LICENSING BUSINESS OPERATIONS

All business operations, no matter how large or small, must be licensed by the State. Currently, licenses are not being given to foreigner owned small businesses, these are reserved for the domestic Vietnamese and Vietkieu.

Overseas Vietnamese (Vietkieu) are legally entitled to own and operate a domestic business, however, the regulatory reforms have failed to speed the growth of these businesses. Soon, Vietkieu will be able to buy and sell land use rights for their homes. This is not yet established for other foreigners, however, there is rumor that it is being considered. Non-Vietkieu foreigners may own land use rights for their household dwellings only for the period of their stay in Vietnam.

Foreigners to Vietnam, wishing to establish a business here, must adhere to the Foreign Investment Laws of Vietnam as they have been enacted and modified by subsequent regulations, memos and circulars. You can review these via the US Consulate, or GLC would be glad to assist you in acquiring copies.

A foreign person or company need not invest any specific amount of money (except for apartments, hotels and office buildings, and certain tourist projects) to open a business.

The types of foreign invested businesses permitted in Vietnam are:

Representative Office (Rep Office)

Joint Venture Enterprise (JV)

Fully Foreign Owned Enterprise (or Foreign Owned Enterprise, FOE)

Business Co-operation Contract (BCC)

Built-Operate-Transfer (BOT)

• Preferred way for foreign companies to have an early presence in Vietnam.
• Rep Offices are not permitted to conduct business (purchase/sales/ consulting)
• Rep Offices provide a base of operations in order for a foreign business to establish a presence in Vietnam
• Rep Offices may hire local staff, import office equipment (although duty has recently and retroactively been applied to household furnishings), and perform functions such as customer support, market research and feasibility studies.
• All Rep offices are administered by the Ministry of Trade and are subject to the Law on Foreign Investment (LFI) which list as the minimum requirement that the foreign enterprise:

Established in accordance with the laws of its own country

In operation for at least five (5) years

Insure its potential investment or commercial projects in Vietnam will assist the economic and commercial development of Vietnam.

• Businesses seeking to implement a project valued in excess of US$10 million, or to implement contracts relating to the export of goods produced or processed in Vietnam, may not have to meet all of the above qualifications.
• Fee for Rep Offices is VND $1 million or approximating US$ 66.
• Two copies of the official application form must be submitted to the Ministry of Trade containing:

• The original or notarized copy of the charter or other founding documents of the company;
• A certificate from the applicant’s bank, or Annual Financial Statement from the company’s accountant confirming the prescribed capital of the company;
• Project or other documents executed and sealed by Vietnamese companies;
• A summary of the company providing pertinent information to impress the State with the substance of its operations, such as annual sales, for the past several years.

• The new business must open its office within 90 days of licensing, and post notices in public journals.
• The business must register with the local People’s. Reports of the business activities are to be made every six months.

• Most common of all forms of foreign investment,
• Actively encouraged by the State and can be given preferential treatment when a State Owned Enterprise (SOE) is the JV partner,
• An investor must apply to the MPI for approval,
• Important Note - Many Joint Ventures fail to get licensed, and almost half the Joint Ventures that are licensed fail due to the inability to raise capital or reach agreement in important matters requiring unanimous consent.
• A Management Committee must be formed and representatives are appointed in accordance with each party’s respective ownership interest. However, in a two-party JV, at least two members must be from the Vietnamese party.

• The Chairman of the Board can be the CEO,
• The General Director is equivalent to the President, who can also be the CEO or COO,
• Either the General Director or the Deputy General Director MUST be a representative of the Vietnamese party.
• Decisions are usually by two-thirds vote of the Board present.

• Giving a minority partner veto powers over key business decisions remains a major problem with this form of agreement.
• Partners must agree on the value of each other’s capital contribution. By law, the minimum foreign investment is 30% of Total Legal Capital. Only in rare cases will the Vietnamese contribution exceed 30%. In certain cases, particularly in oil and gas matters where there are several partners, the Vietnamese and foreign shares can be less than 30%,
• Advantages of a Joint Venture include:

• The JV partner’s knowledge of the local business environment and political bureaucracy.
• The resources of the local partner to include labor and land.
• Limited liability. A joint venture is a separate legal entity and its liability is limited to its legal capital, the amount contributed by each partner to the JV. This limitation concept may be more illusory than real. There is no precedent to protect liability between the partners or from third parties. Contractual provisions in the JV agreement may help with regard to internecine disputes between partners.

• Disadvantages of a Joint Venture:

• This is usually an unequal partnership, minimum investment for any partner is generally 30%, the most common form of Vietnamese contribution is the value of land upon which the JV will build its facility,
• Land use laws, always muddy, are consistently being "clarified" to insure that all foreign and domestic enterprises pay rent to the State for all land.
• While a Vietnamese party contributes land use rights to a JV, it also passes to the JV the liability of paying rent to the State,
• Usually the Vietnamese 30% partner contributes the right to use the land and then burdens the JV with the obligation to pay a higher land-use tax as well as rent to the State, in spite of which the JV partner receives a minimum 30% of profits.
• The foreign enterprise that in essence contributes 100% of the capital has a 70% share in the profits, subject to a veto from the 30% partner on all key business matters,
• Interest on debts is not recognized as deductible item of expense from gross income, to keep their total cash contribution low, Vietnamese partners are often adverse to increasing Total Legal Capital beyond the minimum 30% of Total Investment Capital, which burdens the new joint venture enterprise to carry a debt obligation of 70% of its Total Investment Capital.

• Vehicle for foreign investment in manufacturing operations,
• A Foreign Owned Enterprise (FOE) affords the most control and the least risk, providing that the foreign business understands the business culture, several foreign companies, like GLC, have substantial experience with Vietnam already, and have overseas Vietnamese staff to supporting the Business in Vietnam,
• FOE’s must be approved by the MPI,
• Once approved, the FOE will be a limited liability company,
• The duration of a FOE is determined by the MPI on a case by case basis, and usually is not permitted to exist beyond 50 years,
• FOE is a recognized, separate legal entity in Vietnam, its liability is limited to its legal capital, the amount of money invested by the owners of the enterprise, this limitation concept may be more illusory than real, there is no precedent to protect liability with regard to third party claims.

• In essence a partnership agreement between a foreign and a Vietnamese party,
• The partnership agreement has no legal standing to create a new legal entity,
• The object is to conduct a common business through investment in Vietnam,
• MPI approval is mandated, however, the application procedure is less burdensome than is a Joint Venture.

• A BOT project is a contract between the State and a foreign entity for the construction of an infrastructure project. Potential subjects are roads, bridges and tunnels; power-generation stations, waste-treatment facilities, seaports, railway systems, airports, telecommunications systems, etc.
• Project would be either a Joint Venture or an FOE, the enterprise will, at its own expense, design, build and operate the facility for an agreed upon period of time, a reasonable profit will be allowed to the operator during that time, (the figure currently favored by the State is a 20% return on investment)
• Recent projects proposed for BOT treatment include Electrical Power Generation Stations with duration’s of 30 years without restriction to profit made during that period.
• State very eager to develop projects on a BOT basis,
• Few investors have shown interest,
• Some interest developing in the power and transportation infrastructure sectors,
• Investors are permitted to manage the operation, however revenues, once set in the BOT contract, cannot be changed without approval by the State.
• The Management Committee and senior managers will be appointed in accordance with the laws of Joint Venture (if that is the form), or as the FOE may choose,
• Level of investment for a BOT project can easily exceed $100 million.