Following the issuance of the Investment Law (2014), the Government of Vietnam is speeding up the drafting of a new decree (the Draft Decree) guiding trading and distribution of foreign invested economic organizations (FIEOs) in Vietnam. The Draft Decree, once issued, will replace Decree 23 on trading and distribution of foreign invested enterprises dated 12 December 2007 (Decree 23).
What is new in the Draft Decree?
Below are some new features introduced by the Draft Decree
- [Effective] expansion of business lines to be subject to baby permits;
- Demerger of baby permits from the investment registration certificate (IRC);
- Delegation of the licensing authority with respect to issuance of the baby permits to provincial department of industry and trade (DOIT);
- Setting out circumstances where FIEOs are exempt from baby permits;
- Clarification of criteria for establishing retail outlets including economic needs test (ENT);
- More detailed licensing process.
Detailed comments on the Draft Decree
1. General understanding of baby permit requirements
For a general understanding, for some specific business sectors, the Investment Law requires foreign investor and their local companies to satisfy 02 layers of conditions before officially entering the market. The first one is investment conditions (điều kiện đầu tư) and the second being business investment conditions (also know as business condition or baby permit), (điều kiện đầu tư kinh doanh). Their major differences are presented in the below table:
|Criteria||Investment Conditions||Business Conditions|
|Function||Market access conditions applicable to foreign investment||Professional conditions in order to actually conduct business or investment activities|
|Time of application||Before investment in Vietnam||After investment in Vietnam|
|Applicable Entities||Foreign investors and FIEOs with 51% or more foreign ownership (if acting as an investor in another entity)||Basically, all FIEOs and local companies.|
|Forms||Investment registration certificates or 'approval' of the DPI in case of formation of new entities or acquiring existing local companies respectively||Sub-licenses such as licenses, certificates, etc. In case of trading and distribution by FIEOs, it is the approval for sale and purchase of goods of the DOIT.|
|Relevant Authority||DPI/industrial zone authorities at provincial levels.||State bodies of many levels. In case of trading and distribution, the DOIT|
2. Expanded coverage of baby permit requirements
The Draft Decree makes a specific list of 'purchase and sale of goods' and 'activities directly related to the purchase and sale of goods' by FIEOs, namely:
- Trading (import and export) rights;
- Commercial promotion services
- Commercial intermediary services
- Goods leasing services
- E-commerce services
- Logistics services;
- Commercial assessment services
- Goods auction services
- Goods and service bidding services
- Commodity exchange
- Other activities directly related to the purchase and sale of goods'.
For the purpose of this note, the above services/activities are collectively referred to as 'Conditional Businesses'
Comparing with Decree 23, albeit referring to a variety of trading related activities (e.g. – advertisement, promotion, etc.), mainly subjects trading and distribution by FIEOs to baby permits. Hence, with activities being specified as above, it is more likely that licensing authorities would request all Conditional Businesses to be subject to baby permits. If this is the case, this fact can be seen as a 'one step back' in terms of relaxing licensing process for foreign investment. Specifically, licensing authorities will be given discretion in granting baby permits for Conditional Businesses which are in fact fully opened to foreign investment.
3. Demerger of baby permits from the investment registration certificate (IRC);
Previously, investors applying to setup a trading/distribution FIE need only to obtain an IRC which simultaneously serves as a baby permit. However, with the delegation of the IRC licensing authority from the provincial people's committees to DPIs under the Investment Law, it is still unclear as to licensing process for issuance of baby permit.
The Draft Decree gives the answer. DPIs and the DOITs are responsible for the IRCs and baby permits respectively. DOITs are required to obtain approvals of the MOIT and, under some circumstances, relevant State bodies. This new licensing process, when implemented, will effectively create a 03-layer approval for FIEs which are (i) IRCs at DPI; (ii) baby permits at DOIT and actually approvals at MOIT. This is even more critical because in order for the DPI to issue IRCs including Conditional Businesses they, as a matter of practice, often seek the DOIT/MOIT's greenlight. As such, 04 rounds for approvals would be required for some service sectors that Vietnam has been open to foreign investors for years under its respective international treaties.
Issuance of a decree on trading rights and distribution activities of foreign invested economic organizations (FIEOs) in Vietnam.
4. Delegation of the licensing authority with respect to the baby permits to provincial department of industry and trade (DOIT);
As said, the DOIT will be responsible for issuing baby permits. In doing so, it must first seek greenlights of the MOIT.
5. Baby Permit Exemption
There are roughly 04 possible scenarios where FIEOs are exempt from baby permits
- FIEOs import/export/process or dispose products in accordance with its registered businesses or in combination with their registered services;
- FIEOs already licensed to conduct trading and distribution rights;
- FIEOs already licensed to provide logistics and commercial assessment services; and
- FIEOs with foreign owner holding not more than 35% voting shares (in case of joint stock companies) or 35% charter capital or a lower voting ratio stipulated in charter (in case of limited liability companies).
With respect to FIEOs in item (b) and (c) above, it is not clear as to whether such exemption applies to FIEOs established before or after the effective date of the Draft Decree.
6. Retail Outlet Criteria
Retail outlets by FIEs are still subject to ENT criteria except for:
- The first retail outlet;
- A retail outlet other than the first one having area of less than 500m2 in commercial centers; or
- Retail outlets other than the first one having total area of less than 500m2 in the same commercial centers.
The Draft Decree introduces more specific metrics to measure ENT criteria including geographic size of the relevant area, number of existing retail outlets, possible impacts of retail outlet to be applied on the stability of market, population density and possible contribution of the retail outlets to the socio-economic developments of the area.
7. Licensing Process
FIEOs send the application file to the licensing authority for issuance of baby permits per post, online or direct submission.
The licensing period varies by nationalities of the investors/FIEOs. For example, investors from jurisdictions which have entered into international treaties with Vietnam on market access, the period for the MOIT and other State bodies to give opinions will be 07 working days only. Other investors (e.g. – investors from BVI or other tax heavens) may suffer a 15-day licensing period. The direct licensing authority (e.g. – the DOIT) will issue baby permits within 05 days from the date of receipt of greenlights of the MOIT and other relevant State bodies, if any. In case of refusal, explanations must be given to the applying entities.
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