Trade and Investment in Vietnam for Hong Kong SMEs

Fred BurkeBaker & McKenzie (Vietnam) LimitedBaker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.

Trade and Investment in Vietnam for Hong Kong SMEs

December 4, 2009World SME Expo

Vietnam for Hong Kong SMEs

©2009 Baker & McKenzie 2

Agenda

I. Vietnam’s Integration StrategyII. InvestingIII Service Sector - DistributionIV. PropertyV. Location and other factors



Vietnam WTO Accession• “Big Emerging Economy”

– Economic Reforms underway– High GDP growth – 85,000,000 young population

• Keen to integrate:– WTO Accession in 2007 – ASEAN/AFTA Member– US Bilateral Trade Agreement 2001– Japan Bilateral Investment Agt., etc.

• Key Exports:– Textiles / Footwear– Seaproducts (shrimp, lobster)– Agriculture (rice, coffee)– Furniture– Crude Oil– Software & Hardware



WTO - General Commitments• Non-discrimination

– National Treatment (“NT”)– Most Favored Nation (“MFN”)

• Elimination of quantitative restrictions• Conversion of non-tariff measures to tariffs• Transparency

• BUT: – Specific Market Access and NT Limitations– Progressive Liberalization : Rounds & Phase-Ins– General & security exceptions– Special & Differential Treatment



Tariff and Non-Tariff BarriersWorld Economic Forum 2008 Survey

Vietnam ranked 114th out of 118 countries in terms of Market Access – tariffs and Non-Tariff Barriers



Changing Legal Landscape• New Enterprise Law, Investment

Law, IP Law, Civil Code, Commercial Law, Competition Law, Law on Credit Institutions…

• Securities Law, Franchise Decree, Technology Transfer Law, Enterprise Income Tax Law, VAT Law, Personal Income Tax Law, Law on Compulsory Purchase…

• And don’t forget their implementing decrees, circulars, regulations, official dispatches…



Representative Offices

• Most popular form of Market Entry

• Limited Scope of Operation

• Special Tax Issues• Branch Offices are NOT

yet an alternative



Investing

• Key points• Establishing a company in Vietnam• How are investments made?• M&A• Exiting• Alternative : Rep Offices



Key Points

• Foreign investment highly regulated• Cost of entry significant - time, cost, effort• Easy for export manufacturing in industrial zones• Direct investment is project/business based• Distinguish between Vietnam and foreign owned

companies• Can repatriate legitimate profits (after tax)



Establishing a Company

• Investment Certificate (foreign) and Business Registration Certificate (Vietnamese)

• Corporate forms - limited liability company (“LLC”) and joint stock company (“JSC”)

• Public company: OTC and listed• Foreign invested enterprise; joint venture

company (old school)



How are investments made?

• Foreign investor establishes own Vietnam company/project (FDI)

• Acquire existing foreign investor (offshore)• Acquire interest in existing private company - amend

IC/BRC (onshore)• Acquire shares of listed company• Acquire shares of non-listed public company• Cannot establish a non-operating investment company



M&A

• Offshore vs Onshore• Multitude of targets – foreign vs Vietnamese;

LLC vs JSC; private vs public; FIE vs re- registered

• Government approval – Amendments to incorporation certificates; Competition Authority

• Strategic investor (in a public company)



Exiting

• Sell SPC/foreign investor (offshore transaction; no Vietnam tax)

• Sell foreign invested company in Vietnam (28% EIT on capital gains)

• Sell shares of listed company (withholding of 0.1% EIT on the total proceeds from the sale of the securities)

• Can repatriate legitimate profits and dividends.



WTO Accession Myth #1: The World Changes in 2009One school of thought:

January, 2009 – Distribution Services opened up to 100% Foreign ownership. Vietnam’s distribution sector has been fully and officially opened.



Phase-ins: Import & Distribution

But: (1) Cigarettes and cigars, books, newspapers and magazines, video recordings, precious metals and stones, pharmaceutical products and drugs, explosives, processed oil and crude oil, rice, cane and beet sugar are excluded from these commitments.(2) Circular 9: “Single Licensed Distributor Rule” rescinded by Circular 5 (2008).

Sub-SectorDistribution•Wholesale•Agency•Retail

2007: 49% JV 2008: 51% JV 2009: 100%

“ENT” for Retail

Warehousing 2007: 51% JV 2014: 100%Freight Agency 2007: 51% JV 2014: 100%Marketing 2007: 51% 2009 on: any JV 100% NEVER



Supply Chain ServicesService Legal Definition Restriction

Import Rights the right to import goods into Vietnam for sale to business entities which have the right to distribute such goods in Vietnam (Decree No. 23)

May be 100% foreign- owned, but certain products, such as pharmaceuticals, may not be imported before 2009

Customs Clearance Services

activities consisting in carrying out on behalf of another party customs formalities concerning import, export or through transport of cargoes (WTO)

• Joint venture form • 51% maximum foreign capital contribution • Capital contribution restriction terminates in 2012



Supply Chain Services, cont.Service Legal Definition Restriction

Container Handling Services

The loading, unloading and discharging of vessels' containerized freight, at ports (WTO)

• Joint venture form• 50% Maximum foreign capital contribution• No 100% foreign investment committed

Storage and Warehousing Services

• Storage services of frozen or refrigerated goods• Bulk storage services of liquids or gases• Other storage or warehousing services (WTO)

• Must be joint venture form• 51% maximum foreign capital contribution• No restrictions on foreign investment after 7 years (2014)




Freight Transport Agency Services

The activities consisting of organizing and monitoring shipment operations on behalf of shippers (WTO)

• Must be joint venture form• 51% maximum foreign capital contribution• No restrictions on foreign investment after 7 years (2014)

Other Supporting & Auxiliary Transport Services

Includes bill auditing; freight brokerage services; freight inspection, weighing and sampling services; freight receiving and acceptance services; and transportation document preparation services

• 49% JV until 2010•51% JV from 2010 until 2014•No restriction on foreign capital contribution after 2014 (i.e., 99% possible)




Wholesale Services The activity of selling goods to other business entities and organizations; and does not include the activity of selling goods directly to the final consumer (Decree No. 23)

• Must be joint venture form• No restriction on foreign capital contribution starting 2008• 100% allowed starting 2009

Retail Services The activity of selling goods directly to the final consumer (Decree No. 23

• Same JV requirements as wholesale• ENT on outlets after the 1st one



Retail Services• Limit to One Foreign Owned Retail

Point, then:• Further shops each subject to an

“Economic Needs Test” (normally banned by the General Agreement on Trade in Services).

• Three factors: (1) Number of existing service establishments in the geographic area, (2) stability of the market, and (3) geographic scope.

• All sales to “end users”



Other Distribution Licensing Issues

• Warehousing and Commissioned Agency Distribution Services are open to 100% foreign ownership.

• Licensing process protracted, onerous.

• E.g. new Warehousing Supporting Documentation.



Franchising : A Better Picture• Disclosure Based System in

new Commercial Law, Decree

• Registration of Disclosure Statement and other documents with Ministry of Trade

• Statutory protection for Franchisee, but allows for substantial party autonomy



Phase-ins: Franchisee Ownership

• BUT for Foreign Owners:

– Retail still subject to ENT

– Restaurants only in connection with Hotels.



Other New Commitments• Insurance – 100% now• Education• Veterinary Services• Urban planning and landscaping

services• R&D Services on Natural Sciences• Management Consulting• Technical Testing• Sewerage, Waste Disposal• EntertainmentBUT: Most of these subject to some form

of condition



“Unbound” Services

150+ Service sub-Categories Covered (60 in US-VN 2001 BTA).

Anything not “bound” is “unbound”?

What’s Missing? – Port operation services– Real estate agency and

brokerage, property management– Security services– Translation – Oil field services, etc.



Limits on Services OpenedLicensed Partner Only

• Advertising• Facilities based and non-

facilities based telecoms services

• Electronic Games• Motion Picture

Production

Any Local Partner

• Securities Services• Courier Services• Tourism Services• Distribution Services• Franchising• Education• Environmental Impact

Assessment Services



Infrastructure• Transport:

– Ports better– Roads, transport still

congested

• Telecommunications: has Leapfrogged to compare with the Region

• Power: Barely keeping up



Property

Constitutional PrinciplesLegal FrameworkProject StructuresMarket Access IssuesFinancing IssuesScenariosEmerging Issues



Context for Property Investments• French Civil Code• Socialist Republic (54/75)• Constitution: “All land

belongs to the People, administered by the State for long term and stable use.”

• Lease up to 50 years, extendable to 70.



Legal Framework

• Constitution• Land Law• Investment Law• Law on Real Estate

Business• Enterprise Law• Law on Residential

Housing

• Construction Law• Environmental Law• Tax Law• (Draft) Law on

Expropriation• (Draft) Law on Urban

Planning• “Sub-Laws”: Decrees,

Circulars, Official Dispatches



Relevant Authorities• Ministry of Natural Resources & Environment

– Cadastral Bureau, Land Office, etc.

• Ministry of Planning and Investment– Department of Planning and Investment

• Ministry of Construction– Department of Construction

• People’s Courts• Notary Public Office (for security documents)



What’s Missing?

• An Accessible Title Registry, Title Insurance• Registry of Security Interests (although one

does exist for non-property assets)• Escrow Payment Structures (used now, but still

ad hoc)• Rules on standard of compensation in case of

expropriation/eminent domain.• Status of Properties “abandoned” post-war.



Forms of Ownership

• Land Use Rights• Granted, Allocated,

Leased, Sub-LeasedVietnamese Individuals

– Mortgagable, inheritable, transferable.

– For personal use or personal investment/lease.



Forms of Ownership (2)

Enterprises• Allocated and granted

land.• 50 years extendable to

70.• Mortgagable,

Transferable• For a particular use

(changes require approval).



Land Clearance

• Always a Challenge in Project Development

• Compensation Committees, Systems ad hoc, ever-changing

• Individual households vs. Government

• Provinces vs. Cities, political sensitivities



Project Structures• What structures are available for foreign investors?

– LLCs: Can be 100% foreign owned– JSCs: Minimum 3 parties

• Warning signs of impossible deals?



Historical Limits on Retail Sector

• No Foreign Owned Retail without Prime Minister Approval

• Limited Market Access, granted on discretionary, case-by-case basis (Parkson).

• Retail that’s not “Retail” (Metro “Cash & Carry”).

• One-off Licenses (e.g., Louis Vuitton Hanoi Retail Company per EU-VN Trade Agreement)



How much capital?

• No minimum charter capital/investment capital required for non-property projects.

• Minimum :15% or 20% equity requirement for residential projects, and 20% for new urban centers, IP Technical infrastructure.

• Pre-sales: rules more flexible than in China, but still requires foundation completed to pre- sell condos.

• Local debt finance available.



Minimum Capital• Some industries such as banking, finance, insurance,

securities, real estate, airline, etc… must have a minimum capital in order to be established. This capital is called “legal capital.”

• For property developers: VND6,000,000,000 (about US$350,000).

• DPI assess project feasibility on a case by case basis.

• MOC August Official Dispatch requiring entire charter capital to be paid up in advance (in escrow).



Late Payment of Charter Capital

• It is important to contribute charter capital according to the committed schedule.

• In property projects, delays can lead to cancellation of Investment Certificates.



Emerging Issues • Who Can Buy?

– Vietnamese citizens?– Foreign Residents?– Viet Kieu?– Companies

• Management Agreements

• New Taxes on Gains

• Valuation/assessment licensing and regulation


©2009 Baker & McKenzie 42©2008 Baker & McKenzie 42

Foreign Investment and Taxation

• Value Added Tax (“VAT”)• Corporate Income Tax (“CIT”)• Foreign Contractor Tax (“FCT”)• Special Sales Tax (“SST”)• Personal Income Tax (“PIT”)



Other Key Points for HK SMEs

• HK-Vietnam Tax Treaty ratified (good news), but does not cover capital gains from property sales (bad news).



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Vietnam

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Vietnam

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Documents

Trade and Investment in Vietnam for Hong Kong SMEs