Business line - some notes for foreign investors in Vietnam

Tuesday - 03/03/2020 16:32
One of the most important things in applying for an investment certificate by foreign investors in Vietnam is determination of the scope of investment and business through specifying their business lines.
Business line - some notes for foreign investors in Vietnam
Such determination can help the investors not only gain initiatives in the initial process of investment application but also identify the scope of activities they are allowed to carry out in Vietnam.
 
From the aspect of WTO rules
 
From the point of time when Vietnam officially joined the World Trade Organization (WTO), foreign investors coming from WTO members are subjected to the regulatory system of WTO commitments in which the Schedule of Specific Commitments in Services and Goods are relatively clear about the list and schedule to open the market.
 
Meanwhile, foreign investors coming from non-member countries are still governed by domestic law, which may cause higher risk and instability to their investment activities, unless otherwise provided by the bilateral agreement between the two countries. It means that foreign investors coming from WTO members are now protected by clear and binding legal mechanisms conferred by Vietnam’s WTO commitments that cannot be disclaimed or ignored by registrars who often present different reasons and demands while considering the applications and business lines. For foreign investors coming from non-member countries, it is very difficult to ascertain whether or not they may be granted a license as it much depends on domestic law with different ways of explanation by competent authorities at each point of time.
 
As for foreign investors coming from WTO members, their investment activities will be protected by regulations of WTO commitments. Nevertheless, it should be noted that there are only some business lines for which the Vietnamese Government has committed to open the market, and there are some other business lines the Vietnamese Government has the right to open or not to open the market. In the context that regulations on those matters remain unclear and much depend on particular documents or particular cases, foreign investors still face potential risks.
 
From the actuality of domestic law
 
For ease of reference, in our practice, we temporarily separate business lines belonging to the committed scope into three main categories: (i) normal business lines; (ii) conditional business lines, and (iii) distribution. This separation is based on investment procedures to be carried out.
 
Normal business line category
 
Normal business lines are those not prescribed by Vietnamese law as conditional, such as construction work services, market research services, management consulting services and manufacture (unlimited or unprohibited products). For this category, the investment procedure is named registration procedure for granting investment certificates.
 
As per Article 50 of the Investment Law, foreign investors that invest in Vietnam for the first time must have investment projects and carry out investment registration. Also, as provided by the Investment Law, investment project means a series of proposals on the use of medium- or long-term capital to carry out investment activities in a specific location and for a definite duration.
 
In the dossier of application for an investment project, the foreign investor must submit to competent authorities a set of proposals, including the name of the investment project, its scope, objectives, duration, total investment capital (including equity capital and capital mobilized from other sources), location and implementation schedule and proposals for incentives. The registrar will examine and accept all or some of these proposals.
 
As to this category, the investment procedure is relatively simple and the time for granting an investment certificate is 10 working days from the date of submission of a valid dossier. The dossier will be examined by the registrar without having to consult any other related state agencies.
 
Conditional business line category
 
This category of conditional business lines is provided in Annex C, Decree No. 108/2006/ND-CP and other legal documents in which the business lines specified in Annex C to the Decree are applied to foreign investors only, including:
 
 
1. 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.
 
8. 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 fields governed by treaties to which Vietnam is a contracting party and which restrict the opening of the market to foreign investors.
 
Other business lines (not provided in Decree No. 108 above), those applied to both domestic and foreign investors, are mainly provided in Decree No. 59/2006/ND-CP (amended by Decree No. 43/2009/ND-CP) including goods and services subject to conditional business and grant of certificates of satisfaction of business conditions (such as postal services, international multi-modal transport services, security services, and international travel services) and goods and services subject to conditional business but not subject to grant of certificates of satisfaction of business conditions (such as construction designing services and domestic travel services).
 
For these business lines, the investment procedure is commonly named appraisal procedure for granting an investment certificate. Depending on each business line, the dossier must be sent for appraisal opinions from some different competent authorities (such as the Ministry of Planning and Investment, provincial-level Department of Industry and Trade, provincial-level Department of Construction, provincial-level Department of Finance, etc.). Under Point 3, Article 45 of Decree No. 108/2006/ND-CP, the main contents to be appraised include:
 
- Conformity with the technical infrastructure master plan; the land use master plan; the construction master plan; and the plan on prospecting, exploitation and processing of minerals and other natural resources.
 
For an investment project in a sector without any planning yet or which is not included in any of the aforesaid master plans, the investment certificate-granting agency will consult state management agencies with planning competence;
 
- Land use requirements: land area, land category and land use schedule;
 
- Project implementation schedule: investment capital disbursement schedule, construction schedule and schedule of achievement of project objectives;
 
- Environmental solutions: assessment of environmental impact factors and treatment solutions as prescribed by the environment law.
 
Similar to the investment procedure provided in Article 50 of the Investment Law, foreign investors that invest in Vietnam for the first time must have investment projects and carry out investment registration. As such, in the dossier of application for investment project, the foreign investor must submit to competent authorities a set of proposals, including the name of the investment project, its scale, objectives, term, total investment capital (including equity capital and capital mobilized from other sources), location, implementation schedule and proposal for incentives. The registrar and other competent authorities (required to give their appraisal opinions) will appraise and accept all or some of proposals made by the investor.
 
The typical difference between registration procedure and appraisal procedure (in terms of documents) mentioned above is that the investor is required to submit a technical and economic explanation about its main elements such as objectives, scale, location; investment capital, process of the investment project; need of land use, technological and environmental solutions. In some cases, there are different demands on these contents. Some provinces even require the applying investor to prove the feasibility and profitability of the investment project.
 
The time limit for completing the investment procedure is 25 working days from the date a valid dossier is submitted. However, this duration is exclusive of the time spent on sending, receiving and appraising the dossier by related competent agencies, that may take 35 working days or more. In fact some dossiers may be extended to many months. In general, the appraisal procedure is more complicated than the registration procedure.
 
Distribution category
 
This category is considered a special procedure in which the appraisal procedure in investment registration and the procedure for business registration with the Ministry of Industry and Trade are combined.
 
This procedure is applied to various foreign investment projects, including exercising the goods distribution right in Vietnam. For this procedure, the investor is advised to note the following:
 
Distribution covers wholesale, retail, sale and purchase agency and franchise in accordance with Vietnamese law, in which:
 
Wholesaling means selling goods to other business entities and organizations, and does not include selling goods directly to end consumers.
 
The scope within which a foreign investor is permitted to operate includes selling goods to business entities operating as intemediaries before such goods are sold to end customers only. Then, it should be understood that the investor will be permitted to sell its goods to business entities that are licensed for retail activities in Vietnam.
 
Therefore, if the source of goods is at home (every activity of goods purchase and sale happens inside Vietnam), the investor will be required to apply for distribution activities only. If the source of goods is from abroad, the investor is advised to apply for both distrubution activities and exercise of the right to import, as this would give easier conditions for the investor in doing his business activities in Vietnam.
 
In other aspects, if the foreign investor only needs to import the goods into Vietnam and wholesale to other business entities in Vietnam, it should apply for the exercise of the right to import only. As explained in Decree No. 23/2007/ND-CP, the right to import means the right to import goods into Vietnam for sale to business entities which have the right to distribute such goods in Vietnam. As such, having the import right, an FDI company may import goods into Vietnam for sale to business entities which have the right to distribute such goods in Vietnam.
 
Retailing is selling goods directly to end consumers. Unlike domestic business entities, FDI companies are only permitted to sell their goods in certain registered retail premises. An FDI company which has been licensed for retail activities may set up the first retail store without having to undergo any separation procedure. However, if the FDI company wishes to set up the second retail store or more, it is required to register with competent authorities.
 
The setting up of the second retail store or more will be considered on a case-by-case basis, depending on the number of retail stores, market stability and population density in the province or city where the retail stores are located, in conformity with the province’s or city’s master plan.
 
Nevertheless, the foreign investor may apply for a retail license without setting up a retail store.
 
In reality, we have seen many cases in which an FDI company is permitted to exercise the wholesale right, but it also exercises the retail right. That happens because of incorrect understanding of the nature of the matters between wholesale and retail. For example: one Korean investor imports and wholesales an electricity generator to a real estate project in Hanoi, and such electricity generator is used as backup electric source for the building and is not resold to anyone, then such sale is considered retail.
 
Typically, the procedure for investment projects including distribution activities is the same as the appraisal procedure. However, these projects need to be appraised and accepted by the Ministry of Industry and Trade. If the investor applies for a distribution license with setting up first retail store, the investment certificate also serves as the business certificate.
 
The Vietnamese Government now spares no efforts to improve the country’s business and investment environment in order to create more favorable conditions for foreign investors in Vietnam. However, the country’s business and investment environment still sees a lot of shortcomings in terms of transparency and stablity. Therefore, it is recommended that, before starting with any business undertakings in Vietnam, foreign investors should consult a consulting firm which has competence and experience in investment consultancy in order to be provided with adequate information and advice.

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