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GETTING STARTED - An Insider's Guide to Starting a Business in Vietnam
By Peter N. Sheridan

Part IV - Representative Offices and Joint Ventures

Table Of Contents:

Part I - Introduction

Part II - General Business Considerations

Part III - Cultural Differences

Part IV - Mechanics of Foreign Investment - Representative Offices and Joint Ventures

Part V - More Mechanics of Foreign Investment - Fully (100%) Foreign Invested Enterprises

Part VI - Still More Mechanics of Foreign Investment - Business Co-operation Contracts and Build-Operate-Transfer Enterprises.

PART FOUR - THE MECHANICS OF FOREIGN INVESTMENT

The Government of Vietnam is pursuing a course of market-style economics with a strong socialist orientation. That phrase can encompass a lot, and it does. All business operations, no matter how large or small, must be licensed by the State.  The government is in conflict: how can it grow foreign investment and not place State Owned Enterprises (SOEs) at a disadvantage?

Currently, investment licenses are not being given to foreigners who seek to establish a small business. That includes both cottage industries (Ma & Pa shops) as well as those catering to the carriage trade (high-end services to a limited number of wealthy clientele). These are reserved for the domestic Vietnamese.

The Enterprise Law, now one year old, has gone far to encourage formerly illegal domestic businesses with foreign invested capital to become fully licensed.  The large spurt of new business in year 2000 was for the most part (some say almost 99%) of this nature and not the formation of truly new enterprises.

As a further detriment to foreign investment, in 1998 the State set arbitrary guidelines  limiting advertising and marketing costs to 5% of all costs of business operations (increased to 7% in 1999).  This is what the State, from its own pre and post-embargo experience, considered a fare amount to spend on advertising and marketing.  

Obviously for American companies large (Coca Cola and Proctor & Gamble) and small (VVG) who may spend upwards of 25% of sales on such programs, business here can be a significant challenge if you don't know how.

While Overseas Vietnamese (Vietkieu) are legally entitled to own and operate a domestic business, regulations now more than one year old have failed to speed the growth of these businesses.  Soon, we are told, Vietkieu will be able to buy and sell land use rights for their homes.  This is not yet established for other foreigners, who may own land use rights for their household dwellings only for the period of their stay in Vietnam. 

Foreigners to Vietnam, wishing to establish a business here, must adhere to the Foreign Investment Laws of Vietnam as they have been enacted and modified by subsequent regulations, memos and circulars. Regulations, memos and circulars are promulgated by the National Assembly, the Office of the Government (Prime Minister’s Office) or the Ministries effected by such laws. Each separate organization has the ability to modify an existing law by these means. This adds to the confusion and the lack of transparency of the laws.

A foreign person or company need not invest any specific amount of money (except for apartments, hotels and office buildings, and certain tourist projects) to open a business. However, in practice, small businesses are not being licensed to foreigners as a wholly foreign owned business. Some exception’s have been made.

The types of foreign invested projects permitted in Vietnam are:

• Representative Office (this Part IV)
• Joint Venture Enterprise (this Part IV)
• Fully (100%) Foreign Owned Enterprise (Part V)
• Business Co-operation Contract - BCC (Part VI)
• Built-Operate-Transfer - BOT (Part VI)

What about the company that finds Vietnam the perfect place to establish its world wide headquarters, and has no intention to manufacture, build, or sell anything?  This issue is not academic for VVG has conducted talks with one such company's representative.  We faced the challenge in a novel but not illegal fashion.  What about establishing an E-bay company that will not purchase or sell anything from Vietnam, but instead seeks to use the facilities of Vietnam to house its staff who will work on line to create, manage, and edit their web site housed in an overseas land?  There are no current provisions for such "novel" to Vietnam business interests.

This was the first form of office permitted by the State for foreign enterprises, and in spite of formation and operation costs and problems, remains a preferred way for foreign companies to have an early presence in Vietnam.

Representative (or simply "Rep") Offices are NOT permitted to conduct business (purchase/sales/ consulting) but are useful for providing a base of operations in order to establish a presence in Vietnam. The role of the Rep Office is to permit a company to become familiar with business opportunities, the market, and establish business relations.

Rep Offices may hire local staff, import office equipment (although duty has recently and retroactively been applied to household furnishings), and perform functions such as customer support, market research and feasibility studies.

Except for banks and credit organizations which are administered by the State Bank and are NOT administered by the Law on Foreign Investment (LFI), all Rep offices are administered by the Ministry of Trade and are subject to the Law on Foreign Investment (LFI) which list as the minimum requirement that the home enterprise:

• Established in accordance with the laws of its own country
• In operation for at least five (5) years
• Insure its potential investment or commercial projects in Vietnam will assist the economic and commercial development of Vietnam.

Offices seeking to implement a project valued in excess of US$10 million, or to implement contracts relating to the export of goods produced or processed in Vietnam, or those who show another special relationship to Vietnam, may not have to meet all of the above qualifications.

An Easier Opening. In many ways a Rep Office license is easier than seeking an investment license. The fee for Rep Offices is now VND 1 million, or approximating US$ 63, down from US$ 5,000 when we first returned in 1994. 

Two copies of the current-only official application form are to be submitted to the Ministry of Trade containing:

• The original or notarized copy of the charter or other founding documents of the company;
• A certificate from the applicants bank, or Annual Financial Statement from the company’s accountant confirming the prescribed capital of the company;
• Project or other documents executed and sealed by Vietnamese companies;

A summary of the company providing pertinent information to impress the State with the substance of its operations, such as annual sales, for the past several years.

Offices must be "opened" within 90 days of licensing, and notices posted in public journals. The office must register with the local People’s Committee to which resumes (curriculum vitae) must be presented. Reports of the office activities are to be made every six months.

Joint Ventures are currently the most common, and not surprisingly, the most favored by the State, of all forms of foreign investment. Joint Ventures are actively encouraged by the State and can be given preferential treatment when a State Owned Enterprise (SOE) is the JV partner. An investor applies to the MPI for approval.

Before 1998, as many as 70% of all foreign invested projects were in the form of a Joint Venture. As many as 60% of all new operations (prior to 1998) were in the form of JV agreements.  However, the disadvantages far outweigh the appearance of any advantage in many JVs. 

Accordingly, less than 60% of all foreign invested enterprises are joint ventures, and it is widely reported that in 2003 more than 80% of all new FDI enterprises will be started as 100% fully foreign invested projects.

It is important to choose the form of investment at the outset, as it may be difficult if not practically impossible to change the investment form later.

An important note is that many Joint Ventures fail to get licensed, and almost half the Joint Ventures that are licensed fail due to the inability to raise capital or reach agreement in Important Matters requiring unanimous consent.

Established by contract, a Joint Venture Agreement can set the tone for understandings. But lengthy contracts will NOT be read, or if they are read will not be understood, by most Vietnamese. Particularly for those operating as SOEs, many still have little western business experience. If signed, the contracts may not be enforced by current courts. However, discuss all matters and follow-up each with a letter during the negotiation phase of formation.

Representatives to the Board of Management are appointed in accordance with each party’s respective ownership interest. However, in a two-party JV, at least two members MUST be from the Vietnamese party. The Chairman of the Board can be the CEO. The General Director is equivalent to the President, who can also be the CEO or COO. The Deputy General Director is equivalent to the Executive VP who may also be the COO.

Either the General Director or the Deputy General Director MUST be a representative of the Vietnamese party.

The Chair, appointed by the parties, has the right to call meetings of the Board. While others have the right to request the Chair to call a meeting, this can be a point of conflict.

Decisions are usually by two-thirds vote of the Board present. EXCEPT, for "Important Matters," the unanimous consent of the entire Board is required. Article 14 of the current FIL defines Important Matters. VVG's Guide To Foreign Investment (a hard bound, 250 page book written by VVG), at Section 2.6 provides a complete discussion of this important element of investment.

Under the Bilateral Trade Agreement with America, this repugnant provision has been replaced to read that "important matters are to be decided by consensus...." Vietnamese law will be changed, accordingly.

Giving a minority partner veto powers remains a major problem with this form of agreement.  The 1996 Amendments to the FIL in part correct some of the problems. All board members need not be present, but there must be unanimity between members of the Board of Directors present at a meeting to represent the parties concerned. While still not well defined, the amended law advises that "The most important matters" include:

• Amending and modifying the business charter;
• Nominating and dismissing the President, First Vice President, Chief Accountant;
• Approving an estimate, a balance of annual accounts and the balance sheet of a project;
• Borrowing money for investment.

Joint Venture partners, no matter what their equity interest, have veto control over "Important Matters."

Capital Contribution. The partners must agree on the value of each other’s capital contribution. By law, the minimum foreign investment is 30% of Total Legal Capital.  The minimum Total Legal Capital in any foreign invested enterprise is 30% of Total Investment Capital (which includes all debt incurred or to be incurred by the joint venture company) .

In rare cases will the Vietnamese contribution exceed 30%. In certain cases, particularly in oil and gas matters where there are several partners, the Vietnamese and foreign shares can be less than 30%. Under the Amended FIL, capital contribution for foreign investors in unlisted situations can be less than 30 percent. There are concerns by all parties to a JV about "parity" of the contribution:

• Is the foreigner contributing out-dated equipment or technology; and
• Is the land value ascribed to the property rights contributed by the Vietnamese its actual intrinsic value or has it been overstated to an arbitrary, "International" value?

Advantages of a Joint Venture include:

• The JV partner’s knowledge of the local business environment and political bureaucracy.
• The resources of the local partner to include labor and land.
• Limited liability. A joint venture is a separate legal entity and its liability is limited to its legal capital, the amount contributed by each partner to the JV. This limitation concept may be more illusory than real. There is no precedent to protect liability between the partners or from third parties. Contractual provisions in the JV agreement may help with regard to internecine disputes between partners.

Disadvantages of a Joint Venture may far outweigh the advantages:

• This is a partnership that is more often than not, unequal. The minimum investment for any partner is generally 30% (exceptions have been made in oil and gas matters, and now in other undefined areas). The most common form of Vietnamese contribution is the value of land upon which the JV will build its facility.
• Land use laws, always muddy, are consistently being "clarified" to insure that all foreign and domestic enterprises pay rent to the State for all land. See Land Laws in § 3.6, below. The local, 30% partner will thus contribute the value of the use of the land.
• While a Vietnamese party contributes land use rights to a JV, it also passes to the JV the liability of paying rent to the State. See discussion below in this section, and in Land Laws, Section 3.7, below, concerning Decree 18-CP and other land use laws.
• A private, domestic land use right owner (LURO) may NOT directly rent land to a foreign enterprise. The private, domestic LURO must first cede his land to the State and receive compensation, from the foreign enterprise or JV. Thereafter, when the lease from the State expires, the land does NOT revert to the former domestic LURO. The State claims the right to retain the land use rights.
• The Vietnamese partner’s main contribution to any JV has usually been the declared value of the land use rights. Actually, the Vietnamese 30% partner contributes the right to use the land and (in the recent past) burdened the JV with the obligation to pay a higher land-use tax AND rent to the State. In return the JV partner receives a minimum 30% of profits.
• The foreign enterprise that in essence contributes 100% of the capital has a 70% share in the profits, subject to a veto from the 30% partner on all Important Matters that are still not defined, require unanimous agreement among all present members of the Board of Directors.
• Interest on debts is not recognized as deductible item of expense from gross income.   To keep their total cash contribution low, Vietnamese partners are often adverse to increasing Total Legal Capital beyond the minimum 30% of Total Investment Capital. That burdens the new joint venture enterprise to carry a debt obligation of 70% of its Total Investment Capital. 

New guidelines by the State discourage local companies from forming Joint Ventures where their only asset is land use rights.  Many such companies do not have the business skills and sophistication needed to partner with successful foreign companies, thus encouraging disputes and failure.

Good for Land Development. We recommend against entering into Joint Venture Agreements except in some property development operations. There is a catch.  By operation of law, a foreign investor MUST invest in a land development project only in the form of a Joint Venture. However, even that is changing.

VVG has been awarded the right to proceed in the first-ever major land development project as a fully foreign invested project. Our own $276.3 million Cua Lap Resort, since assigned to others, that is less than one hour from downtown Ho Chi Minh City, was merely one more of many indications that positive changes are occurring in Vietnam.

While VVG has been recommending against Joint Ventures since 1994, our advice has been heard.  Now there is a movement by industry and government to convert non-performing Joint Ventures into fully foreign invested projects.

Notwithstanding the prevalence of Joint Venture agreements and their favored status by the government of Vietnam, we recommend against establishing a manufacturing plant by a Joint Venture unless the investor first:

• Undertakes market research to include a review of all competitive cases and products/services.
• Conducts a "beauty contest" to screen candidates in one of several rounds of interviews and investigations.
• Involves one or more of the screened candidates in a trial/test period exceeding 6 months and preferably extending to one year.
• Understands the cost of doing business can be a minimum 30% equity share donated to the local partner for the privilege of doing business in Vietnam.

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Please Read More From This Article:

Part I - Introduction 

Part II - General Business Considerations 

Part III - Cultural Differences

Part IV - Mechanics of Foreign Investment - Representative Offices and Joint Ventures

Part V - More Mechanics of Foreign Investment - Fully (100%) Foreign Invested Enterprises

Part VI - Still More Mechanics of Foreign Investment - Business Co-operation Contracts and Build-Operate-Transfer Enterprises.

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