Steps toward a more comprehensive legal framework 10 min read
According to a recent report by Google, Temasek and Bain, Vietnam is the second largest and fastest-growing digital economy in the Southeast Asia region. This makes Vietnam's e-commerce market very attractive to both domestic and foreign investors. However, to date, there are no specific regulations on foreign investment in this sector.
In an effort to enhance the legal framework governing e-commerce activities in Vietnam, the Government has recently released for public opinion a draft of a new decree1 (Draft Decree) amending the current Decree No. 52/2013/ND-CP on e-commerce. The Draft Decree provides for stricter control over operations of e-commerce companies and foreign investment in the e-commerce sector in Vietnam.
We consider the key proposed changes under the Draft Decree and their implications.
The Draft Decree provides for more stringent conditions for foreign investment in the e-commerce sector to prevent foreign investors (through their investment in Vietnamese companies) from dominating the Vietnamese distribution market.
To this end, it is proposed under the Draft Decree that foreign investment in a company engaging in e-commerce business must satisfy the following key conditions:
- That the foreign investor must be included in the list of 'globally reputable technology companies engaged in the e-commerce industry', to be periodically published by the Ministry of Industry and Trade (MOIT). Investors not listed in such list will not be permitted to invest in Vietnamese e-commerce companies.
According to the MOIT's official explanation on the Draft Decree (MOIT Explanation), this list will be issued by the MOIT by reference to publications of prestigious international organizations (eg Forbes, Nasdaq, NYT, TechCrunch etc) and other criteria which may be prescribed by the Government. At this stage, the list has not yet been issued and it is unclear what types of companies will be included – eg whether they include financial investors or only technology companies engaged in the e-commerce industry. According to the MOIT, the purpose of this new condition is to 'improve technology standards, encourage joint ventures and strengthen association and technology transfer between domestic enterprises and foreign direct investment enterprises'.
- That appraisal opinion of the Ministry of Defence and Ministry of Public Security will be required for any 'control' investment by a foreign investor in one or more companies in the group of five companies with a dominant position in the e-commerce service market in Vietnam, according to the list issued by the MOIT (Top 5 E-Commerce Companies). Dominant market position of a company will be determined by the MOIT in accordance with the competition law, and companies having less than 10% market share will not be included in the list of Top 5 E-Commerce Companies.
'Control' is not defined in the Draft Decree. Based on other regulations, however, control generally includes direct or indirect ownership of 50% or more of equity interest or voting rights, the right to appoint the majority of the board or the right to amend the charter of the target.
There will be major impacts and limitations on the ability of Vietnamese e-commerce companies to raise funds from new foreign investors
It is not entirely clear whether 'foreign investor' referred to in the above two provisions covers offshore entities and individuals only; or also includes foreign-invested companies in Vietnam which are treated as 'foreign investors' in accordance with the Law on Investment. In our view, the second interpretation would be more consistent with the general policy of Vietnam to capture investment by foreign investors directly or via their subsidiaries in Vietnam.
The Draft Decree does not expressly provide that the above conditions will apply retroactively to existing foreign investment in Vietnamese e-commerce companies made before its effective date. In the absence of such express provision on retroactive effect, and based on the general principles of Vietnamese law, the above new conditions will not affect existing foreign investment in Vietnamese e-commerce companies, and foreign investors should not be required to divest from these companies.
However, if the Draft Decree is issued in its current form:
- There will be major impacts and limitations on the ability of Vietnamese e-commerce companies to raise funds from new foreign investors – ie any new foreign investors would be required to satisfy the new conditions for investment in the e-commerce sector.
- Foreign financial and private equity investors have been a significant channel for fundraising of e-commerce companies in Vietnam. However, based on the current draft wording, it is unclear if and how these investors will be listed in the MOIT's list of 'globally reputable technology companies engaged in the e-commerce industry'. Even if they are included in the MOIT's list, how the list is collated and how often it is updated may still have a significant impact on fundraising activities of e-commerce companies. In particular, unless the list has a catch-all provision to allow purely financial and private equity investors to invest in e-commerce companies, e-commerce companies may not be able to raise funds from regional, small or newly established financial and private equity funds, whereas raising funds from globally recognised financial investors is often more difficult and time consuming.
- The Draft Decree may also affect the ability of Vietnamese e-commerce companies to raise funds from existing foreign investors. Although it is unlikely that the Draft Decree would apply to existing foreign investment conducted before its effective date, any new investment by the existing foreign investors may be subject to the new conditions and hence may be restricted.
The Draft Decree will also limit the exit options for foreign investors from their existing investment in Vietnamese e-commerce companies to other foreign investors as the foreign purchasers would be subject to the new conditions.
Under the Draft Decree, companies operating e-commerce platforms must be subject to the following additional requirements during their operations:
- promptly remove illegal goods or services from the website within 24 hours of receiving a request from the competent authorities;
- cooperate with the authorities to remove any products in breach of intellectual property rights; and
- filter and restrict information published on the platform using key words restricted by the authorities from time to time.
Failure to comply with the above requirements may subject the e-commerce platform operators to joint liability for distribution of such illegal goods/services.
[These] provisions would impose stricter operational requirements and place additional and burdensome administrative works in receiving and handling claims from consumers on companies operating e-commerce platforms.
The Draft Decree also removes the provision under the current decree that the operator of an e-commerce platform is not considered as the 'third party providing information' under the Law on Consumer Protection (who is responsible for the accuracy and sufficiency of the relevant information) in respect of any information directly posted by sellers on the platform. Although neither the Draft Decree nor the MOIT Explanation provides any further guidance or rationale behind such removal, it seems to suggest that the operator of an e-commerce platform may be now required to be responsible for the accuracy and sufficiency of any information posted on its e-commerce platform, regardless of whether such information is posted by the operator itself or by third-party sellers.
Moreover, in respect of any e-commerce platforms having function of ordering and online payment, in addition to the current requirements of publishing policy on dispute resolution and supporting customers to resolve any disputes with the sellers, the operators now must:
- provide the state authorities with adequate tools to search for and identify sellers and relevant transactions conducted on the e-commerce platforms to support the authorities' inspections and resolution of complaints and disputes;
- represent foreign sellers on such e-commerce platforms to resolve complaints from customers; deduct and pay withholding tax in relation to such foreign sellers' sale of goods/service as required by law; and
- receive and resolve any complaints from customers in respect of any transactions performed in the platforms involving more than two parties.
The above provisions would impose stricter operational requirements and place additional and burdensome administrative works in receiving and handling claims from consumers on companies operating e-commerce platforms.
It is proposed under the Draft Decree that foreign e-commerce companies providing services to Vietnamese customers on a cross-border basis will now be subject to Vietnamese law on e-commerce.
In particular, any foreign entity having e-commerce activities in Vietnam by operating (i) a website having a Vietnamese domain name or Vietnamese language or (ii) a website having visitors/orders/transactions from Vietnam exceeding a certain threshold2 would be required to:
- register its e-commerce activities in Vietnam in accordance with law;
- comply with regulations on consumer protection and be responsible, via its representative office or an authorised representative in Vietnam3, for the quality of products distributed via its website; and
- cooperate with Vietnamese authorities to restrict transactions in breach of Vietnamese law and file an annual report on its operations to Vietnamese authorities.
The Draft Decree expands the entities/websites being subject to regulations on e-commerce by:
- adding 'social networks' to the forms of e-commerce platform subject to Vietnamese e-commerce regulations if such social networks have any of the features of an e-commerce platform (eg allowing participants to open booths, post news on selling/buying goods and/or providing services); and
- amending the definition of 'traders/organisations providing e-commerce services' to further include any traders/organisations developing e-commerce websites to carry out their 'commercial intermediary activities'. According to the MOIT Explanation, such 'commercial intermediary activities' include representation for traders, commercial brokerage, goods sale or purchase entrustment and commercial agency (such as the service of buying products from offshore at the order/request of customers, real estate brokerage).
It is clear under the Draft Decree that any websites providing commercial intermediary services and social networks having features of an e-commerce platform and their operators would be now subject to regulations on e-commerce.
Under the Draft Decree, companies owning e-commerce websites which have online payment function must allow customers to elect to make payment via 'guarantee payment method'. To this end, it is proposed under the Draft Decree that the e-commerce companies must sign agreements with intermediary payment service providers, under which payment by customers for transactions conducted on the e-commerce websites must be kept in an intermediary account for a certain period of time as a guarantee for settlement of claims between the customers and sellers. It is not clear as to how long such 'certain period of time' for holding the purchase price before being released to the e-commerce companies and sellers should be.
This proposed new requirement may cause financial implications on the e-commerce companies and sellers (especially small sellers who may not have strong financial capability) as it would cause certain delay in payment process and thus potentially affect the cash flow of e-commerce companies and sellers.
Under the current e-commerce regulations, any e-commerce websites for sales (ie e-commerce websites created by entities/individuals to support the promotion or sales of their own products or services), including those created only for the purposes of marketing (eg introduction or display of products) are subject to the requirement of notification of the websites to the MOIT.
The Draft Decree had made it clear that only e-commerce websites for sales which have the online ordering function are now subject to this requirement. This is a welcome change to reduce administrative burden on owners of e-commerce websites for sales.
The Draft Decree will provide for a more comprehensive legal framework to regulate the fast-growing e-commerce industry in Vietnam to provide for greater protection for Vietnamese consumers participating in e-commerce transactions and additional tools for the state management of e-commerce activities.
In our view, the proposed restrictions on foreign investment are too stringent and may severely impact Vietnamese e-commerce companies that have been relying on funds from foreign investors for their rapid growth and expansion in Vietnam.
The approach to foreign investment in the e-commerce sector under the Draft Decree seems to be consistent with the Vietnamese Government's general policy towards foreign investment under the new Law on Investment (see our Insight for a more detailed analysis) which will come into effect from 1 January 2021. Under this law, while Vietnam continues to attract more foreign investment, emphasis will now also be placed on the quality and effectiveness of foreign investment activities and the national security considerations in licensing these activities. However, in our view, the proposed restrictions on foreign investment are too stringent and may severely impact Vietnamese e-commerce companies that have been relying on funds from foreign investors for their rapid growth and expansion in Vietnam.
It is proposed that the Draft Decree will be submitted by the MOIT to the Government for review in the first quarter of 2021. We will continue to follow the development of this important regulation and update our readers.
Our review and comments are based on the Draft Decree published on the official website of the Ministry of Industry and Trade on 29 October 2020.
It has not been concluded under the Draft Decree as to whether such threshold should be fixed at 100,000 transactions per year or be determined and published by Vietnamese authorities from time to time.
It has not been concluded under the Draft Decree as to whether the foreign entity must establish a representative office or may appoint a person to act as its authorised representative to be responsible for quality of products distributed to Vietnamese customers.