Vietnam: Legal Framework for Franchising in Vietnam
Dec 15, 2011
More than a decade ago, cafés with the same trademark and the same style of service, menus, uniforms and decoration were a new phenomenon in Vietnam. Since then, this business model has developed quickly and has expanded to various types of businesses, beyond restaurants. Many famous foreign brands reach Vietnamese customers through franchise networks. The common trend is to receive franchises from foreign franchisors, but now several Vietnamese businesses are also franchised abroad.
In fact, franchising is well suited to Vietnam where there is a strong culture of entrepreneurship. It is a good method for small and medium size entrepreneurs who want to start a new business in a short period of time to have a more limited risk, a modest amount of invested capital, and the promise of a stable income. Although most existing franchise operations in Vietnam are in the fast food and beverage business, franchising has potential to develop in other sectors. A strong surge of interest in franchised businesses is anticipated among local entrepreneurs. So too, interest from franchisors is expected to grow.
This article discusses regulation of franchising under the laws of Vietnam.
I. PRACTICES AND LEGISLATION AS THEY RELATE TO THE FRANCHISE RELATIONSHIP
1.1 International practices
Although it originated centuries ago, franchising first became popular as a business form in the United States in the 1950s. It has taken hold in Asia: Thailand, Hong Kong, Philippines, China, Japan. Some countries have specific franchising legislation, while others do not.
In the United States, franchising is governed by laws that require franchisors to inform prospective franchisees in some detail about the system, the risks, and their obligations. In the United States, this information is contained in a document called the Uniform Franchise Offering Circular (“UFOC“). Under federal and state rules, a franchisor cannot offer a franchise until the franchisor has prepared a UFOC and has disclosed information, such as its business experience, past or pending litigation, franchise fee, initial investment, restrictions on sources of supplies, and much more.
The UFOC or its equivalent has been adopted or adapted in many other countries. In some countries, once the UFOC has been issued, the government does not intervene and the parties are free to negotiate and enter into a franchise agreement. In others, however, the UFOC may have to be filed or registered with the authorities before an offer is made to a potential franchisee.
Laws on intellectual property rights in Asia vary widely, but generally speaking, registration of an intellectual property licensing agreement is not required.
1.2 Franchises as regulated by Vietnamese law
Vietnamese franchise law
The basic regulations on franchising are provided in the Commercial Law, adopted by the National Assembly on 14 June 2005 (“Commercial Law“). These regulations are elaborated upon in Decree No. 35/2006/ND-CP of the Government (31 March 2006) (“Decree 35“), and Circular No. 09/2006/TT-BTM of the Ministry of Trade (25 May 2006) (“Circular 09“). Regulations related to franchising can also be found in the Law on Intellectual Property, adopted by the National Assembly on 29 November 2005, and the Law on Technology Transfer, adopted on 29 November 2006.
Vietnamese franchise law applies to franchising activities between Vietnamese parties, to a foreign franchisor who grants a franchise to a franchisee in Vietnam, and to a Vietnamese franchisor who grants a franchise to a franchisee in a foreign country.
Definition of franchise
The Commercial Law defines franchising as a commercial arrangement under which a party (the franchisor) grants another party (the franchisee) the right to carry out the business of selling its goods or supplying services under the following conditions:
- the franchisee may carry out the business under a format determined by the franchisor and may affix the franchisor’s trademarks, tradenames, business logos, slogans, and advertisements at the franchisee’s business premises; and
- the franchisor has the right to control and assist the franchisee to carry out the franchised business.
Decree 35 gives a rather comprehensive interpretation of franchising. It includes:
- rights received by the franchisee from the franchisor to carry out a business under a system determined by the franchisor and to affix the franchisor’s trademarks, tradenames, business logos, slogans, and advertisements at the franchisee’s business premises;
- rights received by a primary franchisee from a franchisor under a master franchising agreement;
- rights received by a sub-franchisee from a sub-franchisor (i.e. the primary franchisee) under a master franchising agreement; and/or
- rights received by a franchisee from a franchisor under a franchising development contract, which allows a franchisee to carry out the franchised business at more than one location within a locality.
In a master franchise, in addition to the franchise arrangement, the primary franchisor gives the franchisee the right to act as a sub-franchisor and the right to grant a franchise to a sub-franchisee. When we refer to a foreign franchisor in this article, we intend to include a foreign entity that has been awarded a master right to sub-franchise a business in Vietnam.
Master franchises are regulated by Decree 35. A particular condition for a sub-franchise arrangement under a master franchise is that the local franchisee that receives a franchise from abroad cannot sub-franchise to a sub-franchisee unless that local franchisee “has already run [the primary] franchised business for at least one year.” This restriction helps ensure the sustainable development of a franchising network. The theory is that the primary franchisee should gain experience to run the franchised business before sub-franchising to others.
A franchise agreement must be in writing. A franchise agreement need not be registered to be effective.
The regulatory authorities of franchising activities The Ministry of Industry and Trade (“MOIT”) is the central regulatory authority for franchising activities. The MOIT has the power to provide guidance for implementation of policies and legislation on franchising, and to organize the registration of franchises.
The MOIT registers (a) franchises from overseas, and franchises from an export processing zone, a non-tariff area or a separate customs area; and (b) franchises from Vietnam to a foreign country, and franchises from Vietnam to an export processing zone, a non-tariff area or a separate customs area.
The Services of Industry and Trade (the “SOITs“) are the provincial agencies of the MOIT. The SOITs which supervise franchising in provinces and centrally-run cities. The provincial SOIT will receive the registration of the franchise between the Vietnamese franchisor and the Vietnamese franchisee.
We discuss franchise registration requirements below.
Decree 35 requires an information disclosure document called “Introduction of the Franchise Business,” something equivalent to the UFOC. The Introduction of the Franchise Business must be prepared according to a standard form provided by the MOIT under Circular 09. It must be submitted to the MOIT or the provincial SOIT in order to register the franchising activities, as we discuss below.
Under Decree 35, the franchisor must provide the prospective franchisee or master franchisee with the Introduction of the Franchise Business and a copy of the form of the franchise agreement at least 15 working days prior to the execution of a franchise agreement.
As the master franchisee/sub-franchisor is a franchisor in relation to a sub-franchise granted under a master franchise, the master franchisee/sub-franchisor must comply with the disclosure requirements as if it were a master/primary franchisor. The master franchisee/sub-franchisor is also required to provide a sub-franchisee with the contents of the Master Franchise Agreement and information about the master/primary franchisor. It must also inform a sub-franchisee of remedies in case the Master Franchise Agreement is terminated. In case a foreign franchisor grants a master franchise to a local master franchisee/sub-franchisor, the foreign franchisor is not required to provide disclosure to local sub-franchisees, as that is the responsibility of the master franchisee/sub-franchisor.
Ongoing disclosure obligations
Besides the initial disclosure requirement required in the Introduction of the Franchise Business, a franchisor is required to keep its franchisees updated with all significant changes related to its franchise system. A “significant change” is defined as any change that may have an impact on the business activities of a franchisee.
Circular 09 requires the franchisor to report to the MOIT or the SOIT (as appropriate) any change in:
- the name of the franchisor;
- address of the head office;
- telephone and fax number;
- scope of business; or
- type of business to be franchised.
The report must be made within 30 days from the date on which the change occurs.
A franchisor, whether from abroad or from Vietnam, has only to register its franchising business once before it starts to franchise its business. If either the franchisor or the franchisee is offshore, registration must be filed with the MOIT. If both parties are in Vietnam, registration must be filed with the local provincial SOIT.
The registration dossier must include:
- Registration form of the franchise activity, made on a standard form provided in Circular 09;
- Introduction of the Franchise Business;
- Certified copy of the franchisor’s business registration; and
- Certified copy of patents and certificates of intellectual property rights of the prospective franchisor, if any.
If any of the above documents are in a foreign language, a certified translation is required.
In addition, if the applicant is a master franchisee/sub-franchisor, it must present a document issued by the master/primary franchisor permitting it to sub-franchise the business.
The MOIT and the SOIT have discretion to determine whether the documentation submitted for registration of the franchising activity meets disclosure requirements. They may require changes or additional information in the Introduction of the Franchise Business.
The regulatory time frame for the MOIT or the SOIT to register the franchising activity is five working days from the date on which a complete dossier is submitted by the franchisor. A registration fee is stipulated in Decision 106/2008/QD-BTC (November 17, 2008) of the Ministry of Finance based on the following scale:
- Franchise from a foreign country to Vietnam:
- new registration: VND 16,500,0002
- amendment of a franchise registration: VND 6,000,000
- re-issuance of a franchise registration: VND 500,000
- Franchise from Vietnam to foreign country or franchise within Vietnam:
- new registration: VND 4,000,000
- amendment of a franchise registration: VND 500,000
- re-issuance of a franchise registration: VND 500,000
A franchisor and a franchisee may freely negotiate terms and conditions of a franchise agreement. Decree 35 gives some suggested terms and conditions which can be used for reference, but it is not compulsory to include them in a franchise agreement.
The franchising agreement itself need not be included in the registration dossier, except if necessary to register the licensing of intellectual property rights that are associated with a franchised business and that fall within the regulations on intellectual property. Licensing regulations in the Law on Intellectual Property are rather flexible on what is required to conclude and register such an agreement. An agreement to license the right to use an intellectual property asset, for example a trademark licensing agreement (“TLA”), need not be registered with any authority in order to be effective. The parties to such a licensing agreement, however, are free to register it with the National Office of Intellectual Property (“NOIP”), as registration will protect the asset from a third party’s claim. The registration procedures are rather simple.
Decree 35 does not contain a requirement to register the transfer of technology that may accompany a franchise. In the context of a franchise, technology could mean business secrets and know-how if they form part of the franchised business. According to the Law on Technology Transfer, transfer of technology occurs only through a written agreement. A technology transfer agreement (“TTA“) need not be registered. The Law on Technology Transfer, however, suggests that parties to such an agreement should register it with authorities to enjoy benefits in accordance with this Law and other related regulations. Even if it is not registered, however, a TTA is effective between its parties, as well as in relation to any third party. The law sets out areas in which transfer of technology is restricted. In those cases, a certificate issued by the Ministry of Science and Technology (“MOST“) is required for the TTA to be effective. There is no legal limit on the term of a TTA. Parties to the TTA are free to agree on its term. They are also free to agree on the effective moment of the TTA.
According to the Law on Technology Transfer, transfer of technology must not harm national interests, human health, national cultural values, the environment, or natural resources, and must comply with international agreements of which Vietnam is a member.
Neither the Commercial Law nor Decree 35 imposes any maximum duration for a franchise agreement.
There are some limitations on the term of a trademark license in the context of a franchise agreement. A trademark registration, for example, is valid for ten years. However, this rarely poses any problems, as the trademark license can be renewed for an indefinite number of 10-year terms. A TLA may continue for the period of protection of each of the licensed trademarks and may simply be renewed when the trademark registration is renewed.
Parties to a TTA are free to agree on its term, and may agree on the moment at which the TTA becomes effective.
Decree 35 requires all franchise agreements to be made in the Vietnamese language. The MOIT has explained that this requirement has been included because many local franchisees are small- and medium-size entrepreneurs who are not familiar with a foreign language. A franchising agreement made in Vietnamese is intended to ensure that a local franchisee thoroughly understands and properly performs the agreement, and to avoid disputes due to misinterpretation. This language restriction, however, does not apply to a franchise agreement under which a Vietnamese franchisor grants a franchise in a foreign country.
For that same reason, and because it must be registered with the MOIT and SOIT, the Introduction of the Franchise Business can be made in English, but it must be translated into Vietnamese and the Vietnamese translation must be certified.
II. OPPORTUNITIES FOR A FOREIGN FRANCHISOR TO SET UP A FRANCHISING NETWORK IN VIETNAM
Under the Commercial Law and Decree 35, there are two ways that a foreign franchisor may franchise its business to local franchisees. They are:
2.1 Franchise from offshore
Decree 35 allows a foreign franchisor to franchise a business to a local franchisee from offshore. This saves a franchisor the cost of setting up as an independent entity and operating in Vietnam. In our view, however, this module may not be effective. Without a presence in Vietnam, the franchisor cannot easily control the operation of its local franchisees. In addition, costs for overseas communication and transportation may be a significant burden for both the franchisor and franchisee. This problem may be mitigated to a certain extent by the franchisor having an ongoing supervisory presence in Vietnam.
2.2 Set up a presence in Vietnam in order to franchise a business to local franchisees
An alternative to franchising from offshore is for the foreign franchisor to set up a commercial presence in Vietnam, for example, as a branch office, or in the form of a foreign invested company (“FIE“), either in a joint venture enterprise (“JV“) with a Vietnamese partner, or alone as a wholly foreign invested enterprise (“WFIE“). There is no cap on foreign ownership in such a WFIE. The foreign franchisor may use the FIE to grant franchises to local franchisees, and to oversee their operations. This alternative may be more effective if a foreign franchisor wants to maintain direct control over the network of local franchisees, rather than to act through a local master franchisee.
Vietnam’s legal framework encourages the development of commercial activities, including franchising. In this sense, Vietnam continues to come closer to the international norm. There is intense local interest among both large and small entrepreneurs to be a franchisee of an international franchisor. The legal framework for franchising is all but complete. With the WTO now in place and with interest in franchising growing both within and outside of Vietnam, it seems that conditions are right for franchising to flourish.
1 This paper on franchising was prepared by Mai Thi Minh Hang of Russin & Vecchi. This version is current through November 2011.
2 US$1 approximates to VND 20,500.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.