Discusses distribution network from how products enter to final destination, including reliability of distribution systems, distribution centers, ports, etc.
Using an Agent or Distributor
According to current Vietnamese regulations, unless a foreign company has an investment license permitting it to directly distribute goods in Vietnam, which includes invoicing in local currency, a foreign company must appoint an authorized agent or distributor.
A Vietnamese agent sells a foreign supplier’s goods in Vietnam for commission. In this case, the sale is normally transacted between the foreign supplier and a local buyer in Vietnam while the Vietnamese agent typically performs the following responsibilities: conducting market intelligence, identifying sales leads, pursuing sales leads, and often providing after-sales services. The specific responsibilities of a Vietnamese agent depend on the agency agreement between the agent and the foreign supplier. The risk of non-payment rests with the foreign supplier. Vietnam’s Trade Law recognizes the right of foreign companies to appoint agents if the Vietnamese agent’s registered scope of business includes such activities.
Under a distributorship arrangement, the question of legal protection and recourse is clear. The Vietnamese distributor buys the goods from the foreign supplier for resale in Vietnam and is usually liable for the full amount of the goods purchased. In many cases, a distributor also acts as an agent for the same foreign supplier and this typically occurs when a local buyer wants to purchase directly from the foreign supplier in a high value transaction.
Legal and Practical Considerations
U.S. companies should conduct sufficient due diligence on potential local agents or distributors to ensure that they have the specific permits, facilities, workforce, capital, and other requirements necessary to meet their responsibilities. Commercial agreements should clearly document the rights and obligations of each party, and stipulate dispute resolution procedures. In most cases, payment in advance or by irrevocable confirmed letter of credit is recommended initially. U.S. companies may consider extending credit terms after establishing a track record of sales with the buyer.
Going to court is not a recommended strategy to enforce agreements or seek redress for commercial problems in Vietnam. Foreign firms that have dealt with the court system in Vietnam report it to be slow and non-transparent. Similarly, although a framework for commercial arbitration exists in Vietnam, the process is not usually considered a desirable option for foreign entities. Firms should consider seeking the advice of a reputable international law firm operating in Vietnam before pursuing legal channels.
Foreign-Invested Trading Companies in Vietnam
When seeking prospective agents or representatives in Vietnam, U.S. exporters may wish to consider not only Vietnamese firms, but also foreign trading companies operating in Vietnam. These often have distinct advantages in communication, experience in importing, expertise in product and package modification, and marketing capability. Under Vietnam’s WTO commitments, foreign-owned and invested companies are permitted to engage in import, trading, and distribution services (i.e. wholesaling and retailing) in Vietnam.
Establishing an Office
Foreign companies have several options for establishing a commercial presence in Vietnam. Firms should seek advice from a competent law firm to evaluate the legal and tax implications of the various options, and to review the most up-to-date regulatory information. Recently, the Government of Vietnam launched the National Business Registration Portalat https://dangkykinhdoanh.gov.vn/en/Pages/default.aspx to simplify the procedures as well as to improve the transparency and efficiency of business registration.
Representative Office License
A representative office (RO) is generally easy to establish, but is the most restrictive form of official presence in Vietnam. The license is issued by the Department of Industry and Trade (DoIT) in the city or province where the representative office is to be established. The new Decree 07/2016/ND-CP dated January 25, 2016, guiding the Commercial Law on ROs and branches of foreign business entities in Vietnam took effect on March 10, 2016 and replaced Decree No. 72/2006/ND-CP on the same matter.
A representative office may rent office space/residential accommodations, employ local staff along with a limited number of expatriate staff, and conduct a limited range of business operations. Per Decree 07, the scope of activities of an RO is narrower than the one stipulated in Decree 72. An RO can conduct the following activities: (i) being a liaison office, (ii) conducting market research, and (iii) promoting the opportunities for investment and business co-operation of the foreign business entity. The activity of “monitoring and activating performance of contracts of the foreign business entity signed with Vietnamese parties or related to Vietnamese markets” allowed under Decree 72 is now removed from the scope of operation of an RO. However, the existing ROs established under Decree 72 can operate in accordance with their granted licenses until the expiry of such licenses.
As the representative office is regarded as a commercial liaison office and not an operating entity, it is strictly prohibited from engaging in any revenue-generating activities, such as trading, rendering professional services, revenue collection, invoicing or subleasing of its office space.
The procedure to establish a representative office is relatively straightforward. An application with stipulated supporting documentation must be submitted to the relevant DoIT. The application and profile must be prepared in English and Vietnamese, and the license is usually valid for five years and may be extended.
The term “branch” office under the laws of Vietnam refers to an entirely foreign-owned business that operates in certain designated service sectors. These sectors, which are restricted and closely monitored by the Vietnamese government, include banking and finance, law, insurance, marketing and advertising, education, tourism, logistics, construction, and other types of services. Many foreign branch offices first entered Vietnam as representative offices and later applied for a branch license. Branch status authorizes a foreign business to operate officially in Vietnam, including invoicing/billing on-shore in local currency and the execution of local contracts.
The establishment and operation of the ROs and branches of foreign business entities as stipulated in Decree 07 need to be in line with Vietnam’s commitments in the international treaties of which Vietnam is a member. In case the foreign business entities come from the countries/territories that are not members of the international treaties of which Vietnam is a member, or the scope of operation of the ROs/branches are not in line with Vietnam’s commitments in such international treaties, the licensing authorities must seek evaluation opinions from the specialized ministries before granting the license for establishment of the RO/branch of such foreign business entities. The decree also provides requirements for applying for the opening of a foreign branch in Vietnam, a foreign business must operate for at least five years from the date of establishment or registration.
Examining applications take up to three days and valid applications will be further processed by the licensing agency. The licensing agency will send the applicant a written notification of whether the license or establishment of the representative office is granted or not within seven working days of the receipt of the valid application. with reasons for rejections.
Foreign Investment Licenses (FIL)
Foreign direct investment (FDI) in Vietnam is regulated by the Department of Planning and Investment (DPI) at the local level and the Ministry of Planning and Investment (MPI) at the central level, through related implementing regulations, decrees, and circulars. Current FIL rules delegate more authority over investment licensing to provinces, municipalities, and investment zones than was the case in the past. However, larger investments (usually above USD 100 million), and those requiring complex licensing approval often require extensive consultations between the provincial DPI and MPI – a process that can take many months. The Prime Minister’s office retains authority over larger projects and projects deemed sensitive. MPI remains the principal government agency acting as an advisor for the Prime Minister with regard to approving licenses.
Primary forms of direct investment include:
- To establish economic organizations in the form of 100 percent capital of domestic investors or 100 percent capital of foreign investors.
- To establish joint venture economic organizations between domestic and foreign investors.
- Under (1) and (2) investors shall be permitted to make an investment to enable the establishment of the following economic organizations:
- Enterprises organized and operating in accordance with the Law on Enterprises; credit institutions, insurance enterprises, investment funds and other financial organizations in accordance with various laws;
- Medical service, educational, scientific, cultural, sports and other services;
- Establishments which conduct investment activities for profit-making purposes;
- Other economic organizations in accordance with law.
To invest in the contractual forms of Business Cooperation Contract (BCC); Build- Operate-Transfer (BOT); Build-Transfer-Operate (BTO); and BT (Build-Transfer).
To invest in business development. Investors shall be permitted to invest in business development through expanding scale, increasing output capacity and business capability, renovating technology, improving product quality, and reducing environmental pollution.
To purchase shares or to contribute capital in order to participate in management of investment activities. Investors shall be permitted to contribute capital to and to purchase shares in companies and branches operating in Vietnam. The ratio of capital contribution and purchase of shareholding by foreign investors in a number of sectors is regulated by the government.
To invest via merger or acquisition of an enterprise. Investors shall be permitted to merge with and to acquire companies and branches. The conditions for the acquisition of companies and branches are largely regulated by the 2014 Investment Law and the Law on Competition, among others.
The franchising model is popular and well-suited to a developing economy like Vietnam. Major U.S. brands are now appearing in considerable numbers and Vietnam has developed a few of its own franchise brands.
Decree No. 8/2018/ND-CP issued on January 15, 2018, provides the legal basis for franchising operations, outlining key definitions and requirements of franchise agreements, as well as regulations for the administration of franchises. Companies wishing to utilize a franchise model should consult with qualified legal counsel for the latest franchise laws and regulations.
Direct marketing and multi-level marketing are recognized as a legal business model in Vietnam and is regulated by the Law on Competition and Decree 110/2004/ND-CP issued in 2004. A decade later Decree 110 was replaced by Decree 42/2014/ND-CP. However, the Ministry of Industry and Trade proposed new regulations to strengthen regulation of businesses utilizing multi-level marketing to encourage a transparent multi-level marketing sector. Therefore, the government issued the Decree 40/2018/ND-CP on March 12, 2018, replacing Decree 42, to promote the management of multi-marketing business operations.
Under Decree No. 40/2018/ND-CP, a multi-level marketing firm is required to have the minimum registered capital of approximately VND 10 billion (approximately USD 439,000) before it can receive a business license. The new regulations target pyramid schemes by specifying what a multi-level marketing firm must not do, including forcing new participants to pay a deposit or buy the firm’s goods to participate in the firm’s business. Multi-level marketing firms are not allowed to sell or transfer networks of participants who join multi-level marketing activities to other firms, excluding cases of acquisition, consolidation, or merger of corporations, or to entice corrupt participants of other multi-level marketing companies to join their networks. The new decree prohibits multi-level marketing firms from providing false or misleading information about the benefits of participating in multi-level marketing, features, and uses of goods, as well as activities of multi-level marketing businesses.
The ranks of direct marketing and direct sales agents/distributors continue to grow. These include companies in personal care, cosmetics, and nutrition, as well as household products. Some multi-level marketing firms have established production in Vietnam. Foreign life insurance companies are also licensed for multi-level marketing and have assembled large teams of agents who engage in traditional telemarketing, door-to-door selling, and workplace marketing in urban areas.
The Ministry of Industry and Trade grants business licenses for multilevel marketing firms. Licensed multilevel marketing firms that have no operations or have stopped operations for twelve consecutive months will have their business licenses revoked.
Firms interested in direct marketing or multi-level marketing are strongly encouraged to seek the advice of a competent legal counsel. In addition, the American Chamber of Commerce in Vietnam has established a Direct Selling Committee that meets regularly to discuss industry developments.
A foreign joint venture is understood as an economic entity with at least one foreign company partner. Like all business formations, joint ventures have advantages and disadvantages. On the positive side, a Vietnamese partner can contribute crucial relationships with government officials and clients, local market know-how, access to qualified staff, and knowledge of land-use rights. However, there are many potential challenges, including differences in management styles and organizational cultures, as well as fundamental differences in outlook and objectives among the partners. In some sectors where 100 percent foreign ownership is not allowed, a joint venture many be the only viable investment option.
Technology can be transferred by outright sale, licensing, or contribution as capital. Foreign JVs often contain technology transfer provisions. The Ministry of Science and Technology has primary authority to approve technology transfer contracts. Implementing regulations of the law governing technology transfer have made such deals difficult. The key areas to note are strict requirements for precise details on the timetable for the delivery of technology; provisions requiring extensive warranties; the limited duration of contracts; and restrictions on royalty rates.
Despite recent improvements, licensing arrangements must contend with stringent regulations, long approval times and restrictions on dividend payments, limited contract duration, weak legal frameworks, and intellectual property rights (IPR) problems. Nevertheless, there is considerable licensing of trademarks, technology, and after-sales service activities from overseas companies to affiliated joint ventures in Vietnam.
Express mail services are available throughout Vietnam, and represented by all major express delivery firms - DHL, UPS, and FedEx. Other postal services include EMS - Universal Postal Union that provides service from Hanoi and Ho Chi Minh City to PRC and the surrounding countries, and Kerry Logistics offering domestic express services in Vietnam, Thailand, and PRC. Some of the smaller express delivery services only serve the Asian Pacific area so be sure to check their service coverage prior to enlisting their services.
Any firm establishing a new business venture in Vietnam should develop business relationships in a positive, but cautious manner. It is imperative that relationship building include adequate due diligence prior to entering contracts or other commercial arrangements: check the bona fides of every business, be it agent or customer or consultant, before entering a business arrangement. One straightforward way to check the quality of a business and its management is to request a list of supplier or customer references. Law firms, accounting firms, and professional due diligence companies like Dun & Bradstreet are also in the market.
One of the most challenging aspects of developing partnerships in Vietnam is verifying the financial bona fides of prospective partners. As noted elsewhere, relatively few firms in Vietnam are audited to international standards. This situation is improving as joint-stock companies submit to more rigorous audits with a view to listing on Vietnam’s young, but growing, stock exchange, and as the business sector recognizes the importance of transparency. Private firms may prefer not to disclose assets and funding sources (let alone liabilities), while information on State Owned Enterprises may be considered sensitive by the authorities.
Commercial credit information services in Vietnam are very limited. Until recently, the Credit Information Center, operating under the State Bank of Vietnam (SBV), has been the only credit information resource in Vietnam. Vietnam’s existing public credit registry collects information on large loans from banks, but does not have the resources to cover smaller SMEs, consumer loans, and other credit providers. Faced with such challenges, many foreign parties request international law firms with a presence in country to investigate prospective local partners.
In 2008, the government issued a license to Vietnam WorldVest Base (WVB) Financial Intelligence Services Co. Ltd., allowing it to provide credit rating services on Vietnamese companies. Additional information may be obtained from databases of leading English language periodicals such as the Viet Nam News, the Vietnam Investment Review, and Vietnam Economic Times. These sources may be helpful in determining whether negative information on a company has been published.