Wholesale and Retail Distribution for FIEs in Vietnam: A Complex Landscape (Part 2/2)

In the dynamic landscape of Vietnam's rapidly expanding economy, Foreign Invested Enterprises (FIEs) have emerged as pivotal contributors to the retail sector. However, these entities must proficiently navigate a complex regulatory framework when engaging in retail activities. This article offers a comprehensive overview of the essential aspects of retail operations for FIEs in Vietnam, with a particular emphasis on licensing requirements and the potential challenges these enterprises may encounter.

1. Licensing Requirements for Foreign Invested Enterprises in Retail

Foreign Invested Enterprises operating within the retail sector, especially those functioning in the business-to-consumer (B2C) domain, are obliged to obtain two fundamental licenses:

1. Trading License:

Officially designated as "Gi?y phép kinh doanh mua bán hàng hóa và các ho?t ??ng liên quan ??n mua bán hàng hóa," this license is crucial for all FIEs engaged in retail distribution. It is vital to recognize that certain goods are exclusive and not accessible to FIEs as per the provisions of Circular 34/2013/TT-BCT.

2. Retail Outlet License:

In addition to the trading license, FIEs must obtain a separate license for each physical retail outlet through which they conduct retail distribution, known as "gi?y phép l?p c? s? bán l?." Significantly, an Economic Needs Test (ENT) is not required for the first retail outlet, as well as for outlets smaller than 500 square meters located within shopping centers (excluding mini-supermarkets and convenience stores). Vietnam has committed to phasing out the ENT requirement for countries participating in the EU-Vietnam Free Trade Agreement (EVFTA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the UK-Vietnam Free Trade Agreement (UKVFTA). The ENT will be abolished five years following the effective dates of these agreements.

Furthermore, in the context of online retailing, an official notification must be submitted to the Ministry of Industry and Trade, in addition to the trading license. Moreover, for certain products, such as functional foods and vitamins, compliance and conformity notifications are obligatory.

2. Challenges in Obtaining Licenses

The principal regulatory framework governing these licenses is encompassed within Decree 09/2018/N?-CP ("the Decree"). However, the implementation of this Decree poses several challenges for FIEs:

1. Trading License:

FIEs are required to submit a comprehensive explanation, herein referred to as a master explanation, demonstrating their adherence to the conditions necessary for conducting trading activities. This explanation must include, but is not limited to:

- Adherence to market access conditions as delineated by WTO Commitments or other international treaties

- Comprehensive financial plans specifying the sources of funding allocated for trading activities

- Strategic business plans that elucidate the scope of operation, business strategies, market development strategies, and customer acquisition methodologies

- Socio-economic impact assessments illustrating the projected positive economic effects stemming from the proposed trading activities

The primary challenge is the absence of explicit guidelines regarding the scope and standard content required in these explanations. This ambiguity often results in protracted application processes, with the Department of Industry and Trade (DoIT) frequently requesting additional information. The process can extend up to a year, especially for products requiring input from specialized agencies, such as medical devices (needing input from the Ministry of Health) or specialized machinery (requiring input from the Ministry of Agriculture and Rural Development and/or the Ministry of Science and Technology).

2. Retail Outlet License:

Even for the initial retail outlet, exempt from the ENT requirement, FIEs face challenges due to ambiguous legal stipulations. The law mandates that "The location of the retail establishment must be in accordance with relevant planning in the geographical market area," a requirement that is subject to varied interpretations by different DoITs.

A case illustrates these challenges: I assisted a prominent French furniture distribution company in establishing a retail outlet in Thu Duc, Ho Chi Minh City. The selected site, located in a residential area (Thao Dien), was leased from an individual landlord, i.e. the outlet is not in the shopping mall or similar. The licensing authority contested the application due to land use issues and, in collaboration with local authorities, conducted an on-site audit. They concluded that the land was zoned for residential, not commercial use. Moreover, the location was deemed inconsistent with Thu Duc City's planning, which is designated for high-tech development.

3. Key Considerations for Foreign Investors

Given these challenges, foreign investors are advised to consider the following strategies:

a) Develop a thorough understanding of the goods to be sold, business and trading models, sales methodologies, and trading processes.

b) Gain an intricate knowledge of regional planning and local economic zoning concerning the desired retail outlet location.

c) Consider establishing outlets within supermarkets or shopping malls, which typically conform to well-defined planning and comply with traffic and fire safety regulations. This approach may encounter fewer obstacles compared to leasing in residential areas.

d) Engage local experts or consultants who possess a nuanced understanding of Vietnam's retail regulations and the intricacies of the licensing process.

By carefully considering these strategies and preparing adequately, FIEs can significantly enhance their prospects of successfully establishing and operating retail businesses within Vietnam's vibrant and evolving market.