The years 2022 and 2023 have seen increased investment in data centers. Both local and foreign enterprises are players. Vietnam is ranked as a key location among emerging economies to build a colocation hub, and is expected to reach a market size of about $1.5 billion by 2026. Vietnam is an easy target for data centers because it is undergoing a digital transformation. Demand for data storage and processing–both domestic and foreign–is increasing significantly.
This is a brief discussion of the rules regarding data centers, and the path for foreign investors to invest in them. There are several key considerations.
What is a data center
A data center is a physical infrastructure (building, cable systems, etc), containing a computer system plus auxiliary equipment. The center stores, exchanges, and manages data of one or multiple unrelated organizations or individuals.
There are two main types of data center: an enterprise data center which is built and owned by a company for its own internal use and those of its clients or customers. Then there are service data centers which provide data storage and computing services to multiple companies and users.
Investment in the data center business
Under Vietnam's Commitment to WTO, data center operation is considered to provide "data processing services (CPC 843)" and "database services (CPC 844)". These services are classified as "computer and related services" and so they are fully open to foreign investment.
Data center services include IT/software services and/or computer-related services. These services are delivered to users via telecommunications networks (mostly the internet). The operation of a data center is not classified as telecommunications services under the Law on Telecommunications ("LoT"). That is, a company which provides data center services is not required to obtain a telecoms license in order to operate the data center. This is a significant factor as telecoms licenses can be restricted. Moreover, Vietnamese law does not impose particular restrictions on investment in data centers. Nor has Vietnam imposed conditions on market entry by foreign investors in the data center sector.
A data center service provider will need a telecoms license only if the operation of its data center involves providing telecoms services to customers. In this connection, various technological characteristics relating to how the services are operated, such as mode of transmission, communications range, form of payment for services, etc. will be relevant in assessing whether any form of telecoms services are involved. Because there may be services that a data center provides, that may be seen as telecoms services, and since the law does not elaborate any particular telecoms services that a data center can provide, a common practice, during the licensing process, is to consult the authorities in a reasonably detailed way on the data center's intended business and seek their informal views whether such activities are seen to require a telecoms license.
Licensing process to form a data center with foreign owned capital
Generally, the investor can choose from a number of corporate forms to conduct the data center business. Depending on the number of investors, the subsidiary can be established as a single member limited liability company ("LLC"), a two-to-50-member LLC, or a joint stock company ("JSC"). An LLC is the simplest format. A JSC requires a minimum of three shareholders and has a more complex corporate structure, but can be more suitable for complex ownership.
To establish the subsidiary, the investor must first apply for an Investment Registration Certificate ("IRC") by which the investment project is approved. After the IRC is issued, the investor will apply for an Enterprise Registration Certificate ("ERC") which allows the investor to establish the subsidiary to carry out the investment project which was licensed in the IRC. An IRC and ERC are not unique to data centers. They are required for all company formations where there is foreign investment.
Obtaining an IRC involves government review to assure, for example, conformity with statutory and safety concerns and conformity with any government master plan. After an IRC has been issued, obtaining an ERC is relatively routine.
Other considerations
- Are there technical standards with which a data center must comply?
A data center must be designed, constructed and operated in accordance with the following technical regulations. There are Vietnamese standards for construction. (i) National Standard: TCVN 9250:2012 – Data centers – Telecommunications technical infrastructure requirement; (ii) QCVN 32:2011/BTTTT: National Technical Regulation on lightning protection for telecommunications stations and an outside cable network; (iii) QCVN 9:2010/BTTTT: National Technical Regulations on earthing of telecommunications stations; (iv) National Standards: TCVN 3890:2009 – Fire protection equipment for construction and building – providing installation, inspection, and maintenance; and (v) QCVN 06:2010/BXD: National Technical Regulations on fire safety of buildings.
Before putting a data center into operation, an investor must obtain a Notice of Receipt of Conformity Declaration issued by the Vietnam Telecommunications Authority.
- Is a telecoms license required for a data center to provide cloud services as part of the data center business?
No. It is possible for a data center to provide cloud services, such as data processing and storage services to users on demand via the internet, from a cloud computing server of the data center. A data center can provide cloud services to its customers as part of the data center business. It does not need a separate telecoms license for cloud services.
Of note, cybersecurity can be an issue. Under the Cybersecurity Law, companies that provide services involving a telecommunications network, internet, and/or that provide value-added services in Vietnam's cyberspace and that collect, analyze or process private information/data, data relating to relationships of their users or data created by their users in Vietnam, must store such information/data in Vietnam for a specific period of time. A company providing data center services is subject to the Cybersecurity Law because its operations involve collection and storage of private information/data.
- Is a license required for a data center to rent rack space or charge customers for power consumption?
It is not clear under the law whether a data center is permitted to rent rack space to its customers. It will be a challenge if renting rack space is provided as a stand-alone service and is charged separately. However, a data center can structure the rental of rack space as a form of use of premises within the data center for customers' use as operating space. There are several workable and legitimate strategies to accomplish this.
A data center's operation consumes significant electricity (to run the servers and coolers, etc). If the idea is to charge customers separately for electricity use, then in theory, the company must be licensed to "resell" electricity on a retail basis. As electricity is an essential commodity and is under the State's exclusive management, the right to "retail" electricity is accorded exclusively to EVN (Vietnam Electricity). It is unlikely that the authorities will grant a data center company the right to "retail" electricity. Alternatively, it is possible to structure the cost of electricity charges as a component of the service fees for the data center services provided to customers. That is, customers will not be charged separately for power consumption.
The coming revisions to the Law on Telecommunications.
There is a concern. In the recent draft LoT, a number of new services, including data center services, are proposed to be included. If so, licensing requirements may change. The new draft would change the current framework for the data center business, such as form of investment, foreign capital ratio, telecoms licenses, etc. The development of data centers requires Vietnam to continue to adapt a clear and conducive legal framework for investors, not only for the data center business but also other related areas such as real estate, electricity consumption, cybersecurity, private data information, etc. The inclusion of the data center business into the regulatory scope of the LoT would provide a burden which will impede data center development. Such comments have been raised by many experts in recent discussions with representatives of the Ministry of Information and Communications. The current expectation is that data centers will be excluded when the LoT is promulgated, tentatively, in Q4, 2023.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
