Vietnam’s developing legal system for foreign businesses brings both opportunities and challenges. Recent changes have given foreign businesses easier methods to access Vietnamese markets. However, these changes have created challenges for companies already doing business in Vietnam. One opportunity is that foreign companies no longer have legal exposure primarily when establishing a business in Vietnam. Now, foreign companies have legal exposures during the entire duration that they have a business in Vietnam.
With the changes to Vietnam’s legal system for foreign businesses, companies have to consider legal accountability during the duration of the business for multiple reasons other than just setting up the business. This includes the business’s licenses, employees and various contracts, and the business’s intellectual property and expansion. This guide looks at the legal services that foreign businesses in Vietnam require, the various law firms that foreign businesses in Vietnam may encounter, and how foreign businesses in Vietnam may evaluate law firms based on the business’s stage of growth.
Why Legal Counsel Matters in Vietnam
Easier Entry, Stricter Operations
In the last ten years, the complexities associated with foreign businesses establishing themselves in Vietnam have decreased. The procedures that foreign businesses must follow to register a business have become clearer. The investment license process has become more transparent, and a growing number of sectors have become more open to foreign businesses. Because of these changes, establishing a business in Vietnam is no longer the most complex issue that foreign businesses have to address.
The most complex issues for foreign businesses in Vietnam now begin once the business is established.
Vietnam has been gradually relaxing its pre-approval oversight and introducing a more post-registration oversight regulatory framework as it pertains to foreign investment. It is by now well-known that obtaining an Investment Registration Certificate (IRC) and an Enterprise Registration Certificate (ERC) does not guarantee that a foreign investor is free from the risks of operational compliance once the foreign investment enterprise commences business operations (i.e., employment of staff, serving clients, signing contracts, and expanding business operations). For foreign investment enterprises, legal compliance is no longer a one-off requirement at the time of incorporation, but an ongoing requirement during the operation of the enterprise.
This trend has been driven by a number of factors. Enterprises operating in conditional sectors are being subjected to greater scrutiny with respect to licensing and compliance with sector-specific requirements. There has been a marked increase in tax compliance with respect to transfer pricing and related-party transactions. Further, labor compliance has gained prominence as enterprises expand their staff. In addition, foreign enterprises that have established long-term business operations in Vietnam have an increased focus on the protection of their intellectual property and regulatory compliance.
For business owners, the focus of legal counsel is no longer limited to obtaining business licenses and completing the incorporation process. Legal counsel and ongoing legal compliance is now an integral part of business operations and business decisions.
Legal issues
The absence of licenses for major business operations is not the primary cause of most legal compliance issues faced by foreign businesses. In fact, most legal compliance issues arise from the conflict between business operations and business licenses.
A good example is business scope registration. When companies are incorporated, they describe what they will do under their IRC and ERC. As companies grow, they may introduce products, services, or activities that do not result in changes to the registered scope. Usually, this discrepancy is only noticed when a customer due diligence, licensing, and/or a government inspection is carried out.
Contract management creates similar problems. Contracts that are signed under a foreign legal system may not comply with Vietnamese legal frameworks in respect of governing law, clause of settlement, and/or enforceability issues. While these problems may be abstract during negotiations, they can become very concrete in commercial conflicts.
Employment compliance can be a similar issue. Vietnam’s labor system has unique requirements on documentation, regulations, and procedures, which causes a divergence from most other countries. Companies that have a reliance on their global HR policies run the risk of Vietnam’s labor system when they are dealing with conflicts and/or disciplinary actions with their employees.
The protection of Intellectual Property is another example where the first to file system, dictates that the first system of trademark registration in Vietnam will address the system of trademark registration. Companies that delay the focus of trademark registration and the system on their commercial activities may find that conflicts of trademark registration become more complex.
The excitement of entering the market typically diverts attention from these issues, as they are seldom noticed until the business has started to scale months or years after entry. This is the reason that legal counsel needs to be integrated into business operations in the same way that infrastructure and resources are and not just viewed as an expenditure for compliance.
Legal Support Across the Business Lifecycle
Stage 1: Entering the Market
The legal groundwork must first be laid before foreign companies can hire employees, sign contracts, or earn revenue in Vietnam.
At this phase, legal professionals assist investors in identifying appropriate ways to enter target markets based on specific goals and the pertinent industry and ownership model. Establishing a foreign invested enterprise, a representative office, branch office, or a joint venture, among others, may be needed for this purpose.
The incorporation process is more than a licensing exercise. Investors must consider structure and governance, capital contribution, and ownership, in addition to several industry-specific requirements that will determine how the enterprise will function. Given its conditional business sectors, Vietnam can create additional requirements that will make foreign investment even more difficult. Therefore, the importance of having a legal team on board in the early stage of business set up cannot be overstated.
The most underestimated of all is business scope registration. What a company can legally do is determined by how the business activities are articulated in the IRC and ERC. A business scope may be adequate at the time of the incorporation process but can become a limiting factor as a company expands its business activities or even the market that it operates in.
This is why legal assistance during market entry goes beyond obtaining approvals. Rather, it is about creating a framework that is sustainable during business growth.
Stage 2: Running the Business
Inevitably, as soon as the company is operational, the focus of legal support shifts from the incorporation process to the day to day running of the business.
The need for continual legal support most commonly begins with employment issues. Vietnam’s labor laws have provisions on employment contracts and the internal labor regulations, as well as provisions on disciplinary actions and the termination of employees. While these provisions are easy to comply with, they pose serious risks to a business when internal practices are inconsistent with the laws of Vietnam.
The need for continual legal support extends to tax compliance. Businesses in Vietnam have to comply with the local standards for accounting, as well as the local standards for tax and, when applicable, the local standards for transfer pricing. The focus of authorities on verifying compliance after the business registers has led to tax issues being viewed as an operational risk, rather than an accounting risk.
With the increase in commercial activities, the protection of intellectual property becomes critical. Foreign businesses have focused their resources on the development of their brands, the acquisition of their customers, and the positioning of their business in the market. Because of Vietnam’s first-to-file trademark system, delaying the registration of intellectual property causes unnecessary problems.
The need for legal support is also evident in the commercial contracts a business enters into. The various contracts that a business enters into with suppliers, customers, and service providers aids a business to better manage the risk of its operations and the disputes that may arise from them. Contracts that have Vietnamese counterparties need to focus on local laws when providing the means for enforceability of the contract, the law to govern the contract, and the resolution of disputes. Many foreign businesses manage the disputes that may arise from their business activities through the framework of arbitration with the Vietnam International Arbitration Center (VIAC).
Legal support for these areas of business focuses on the embedding of laws and regulations in the daily operations of a business. At this stage businesses have moved their focus from establishing themselves in Vietnam to the effective management of their business in Vietnam.
Stage 3: Scaling the Business
As businesses grow, the importance of strategy in regards to the law expands exponentially.
The growth of a business means that the leadership will have to make decisions that will require them to think beyond simple compliance matters. Acquisitions, joint ventures, new investments, entry into new markets, and the reorganization of business activities are all examples of the decisions that create legal challenges that the leadership will have to think about. These decisions will have an impact on the level of risk and the potential for sustained value creation in the business.
Mergers and acquisitions are a perfect illustration of the decisions that need to be made. Foreign investors who are considering acquisitions have to think about the commercial side of the business and the licensing, compliance, and ownership concerns and the liabilities that will be created. The legal compliance reviews will bring to light potential issues that will not be discovered in the negotiations.
Joint ventures will require the same kind of scrutiny. Many foreign businesses will enter the local market by going into partnerships in order to gain operational, market, and local business knowledge. The governance of the joint venture will define the success of the partnership, and as such the agreements on how decisions will be made, the sharing of profits, deadlock, and exit will have to be precisely drafted and agreed before the partnership commences.
As businesses grow, the focus on the impact of litigation and the resolution of disputes will also grow. While litigation remains an option in the Vietnamese court system, most commercially binding contracts will create an arbitration agreement with the VIAC in order to create a more predictable system for resolving cross border disputes.
In this stage, legal advisors change their focus from compliance to partnership. Their focus will expand from understanding the regulations to the identification of opportunities, the management of risk, and the facilitation of sustainable growth in Vietnam.
Types of Law Firms in Vietnam
The most common question foreign businesses have after deciding to establish and/or expand their operations in Vietnam is not whether they should support their operations with legal services. Instead, they wonder what kind of legal services support are most appropriate.
The Vietnamese legal services market is made up of international law firms, full-service Vietnamese law firms, and specialized law firms. Each of the aforementioned types of law firms plays an important role, and the most appropriate type will generally depend on the stage of growth and the legal services needs of the specific industry.
International Law Firms
Baker McKenzie, Freshfields, Allen & Overy, Dentons, and other similar international firms have a presence in Vietnam through their offices in Ho Chi Minh City and Hanoi. These firms focus on serving clients that are multinational companies, regional headquarters, private equity funds, and companies that conduct large scale cross-border transactions.
These law firms are most appropriate for clients that are engaged with large scale cross-border transactions, mergers and acquisitions, international investments, and regional financial transactions. International firms also have substantial experience with global standards of compliance and international corporate law.
There are many situations in which these law firms are most appropriate; however, they are not the solution for every business that needs legal support. Because of the legal services regulatory framework in Vietnam, these law firms typically operate in collaboration with locally licensed law firms to provide Vietnamese legal opinions or fulfill the role of legal representatives in Vietnamese courts. Additionally, the cost of providing legal services may not be appropriate for smaller businesses that are entering the Vietnamese market for the first time.
Significant value is provided by international firms for larger investments and highly complex transactions. For more routine operational matters, other legal providers may offer a better balance between expertise and cost.
Full-Service Local Firms
Many foreign investors consider a full-service Vietnamese law firm to be the best and most flexible legal partner.
These firms are able to provide assistance to foreign invested enterprises in areas such as Vietnamese law, company establishment, licensing, employment and contracts, tax and business law, intellectual property and enforcement, as well as dispute resolution. Several top Vietnamese firms have established international client teams and partner with foreign investors, as well as technology and regional SMEs.
These firms are able to provide practical guidance as to the local business and regulatory environment. While the framework may be provided by legislation and regulations, business customs and practices may dictate how the law is implemented or the regulatory requirements are enforced. Local firms have the best knowledge of government and licensing agencies and the practical compliance of foreign business operations.
For foreign investors establishing or expanding in Vietnam, a law firm from Vietnam has the best practical expertise and experience with business operations and at the most reasonable cost.
Boutique and Specialist Firms
When not all legal services are required, a firm specializing in a practice area may be the best option.
Firm specialization can be found in various types of law, such as intellectual property, labor, tax, real estate, financial services, dispute resolution and sector-specific regulation. These firms provide value in areas of advanced specialization that exist beyond a general firm’s expertise.
Businesses may require the assistance of a specialist in intellectual property to file for trademark protection, but a general practice firm may not be able to help with complex labor disputes, and a general practice firm may also be insufficient for the employment needs of clients in highly regulated sectors such as fintech, health care and renewable energy.
Boutique firms usually provide the best value for a specific legal issue, but not as a legal solution for every issue a business may face. Many businesses in other countries may prefer to keep a general legal advisor while using legal specialists as the situation may require.
Choosing a Legal Partner in Vietnam
Five Criteria to Consider
When looking for a law firm in Vietnam, looking only at a firm’s reputation or size is not enough. For foreign companies, the right legal partner is the firm that knows the local laws and the realities of running a business in Vietnam. Investors should analyze five main criteria before contacting a law firm.
1. Experience in your industry
A firm that has worked in your industry will be able to offer more tailored advice, as opposed to a firm that has worked with foreign investors in general. A firm that focuses on manufacturing, sourcing, technology, or trading may have different contract, labor, tax, or licensing issues. An applicable question to ask will be, “Have you assisted firms in the same industry with the same operational structure?”
2. Strong bilingual capability
Having lawyers who can converse in English is an asset, however, a bilingual firm is a necessity. The majority of legal documents in Vietnam are required to be drafted in both the Vietnamese language and English, and the Vietnamese version often remains the version of the document that is legally binding. A firm that is a strong legal partner has the capability to draft, review, and explain Vietnamese business documents as well as the English version.
3. Knowledge of present regulations
The laws in Vietnam change continuously, especially in regards to the registration of investments, business compliance, labor and tax laws, and post-registration requirements. A strong legal partner will be able to inform you about the laws and the everyday implications of compliance.
4. Transparent Fee Structure and Scope
In Vietnam, legal fees can vary greatly. Foreign companies should target firms that describe what is included in the scope of work, what may result in extra charges, and what to expect in terms of time. A fee proposal that describes these elements minimizes the potential for misunderstandings and makes the proposal more predictable.
5. Willingness to Work with Specialists
Beware of firms that claim to handle all matters in-house. Good legal partners have the ability to recognize when to work with specialists for tax, IP, litigation, and areas of law that are highly regulated. Being able to recognize the need for specialists often leads to better outcomes for the client.
When to Engage Legal Counsel
Usually, foreign firms wait until a legal problem has occurred to engage a legal counsel. This approach is costly in Vietnam, since many legal issues are easier to fix if viewed from a preventive perspective.
Legal counsel should be engaged prior to the submission of the IRC or ERC, when the business scope, ownership structure, and the classification of sector are still being determined. Changes to the company structure after incorporation can be costly and time- consuming, and can result in an undesirable compliance history.
Legal counsel should be engaged prior to the signing of any contracts with local Vietnamese counterparties. This includes contracts for supply, distribution, leases, joint ventures, and other contracts. The cost of contract review is far less than the cost of resolving legal disputes that originate from unclear or legally unenforceable contract provisions.
Businesses should beware and obtain legal advice at the first sign of a labor dispute. Vietnamese labor law is procedural. Even if an employer’s commercial position is reasonable, they may still lose a case if the employer hasn’t followed the correct procedural steps.
Legal due diligence is also important in the case of any merger and acquisition, equity transactions, or joint ventures. A thorough legal due diligence review will consider more than just the corporate documentation, but should also consider the actual business activities of the company and the registered business scope, the ownership and control of the company, the company’s tax position, and the company’s position with its intellectual property.
For foreign businesses in Vietnam, the best and most valuable legal services are those that have been obtained at an early opportunity. The aim is to avoid disruptions to your business from legal issues and not just solve legal issues.
Conclusion
For foreign businesses, especially those from the West, doing business in Vietnam and the rest of Southeast Asia, legal services provide more than risk management. They have become a mandatory support service that provides the legal structures and processes necessary for the business to operate.
The best businesses do not necessarily have the most legal overhead. They have the best legal services at the best times for the best legal support that provides the best legal frameworks and structures to allow the business to operate. From the first entry to the most strategic business legal support, legal services provide the support the business needs to operate, the business needs to grow, and the business needs to avoid the high legal costs associated with disruptions to the business.