Practical Issues, Updates and Some Case Studies By Katrina Alday March 26, 2010

Practical Issues, Updates and Some Case Studies

By Katrina AldayMarch 26, 2010

Investment Procedure(1) Selection of an investment project

What type of investment? Direct or indirect?What type of business sector?

Specially encouraged investment projects Encouraged investment projects Geographical regions in which investment projects

are encouraged Sector in which licensing of investment is

conditional Sectors in which investment will not be

licensed/prohibited

Investment ProcedureAlso check Vietnam’s WTO Commitments i.e.,

Schedule on Services to find out specific requirements 11 sectors in GATS include: 1) business services; 2) communication services; 3) construction and related engineering services;4) distribution services; 5) educational services;6) environmental services; 7) financial services; 8) health related and social services; 9) tourism and travel related services; 10) recreational, cultural and sporting services; 11) transport services.

Understanding Vietnam’s Services Schedule under WTO

Therefore, if a service sector is not listed in the Services Schedule, then Vietnam has not made any commitments under the WTO regime to open up this sector .

The first column will often use numerical "CPC" entries. This is a reference to the Central Product Classification System of the United Nations. The detailed structure and explanatory notes of the CPC system can be found at http://unstats.un.org/unsd/cr/registry/regcst.asp?Cl=16&Lg=1.


COLUMN 1: The 1st column contains the sector or sub-sector which is the subject of commitment of the GATS principle


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


COLUMN 2: Contains the limitations on Market Access under Article XVI of GATS


Again in the Services Schedule, commitments will be specified as ‘none’ or ‘unbound’. In this context, these terms having the following meanings: "None" means that Vietnam cannot make any

limitations on national treatment (that is, Vietnam has committed to treat foreign investors and local investors equally, at least after market entry).

"Unbound" means that Vietnam is free to introduce or maintain measures vis-à-vis foreign investors which are different to those imposed on local investors

Illustration

Illustration

CPC 871Group: 871 - Advertising servicesThis Group is divided into the following

Classes:8711 - Sale or leasing services of advertising

space or time8712 - Planning, creating and placement

services of advertising8719 - Other advertising services

Illustration

Illustration Group: 642 - Food serving services 6421 - Meal serving services with full restaurant serviceSubclass: 64210 - Meal serving services with full restaurant

serviceExplanatory noteFood preparation and serving services and related beverage serving

services furnished by restaurants, cafes and similar eating facilities providing full service consisting of waiter service to individual customers seated at tables (including counters or booths), with or without entertainment. Included are such services provided by restaurants, bars, nightclubs and similar facilities, operated in hotels or other lodging places or in transport facilities, e.g. in trains or aboard ships.

Exclusion: Serving services of beverages without prepared food are classified in subclass 64310, if without entertainment, and in 64320, if with entertainment.

6422 - Meal serving services in self-service facilities 6423 - Caterer services, providing meals to outside 6429 - Other food serving services

IllustrationGroup: 864 - Market research and public opinion polling

servicesClass: 8640 - Market research and public opinion polling

servicesSubclass: 86401 - Market research servicesExplanatory noteInvestigation services designed to secure information on

the prospects and performance of an organization's products in the market. Included here are market analysis (size and other characteristics of a market) and analysis of consumer attitudes and preferences, which may utilize personal interviews, telephone and mail surveys, historical data, etc. Economic and social intelligence services not in connection with merchandised products, such as industry analysis, econometric modelling, demographic analysis, etc., are also included.

Investment Procedure: Conditional Business Sector

Conditional Business Sectors1. Broadcasting and television.2. Production, publishing and distribution

of cultural products.3. Exploitation and processing of

minerals.4. Establishment of infrastructures for

telecommunications networks, transmission and provision of Internet and telecommunications services.

5. Establishment of public postal networks and provision of postal services and delivery services.6. Construction and operation of river ports, seaports, airports and airfields.

7. Transportation of goods and passengers by rail, air, land and sea and inland waterways.

Investment Procedure: Conditional Business Sector

Conditional Business Sectors8. Catching of marine resources.9. Production of cigarettes.10. Real estate business.11. Investment in import, export

and distribution.12. Education and training.13. Hospitals and clinics.14. Other investment domains in

treaties to which Vietnam is a contracting party and which restrict the opening of the market to foreign investors

Investment Procedure:How to set up a company in Vietnam

(2) Obtain the investment licenseWhat are the requirements for setting up a company? Licensing – steps required to obtain the

investment license Post licensing – steps required after obtaining

the investment license


Requirements for obtaining an investment license (trading sector)Application for investment licenseDraft charterLetter confirming the financial capacity of the

investorCorporate approvals (board resolution and meeting

minutes)Certificate of incorporation of the investor and copy

of the charter of the investorIdentification documents of the legal representative

of the company to be established


Requirements for obtaining an investment license (trading sector)Explanatory statement on satisfaction of

business conditions regarding the nationality of the legal entity, investment form, business services and operational scope;

Registration document for exercise of import-export rights.

MOU for the lease of the head office

Case Study 1

Scenario: investor wants to acquire 80% of the shares of a local company in the distribution services (retailing) business (2008)

Challenge: trading and distribution is a conditional business sector in Vietnam. Obtaining an investment certificate appears to be less straightforward in practice

Case Study 1At present, the definition of “trading rights”

is commonly understood to mean the right to import and export goods.

Decree 23 defines distribution as activities of goods whole-sale, retail, purchase and sale agency, and commercial franchise as provided for by Vietnamese law.

Case Study 1

Retail Services and Retail Outlets:Can 100% FOC with a trading license for importing

equipment for selling to a factory/end user?Does end user mean an individual or company?

Economic Needs Test (ENT)What does this mean?

Case Study 1

Currently, under Decision 10 foreign investors are allowed to establish 100% foreign owned companies to engage in trading and distribution services (i.e., retail)

Actual scenario is…Not easy to obtain an investment certificate in

this sector.

Case Study 1

The investor submitted the application to the licensing authority

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

Case Study 1In this case, the MOIT stated that:

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

Case Study 2Scenario: investor seeks to establish a 100%

FOC in the form of a one-member LLC (to do trading i.e., import/export of industrial equipment & machinery with no distribution rights)

Challenge: trading and distribution service business is a conditional business sector. In certain localities, it is not easy to obtain an investment certificate in this business sector

Case Study 2

Application requirements under Circular 09

Request for issuance investment certificate in accordance with the law on investment;

Explanatory statement on satisfaction of business conditions regarding the nationality of the legal entity, investment form, business services and operational scope;

Registration document for exercise of import-export rights.

Case Study 2

The licensing authority required the investor to explain:

the capability of meeting the total investment capital for the project size; (investment capital)

investor’s experience to ensure the performance of the import-export business;

Case Study 2

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

Case Study 2

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

Case Study 2

Submitted an explanatory letter to the HCMC DPI and explained in a straightforward manner the following:Investment capitalBusiness linesExperience of the investorDescription of the goods and the tariff code

In this case, the investor followed the additional requirements of the DPI and the investor’s application was approved.

Case Study 3Investor wishes to acquire the entire capital (100%) of

domestic company company; business activities of the target included: Manufacturing cattle feed, domestic fowls feed and aquaculture

feed. Manufacturing veterinary medicines Service on disposal of liquid waste and environment. Consultancy service on breeding Examining, diagnosing, treating, caring and prescribing medicine

for animal health. Processing, bottling, packing, making up materials for aquaculture. Selling and purchasing veterinary medicines Selling and purchasing medicines, bio-preparations for aquaculture Selling and purchasing machines for activities of breeding cattle,

domestic fowls, aquaculture Selling and purchasing equipments, production line for slaughter of

cattle, domestic fowls Warehouses and commodity storage in refrigerated warehouses

(excluding bonded warehouses

Case Study 3Under the WTO schedule, a foreign owned

company (“FOC”) may import and trade in the products under HS Codes 3002, 3003 and 3004, but may not distribute/retail these products (“Target’s Products”);

an FOC cannot retail the Target’s Products regardless of the percentage of foreign equity in the FOC.

Case Study 3

in the case of a 49% FOC, the incorporation procedures with respect to a “domestic” company apply, while, in the case of a company with higher foreign equity, the incorporation procedures with respect to a “foreign owned” company apply.

It is currently unresolved whether this “49% rule” concerns only licensing procedures or also other aspects. It’s especially unclear if the “49% rule” can apply to the products the company may sell.

Representative Offices

RO permitted to carry out activities specified in its license

Permitted activities include: Non-revenue generating activities such as market

research, customer support and marketing or feasibility studies for investment projects.

Foreign companies are not permitted to use the RO as a vehicle to carry on actual business in Vietnam Cannot be used to conclude or execute commercial

contracts But chief representative of the RO may be authorised by the

parent co. on its behalf, under a power of attorney on a case by case basis provided that such contract is performed by parent company itself.

Options for foreign investorNo commercial presence

Enter into a distribution agreement with a local distributor

With commercial presenceRepresentative officeBranch office100% Foreign-owned companyJoint Venture Company (between a foreign investor and

Vietnamese Party)

Options for foreign investor Representative Office

No profit making activities; just acts as liaison office for “marketing activities”

Branch Office allowed to conduct activities of goods purchase and sale and other

commercial activities in compliance with their establishment licenses, the laws of Vietnam and treaties (i.e. WTO)

Purchase of shares in local company

100% Foreign-Owned Company With trading rights (i.e., right to import and export) but no right to

directly distribute May appoint distributors

Joint Venture Companies Trading and distribution rights

THANK YOUHo Chi Minh City Office

# 505, Saigon Tower, 29 Le Duan, Dist. 1Tel. (848)38277300 Fax: (848)38277303Emal: [email protected]

Hanoi Office# 603, HCO Building, 44B Ly Thuong KietTel. (844)39348530 Fax: (844)39348531Email: [email protected]

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Practical Issues, Updates and Some Case Studies By Katrina Alday March 26, 2010