The Ministry of Industry and Trade’s Legislation Department has clarified that all commercial processing activities of foreign firms in Vietnam are subject to Decree No.23/2007/ND-CP issued in February 2007, detailing the Commercial Law regarding goods purchase and sale activities and other related activities of foreign-invested enterprises (FIEs)—not to a circular issued two months later.

Pham Dinh Thuong, deputy director of the Ministry of Industry and Trade (MoIT)’s Legislation Department, told VIR that all FIE commercial processing activities are now subject to Decree 23, not Circular 04.

“Despite contradictions between the decree and the circular, the decree is still enjoys priority in application, meaning all enterprises must obtain a trading licence,” Thuong said.

In fact, unclear regulations are adding uncertainty and risk to the foreign investment picture for firms providing commercial processing services for other firms in Vietnam.

Under Decree 23 issued on February 21, 2007 detailing the Commercial Law regarding goods purchase and sale activities and other related activities of foreign-invested enterprises, commercial processing is regarded as an activity relating to the sale and purchase of goods. Accordingly, if an FIE wishes to get involved in commercial processing, it should obtain a trading licence.

However, after Decree 23, the Ministry of Trade (now MoIT) issued Circular No.04/2007/TT-BTM on April 4, 2007, guiding the import, export, processing, and liquidation of imported goods and consumption of products of FIEs.

This circular detailed the implementation of Decree No.108/2006/ND-CP dated September 22, 2006, which guides the implementation of a number of articles of the Investment Law 2005. Notably, under Circular 04, such a licence is not needed.

Circular 04 outlined several conditions which an FIE must meet to process goods without a trading licence. First, the processing activity should be consistent with the objectives set out in the investment certificate of the FIE. Second, the processed goods must not be banned or suspended from import and export. If the processed goods are subject to an import and export licence, the FIE can enter into a processing contract only when the import and export licence is obtained.

Moreover, an FIE can process goods if it has completed its capital construction investment and has commenced production and business activities.

“It appears that a trading licence is not required under Circular 04,” said Le Minh Thuy, a lawyer at Venture North Law Limited. “Currently, it is unclear under the Vietnamese law if an FIE needs to obtain a trading licence to provide commercial processing services for other companies.”

Also commenting on these vague regulations, Venture North Law’s founder and business lawyer Nguyen Quang Vu told VIR, “Unclear and out-dated regulations increase unnecessary legal costs and legal risks for businesses. For example, though FIEs can operate normally under Circular 04, they may face big risks when authorised agencies inspect them and refer their operations to Decree 23—then they will be found to have no trading licence.”

According to Nguyen Lan Phuong, partner at law firm Baker & McKenzie Vietnam, the question at hand is whether “commercial processing activities” are also subject to a trading licence. This commercial activity, together with almost all other commercial activities like advertising, sales promotion, logistics services, auctioning services, and postal services under Chapters IV, V, and VI of the Commercial Law, are included by reference to Decree 23.

All of these activities are considered “goods purchase and sale activities or goods purchase- and sale-related activities” pursuant to Decree 23. Accordingly, they are subject to a trading licence requirement.

However, each of these highly-regulated services is subject to their own business conditions under separate legislation. For example, logistics services are subject to the business conditions under DecreeNo.140/2007/ND-CP, while advertising services are subject to the Advertising Law and its regulations. The role and function of Decree 23 is reduced to governing only trading and distribution services.

“The drafting of Decree 23 has certain issues, and whether all the services under Chapters IV, V, and VI of the Commercial Law are included by reference to the decree is the intention of the drafter of Decree 23 is at least unclear. Decree 23 is entangled with other decrees, which are at the same normative legal document level,” Phuong said.

“The risks due to the ambiguity and entanglement of the legal documents still remain. FIEs are confused as to what to follow, the black letter of the law or the practice and guidance of the authorities. They are unsure whether their legitimate rights and benefits will be protected if the trade authorities change their views and insist on the authority to issue the trading licence to this wide range of services.”

This, Phuong said, has major ramifications for foreign direct investment in Vietnam. “The impact is evident,” she said. “FIEs are cautious of the market. They are not confident to bring in the expertise, the world brands, the know-how and knowledge, and the necessary soft and hard investment in order to develop their industries and markets in Vietnam.”

However, according to Thuong, if all activities prescribed in Decree 23 coincide with any specialised law or decree, such activities will be subject to the specialised regulations. For example, advertising activities are subject to the Advertising Law, not Decree 23.

Vietnam Investment Review