Establishing a joint venture (JV) is a popular method used by foreign companies to enter the Vietnamese market. This does not only help to utilize the expertise of all participating parties but is also in line with the local regulation regarding foreign ownership in some industries.
The procedure of setting up a JV shares similarities with that of foreign-owned enterprises in Vietnam. However, one of the unique challenges of a JV comes from the selection of the local partner, and how to structure this collaboration. The key focus is to benefit all parties while minimizing the potential conflict of interest, especially during the decision-making process.
In this article, you will learn about the procedure of setting up a JV in Vietnam, together with relevant regulations that foreign investors should be aware of.
What are the benefits of setting up a joint venture in Vietnam?
A JV with a local business(es) is sometimes the best option for foreign companies thanks to the expertise of the local partner(s), as well as the low compliance risk. In some cases, it also is the only option for overseas brands to enter the Vietnamese market. This is especially applicable when it comes to the industries that have a limit on foreign ownership of the business. Below are some examples of the benefits that foreign companies can expect from this collaboration model.
Compliance with local regulations
Some industries limit foreign ownership as some industries that are considered to be sensitive by the government. Below you can find a handful of industries and the foreign ownership limitations:
- Banking – 30%
- Goods transportation by rail or domestic waterway – 49%
- Goods transportation by road – 51%
- Cargo handling services – up to 50%, depending on the type of cargo
Therefore, establishing a JV might be the only way in for foreign companies in certain industries. However, this is more complicated and requires significantly more resources from the investors, both in terms of legal documents and human capital.
Access to local expertise
A great benefit of a JV is that you can utilize the local experience and network of the domestic Vietnamese partner.
Foreign companies can establish their footprint in the domestic market while enjoying external support from someone familiar with the market for years. You and your partner can then bring your own strengths to further develop the JV.
Your partner will support with related paperwork and documentation, as well as deal with local authorities. They can also provide insights about local practice, as well as established relations with relevant stakeholders, such as suppliers and distributors.
Meanwhile, the foreign partner is expected to bring experience of globalization, technological innovation, and know-how, which typically are the weaknesses of the local party. Hence, the addition of a foreign company is considered a competitive advantage over local peers in the same industry.
What are the disadvantages?
Having a local partner(s) can sometimes bring disadvantages to foreign companies, mostly from the differences in working style. These differences are often associated with cultures, languages, and development plans.
Conflict of interest
One of the most common reasons for JV’s to fail is due to disagreement in strategic decisions. Even when they share multiple mutual goals, it is not always possible for the two to align perfectly.
To prevent this situation, it is strongly suggested to clarify the scope of work, as well as the responsibilities. This shall be agreed upon in the company’s Charter, shareholder agreement, or any other type of agreement between the founding parties.
When the conflict cannot be solved in goodwill, one might liquidate their stake of ownership, either to the other partner(s) or to an external party. Hence, it is important to consider and carefully discuss the tag-along and drag-along rights before the establishment of a JV, to ensure a smooth exit strategy for all parties, if needed.
As a result, a 50/50 JV is not recommended, as it creates a deadlock when a disagreement arises. This could be resolved simply by making the equity of a party slightly higher than the other (51/49).
It is a challenging task to select the right business partner, either to purchase from, sell to, or cooperate with. This is even harder when the business partner differs in both language and culture.
It is often a challenge for a foreign company to understand, adapt and get used to Vietnamese culture at a start. The overseas partner will heavily rely on the local partner at the beginning. This mainly includes the initiation of business relations with relevant stakeholders or the fulfillment of necessary legal requirements.
The differences in culture and language might lead to delays in decision-making or inefficient operations. To resolve such issues, a common solution is to engage employees of the foreign investor to hold some managerial positions, to act as a bridge between the foreign company and local practices.
Requirements to set up a Joint Venture in Vietnam
With a legal framework that is not as efficient and transparent like in Western countries, foreign companies needs to be fully aware of and understand the local requirements to set up a JV. This could be done via either publicly available sources of information or professional local advisors.
Companies need to follow a three-step procedure, as shown below, to identify if they are allowed to do business in their target sectors:
1. Identify if the target industry is prohibited
There are both industries that are prohibited in general, but it could also be specifically for foreign companies.
Examples of industries that foreign investors (including some JVs with foreign ownership) are prohibited to operate in are:
- Catching or exploiting seafood
- Notary services
- Labor export
- Direct waste collection from households
- Import and dismantle used vessels
- Manufacturing and trading of military weapons, equipment, and devices
(Source: Decree 31/2021/ND-CP by the Vietnam Government)
2. Check if the target industry is in the list of “Approach with conditions” for the foreign investors
This is regulated in Decree 31/2021/ND-CP. Foreign investors (including some JVs with foreign ownership) are required to meet a certain set of conditions, in order to do business within that industry.
The conditions vary case-by-case, but can be grouped into the following categories:
- The proportion of foreign ownership
- The type of the investment
- The scope of the investment activities
- The capacity of the investors
Other conditions as regulated by applicable legal documents from either local authorities or international treaties that Vietnam is a member of.
3. No restriction or condition for foreign companies
If the target industry does not fall into any of the categories in Step 1 or Step 2, companies are all treated equally, whether there is foreign ownership.
Minimum Capital Requirements
Vietnam has no general minimum capital requirement for JVs. However, some industries are still regulated:
- Consumer finance company: 500 billion VND (22 million USD)
- Financial lease company: 150 billion VND (6.5 million USD)
- Real estate: 20 billion VND (870 000 USD)
- Audit services: 6 billion VND (260 000 USD)
- Air transportation (cargo and passenger): 100 billion VND to 1000 billion VND (4.3 million USD to 44 million USD), depending on the nature of the business and the number of aircraft
- Insurance (life and non-life): 200 billion VND to 1000 billion VND (8.7 USD to 44 USD), depending on the nature of the business
Apart from the industries that have minimum capital requirements, a general rule for all businesses established in Vietnam (including JVs) is that they should have sufficient and reasonable registered capital that matches their operation. This is typically assessed by the local Department of Planning and Investment.
Foreign-invested businesses, including JVs, are required to have a direct investment capital bank. Foreign capital must be injected through this bank account.
How long does it take?
When establishing a JV in Vietnam, two important milestones are the issuance of the Investment Registration Certificate (IRC), and the issuance of the Business Registration Certificate (BRC).
The average processing time (from the submission date of proper documents) is 10 to15 working days for IRC and 5-10 working days for BRC. It is worth noting that the IRC might take significantly longer depending on the nature of the business. For example, projects that lease public land from local authorities, or projects that require the transfer of a restricted technology, are both subject to the additional approval of the provincial people’s committee.
The preparation of proper documents and licenses usually takes the longest time. This is even harder to estimate when it comes to the “Approach with conditions” industries, where the shareholders of the JV need to fulfill a certain set of requirements, either before or after the submission of IRC and BRC.
What to consider when setting up a joint venture in Vietnam
As mentioned above, it is important to identify the desired industry of the JV, as some are subject to foreign-ownership restrictions, and some (in the worst scenario) are not allowed in Vietnam. Common conditions to be fulfilled are the percentage of foreign ownership, minimum paid-in capital, or the acquisition of relevant sub-licenses.
Another factor to consider when establishing a JV in Vietnam is the selection of suitable partner(s) locally, which will impact the development of the company. The reputation and reliability of partners should be assessed from multiple aspects to give a true and fair view of this matter. This can be done either by the company themselves, via their local and international business networks, or independently by professional local market entry specialists.
Setting up a JV brings many benefits to foreign companies, especially those entering Vietnam for the first time. It requires less paid-in capital (as this is shared by the shareholders) from the company than establishing a local legal entity itself. The JV is also a chance for foreign companies to learn, and to take advantage of the accumulated market insights of the local partner(s).
However, the foreign company in a JV also needs to prepare for many challenges. Some are similar to establishing a normal foreign-owned enterprise, including steps such as complicated legal procedures, the opening of a direct investment capital account, and large paid-in capital for some industries. Moreover, the foreign partner also needs to be ready for unique challenges of JV, such as the conflict of interest with the local partner, or the impact of cultural differences on the collaboration of the founding parties.
Finally, it is also important for foreign companies to identify if the intended industry of the JV falls into any of the “Prohibited”, or “Approach with conditions” ones. If there are conditions to fulfill before establishing the JV, all founding members should have a clear plan to meet such requirements, as well as to acquire relevant licenses.
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