It is time to remove the joint venture requirement for foreign investors in the advertising sector

HM&P's Managing Partner Nguyen Van Phuc and Legal Associate Nguyen Nhat Duong share HM&P's insight in The Saigon Times (No. 38-2023) on 21 September 2023. Below is the English version translated by HM&P of this article:

According to the provisions of the Law on Investment, advertising is one of the business sectors in which foreign investors have conditional market access[1]. According to Vietnam's commitment upon accession to the World Trade Organization ("WTO"), the provision of services through the mode of commercial presence in the advertising sector is defined as follows[2]:

“None, except

Upon accession, foreign service suppliers will be permitted to enter into joint venture or business cooperation agreements with Vietnamese partners who are legally authorized to provide advertising services.

Upon accession, joint ventures will be allowed with foreign capital contribution not exceeding 51% of the legal capital of the joint venture. From 1 January 2009, there will be no limitation on foreign capital contribution in the joint ventures”.

Source: https://thesaigontimes.vn/

Simultaneously, Clause 1 Article 40 of the Law on Advertising 2012 stipulates: “Foreign organizations and individuals are allowed to cooperate with Vietnamese advertising service providers in the form of joint ventures or business association contracts.”

According to the above provisions, it can be seen that foreign investors who want to operate in the advertising sector in Vietnam must invest through the joint venture form with Vietnamese partners who are legally authorized to provide advertising services, except for signing the business cooperation contract. In addition, there is no limit on the percentage of foreign capital contribution in the joint ventures.

Within the scope of this article, the author will not mention the investment through the business cooperation contract, but will focus on the joint venture form and the factors that should be taken into consideration to remove this requirement by the competent authority.

The joint venture requirement does not protect domestic advertising enterprises

Regarding the requirement for foreign investors to establish joint ventures with Vietnamese partners legally authorized to provide advertising services, it can be seen that this requirement is partly aimed at protecting Vietnamese advertising enterprises that lack experience at the time of WTO accession compared to highly experienced foreign investors in the advertising sector. At present, however, the absence of a limit on the percentage of foreign capital in joint ventures may result in a difference in the percentage of capital contribution or even a symbolic percentage of capital contribution in such joint ventures, as domestic enterprises with their meager capital have absolutely no decision-making power in the joint venture.

Moreover, it should be noted that according to the Law on Investment 2020, advertising is not a conditional line of business, therefore the procedure for establishing an advertising company is relatively simple. For many companies, advertising is only a registered contingent line of business and does not generate any revenues. However, these companies are still allowed to provide advertising services because they have registered an advertising line. With the registered advertising industry, these enterprises can fully establish joint ventures with foreign investors in the advertising industry with a limited amount of capital contribution because the advertising industry is not the main business of the enterprise.

In the above situation, the joint venture requirement has no protective effect at all for domestic advertising companies.

The requirement of joint ventures leads directly to an increase in nominee agreement

Nominee agreement in investment activities can be understood as a case where a foreign investor for some reason does not invest directly in Vietnam but through a Vietnamese investor to carry out investment activities in Vietnam. In such a situation, there may be an agreement between the foreign investor and the Vietnamese investor. Typically, this agreement covers matters related to rights, obligations, and financing by the foreign investor. The reasons for foreign investors to invest in Vietnam through a nominee agreement are often due to market access restrictions for foreign investors, including industries where foreign investors have conditional market access.

As mentioned above, foreign investors wishing to invest in the advertising industry in Vietnam must establish joint ventures with Vietnamese partners who are legally authorized to provide advertising services. To make the process become convenient, foreign investors can hire or appoint a personnel (who can be employees of their own company or any individual) in Vietnam to establish a company and register advertising business lines. The entire capital contribution for establishment of enterprises is funded by foreign investors, and the right to make decisions also belongs entirely to foreign investors, while Vietnamese individuals are only nominally named. Thereafter, foreign investors then establish joint ventures with the existing enterprise to establish a new enterprise with the symbolic percentage of capital contribution. With a few simple procedures, the foreign investors meet all the requirements of Vietnamese law.

In the above transaction, it can be seen that the type of investment activities to establish an initial enterprise is a foreign investor scenario. The capital sources for the establishment of the initial enterprise and the capital contribution to the joint venture are all financed by foreign investors, therefore, they have full decision-making power over these enterprises.

Currently, the Law on Investment 2020 contains provisions on the termination of investment projects in which investors carry out investment activities on the basis of sham civil transactions in accordance with the provisions of civil law[3]. Despite the ambiguity and lack of verification of the practical implementation of this provision, it is possible that in the unfortunate event of the termination of the investment project of a foreign investor (such as a joint venture advertising company with foreign capital), the investor may still be able to recover its invested assets, and possibly even the profits earned from the investment activities upon the liquidation of the investment operation[4] (dissolution of the company).

The above factors illustrate that foreign investors face minimal risks when investing in Vietnam's advertising sector through the use of nominee agreements. In addition, the inclusion of joint ventures as a requirement for foreign investors serves to increase the variety and approaches of nominee transactions. Clearly, the management of foreign investors' investment activities when investing directly in Vietnam (without joint ventures) will be more convenient and easier compared to the management in the current context where many investors operate through nominee agreement. In addition, nominee arrangements may involve hidden arrangements and illegal transactions that can undermine investment operations in Vietnam.

The requirement of a level playing field for advertising enterprises

From another perspective, advertising laws have been modified and adapted to create a more favorable climate for foreign investors involved in advertising activities in Vietnam.

In particular, according to the previous provisions of Decree No. 181/2013/ND-CP[5], when foreign organizations or individuals are involved in cross-border advertising services in Vietnam, Vietnamese organizations or individuals who wish to advertise their goods or services on the electronic platforms of these foreign organizations or individuals must use advertising service providers that are legally registered and operating in Vietnam[6]. In addition, before engaged in any advertising activities, foreign organizations or individuals involved in cross-border advertising services in Vietnam are required to submit a written notification to the Ministry of Culture, Sports, and Tourism[7] at least 15 days before engaging in any advertising activities through their own electronic platforms. With the implementation of Decree No. 70/2021/ND-CP[8], foreign organizations or individuals engaged in cross-border advertising services in Vietnam are no longer required to use advertising service providers that are legally registered and operating in Vietnam for their advertising activities. In addition, the notification to the relevant authority only involves the disclosure of the contact details of foreign individuals or organizations engaged in cross-border advertising services in Vietnam, and it is a one-time requirement that needs to be fulfilled at the commencement of the advertising campaign[9]. An important point to highlight is that the Report on the Summary and Evaluation of the implementation of Decree No. 181/2013/ND-CP on cross-border advertising includes a section discussing the recommendations made by the United States to the Government of Vietnam during various working sessions with the Ministry of Industry and Trade. These recommendations address the challenges and shortcomings encountered in the implementation of cross-border advertising by advertising service providers registered for legal business in Vietnam and the requirement to notify the competent authority. According to the report, the United States believes that these regulations discriminate and unfairly treat foreign enterprises, while also being impractical to implement and organize. As a result, the issuance of Decree No. 70/2021/ND-CP can be interpreted as an attempt to address the practical challenges and difficulties faced by foreign investors.

The evidence presented suggests that the existing regulations on joint venture requirements for foreign investors contribute to the unfairness experienced by advertisers. Like the regulations on cross-border advertising, the regulations on joint venture requirements should be evaluated for possible elimination by the relevant authorities.

In summary, considering the above factors, the author argues that it is imperative for the relevant authorities to promptly review and amend legal regulations with the aim of eliminating the joint venture requirement for foreign investors in the advertising sector in Vietnam. This measure will not only promote transparency in investment activities and curb nominee agreements, but also create an environment of fair investment and competition. In addition, the complete elimination of market entry requirements for foreign investors also plays a role in filtering and selecting advertising companies that truly have the capacity and competitiveness in the current dynamic economy.

Read the article at: Quảng cáo ‘Yêu cầu liên doanh’ cản trở cạnh tranh lành mạnh