CONDITIONS FOR FOREIGN INVESTORS TO DISTRIBUTION SERVICES

CONDITIONS FOR FOREIGN INVESTORS TO DISTRIBUTION SERVICES

Investment in distribution services is one of the interesting sectors that attracts a large amount of FDI in Vietnam. Distribution services are understood as activities related to wholesale, retail, and agency sales of goods and franchises. According to data from the Foreign Investment Department – Ministry of Planning and Investment, in the first 3 months of 2023, FDI capital in wholesale and retail industries ranks 3rd among invested industries and trades with a total registered capital of nearly 276 million USD, up 2 times over the same period.

Foreign investors when investing in Vietnam, will be considered to apply the provisions of Vietnamese law on market access conditions. For distribution services, Siglaw will share conditions for investment in distribution services for foreign investors under international treaties that Vietnam has signed as well as Vietnamese national laws.

Conditions for investment in distribution services for foreign investors according to the provisions of international treaties signed by Vietnam

Based on international treaties WTO, FTAs, and VKFTA to which Vietnam is a signatory, investment in the distribution sector will set the following conditions for foreign investors as follows:

Firstly, investment and business scope:  when foreigners invest in distribution services in Vietnam, they will be allowed to carry out the following activities: (i) Commission agent; (ii) Wholesale and retail; (iii) Franchise.

Secondly, distributed products scope according to Vietnam’s commitments in treaties. Investors shall not be allowed to distribute the following goods and products: Cigarettes and cigars, books, newspapers and magazines, recorded items, precious metals and precious stones, pharmaceuticals, explosives, crude and processed oil, rice, cane sugar, and beet sugar. These products are excluded from the scope of Vietnam’s commitments to foreign investors.

Except for the above-mentioned goods, at present, foreign-invested companies in the field of distribution will be allowed to provide commission agency, wholesale, and retail services for all products made in Vietnam and legally imported into Vietnam.

Third, other conditions:

• For investment in retail distribution services, in case foreign investors set up retail establishments, the establishment of retail establishments (other than the first retail establishment) of foreign-invested economic organizations will be considered based on the economic need test (ENT). Specifically, obtaining permission to establish more than one retail establishment must follow an existing and publicly disclosed process and licensing must be based on objective criteria. The main criteria for checking economic needs are the number of service providers present in a geographical area, the stability of the market, and the geographic size.
• With franchise services, after 3 years from the date of joining, it will be allowed to establish a branch.

Thus, at present, there are no regulations on the condition of capital ownership ratio in enterprises for foreign investors.

Conditions for investment in distribution services for foreign investors under Vietnamese law

Conditions for investment in wholesale and retail distribution services

Firstly, meet the conditions to be granted a business license.  When investing in wholesale and retail distribution services in the following cases, investors will need to meet the conditions to be granted business licenses:

• Foreign investors exercise the right to retail distribution of all types of goods.
• Foreign investors exercise the right to retail distribution of rice; sugar; recorded items; books, newspapers, and magazines. In this case, it is only considered to grant licenses to exercise retail distribution rights to foreign-invested economic organizations that already have retail establishments in the form of supermarkets, mini supermarkets, and grocery stores for retail at such establishments.
• Foreign investors exercise the right of wholesale distribution of goods such as oils and greases. In this case, it is only considered to grant licenses to exercise wholesale distribution rights to foreign-invested economic organizations that carry out one of the following activities:

+ Producing oils and greases in Vietnam.

+ Producing or being allowed to distribute in Vietnam machinery, equipment, and goods using specific oils and greases.

Accordingly, to be granted a business license, foreign investors need to meet the following conditions:

Firstly, in case foreign investors belonging to countries or territories acceding to treaties to which Vietnam is a contracting party commit to open markets for goods purchase and sale activities and activities directly related to goods purchase and sale, it should:

• Satisfy market access conditions in treaties to which Vietnam is a signatory.
• Have a financial plan to carry out activities of applying for a business license.
• No more overdue tax debts in case the company has been established in Vietnam for 1 year or more.

Secondly, in case the foreign investor does not belong to a country or territory acceding to treaties to which Vietnam is a contracting party; in cases where business services have not been committed to market opening in treaties to which Vietnam is a contracting party, and in cases where business goods have not been committed to market opening in treaties to which Vietnam is a contracting party: Oil, lubricating grease; rice; sugar; recorded items; books, newspapers and magazines, which need:

• Have a financial plan to carry out activities of applying for a business license;
• No overdue tax debts in case FDI enterprises have been established in Vietnam for  1 year or more.
• Meet the following criteria:

+ Have to be suitable with specialized laws;

+ Have to be suitable for the level of competition of domestic enterprises in the same field of operation;

+ Can create jobs for domestic workers;

+ Have the ability and level of contribution to the state budget.

The consideration and approval of competent state agencies in case two will depend on the following 05 main criteria:

• Conformity with regional and national planning and strategy for the development of sectors and domains.
• Vietnam’s market opening negotiation process.
• Vietnam needs to open its market.
• Cooperation strategy with foreign partners of Vietnam.
• Diplomatic relations, national security issues, social order, and safety in case foreign investors do not belong to countries or territories acceding to treaties to which Vietnam is a contracting party.

Thirdly, it is necessary to satisfy the conditions for setting up retail establishments in case foreign investors set up retail establishments. Specifically, conditions for setting up retail establishments of foreign investors and foreign-invested economic organizations are stipulated as follows:

• For the establishment of the first retail establishment, it is necessary: (i) Have a financial plan to establish the retail establishment; (ii) Have no overdue tax debts in case they have been established in Vietnam for 1 year or more; (iii) The location of the retail establishment under the relevant planning in the geographic market area.
• For the establishment of a retail establishment other than the first retail establishment: In case the economic needs inspection is not required, the applicable conditions such as the conditions for setting up the first retail establishment should be met. In the case of having to carry out an economic needs inspection, in addition to meeting the applicable conditions such as the conditions for setting up the first retail establishment, it must also meet the criteria for Economic Needs Inspection.

When satisfying the conditions, foreign investors and foreign-invested economic organizations will be granted licenses for setting up retail establishments. For each retail facility, investors will need to apply for each license separately for each of them.

Conditions for investment in franchise distribution services

To implement a franchise, it is necessary to meet the basic conditions that the business system intended to be used for franchising has been operating for at least 1 year. If a Vietnamese trader is a primary franchise from a foreign franchisor, such a Vietnamese trader must do business under the franchise method for at least 1 year in Vietnam before re-granting the franchise.

The franchise registration will be carried out by the Ministry of Industry and Trade if it is a franchise of foreign traders entering Vietnam. Implement the regime of periodic reporting to the Department of Industry and Trade without registration if franchising in the country; franchise Vietnam abroad.

It is necessary to franchise goods and/or services that are not on the list of business bans. In case of a conditional concession of goods and/or services, the franchisor must have a sublicense or be eligible for business.

Thus, for investment in distribution services, market entry will require foreign investors to meet stricter conditions than Vietnamese investors. With a team of experienced lawyers and legal experts, Siglaw Law Firm is ready to advise and answer for you the remaining problems regarding the Conditions for investment in distribution services for foreign investors. Please contact us for advice.

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