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Vietnam – Recent Law Change Boosts Opportunities For Foreign Investors In Retail Industry.

13 November, 2012

 

Legal News & Analysis – Asia Pacific – Vietnam – Corporate/M&A

 

Introduction

 

Earlier this year, the Ministry of Industry and Trade (“MOIT”) issued Circular 8/2013/TT-BCT on April 22, 2013 (“Circular 8”) to provide a new guideline and clarification of the Economic Needs Test (“ENT”) standard.  This major reform of the Vietnamese retail industry will create greater opportunities for foreign investment in one of the world’s most attractive locations for global retailers.  

   

Key Changes

 

The key changes introduced by the new regulations relating to foreign investment in the distribution and retail sector in Vietnam include:

 

  • Most significantly, for the first time, foreign-invested enterprises (FIEs) may be exempted from the economic needs test (“ENT”) process when opening additional retail outlets of less than 500m2.
  • A clearer licensing process and new guidelines regarding the establishment of an Economic Needs Assessment Committee which will help to improve overall transparency;
  • More certainty regarding regulatory treatment of foreign investment in an existing Vietnamese trading business, with simpler procedures to obtain licenses for existing retail outlets; and
  • A specific rule to permit FIEs to export goods that have been imported into Vietnam.
 

According to the market access undertakings contained in Vietnam’s WTO commitments, Decree 23/2007/ND-CP dated 12 February 2007 issued by the Vietnamese Government (“Decree 23”) provided the legal basis for FIEs to carry out trading and distribution activities in Vietnam.  However, after the first few years of Vietnam’s accession to the WTO, trading and distribution have faced controversy because of the numerous hurdles encountered by foreign investors.

 

One of the main obstacles faced by foreign investors who have sought to establish more than one retail outlet is the ENT.  Decree 23 and Circular 9/2007/TT-BTM (“Circular 9”) set out certain criteria for review and application to establish a retail outlet, such as:

 

  • The number of retail sales outlets in the province or city where the retail sales outlet is to be established;
  • The market stability in the province or city where the retail sales outlet is to be established;
  • The population density in the province or city where the retail sales outlet is to be established; and
  • The consistency of the investment project with the master plan of the province or city where the retail sales outlet is to be established.
 

However, there is no further guidance in the regulation and evaluation is dependent on the discretion of the relevant competent authority.  Therefore, ENT becomes a major concern for foreign investors due to its unpredictability and uncertainty in application.

 

New Circular 8 took effect on June 7, 2013.  It replaces Circular 9 and a summary of Circular 8 and its ENT evaluation standards are set forth below:

 

 

Circular 9 New Circular 8
The number of retail sales outlets in the province or city whether the retail sales outlet is to be established. The number of retail sales outlets in the district where the retail sales outlet is to be established.
The market stability in the province or city where the retail sales outlet is to be established.   The market stability in the district where the retail sales outlet is to be established. 
The population density in the province or city where the retail sales outlet is to be established. The population density in the district where the retail sales outlet is to be established.
The consistency of the investment project with the master plan of the province or city where the retail sales outlet is to be established. The consistency of the investment project with the master plan of the province or city where the retail sales outlet is to be established.
  The scale of the district-level locality where the retail sales outlet is to be established.

Although the evaluation standards in Circular 8 are similar to those in Circular 9, there are some noticeable differences.  The level of evaluation changed from “province  or city” to “district”.  Furthermore, the scale of the district-level locality was added as a new element.  Consequently, evaluation should be easier because the level of scrutiny has decreased. 

 

Nevertheless, consistency of the investment project in accordance with the province or city’s master plan is still required.  The master plan is not publicly disclosed and therefore would be subject to broad governmental discretion.

 

ENT Evaluation

 

If the following requirements are met, an FIE is allowed to set up a retail outlet in addition to the first retail establishment, without an ENT.

 

  1. In areas planned for trading of goods by central-affiliated cities and provinces;
  2. With a total business area of no more than 500m2; and
  3. Construction of infrastructure is already completed.

 

Although it seems to be easier to establish small retail outlets, consistency with the master plan would also be required in this case.  Therefore, broad discretion of the competent authority still remains.

 

Council’s ENT Review

 

Under new Circular 8, the People’s Committee of each respective central-affiliated city and province must form a council to review the ENT.  The council is made up of representatives of the relevant People’s Committee, Department of Planning and Investment and other relevant authorities.  Through such councils, the evaluation process of ENT will be more transparent.

 

Clarification of ENT standards and procedures have been demanded by foreign investors for some time.  This recent regulation amendment means that such calls have been clarified to some extent.

 

Conclusion

 

Like most things in Vietnam, it may take a while before seeing if any positive effects of Circular 8 are fully realized.  However, the ENT exemption is a step in the right direction to reduce the existing difficulties and unclear treatment of FIEs in trading businesses and is also a significant move towards more transparency in the licensing process, which provides added comfort to foreign investors. 

 

SUMMARY OF NEW CIRCULAR 08/2013/TT-BCT OF THE MINISTRY OF INDUSTRY AND TRADE

 

Provisions Advantages/Disadvantages in comparison with the older version 
An FIE which is licensed with  export rights will be entitled to export: (1) their own products; (2) merchandise from local manufacturers or distributors; and (3) merchandise imported by it or other companies. It is expanded for an FIE to export itself merchandises imported by it or other companies (item 3). In the past, FIEs were allowed to export only merchandise/goods/products of items (1) and (2). In case FIEs wanted to export something imported by themselves or other companies, FIEs had to assign an import-export company to handle the procedures at a customs agency. 

This new point of regulation will help FIEs dispose of their assets and property imported for their operation in Vietnam.

 

The new circular provides specific regulations regarding operation of export processing FIEs engaged in the business of import, export, distribution and other relevant activities.   There was no guidance for export processing FIEs in the old circular. The new regulation has specific guidance which will help application in practice. The new circular provides that any incentives applicable to export processing in FIEs will not be applied to their business of import, export and distribution. 
Regulations on procedures for establishing retail outlets:
– Except for the first retail outlet, an ENT is required for establishing a retail outlet;– ENT is not required for establishing a retail outlet with an area of less than 500m2 in a zone planned by the State for development of goods trading.
In practice, it used to be difficult for FIEs to establish retail outlets due to the lack of regulations on ENT. The new regulation provides specific guidance which is very helpful for FIEs to establish a retail outlet as they now have a legal basis to follow when working with the relevant authority.

 

 

 

For further information, please contact:

 

Kent Wong, Partner, VCI Legal
[email protected]

 

 

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