That Vietnam offers magnificent opportunities for franchisors is not in doubt.
A large population growing in wealth and demands each year guarantees that Vietnam is on the map for large and small franchisors the world over. However, while the potential is clear, the sector has long been constrained by the lack of a clear legal framework. In a country where the general rule is that anything not specifically permitted is not allowed, this has meant that franchisors have proceeded with caution and Vietnam today remains a country largely without the presence of major franchising brand names.
The lack of a framework for franchising has now changed and new specific domestic legislation and recent WTO commitments on franchising have laid the groundwork for a likely explosion in activity in this dynamic sector. However, as more domestic legislation is passed to implement Vietnam’s WTO commitments, question marks have arisen over the full scope of obligations and limitations for franchisors and franchisees alike. Only time is likely to tell how these will be addressed.
Prior to 2006, franchising in Vietnam could loosely have been considered a form of so-called ‘technology transfer’ governed by regulations on the same. This was like hammering a square peg into a round hole however and international franchisors largely stayed away. Of most concern was the fact that the technology transfer regulations limited the amount of royalties a franchisee could pay to a maximum of 5 per cent of “net sales” (a term narrowly defined under technology transfer rules). In 2006, a new Commercial Law took effect containing, for the first time, a chapter specifically on franchising. The Commercial Law now recognises franchising as specific type of commercial activity separate from technology transfer and sets out a broad framework of rights and obligations of both franchisees and franchisors.
Several months later, the government issued Decree No. 35 regulating franchising in detail. Decree No. 35 adopts international practice and centres around a disclosure obligation for franchisors as well as a one-time registration requirement with the Ministry of Trade (for international franchisors). Furthermore, although Decree No. 35 does stipulate certain mandatory terms for franchise contracts, the regime clearly favours private commercial agreement between franchisees and franchisors. This largely ‘hands-off’ approach from the authorities was the result of significant lobbying efforts after an early draft of Decree No. 35 indicated that the government planned to adopt a requirement for franchisors to register each and every franchise agreement with the authorities.
Importantly, Decree No. 35 does not impose specific registration or licensing requirements on franchisees. Rather, according to Decree No. 35, franchisees must only be duly licensed to engage in the business contemplated by the proposed franchise agreement. So, in the case of a restaurant franchise, the franchisee must be a person or entity duly licensed to engage in the business of restaurant services.
Then, on January 11, 2007, Vietnam officially became a member of the WTO and its WTO commitments were made public. As part of its service sector commitments, Vietnam limited foreign commercial presence in Vietnam in the franchising sector. In particular, foreign participation in businesses engaged in franchising in Vietnam must be in the form of joint venture enterprises with maximum 49 per cent foreign ownership until January 1, 2008. As of that date, the 49 per cent foreign capital restriction is lifted but the joint venture requirement retained. As of January 1, 2009, franchisors established in Vietnam can be 100 per cent foreign owned. This restriction means that if a franchisor wishes to grant a master franchise to a Vietnam entity for the purpose of franchise development or sub-franchise in a given territory, the Vietnam entity must either be wholly Vietnamese owned (i.e. – not foreign invested) or, at most, 49 per cent foreign owned until at least 1 January 2008. Not until January 2009 could the Vietnam entity be wholly-foreign owned. In a country where it can be difficult to locate financially-stable franchisees with sufficient capability to undertake complex business systems, this restriction may well delay the rapid growth in the franchising sector predicted after the issuance of Decree No. 35. The next step in the regulatory mire came in February 2007 with the issuance by the government of Decree No. 23 regulating sale and purchase activities of foreign-invested enterprises (FIEs) in Vietnam. Decree No. 23 was designed to implement certain of Vietnam’s WTO commitments, in particular the commitments on the involvement of FIEs in Vietnam’s distribution sector.
As franchising is classified as a form of distribution service under WTO rules, franchising is also referred to in Decree No. 23. However, while Decree No. 23 provides detailed contents regulating wholesale and retail sale activities of FIEs, it is completely silent on franchising specifically other than to state that franchising is a form of distribution activity. The result has been to introduce more uncertainty as to the rights and opportunities for franchisors and franchisees.
One possible, restrictive, interpretation of Decree No. 23 is that foreign-invested franchisees now need to obtain a specific business license from the Ministry of Trade in order to open and operate a franchised business in Vietnam. This is a clear requirement for FIEs wishing to open retail outlets (which are defined broadly in the decree) in Vietnam and could, arguably, be applied to franchising by virtue of its inclusion in Decree No. 23 as a form of distribution. Such a conclusion would be contrary to the apparent intent of Decree No. 35 and introduce the kind of case-by-case permitting that Decree No. 35 deliberately avoided.
Even worse, Decree No. 23 stipulates that FIEs, licensed by the Ministry of Trade to engage in distribution, may establish one retail outlet as of right but that subsequent retail outlets require additional licenses with issuance subject to an “economic needs” test. It is not yet known what such an economic needs test will entail and there is considerable concern as to the Ministry of Trade’s likely wide discretion in this area. Again, while it appears this was targeted primarily at traditional bricks and mortar retailers rather than franchisors, the fact that Decree No. 23 specifically includes franchising leaves that sector vulnerable to claims that specific licensing will be required for each franchised operation involving the opening of a new outlet.
Only time will tell how the authorities will implement and apply the regulations as a whole to franchising activities. At present, it is clear that all prospective foreign franchisors must, at least, register their intention to franchise with the Ministry of Trade in Hanoi as a first step. Whether franchisees will require specific franchising and/or ongoing licenses to operate the first and successive outlets remains unclear. As a result of the uncertainties, franchisors are advised to do appropriate due diligence on prospective franchisees and address the issues appropriately in their franchise agreements.
1) The Commercial Law of the Socialist Republic of Vietnam (the “Commercial Law”) adopted by the National Assembly on June 14, 2005 and effective from January 1, 2006.
2) Decree No. 35/2006/ND-CP detailing the provisions of the Commercial Law on franchising dated 31 March 2006.
3) Decree No. 23/2007/ND-CP providing regulations for implementation of the Commercial Law regarding purchase and sale of goods and activities directly related to the purchase and sale of goods by enterprises with foreign owned capital in Vietnam dated February 12, 2007.