Vietnam: Technology Transfer In Vietnam

As in other countries, Vietnamese Government realises the crucial role of technology transfers on the process of industrialisation and modernisation. Together with the increase in number of patents, trademarks and other industrial properties objects, the state also provides legal basis for commercialise those objects, in the framework of technology transfer. So far, the result is still very limited. Most of the technology transfer contracts are merely trademark licensing contracts between a parent foreign company and a Vietnamese subsidiary company. No significant technology transfer contract has been registered. The reasons of such failure are many, but the most notable is the lack of a flexible regulatory environment, and the ambiguity in terms used in legal documents.

In respect to the technology transfer regulations, both the Decree No. 49/HDBT dated 3/4/1991 and Decree No. 45/1998/ND-CP dated 7/1/1998 were based on the sample of UNCTAD technology transfer model law. The model law protects the licensee’s interests, which is suitable for developing countries such as Vietnam. In particular, it provides strict price control and stipulates clauses that may not be provided in the technology transfer contract, such as limitation on export market of the licensee, or the prohibition of the licensee from using the technology after the termination of the technology transfer contract. Those clauses are called ‘black listed clause’. All such restrictions, together with the limit on the skill of the licensee, have discouraged foreign companies from transferring technology into Vietnam.

In respect to the ambiguity of terms used, the law defines the term ‘technology’ very broad, including technical service contracts. Thus it is unclear if a technical maintenance contract, or a contract for training executive officers in a company may be considered technology transfer contract, and must be either approved or registered, no matter how simple the transaction could be. Although the mechanism of approval and registration is designed to maintain the certainty of technology inflows, they are lengthy and cause unnecessary panic for both the licensor and the licensee. They do not only affect the flow of technology, but also affecting other simple sale contracts or lease contracts, since part of those contracts may be considered technology transfer, and may be void if not registered.

In order to provide more transparency to the area of technology transfer, and enhance the technology inflows, on July 12, 1999 the Ministry of Science, Technology and Environment (MOSTE) issued Circular No. 1254/1999/TT-BKHCNMT Implementing Decree No. 45/1998/ND-CP dated July 1, 1998 on Transfer of Technology ("Circular No. 1254").

The main developments of Circular No. 1254 are its clarification of the notion of "technology" and interpreting the list of black listed clauses. By so doing, this Circular remedies two points of Decree No. 45 that worry the licensor.

Circular No. 1254 clarifies that software-licensing contracts are not technology transfer contracts. Thus, software licensing contract will be governed by copyright law, which only requires that a software contract to be concluded in writing. This deregulation certainly will boost domestic software industry. However, some issues remain unsolved. For example, Circular No. 1254 does not clarify if maintenance agreements for machinery installed could be considered as "technology transfer".

With regards to black listed clauses, Circular No. 1254 provides a few exemptions for some clauses if the licensor can prove the reasonableness of such clauses. For examples, the licensor may restrict export areas of the licensee’s products, if such export would detriment legitimate interests of the licensor. The parties may agree that the licensee’s use of technology development will be subjected to the consent of the licensor, if the scope of technology transfer includes trademarks. The parties may also agree upon a clause that the licensee will not continue to use technology transferred after the end of the contract term, if they may explain the reasonableness of such clause to the MOSTE. As for the confidentiality clause, Circular No. 1254 allows the parties to stipulate the term of this clause longer than the term of the technology transfer contract. Hopefully, with those interpretations, the foreign licensor will feel more comfortable while entering into technology transfer contract with Vietnamese licensees.

As a requirement from the Civil Code of the Socialist Republic of Vietnam (the "Civil Code"), the licensor has the obligation to warrant that the technology transferred shall properly meet the technology quality agreed upon by the parties (Civil Code, Art. 815.1). Circular No. 1254 further requires that a provision on liabilities of the parties for breach of warranties must be provided in each technology transfer contract. During the term of the contract, the parties must notify each other of any development regarding the technology. However, no party will be obliged whatsoever to provide such information to the other party unconditionally or free.

As for royalties, Circular No. 1254 provides some methods for the calculation. One method of calculation is based on a percentage of net income. The Circular defines net income as "income after tax", but royalty calculated under such method is still tax deductible.¹ It should be noted that Vietnamese law provides a threshold for maximum royalty rates, notwithstanding the methods of royalty calculation and whether or not such methods can be combined. The maximum of royalty calculated is 5% of the net sale price, or 25% of net income (after tax), or 8% of the value of legal capital of a company (if such technology is capitalized to the company).

One particular point for foreign investors to note is that a technology transfer whereby one party is a joint venture must be approved unanimously by the venture’s board of management. This requirement is somewhat inconsistent with Article 14 of the Law of Foreign Investment in Vietnam, which does not require such agreement to be approved unanimously.

Attached to the Circular No. 1254 are six appendices. Appendix 1 lists agreements whose term can last up to ten years (maximum term permissible under Vietnamese law). Appendix 2 provides a list of priority technologies that the parties may agree on and the maximum royalties permissible (8% of net sale price; 30% of net income; or participation of up to 10% legal capital of a joint-venture company). Appendix 3 provides a sample of protocols on technology assessment to be prepared by the parties to a technology transfer contract at its completion. Appendix 4 provides forms of application for MOSTE approval and registration of technology transfer contracts. Appendix 5 provides a form of annual report to the MOSTE on technology transfer. Appendix 6 provides a form of technology transfer contract between a Vietnamese party and a foreign party (the "Form"). The Form is drafted from the viewpoint of the licensee. Therefore, the licensor should beware of the form’s terms and conditions. Although Circular No. 1254 states that the Form is drafted for guideline purposes only, it would certainly be a good example for the MOSTE’s officials for approving technology transfer contracts.

Circular No. 1254 is certainly a step forward for technology transfer regulatory environment in Vietnam. However, no single legislation can solve a problem that has been standstill for so long. Looking at the number of licensing and technology transfer contracts registered at the MOSTE, one cannot help surprising with the low figure, and that most of the technology transfer contracts are inter-company relationship, not a real patenting or know-how licensing. One of the biggest issues seems to be the limit of technology transfer royalty and the introduction of blacklisted clause. The supporters of those restrictions can argue that the restrictions are useful for helping weaker party (i.e., Vietnamese party) to gaining some bargaining strength. This argument may be right, but no one can deny that the transfer of technology has been frozen for so long, partly because of these limitations.

Whereas it is still desirable to introduce blacklisted clause, the restriction royalty should be released. This is so because by the end of the day, technology price (i.e., royalty) is not the purpose of the technology transfer, but it is merely a tool. We have a proverb: we pay for what we get. If we limit the royalty, we will not receive the best technology, and no one will be happy with just ‘cheap’ (but bad) technology.

1. Provided that: FR = royalty fee rate (limited by Circular 1254 to 25%); T = total revenue; PC = production cost (except royalty), and assume that the basic corporate income tax rate 32% is applied, we may come up with the calculation formula of royalty (R) as follows: