Vietnam Legal Update March 2005

Transcription

1 Vietnam Legal Update March 2005 Hanoi Branch Office Suite 401, Hanoi Tower 49 Hai Ba Trung Hanoi Vietnam Tel Fax bill.magennis@phillipsfox.com Ho Chi Minh City Branch Office Suite 605, Saigon Tower 29 Le Duan Boulevard District 1, Ho Chi Minh City Vietnam Tel Fax nigel.russell@phillipsfox.com Melbourne Office Level 44, 120 Collins Street Melbourne Australia Tel Fax maureen.mclaughlin@phillipsfox.com Adelaide Brisbane Canberra Melbourne Perth Sydney Auckland Wellington Hanoi Ho Chi Minh City Part 1 Selected New Legal Instruments 1.1 Interest Rates Public Order Mineral Licenses Micro-Finance Organizations Special Sales Tax Import Licenses EU Banks - VND Deposit Limit Mutual Insurance Organizations Construction Projects 6 Part 2 Features 2.1 Technology Transfer Reforms Import and Distribution Sector National Assembly Update Labour Contracts - Termination 14 Part 3 Did You Know? 3.1 Electricity Tariff Foreign Bank Buys into Vietnamese Bank Labour - Foreign Secondees to Vietnam Labour - Public Holidays Land Leases - Foreign Invested Enterprises Hanoi Securities Trading Centre Opens Finance Leasing Internet Offences Shipping Sector - Foreign Investment FISCs - First Public Share Issue 20 For the most extensive online database of English translations of Vietnamese investment and business laws, go to Vietnam Laws Online Database on This publication is copyright. Except as permitted under relevant laws, no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Phillips Fox, Vietnam Laws The material contained in Vietnam Legal Update is intended to inform you of recent legal developments in Vietnam. It is not intended, and should not be relied upon, as legal advice. Should you wish further information in relation to any legal instrument or matter mentioned in this issue, please do not hesitate to contact one of our offices. For all past issues of Vietnam Legal Update, complete with index of contents from 1997 to 2005, go to or

2 2 Part 1 Selected New Legal Instruments 1.1 Interest Rates Decision QD-NHNN of the State Bank of Vietnam dated 21 March 2005 on Adjustment of Maximum Interest Rates for US Dollar Denominated Deposits of Legal Entities at Credit Institutions Decision 272 increases the maximum interest rates for USD deposits of legal entities at credit institutions as follows: > On-call deposits: Increased to 0.3% per annum (from 0.1% per annum) > Term deposits up to six months: Increased to 0.7% per annum (from 0.4% per annum) > Term deposits over six months: Increased to 1% per annum (from 0.8% per annum) These maximum interest rates apply to USD deposits of economic organizations (excluding credit institutions), State bodies, units of the armed forces, political, socio-political, social and socio-professional organizations, social and charitable funds, other organizations satisfying the conditions on "legal entities" stipulated in the Civil Code, and foreign legal entities operating in Vietnam. Decision 272 will become effective as of 8 April and replaces Decision QD-NHNN of the State Bank of Vietnam dated 30 July This is the first change in USD deposit maximum interest rates in almost 2 years. As of 1 August 2003, Decision 834 lowered the maximum interest rate for USD term deposits up to six months to 0.4% per annum (it had been 0.5% per annum since 1 January 2002) and lowered the maximum interest rate for USD term deposits over six months to 0.8% per annum (it had been 1.0% per annum since 1 January 2002). So Decision 272 now returns the maximum interest rate for USD term deposits over six months to its 1 January July 2003 level of 1% per annum. Of note, Decision 272 takes the maximum interest rate for USD on-call deposits to an all-time high of 0.3% per annum (it had been 0.1% per annum since 1 January 2002). Decision 93-QD-NHNN of the State Bank of Vietnam dated 27 January 2005 on Promulgation of Basic Interest Rate Denominated in Vietnamese Dong Decision 93 increased the basic interest rate for VND loans at credit institutions to 0.65% per month/7.8% per annum (from 0.625% per month/7.5% per annum). Decision 93 became effective as of 1 February 2005 and replaced Decision 1716 of the State Bank of Vietnam dated 31 December This is the first change in the basic VND loan interest rate in almost 2 years. As of 1 April 2003, Decision 285 of the State Bank of Vietnam dated 31 March 2003 increased the basic VND loan interest rate from 0.62% per month/7.44% per annum to 0.625% per month/7.5% per annum.

3 3 1.2 Public Order Decree ND-CP of the Government dated 18 March 2005 on a Number of Measures to Ensure Public Order With the stated objective of ensuring public order, Decree 38 requires any gathering of persons in a public place to be registered in advance with the people s committee where such gathering will take place. The registration must be carried out by the organization or persons organizing the public gathering or public activities. The following matters must be indicated clearly: the content and purpose of the public gathering; the time where the public activities will take place; the place and mode of gathering; the names of organizations and the number of persons expected to participate in the public activities. The competent people s committee is required to reply within 7 working days. Decree 38 prohibits any person or organization from taking advantage of the democratic freedom right of citizens to gather in public in order to incite unrest. Decree 38 also prohibits public gatherings from obstructing roads and pavements and from congregating in front of offices and organizations or in areas where international conferences, National Assembly Sessions, People s Council Sessions and other important political activities are occurring. 1.3 Mineral Licenses Circular TT-BTC of the Ministry of Finance dated 16 March 2005 Providing Regulations on Collection, Payment and Management of Use of Fees for Issuance of Licenses for Mineral Activities Circular 20 prescribes the fees for initial issuance of each type of mineral license as follows: > Mineral exploration license: VND 2 million > Mining license: VND 4 million > Mineral processing license: VND 2 million For renewal of mineral licenses (or re-issuance in case of transfer or inheritance): a fee equal to 50% of the fee for initial issuance is payable. Any body collecting fees for mineral licenses is entitled to retain 40% thereof to cover its expenses (the balance is payable into the State Budget). Circular 20 replaces Circular TT-BTC of the Ministry of Finance dated 31 December Micro-Finance Organizations Decree ND-CP of the Government dated 9 March 2005 on Organization and Operation of Small-Scale Finance Organizations in Vietnam Decree 28 provides for the establishment of micro-finance organizations in Vietnam by social, political and trade organizations, charitable and social funds, and non-governmental organisations. Other domestic and foreign organizations and individuals are permitted to contribute capital to such micro-finance organizations. To be licensed, a micro-finance organization must have a minimum legal capital of VND500 million (or VND5 billion if savings services are offered). The objective of micro-finance organizations is to provide "small-scale finance activities" for low income people and households. Decree 28 became effective as of 30 March 2005.

4 4 1.5 Special Sales Tax Circular TT-BTC of the Ministry of Finance ("MoF") dated 8 March 2005 on Amendment of and Addition to a Number of Clauses of Circular TT-BTC of the MoF dated 12 December 2003 Providing Guidelines for Implementation of Decree ND-CP of the Government dated 4 December 2003 Making Detailed Provisions for Implementation of the Law on Special Sales Tax (As Amended) Circular 18 introduces a number of reforms, including: > Specialized passenger transport vehicles in entertainment and sports areas not participating in traffic as prescribed in the Law on Road Traffic are now included as goods not subject to special sales tax ("SST"). > The SST rate of 25% now applies to automobiles of seats, irrespective of whether they are imported or locally made (including vehicles designed for passenger as well as cargo transport and all types of three-wheeled motorized vehicles). > Where an export trading entity buys goods on the local market for export (which are exempt from SST) and then sells them on the local market instead of exporting them, the business entity must declare and pay in full the SST due on behalf of the manufacturer. Now, a time-limit of 5 days from the date of sale applies to such declaration. The price on which SST will be calculated is the net price without SST and VAT. Where the business entity declares a selling price (including VAT and SST) to be used as the basis for determination of SST which is 10% lower than the selling price in the market, the price on which SST will be calculated will be fixed by the tax office. > The time-limit for production or business establishments to submit SST finalizations to the tax office has been extended to 60 days (previously, 45 days) after 31 December of the tax finalization year. Circular 18 became effective as of 31 March Import Licenses Decision QD-TTg of the Prime Minister dated 2 March 2005 issuing Regulations on Issuance of Import Licenses The simplification of procedures for issuance of import licenses for those goods which are subject to State management by way of non-automatic import licensing (such as sugar) and the leveling of the playing field for importers are basic requirements for Vietnam's accession to the WTO and standing commitments for Vietnam under the US-Vietnam Bilateral Trade Agreement. Decision 41 has been issued in an attempt to achieve these reforms. One of the basic principles of Decision 41 is transparency of import licensing procedures. As of 1 September 2005 (when Decision 41 becomes effective), any regulations on issuance of import licenses must be published in the Official Gazette of Vietnam at least 21 days before they become effective and must be posted on the Ministry of Trade's website as well as posted up at import licensing bodies. Any changes to licensing regulations must be published in the same manner and within the same time-limit. Decision 41 only allows for license applications (for both initial licenses and license extensions) to be submitted at one authority, with the license applicant permitted to contact a maximum of 3 authorities. Import licensing bodies will not be permitted to refuse license applications merely due to small errors in information which do not alter the fundamental contents of an application. In the case of license refusal, the licensing body will be required to announce its reasons for refusal. Refusal of custom clearance for licensed import goods will not be permitted merely due to small differences in the real value, quantity and weight of goods from the data in the license arising from changes in the process of delivery, separation of goods loading and unloading and other small differences in accordance with normal trading practices.

5 5 Decision 41 provides for 2 forms of licensing: self-regulating import licensing and non self-regulating import licensing. In the case of self-regulating import licensing, the time-limit for licensing will be 10 working days from the date of receipt of lawful documents; in the case of non self-regulating import licensing, the time-limit will be 30 working days. Foreign exchange controls for imported goods will be applied equally irrespective of whether the goods are under management by import licensing or not. Decision 41 requires the Ministry of Trade to provide information on import licensing to the WTO's Import Licensing Committee and to WTO members when Vietnam becomes a WTO member. 1.7 EU Bank Branches - VND Deposit Limit Decision QD-NHNN of the State Bank of Vietnam ("SBV") dated 28 February 2005 on Adjustment of Rate of Mobilization of Vietnamese Dong Deposits Applicable to Foreign Bank Branches from European Union ("EU") Countries Operating in Vietnam Since the end of 2002, the level at which the various foreign bank branches in Vietnam are permitted to accept VND deposits from Vietnamese legal entities or natural persons with which there is no credit relationship has been the subject of some controversy and has been monitored by businesses, governments and commentators alike as a litmus test for the fair and equal treatment of US and non-us investors in the post-us-vietnam Bilateral Trade Agreement ("BTA") environment. As Vietnam approaches WTO accession, this issue remains a barometer of Vietnam's commitment to fair and equal treatment of foreign investors from all WTO member countries. According to Vietnam's BTA commitments, an US foreign bank branch in Vietnam is allowed to accept VND deposits from Vietnamese legal and natural persons with which it does not have a credit relationship up to the following limits (expressed as a percentage of charter capital): From Vietnamese legal entities with which it does not have a credit relationship From Vietnamese individuals with which it does not have a credit relationship As of 10 December % 100% As of 10 December % 250% As of 10 December % 350% As of 10 December % 500% As of 10 December % 650% As of 10 December % 800% As of 10 December 2008 Full national treatment 900% As of 10 December % As of 10 December 2010 Full national treatment Until the end of September 2003, all non-us foreign bank branches remained subject to the much tighter 25% cap (originally introduced in 1996). After considerable pressure, the SBV raised the cap to 50% for non-us foreign bank branches, effective as of 1 October This was small comfort as, within little more than 2 months (ie as of 10 December 2003), US banks were allowed to accept up to 250% of their charter capital in VND deposits. Reportedly in return for an increase in textile and garment quotas from the EU in 2004 and permission for Vietnam to use its leftover quotas from 2003, effective as of 1 April 2004, the SBV raised the cap on VND deposits for non-us foreign bank branches, but only for foreign bank branches from EU countries. EU foreign bank branches became entitled to equal treatment with US foreign bank branches and could accept VND deposits up to 250% of charter capital. Now, by Decision 210, the SBV provides for EU foreign bank branches to continue to enjoy equal treatment with US foreign bank branches. As of 1 March 2005, an EU foreign bank branch may now accept VND deposits from Vietnamese legal entities with which it does not have a credit relationship up to 400% of its charter capital and from Vietnamese natural persons with which it does not have a credit relationship up to

6 350% of its charter capital (as US foreign bank branches have been permitted to do since the end of 2004). Of note, the % cap for VND deposits from Vietnamese legal entities and for VND deposits for natural persons is expected to differ from now until the end of Unfortunately, non-eu and non-us foreign bank branches remain subject to the 50% cap. They and their governments will be keen to see a substantial increase in this cap very soon. Of interest, joint venture banks have been permitted to receive VND deposits from the above depositors without limit since 1 December Mutual Insurance Organization Decree ND-CP of the Government dated 24 February 2005 on Establishment, Organization and Operation of Mutual Insurance Organizations Decree 18 defines a mutual insurance organization ("MIO") as an organization with legal entity status established to provide insurance to members who are Vietnamese organizations or individuals operating within the same sector or industry or located/residing within the same geographical area and who have the same type of insurance risks. Members are both the owners of the MIO and the policy holders who indemnify each other and also share any profits made, although Decree 18 provides for profits to be used to reduce the level of premium payable on insurance contracts renewed in subsequent years (consistent with common international practice). The organizational structure of a MIO comprises a general meeting of members, a board of management, a general director and a board of controllers. The charter of a MIO must be approved by the Ministry of Finance. Likewise, the appointment of the chairman of the board of management and of the director of a MIO must also be approved by the Ministry of Finance. The minimum number of members of a MIO is 10. Its legal capital must be at least VND10 billion (less in the case of an agricultural mutual insurer). Founding members must pay their premiums in advance and make up the legal capital with capital contributions. The founders must remain in the MIO for at least 3 years. Many of the general provisions of the 2000 Law on Insurance Business apply to MIOs, such as the procedures for issuance of an establishment and operating license, the requirement for payment of a security deposit into a bank (for MIOs, 5% of legal capital), and the requirement for establishment of 3 types of professional reserves (unearned premium reserve, outstanding claim reserve, and large loss fluctuation reserve). 1.9 Construction Projects Decree ND-CP of the Government dated 7 February 2005 on Management of Investment Projects for Construction of Works To implement the new Law on Construction (which became effective as of 1 July 2004), Decree 16 provides guidelines on formulation and implementation of investment projects for construction of works; contracts in construction activities; and conditions applicable to capability of organizations and individuals for construction project formulation, survey and design, and execution and supervision of execution of building works. Of note, in Decree 16, the Government has separated out the regulations on State management and tendering for construction projects from the regulations on State management and tendering of other types of investment projects. Decree 16 replaces the provisions on State management of construction activities in the Regulations on Management of Investment and Construction issued under Decree ND-CP of the Government dated 8 July 1999 (as amended by Decree ND-CP dated 5 May 2000 and Decree ND-CP dated 30 January 2003). 6

7 Under Decree 16, all investment in construction projects must conform with the overall master plan for socioeconomic development, with master planning for branches and with construction master plans; and must ensure security, social and environmental safety, and must comply with the law on land and other relevant laws. In addition: > With respect to construction projects funded by capital from the State Budget, the State will manage all stages of investment from formulation of investment policy, investment decision, preparation of design, preparation of total estimated budget, selection of contractor, and execution of building works up to the stage of check and acceptance, handover and commissioning of the works (as previously). > With respect to projects of enterprises funded by credit facilities guaranteed by the State, by State owned credit facilities, and by invested capital of State owned enterprises ("SOEs"), the State will only assume management of the investment policy and of the scale of the investment. The enterprise itself will be responsible for arranging project management and project implementation in accordance with Decree 16 and other relevant laws. An officer at the Ministry of Construction has informed us that the phrase "enterprises funded by invested capital of SOEs" is limited to 100% State owned enterprises and does not include joint venture enterprises ("JVEs") involving SOEs. > With respect to projects funded by other capital sources, including private capital (eg., projects of 100% foreign owned enterprises and projects of joint venture enterprises with private Vietnamese investors), the investor is free to decide the form and content of project management. With respect to projects funded by a combination of funding sources (eg., JVEs involving foreign capital and SOE capital), the capital contributing parties are free to agree on the management method (failing which the project must be managed according to the regulations applicable to the funding source with the highest percentage in the total invested capital). Notwithstanding the level of State management, all investment projects must comply with the provisions of Decree 16 and other laws on such matters as construction permits, construction designs, construction quality, etc.. For example, 100% foreign owned enterprises must use qualified persons (ie, persons satisfying the conditions prescribed by Vietnamese law to prepare construction designs) to design their construction projects and must ensure that Vietnamese quality standards are attained. Decree 16 also replaces the provisions on tendering for selection of construction contractors in the Regulations on Tendering issued under Decree ND-CP of the Government dated 1 September 1999 (as amended by Decree ND-CP dated 5 May 2000 and Decree ND-CP dated 12 June 2003) but only to the extent that such provisions are inconsistent with Decree 16. As always, this last proviso causes a great deal of uncertainty for investors. In particular, uncertainty arises under Decree 16 as to what requirements with respect to tendering now apply to JVEs involving SOEs. Under Decree 88 (and also under article 100 of the foreign investment regulations issued under Decree 24 of the Government dated 31 July 2000, as amended 19 March 2003), JVEs with 30% or more capital contribution by a SOE are required to comply with Vietnamese tendering regulations. Decree 16 does not provide specifically for such JVEs (or any other JVEs). However, Decree 16 does provide that selection of construction contractors for "investment projects funded by invested capital of SOEs" must be implemented in accordance with Decree 16's tendering provisions and other relevant legal instruments on tendering. Based on the Ministry of Construction's interpretation of the phrase "enterprises funded by invested capital of SOEs" above (ie., that it is limited to 100% State owned enterprises and does not include JVEs involving SOEs), it would seem that no JVEs are now required to comply with Vietnamese tendering regulations. Given the importance of such a reform, we have pursued this matter with the Ministry of Construction. We have been informed that the Decree 88 requirement that JVEs with 30% or more capital contribution by a SOE must comply with the Vietnamese tendering regulations for construction is still effective. The only change is that the Vietnamese tendering regulations for construction are now prescribed in Decree 16, not Decree 88. So, remember: > for Vietnamese regulations on tendering for construction projects, now go to Decree 16; > for Vietnamese regulations on tendering for selection of consultants and for procurement of goods, still go to Decree 88. 7

8 8 Part 2 Features 2.1 Technology Transfer Introduction Until recently, technology transfers in Vietnam were subject to Decree ND-CP of the Government on Technology Transfer dated 1 July 1998 ("Decree 45"). However, as Vietnam began to see its competitiveness ranking erode (downgraded from 60 th to 77 th in 2004 by the World Economic Forum), the Government set about to modernize its regulations on technology transfer. This has resulted in the recent issuance of Decree ND-CP of the Government dated 2 February 2005 on Technology Transfer ("Decree 11"). Most of the provisions of Decree 45 have been repeated, but there have been some improvements, as discussed below. However, there is also considerable room for more improvement in this area, as also discussed below. The Government is currently drafting a Law on Technology Transfer that is expected to be issued later this year, so it is likely that Decree 11 will be replaced before it has been in effect for very long. Technology An unfortunate carry-over from Decree 45 is the definition, or rather the lack of a definition, of "technology". By not defining the most basic term, Decree 11 potentially applies more broadly than is necessary or desirable by including technologies that need not be regulated in such a manner. Franchising Decree 11 is perhaps an odd place to include the topic of "franchise" as much franchising does not involve the transfer of technology. Here the term "franchise" is actually translated as a "grant of a special commercial right" and relates to the transfer of the commercial name, trademark and know-how of the transferor. Parties conveying such rights are required to enter into a franchising agreement "in accordance with law". There is no mention as to which law, but as there is no specific franchising law, Decree 11 may be referring to the Commercial Law which is currently undergoing revision and is expected to include provisions on franchising. The potential for inconsistency between the franchising provisions of Decree 11 and those in the revised Commercial Law (and the planned implementing decree on franchising) is of concern. Trademark licensing As with Decree 45, Decree 11 continues to provide for the transfer of trademark licenses. Trademark licenses may still be included in a technology transfer contract ("TTC"), in a separate section of the contract. Such licenses are still subject to separate registration procedures. Approval vs. registration Under Decree 11, TTCs relating to the transfer of technology from offshore into Vietnam must be registered. Until July 2002, under Decree 45, all TTCs needed to be "approved". The distinction between "approval" and "registration" is rather blurred when one considers the burdens imposed by these registration requirements (eg requiring the parties to submit evidence of their legal status, and other supporting documentation about the transferred technology and minutes of the board meeting approving the TTC if the transferee has foreign owned capital and its charter requires unanimous board approval of its annual financial plan). There appears to be little difference in substance between registration and approval as the registration authority can reject TTCs for registration if such TTCs do not meet the standards for approval. Of note, as of July 2002, the requirement for approval of TTCs was replaced with the requirement for registration in the following cases: TTCs for domestic technology transfer; TTCs for technology transfer from abroad to Vietnam with respect to investment projects not funded by State owned capital; and TTCs for technology transfer from abroad to Vietnam with respect to investment projects funded by State owned capital the value of which is equivalent to less than USD30,000 (under Decree ND-CP of the Government dated 4 June 2002). Registration authority Under Decree 11, the registration authority for TTCs having a value over VND1 billion is the Ministry of Science and Technology ("MOST"). TTCs with lower value can be registered with the local Department of Science and Technology ("DOST"). However, this registration requires some foresight and in some cases

9 perhaps a crystal ball. If the parties opt to price the TTC according to periodic installments equal to a percentage of the net selling price of each product unit sold, then the parties may need to envision how well their product will fare in the Vietnam market lest they register with the DOST and later find that their success invalidates the registration of their TTC with that body. Effective registration Decree 11 provides that a TTC that needs to be registered does not come into effect until it is so registered. If the registration authority fails to respond to the registration application within 15 working days, the TTC will be deemed to be registered automatically from the 16 th day. Although this "15 days without action automatic registration" provision appears to remove some of the bureaucratic delay that frustrates many investors, unfortunately it is not entirely practical. Under Decree 11, the parties are required to submit evidence of the registration of the TTC in order to remit payments and deduct them for tax purposes. Just simply allowing the TTC to be registered by lapse of time does not provide the parties with such written evidence. Of note, the parties to a TTC may agree on a date that is earlier than the date of registration for commencement of the time for calculation of the technology transfer fee. Registration period The application file for registration (prescribed in Decree 11) must be submitted to the relevant authority within 90 days from the date on which the TTC is signed. The registration authority may make a written request for amendment of or addition to an application file, but the grounds upon which it may do so are not specified. Term of contract Under Decree 11, the maximum duration of a TTC remains 7 years (unless a longer period, up to 10 years, is approved by the "competent State body", presumably the MOST). Decree 11 does not address the replacement (or extension/renewal) of a TTC. The fact, however, that a TTC may still only be for a limited duration means that trademark licensing will generally remain preferable to technology transfer. Such a short duration for TTCs offers little incentive to owners of capital-intensive technologies that may require longer periods of time in order to justify the TTC. Further, such a short duration for franchising contracts is inappropriate and likely to be inconsistent with the revised Commercial Law pursuant to which the implementing decree on franchising is expected to prescribe a minimum duration of five years. No price controls Previously applicable price controls appear to have been relaxed considerably: (a) Where the transferee "does not use State funds", the parties may agree on any price - there is no price control whatsoever; (b) Where the transferee "does use State funds", the investor must submit the TTC to "the body that is competent to make investment decisions [for the investor] for consideration and decision" (ie approval); (c) Where the transferee "uses a number of different funding sources but items or parts of the project cannot be separated", then: (i) only if the State funds comprise 50% or more of the total funding sources does the procedure in (b) above need to be followed; (ii) if the transferee's charter requires "annual finalization of revenue and expenses [and/or requires] the annual financial plan to be approved unanimously by the board of management", the transferee's board must unanimously approve "the price and method of payment prior the registration". (We note that the Vietnamese text of Decree 11 is unclear as to whether the transferee's charter needs to require unanimous board approval for both the annual financial plan and the annual finalisation of revenue and expenses, or just one of those documents, in order for unanimous board approval of the price, etc to be required). Evidently, in light of (c), (a) is intended to refer only to cases where the transferee does not use any State funds, eg a 100% foreign owned enterprise. (b) and (c) read together mean that if the Vietnamese party's interest in a joint venture enterprise is 50% or higher, then official approval of the price is required; and if the charter of the joint venture enterprise requires unanimous board approval of the annual budget, then the price must be approved unanimously by the board this introduction of a new matter requiring unanimous board approval is counter to the trend in recent years of reducing the number of matters requiring such approval. 9

10 10 Pricing methods Prices for technology transfer must be agreed between the parties, and may be: (a) a percentage of net selling price (as defined in Decree 11) or a fixed amount per product; (b) a percentage of net revenue or of pre-tax profits; (c) a lump sum or installment payments; or (d) a combination of the above, or another agreed method. The inclusion of "another agreed method" in (d) would appear to render (a) to (c) redundant. Unlike Decree 45, Decree 11 does not impose any caps on the prices agreed by the parties. No implementing legislation The authorities may not be prepared to apply Decree 11 (ie in order to register TTCs) until the MOST issues a circular providing implementing guidelines. To date, no implementing guidelines have been issued. Conclusion Decree 11 has removed some of the price-related conditions that were previously discouraging to many investors, but some new price controls have been introduced in respect of joint venture transferees. The move towards a "registration" process versus an "approval" process for TTCs has not provided any additional benefits and appears for practical purposes to be nothing more than a change in name rather than procedure. Ambiguous terms are still used throughout Decree 11 and authorities are still given too much discretion at a time when WTO requirements are calling for increased transparency and clarity in the application of rule of law. Nevertheless, with a Law on Technology Transfer currently being drafted and the authorities already in receipt of comments such as described above, there is some chance that many of these issues can be rectified in due course. 2.2 Import and Distribution Under the US-Vietnam Bilateral Trade Agreement ("BTA"), from 10 December 2004, Vietnam was supposed to allow: 1. Existing US-invested companies in Vietnam that are engaged in "substantial manufacturing" to import (and, presumably, to distribute - but strangely, this is not stated) finished products (also strangely, there is no stated restriction on the type of products that may be imported - eg related to the products manufactured by the company in Vietnam? - other than the general restrictions mentioned below); and 2. US companies to enter into 49/51% joint ventures with local Vietnamese companies to import and distribute finished products. In each case, the BTA imposes some restrictions on the importation and distribution of various products by phasing-in the right to import and distribute such products over a period of time; or by prohibiting the importation and distribution of some products altogether. For example, quantitative restriction apply to the importation of products such as bicycles and frozen orange juice until 10 December 2006 while rice, television and radio parts may not be imported and distributed at all. A complete listing of all such products is attached to the BTA. Unfortunately (for US companies and for other foreign companies wishing to ride on their coat tails), neither of these important reforms has been implemented yet. Arguably, there is no need to introduce enabling legislation in order to give effect to 1 and 2 above. Vietnamese authorities could simply start to issue licenses (or license amendments) where necessary in order to allow US (and other foreign) companies to take advantage of these reforms. But some new laws and/or amendment of existing laws may be necessary to give effect to, or to "guide the implementation of", these reforms. It is interesting to note, however, that Vietnamese laws often stipulate that the terms of treaties to which Vietnam has acceded will override any contrary provisions in such laws (eg Article of the foreign investment regulations issued under Decree 24 of the Government dated 31 July 2000, as amended 19 March 2003). In any case, Vietnam has issued neither new laws nor (so far as we are aware) new licenses/amendments in order to allow US participation in import and distribution. There is some speculation that this highly sensitive

11 subject has now become an important bargaining chip in Vietnam's negotiations to join the WTO, now expected to be delayed until at least Rather than continuing to hold their breath, many foreign companies are exploring and utilizing "other means" of getting their products to market in Vietnam. Set out below is a summary of some of these alternative approaches: 1. Local importer/distributor Under this option, the foreign company appoints a local Vietnamese company as its importer and distributor. The foreign company may establish a representative office in order to "manage" the importation and distribution process. This arrangement is very common. Some foreign companies have acquired an interest in their local distributor/partner (up to 30%) in order to exercise some control over such entity. Alternatively, if the foreign company has invested in a manufacturing company in Vietnam (ie a 100% foreign owned enterprise or a joint venture enterprise), then that company may be able to manage the importation/distribution process (depending on its investment license) % foreign owned service provider Some foreign companies have established 100% foreign owned enterprises that are specifically licensed to provide various services related to the importation and distribution of their products. Most of these are in the industrial sector, where 100% foreign owned enterprises have been established to install, commission, maintain, repair and stock spare parts. In this way, the 100% foreign owned enterprise can also manage the supply of equipment, lifts, airconditioners, etc to customers in Vietnam. In the consumer products sector, at least one 100% foreign owned enterprise has been established in order to provide storage, packaging, labelling, warehousing, delivery and record-keeping services. 3. Manufacturer/distributor It is arguable for some foreign invested manufacturing enterprises that the wording of their "authorized scope of activities" in their investment licenses allows them to distribute imported products that they have not manufactured. In such cases, it may be possible for the foreign company to appoint a local Vietnamese company as its import agent and then supply the finished products to its subsidiary in Vietnam, for sale to distributors and customers in Vietnam. In one case, a foreign company, Zuellig, was apparently even permitted to import the finished products (pharmaceuticals) itself, and so could avoid the need for a local import agent. Whether such activities are possible depends on the wording of the investment license. Foreign companies should also be aware that the Ministry of Planning and Investment has challenged some investment licenses issued by provincial/city People's Committees and Industrial Zone Authorities as "not being in accordance with the law". 4. Retail/wholesale licenses In only a few cases, such as "Big C" and Metro Cash and Carry, foreign companies have been permitted to establish foreign invested enterprises in Vietnam that are specifically permitted to invest (on a large scale) in distribution only (ie without any, or only very little, value adding processing or packaging). 5. Import permit Foreign invested enterprises may apply to the Ministry of Trade for a permit to import finished products for "market seeding purposes". The volume that may be imported under such a permit may not exceed 0.5% of the designed capacity of the factory, or USD500,000 in value. In practice, some foreign invested enterprises have also succeeded in obtaining import permits for products that complement the products that they manufacture in Vietnam, or where there has been 11

12 some disruption to manufacture in Vietnam. In all cases, such import permits have been subject to both volume and time restrictions. 6. Branch office Under current law, foreign companies may be permitted to establish a branch office to trade in only a very narrow range of goods, ie import of certain machinery and raw materials (subject to permit and volume restrictions); and export of handicrafts, processed agricultural products (except coffee and rice), vegetable and fruit (processed or unprocessed), industrial consumer goods, meat and processed food. 12 STOP PRESS On 31 March, officers of the Ministry of Trade confirmed that a Prime Ministerial Decision will be issued shortly (July/August) to implement Vietnam's commitments under the BTA to open the import-distribution sector. Of note, one officer has informed us that the Decision will apply equally to all foreign investors; whereas an officer from another department has suggested that the Decision may open the import-distribution sector to US and Japanese investors only. Given the passing of the 10 December 2004 deadline, this Decision is being issued as a stop-gap only, pending promulgation of the revised Commercial Law (which will provide for the import-distribution sector to be opened more widely to foreign participation, see our Feature in the December 2004 Issue of Vietnam Legal Update for more detail). 2.3 National Assembly Update On 4 March, the Standing Committee of the National Assembly ("NASC") considered the Government's status report on Vietnam's negotiation process for WTO accession and approved the Government's request for adjustment of the National Assembly's 2005 legislative program to accelerate promulgation of important laws and reflect Vietnam's commitment to fulfilling its WTO accession obligations. Under the National Assembly's Resolution QH11 on the Program for Formulation of Laws and Ordinances in 2005 ("Resolution 35"), 22 Laws and 16 Ordinances were originally scheduled to be promulgated by the National Assembly in Now, an additional 4 Laws and 2 Ordinances will be promulgated and an additional 3 Laws will be considered (and, if possible, also promulgated) by the National Assembly in Laws to be promulgated in 2005 Under Resolution 35, the following 11 Laws are scheduled to be promulgated at the National Assembly s 7 th Session in May 2005: > Commercial Law (Amended) > Civil Code (Amended) > Maritime Code of Vietnam (Amended) > Law on Pharmacy > Law on Railways of Vietnam > Law on National Defense > Law on State Auditing > Law on Education (Amended) > Law on Customs (Amended) > Law on Compulsory Military Service > Law on Signing of, Accession to and (Amended) Implementation of International Treaties In order to lighten the National Assembly's legislative load in October 2005, on 30 March, the NASC decided that the following additional 3 Laws (originally scheduled only for consideration at the May 2005 Session) will now be considered and promulgated at the May 2005 Session: > Law on Tourism > Law on Export and Import (Amended)* > Mineral Law (Amended) Also on 30 March, the NASC announced that its 7th session will commence on 5 May and run for 36 days.

13 8 Laws (previously 11 but now less the 3 Laws noted above) are scheduled to be considered at the May 2005 Session and then promulgated at the National Assembly's 8 th Session in October 2005: > Anti-Corruption Law > Law on Intellectual Property > Law on Electronic Transactions > Law on Residential Housing > Law on the People s Police > Law on Youth > Law on Negotiable Instruments in Banking > Law on Protection of the Environment (Amended) Now, 4 additional Laws will be considered at the National Assembly's May 2005 Session and then promulgated at its October 2005 Session: > Unified Enterprise Law ("UEL") To be applicable to domestic and foreign invested enterprises. Originally scheduled to be considered in October 2005 and not expected to be promulgated until May > Common Investment Law ("CIL") To be applicable to domestic and foreign investment. Originally scheduled to be considered in October 2005 and not expected to be promulgated until May > Law on Value Added Tax (Amended) Not previously in 2005 legislative program at all. > Law on Special Sales Tax (Amended) Not previously in 2005 legislative program at all. Laws to be considered in 2005 Under Resolution 35, 9 Laws were scheduled to be considered at the National Assembly s October 2005 Session (and not expected to be promulgated until its 9 th Session in May 2006). 2 of those Laws are now due to be considered in May 2005 and promulgated in October 2005 (ie UEL and CIL). In place thereof, an additional 3 Laws will be considered at the October 2005 Session. So the expected program of 10 Laws for consideration at the October 2005 Session is now as follows: > Law on Social Insurance > Law on Real Estate Business > Law on Information Technology > Code on Enforcement of Judgments > Law on Cinematography > Law on Registration of Real Estate > Law on Civil Aviation of Vietnam (Amended) > Law on Personal Income Tax > Law on Legal Profession > Law on Securities Ordinances to be promulgated in 2005 Under Resolution 35, 16 Ordinances were scheduled to be promulgated by the NASC in 2005, including the Ordinance on Tendering. Now also, the following additional 2 Ordinances will be promulgated: > Ordinance on Foreign Exchange Originally only scheduled for preparation in > Ordinance on Standardization Originally only scheduled for preparation in Laws and Ordinances to be drafted in 2005 Under Resolution 35, 16 Laws and 8 Ordinances were scheduled to be drafted in of those Laws are now due to be drafted, considered and also, if possible, promulgated in 2005 (see above). 2 of those Ordinances are now due to be drafted and also promulgated in 2005 (see above). As a result, now, only 13 Laws and 6 Ordinances are due to be drafted (only) in 2005, including: > Law on Technology Transfer > Law on Occupational Training > Law on Permanent Residence > Law on Equality of the Sexes > Code on Dealing with Administrative > Ordinance on Registration of Security Offences Transactions New additions for consideration (and, if possible, also promulgation) in October Originally only scheduled for preparation in

14 14 WTO accession by the end of 2005 remains Vietnam's goal. To achieve this, multilateral negotiations would need to be concluded by mid Also, bilateral negotiations with 21 WTO member countries, including major countries such as USA, China and Japan, still need to be concluded. Vietnam has concluded negotiations with six member countries, Argentina, Brazil, Cuba, Chile, EU and Singapore. WTO accession in 2006 is probably a more realistic target for Vietnam. National Assembly Laws effective as of 1 April 2005: > Law on Forest Protection and Development dated 3 December 2004 > Law on Promulgation of Legal Instruments by People's Committees and People's Councils dated 3 December 2004 National Assembly Laws effective as of 1 July 2005: > Law on Competition dated 3 December 2004 > Law on Publishing dated 3 December 2004 > Law on Electricity dated 3 December Labour Contracts - Termination Below we look at termination of employment of employees on definite term labour contracts. Next month, we will look at termination of employment of employees on indefinite term labour contracts. For labour contracts of months: Type of Termination 1 Unilateral termination by the employee (resignation) (Article 37.1 of the Labour Code) Circumstances (a) The employee is not assigned to the correct job or work place or ensured the work conditions as agreed in the contract; (b) The employee is not paid in full or in time the wages due as agreed in the contract; Prior notice required 3 days 3 days Final payment to employee 1 Retrenchment allowance equal to half monthly wage for each year of employment (only applicable to employees having worked for 12 months or more) (c) The employee is maltreated or is subject to forced labour; 3 days (d) Due to real personal or family difficulties, the employee is unable to continue performing the contract; 30 days (dd) The employee is elected to fulltime duties in a public office or is appointed to a position in a State body; 30 days 1 Note, where the employee unilaterally terminates the employment (except for the case of unilateral termination in accordance with doctor's recommendation to pregnant employee) the employee has to pay the employer an amount equivalent to the training fee (if any) (Article 41.3 of the Labour Code). In addition, if the employee is in breach of notice requirement, the employee must pay the employer a sum equal to the wages which would otherwise have been received for those days not notified. (Article 41.2).

15 15 (e) A female employee is pregnant and must cease working on the advice of a doctor; Subject to doctor's instruction 2 Mutually agreed termination (Article 36.3) 3 Unilateral termination by the employer (Article 37) NOT PERMITTED WHERE: - The employee is under treatment for personal injury suffered while working - The employee is on leave; - The termination is due to discrimination towards a female employee. (Article (f) Where an employee suffers illness or injury and remains unable to work after having received treatment for a period of three consecutive months. 3 days As agreed As agreed As above The employee repeatedly fails 30 days As above to perform work under the labour contract 2 The employee suffers illness 30 days As above and has been treated for 6 consecutive months The employer has to reduce 30 days As above employment and production for reasons of disasters, events of force majeure 3, etc. The employer ceases operation 30 days As above The employee is dismissed under Article 85 4 of the Labour Code 39) The employer undergoes a restructure or technological change 5 or a merger, division, consolidation, demerger, etc Not required. May terminate immediately - None, if dismissed under Articles 85.1(a) or (b) of the Labour Code - As above, if dismissed under Article 85.1(c) of the Labour Code 30 days Loss of work allowance equal to the monthly wage for each year of employment but the total allowance must be equal to at least two month's wages (only applicable to employees having worked for 12 months or more) (Article 17 of the Labour Code) 2 This means the employee fails to perform assigned work levels or tasks due to subjective factors and has been given a written reminder or failure has been minuted at least twice within any one month and after that the employee still fails to remedy the failure. Levels constituting failure to perform the assigned work must be recorded in labour contracts, collective labour agreements or internal labour rules (Article 12.1 of Decree 44 dated 9/5/2003). 3 An event of force majeure means a case where there must be a change in or reduction of production and business due to a request from a competent state body at the provincial or higher level, or due to irremediable enemy destruction or epidemic (Article 12.2 of Decree 44). 4 Article 85: (1) Dismissal shall only be applied as a means of penalty in the following circumstances: (a) Where an employee commits an act of theft, embezzlement, disclosure of business or technology secrets, or other conduct which is seriously detrimental to the assets or well-being of the enterprise; (b) Where an employee who is disciplined by extension of the period for wage increase or transfer to another position re-commits an (c) offence during the period when he is on trial or re-commits an offence after he is disciplined in the form of removal from office; Where an employee takes an aggregate of five (5) days off in one month or an aggregate of twenty (20) days off in one year on his own will without proper reasons. (2) After dismissing an employee, the employer must notify the body in charge of State administration of labour of the province or city under central authority. 5 The following circumstances shall be deemed to be organizational restructuring or technological changes pursuant to article 17.1 of the Labour Code (Article 11 of Decree 39 dated 18/4/2003): 1. A change to part or all of machinery, equipment or technological process leading to an increase in labour productivity. 2. A change of product or product structure resulting in less employment. 3. A change in organizational structure: merger or dissolution of a number of sections within an entity.