E-Commerce (Part 2)

Please first read Part I here to understand what is e-commerce in Vietnamese legal context and how it is classified.

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1 – Is investment in ‘e-commerce’ business subject to any market access conditions?

Yes and No. That depends.

For a Sale Web, essentially No.

For a Service Provision Web, Yes. The latest regulation on e-commerce[1] officially confirmed that foreign investment in a Service Provision Web is subject to the following conditions:

1 – Investment form. Foreign investment can take the form of either greenfield investment i.e. – creating a brand-new e-commerce Vietnamese subsidiary or via M&A i.e. – acquiring shares in existing ones;

2 – Special review. Foreign investors’ [investment resulting in] control of at least one company in the list of the top five e-commerce companies in Vietnam market as publicized by the Ministry of Industry and Trade must obtain opinions of the Ministry of Public Affairs.

KEY NOTES:

(a) – In general, the concept of control in e-commerce is relatively similar to that widely acknowledged in corporate law i.e. – holding 50% or more of paid-up equity or voting right, power to appoint the majority of board directors, etc. Nevertheless, control in this new e-commerce rule also expands to the ‘right to decide important issues’ of the e-commerce entity’s business operations’ which seems to be vague and exposes the investment to discretionary judgement of the licensing authority.[2]

(b) – Foreign investment that is subject to the above special review may be concurrently subject to merger control filing pursuant to the Law on Competition of Vietnam (2014).

(c) – In previous drafts, the foreign investor applicant must fall inside the list of ‘globally reputable technology companies engaged in the e-commerce industry‘. In the official document, such condition has been removed. It remains unclear as to whether investors must invest in top 05 e-commerce entities (other than startups) OR investors can invest in any e-commerce entities but only investment in top 05 is subject to a special review by the Ministry of Public Affairs. While we trust that the latter approach makes more economic sense, a detailed guidance on this point by the Ministry of Industry and Trade would be useful.

2 – If we invest in an e-commerce Vietnamese startup, will these conditions still apply and how?

The answer is not crystal clear though under the new e-commerce rules, startups are NOT required to meet 02 above conditions including a special review by the Ministry of Public Affairs.

(a) – Startup definition

First, startups are undestood as innovative small and medium enterprises (‘doanh nghiệp nhỏ và vừa khởi nghiệp sáng tạo‘ in Vietnamese language) which is further identified according to one of the following criteria:

(i) – Production, sale of products derived from inventions, useful solutions, industrial designs, integrated circuit (IC) designs, computer software, cell phone applications, cloud computing, new animal breeds, plant varieties, aquatic organism breeds;

(ii) – Production, sale of products that are created from trial production projects, prototypes and technology completion; production, sale of products that win national, international prizes for entrepreneurship, startups and science and technology prices in accordance with regulations of law on science and technology prizes; or

(iii) – There are new technological solutions or business models that might increase the enterprise’s revenue by at least 20% in 02 consecutive years on the basis of analysis of market share, prospective development of the products and competitiveness of the enterprise.

Simply put, the easiest way to prove whether the VietCo is a startup is to show registered IP right licenses or relevant awards it has collected.

(b) – E-commerce condition exemption

However, whether and how the licensing authority especially the MOIT would listen to the above explanations by startups remains to be seen. In addition, once set up or acquired by foreign investor(s), a startup will be treated as FIEs regardless of the foreign equity percentage.

Then the question is whether a foreign-owned startup is still subject to a business license for running a Service Provision Web. Technically, the answer is still Yes because there is no corresponding exemption under sale-related laws for foreign invested enterprises (FIEs). Under these laws, in addition to market access conditions, FIEs must also submit a ‘feasbile financial plan’ to the licensing authority for an e-commerce business license.

If this is the case, the above exemption seems to be redundant. This is because it is less likely for a startup to be listed as top five e-commerce market leaders in Vietnam.

3 – What are specific conditions and licenses?

4 – If we buy shares of a foreign investment vehicle that directly owns VietCo, are the above restrictions still apply?

Yes.

Founders of some domestic e-commerce entities do set up companies outside Vietnam (e.g. in Singapore, Cayman Islands or USA) and use those as an SPVs for funding purposes.

Nevertheless, the SPV would eventually hold equity of VietCo thus would still be treated as a foreign investor under Vietnamese law. As a result, the above foreign investment restrictions still apply.

5 – Is there any way to ultimately invest in VietCo without having to go through the above conditions and licenses?

Yes but no route is risk-free.

We are aware that some local startups using different corporate layers (with local holding vehicle(s) being at the top of the chain) or using nominee structures to keep the operating entity as domestic company and therefore avoid foreign investment restrictions. Nevertheless, such arrangement may be exposed to the risk of a fabricated transaction and therefore can be rendered invalid by a court decision.

Another risk, albeit nominal, relates to the employment of different corporate layers lies in the lack of guidance of Vietnamese law on holding company structure.

With contribution of Chi Do.

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[1] Decree 85/2021/NĐ-CP on e-commerce (“Decree 85”) issued by the Government of Vietnam on 25 September 2021.

[2] including the choice of technology platform, the form of business organization, the choice of form and method of mobilizing and allocating and use the business capital of that enterprise.

[3] Depending on whether the investment is in the form of greenfiled or M&A.

[4] Provincial department of planning and investment in the province where VietCo locates its headquarter.

[5] Only in case where the website sells goods to the end-users i.e. – retails.

[6] Circular 24/2015/TT-BTTTT dated 18 August 2015 issued by the Ministry of Information and Communications on management and Use of Internet Resources, Article 20.