trade Issues and Solutions

The Government of Vietnam has made certain success in stabilizing the economy to reach a high growth rate projection in 2015 by World Bank (i.e., 6%) and maintain import-export balance over the five years. Nevertheless, there are a lot of outstanding issues which should be further addressed as analysed below:
1. Enforcement and recognition of arbitral awards – Status, issues and solutions
The major regulatory framework on arbitration proceedings in Vietnam includes the Law on Commercial Arbitration No. 54/2010/QH12, which took effect on 1 January 2011 (“Arbitration Law”) and replaced the Ordinance on Commercial Arbitration (“Arbitration Ordinance”) in 2003; Decree No. 63/2011/ND-CP of the Government on detailing the implementation of certain regulations in the Arbitration Law (“Decree No. 63/2011”) and Resolution No. 01/2014/NQ-HDTP by the Vietnamese Supreme Court guiding the implementation of a number of regulations in the Arbitration Law (“Resolution No. 01”).
Vietnam also ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 in September 1995 and the provisions of the New York Convention have been incorporated into the arbitration laws in Vietnam.
The above shows that Vietnam has made great attempts in building a legal framework for arbitration which played an important role in attracting foreign investment over the recent years. However, statistics from Vietnam International Arbitration Centre show that almost 50% (19 out of 44) of its awards submitted for recognition and enforcement were set aside. This is a disaster as this number is far below the statistics in other countries (for example, Japan – 100%; China and Hong Kong – 90% of arbitral awards are recognized and enforced).
The reason behind it lies in the judges’ misunderstanding of fundamental principles of arbitration, which is based on a contractual agreement between parties to submit their disagreement to a dispute settlement forum, where they await a simplified and expedited procedure. However, the judges seem to complicate it and apply very strict standards to arbitration awards that are simply unnecessary and inappropriate. The judges even re-consider the merit of the case despite it being heard by arbitrators’ expertise in relevant fields and provide no chance of challenge. The main reasons for judges to annul arbitral awards could be summarized in two points as follows: (i) arbitration procedures failing to strictly follow procedures under the Civil Procedure Code; and (ii) the arbitral awards in certain aspects violating fundamental principles of Vietnamese law.
Arbitration procedures failing to strictly follow procedures under the Civil Procedure Code
It should be noted that when parties to the dispute agree to submit their case to arbitration by a contractual agreement, they already opt to select a much more simplified and tailor-made procedures than court litigation. They stipulate the rules of arbitration to be applied. The principle that, dispute resolution by arbitration is a contractually agreed process and does not involve timely and costly procedural rules as litigation does, is widely recognized in every arbitration organization in the world. Claiming that arbitration procedures do not follow procedures under the Vietnam’s Civil Procedure Code is a baseless, unreasonable argument and goes against the main spirit of arbitration process.
The arbitral awards in certain aspects violating fundamental principles of Vietnamese law
“Fundamental principles of Vietnamese law” is a very vague and ambiguous concept that is nowhere defined in Vietnamese law. Further, there is also no consistent standard of “fundamental principles” so the Vietnamese judges take certain discretion in assessing the compliance of arbitral awards with Vietnamese fundamental principles. They take the view that anything that is not compliant with Vietnamese administrative procedures would be considered violating “fundamental principles”. Due to the inaccessibility to the court’s decisions by the public, it is nearly impossible to establish a well-founded jurisprudence of what “fundamental principles” are. It is also create unpredictability in the court decision in recognizing and enforcing arbitral awards.
All of the above somehow discourages foreign investors from having their disputes resolved in judicial system of Vietnam. With an attempt to addressing this problems, certain measures are strongly requested to take by the Government.
How to protect the parties from the request for setting aside an arbitral award
Recently, with the issuance of Resolution No. 01, the Council of Judges gave a signal to support the enforcement of domestic arbitral awards in Vietnam as well as the development of arbitration proceedings. Resolution No. 01 provides more criteria and grounds for handling a request for annulment and especially, the cases when an arbitral award is set aside are more clearly defined. However, there should also be a special mechanism to appeal to judicial decisions that annul arbitral awards on an unreasonable and wrongful basis.
In order to do that, the Government should first task a special body to review all the cases that have been set aside. The content of the case as well as the court’s decision must be made public for transparency purposes and this could be considered as a supervising tool of the public on the court and review process.
2. New Investment Law and Enterprise Law – standing issues
Under the old Investment Law, the Investment Registration Certificate (“IRC”) concurrently serves as the Enterprise Registration Certificate (“ERC”) of a foreign-invested company. However, under the new Investment Law which takes effect from 01 July 2015, enterprises need to apply for two separate certificates with different application dossiers. Though the timeline and procedures seem to be quicker and clearer, investors are still concerned about the reason behind the separate applications, especially in the context of administrative reforms conducted by the Government.
The new Investment Law shortens the period for charter capital contribution from 03 (three) years to (90) ninety days. In connection with the existence of two separate certificates, investors are concerned about the delay it may cause when applying for an increase in the charter capital. (Note: Charter capital is an amount contributed by the investor to establish a legal entity). Such delay could result in slow disbursement of the additional capital, which in turn affect business operations of enterprises. Thus, the Government needs to take further measures to prevent such delay.
With regards to conditional sectors, the number has been reduced much compared with the old laws and from several workshops on this topic, conditional sectors will only be promulgated by the Government and the National Assembly. However, in terms of conditions applicable to doing business in conditional sectors and any inconsistency, it is unclear which law will prevail (the Investment Law itself or its implementing decrees, ordinances, etc.).
3. Draft Circular on import of used equipment – New trade restrictive measures?
Draft Circular No. 20/2014/TT-BKHCN is to take effect on July 01, 2015 to encourage imports of new machinery, equipment and production lines that are manufactured with the latest technology. This Draft Circular is aimed to prevent Vietnam from being a “dumping ground” of old technology and scrap machinery in place of China when this country adopted a regulation prohibiting imports of used machinery and equipment.
Despite the good intention of the Draft Circular, it somehow introduces new trade restrictive measures that could be considered as violation of Vietnam’s international treaties and agreements. In particular, the Draft Circular conditions the imports of used machinery and equipment on its usage period of 10 years and remaining quality of 80%. While it is hard to evaluate the quality of technology and production lines due to available information of the products, it is even harder and impractical to apply these standards across all types of technology and production lines. Furthermore, the Draft Circular also requires the imported goods be in conformity with safety, energy saving and environment protection and be inspected before being imported and customs released. This may significantly delay the customs clearance process and create more burden for enterprises, which go contrary to the objectives mentioned in Resolution No. 19 of the Prime Minister in 2015. A question of consistency with the WTO Agreement on Pre-shipment Inspection and WTO Agreement on Technical Barriers to Trade arises in relation with the required standards and pre-shipment requirement as well.
4. Tax administration
Vietnam currently ranks 78 out of 189 countries in terms of ease of doing business according to 2015 World Bank Report. This low ranking is mainly due to tax problems such as requiring importers to pay VAT twice on the same import transaction, delay in tax complaints resolution, etc.
It is notable that business complaints do not mostly relate to high total tax over net profit of 40% but the compliance cost and time, lack of predictability, simplicity and transparency in the tax system.
The Government should take immediate actions to improve the tax administration for a better growth in Vietnam’s economy.
5. Privatization of state-owned enterprises – the problem for every solution…
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.

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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.
IF YOU ARE INTERESTED IN DOING BUSINESS IN VIETNAM PLEASE VISIT: www.vietnamlaws.xyz
THANK YOU VERY MUCH!

Question on doing business in Vietnam!

Interview by Vietnam Financial Times
Oliver Massmann

Question 1: What do you think about the reform in tax and customs of Vietnam so far? For the German enterprises in Vietnam, how do these policies affect them?

Over the past year, we have seen significant efforts and progress made by the General Department of Customs in terms of improved regulations, more effective e-customs operations, and increased dialogue and consultation with the business community. From 01st January 2015, the new Customs Law takes effect with its implementing Decrees coming into force later on 15 March. The implementing Circulars are also already in force from 01 April with the most notable one being Circular No. 38/2015/TT-BTC. This Circular, which replaces 13 previous customs regulations, is considered most comprehensive among the new regulations. While there are still more regulations being adopted soon following the new Customs Law, for example, regulations on advance customs rulings, post-clearance inspection, or regulations in anticipation of the upcoming Free Trade Agreements, impacts on German enterprises need to be accessed later.

We have also seen much progress in reforming Vietnam’s tax procedures over recent years. Up to 01 January 2015, the total time for tax compliance is reduced to 370 hours per year, which is an impressive decrease compared with 872 hours annually according to the 2013 statistics. Time for tax declaration and payment is also reduced to 121.5 hours per year, with possibility of online tax declaration and payment. Although German enterprises highly appreciate these tax reforms, we would expect that the efforts are not only at Government or ministerial levels but also at the local levels where we have to deal with the authorities there directly.

Question 2: How do the German enterprises in Vietnam look at the VN’s business environment? In the future, what should VN adjust to attract more German enterprises?

The Government of Vietnam has made certain success in stabilizing the economy to reach a high growth rate projection in 2015 by World Bank (i.e., 6%) and maintain import-export balance over the five years.

Vietnam is also extremely successful in international economic integration, especially by joining the negotiations for the Trans-Pacific Partnership (“TPP”), the European – Vietnam Free Trade Agreement (“EVFTA”), Korea – ASEAN Free Trade Agreement, Japan – ASEAN Economic Partnership Agreement, and establishment of the customs union Russia- Kazakhstan-Belarus, and notably the ASEAN Economic Community by end of this year. Vietnam is expected to be the main beneficiary of the major trade pacts, with additional growth of 13.6% (for the TPP) and 15% growth of GDP (for the EVFTA). 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.

Moreover, with the adoption of the 2014 Investment Law and Enterprise Law, the investment environment in Vietnam now even becomes more attractive to foreign investors, especially to German investors. Nevertheless, there are still certain outstanding issues that should be further addressed to attract foreign investors in general and German enterprises in particular. These problems include annulment and unenforceability of arbitral awards in Vietnam, certain trade restrictive measures in the field of import and export, burdens created for enterprise in tax administration by state authority, and especially corrosive and widespread corruption in Vietnam. These problems require Government’s stronger efforts and urgent actions to solve, in addition to several current attempts which we really appreciate.

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Please do not hesitate to contact Mr. 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!