The CEO pulled me aside after our successful project completion. It was a complex, multi-province manufacturing expansion for a long-term client, and his words changed my entire approach to advising on regional growth. "Long," he said, "our trust is with you and your team. We're ready for the next step in ASEAN, but we need […]
Vietnam is an attractive destination for ASEAN investors and more and more investors from the United State and Europe pour their capital into projects in Vietnam. Thanks to the strategic business location (near China), establishing a company, a branch or a representative office can help investors or business owners understand the market and build a local team easier. This article will provide you information about a joint venture and steps to set up a joint venture in Vietnam.
What is a joint venture?
A joint venture is a business arrangement in which 2 or more parties agree to pool their resources to establish the business. Each participant is responsible for profits, losses, and costs associated with it.
There are two types of joint venture contracts. The first one is the cooperation between a foreign-invested enterprise and a Vietnamese enterprise. The second one is 100% foreign-invested capital cooperating with a foreign investor on a joint venture contract.
Vietnam creates a favorable investment climate for foreign investors. Nevertheless, some business fields are limited to invest for investors:
- Advertising services
- Services incidental to agriculture, hunting, and forestry
- Telecommunication services
- Travel agencies and tour operator services
- Entertainment services
- Electronic game business
- Container handling services
- Customs clearance services
- Internal waterways transport, rail and road transport services
- Services auxiliary to all modes of transport
If your business falls under any of these, you will need to work with a local partner.
A joint venture is predicted to bring benefits to the organizations because two companies share resources, the sum of two businesses cooperating together will be of greater value than if each worked alone. The joint venture is built based on the shared ownership between the participants in the venture. Besides, joint ventures are not a unique corporate structuring option, partners usually establish a Liability Limited Company (LLC) if there is no desire to list on Vietnam’s stock exchange.
Advantages and Disadvantages of a Joint Venture
Advantages
- Leverage resources and cost savings: take the combined resources of both parties to achieve the goal of the venture. Each company can use comparative advantage to make the most out of the resources that each company has.
- Accessibility to conditional markets that are forbidden by the Vietnamese government: grant investors access to the market that impose ownership restriction to foreign investors.
- Knowledge of a local company: For foreign investors entering into the market for the first time, local partners can provide greater access to suppliers, customers, and sometimes improve a foreign brand’s reputation within the domestic market.
- Governments will have incentives for foreign businesses to invest in Vietnam, therefore it helps share the risk (aviation, oil industry, banking and finance, new market management, and instability) and shares knowledge expertise (business processes, manufacturing methods, scaling up operations).
Disadvantages
- Limited level of independence: decision-making over important issues like expansion, remittance of profits, or terminating operations can create conflicts among partners.
- Differences in opinions, cultural barriers, objectives can compound and further conflicts and make it difficult to cooperate.
- Corruption and bureaucracy in Vietnam's government lead to lack of transparency, uniformity, and consistency for companies doing business in Vietnam.
- Enterprises have not much information about the market and partners, and customs procedures, quality inspection of goods are quite complicated and high cost.
- Difficult to enter the global market dominated by cross-border trade, hence it leads to problems relating to transfer pricing, export resources from inside and outside.
Steps to set up a joint venture in Vietnam
First, regarding 100% foreign-owned company, there are three main steps in setting up a joint venture in Vietnam:
Step 1: Application for an Investment registration certificate
- Execution place: Department of Planning and Investment of the province or city where the investment project/management board of industrial parks and export processing zones is executed for the projects in industrial parks and export processing zones.
- For investment projects subject to an investment policy decision, investors must register their investment policy with provincial-level People's Committees.
- Expected time: 30-45 working days
Step 2: Application for an enterprise registration certificate
- Execution place: Department of Planning and Investment of the province or city where the investment project/management board of industrial parks and export processing zones is executed for the projects in industrial parks and export processing zones.
- Expected time: 10-15 working days
Step 3: Obtain sub-licenses: trading license for trading companies; construction permits, fire safety license for construction companies
- Expected time depends on the type of license, ranging from weeks to months
Second, if a Vietnamese party and a foreign party cooperate, it is required to create a Business Cooperation Contract. In this case, business owners and investors should be aware of some following requirements:
a) With foreign investors holding 51% or more of charter capital or with a majority of general partners that are foreign individuals to economic organizations that are partnership companies;
b) With an economic organization defined in Point a) of this Clause holding 51% or more of charter capital;
c) With foreign investors and economic organizations defined at Point a) of this Clause, holding 51% or more of the charter capital.
- Foreign-invested economic organizations not falling into the cases prescribed at Points a, b and c above shall comply with investment conditions and procedures prescribed for domestic investors upon their investment in establishment of economic organizations; investment in the form of capital contribution, purchase of shares or capital contributions of economic organizations; Investment in the form of BCC contracts.
There are 2 options to classify Business Cooperation Contract (BCC):
- Option 1: Business Cooperation Contract is in the form of jointly controlled assets and BCC in the form of jointly controlled business operations
- Option 2: Business Cooperation Contract in the form of revenue sharing, the pre-tax and Business Cooperation Contract in the form of after-tax profits
Moreover, it is required that foreign investors in BCC contracts shall submit an application for the establishment of an operating officer at the investment registration authority where the operating office is expected to be located. Within 15 days after receiving the document as prescribed in Clause 4 of this Article, the investment registration authority shall issue an operating office operation registration certificate to the foreign investors in the BCC contract.
Especially, some points that investors ought to bear in mind are:
- BCC contracts can be signed between two domestic investors, domestic investors and foreign investors, or two foreign investors. (Article 28 of the 2014 Investment Law).
- Parties to a BCC contract establish a coordinating board to carry out the BCC contract. The functions, duties, and powers of the coordinating board are agreed upon by the parties.
READ FURTHER: How To Own Property In Vietnam For Foreigners.
To sum up, this article covers three main parts. The first section provides the definition of a joint venture and some business fields that are limited to investment by foreigners. The second part analyzes the advantages and disadvantages of setting up a joint venture. Then the article concludes with steps to set up a joint venture with regard to 100 foreign-owned companies and cooperation of a Vietnamese and foreign party. If you are an investor and would like to establish a joint venture in Vietnam, Viettonkin is always here to provide you the most professional one-stop solution.
