Would it be feasible, under the new regulation for Netflix to set up a representative office in Vietnam?

On October 1, 2022, the Government issued Decree No. 71/2022/ND-CP. It took effect on January 1, 2023 amending and supplementing a number of articles of Decree No. 06/2016/ND-CP dated January 18, 2016 detailing on management, provision and use of radio and television services. As a result, providing cross-border services through the internet in Vietnam will likely be significantly impacted by this Decree, according to experts. In this article, HM&P will explain to readers whether it would be feasible for an over-the-top (“OTT”) media service like Netflix simply to establish a representative office in Vietnam as recently announced under the new regulation[1]?

Planning to set up a Netflix representative office in Vietnam

After assessing the security and political concerns of running an office, storing data, and controlling sensitive content in Vietnam, in late 2022, the intention to open a representative office of Netflix in Vietnam was announced[2]. There has not been any official statement from Netflix on the reasons for this decision. This intention may come from the provisions of Law on Cybersecurity 2018 and Decree 53/2022/ND-CP[3], according to our assessment.

The Law on Cybersecurity 2018, Article 26, Clause 3 stipulates: “Domestic and foreign enterprises providing services on telecommunications networks, the Internet, and additional services in cyberspace in Vietnam that collect, analyze and process data concerning personal information, the relationship of service users, and data which is created by service users in Vietnam, must store this data in Vietnam for the period prescribed by the Government. Foreign enterprises specified in this Clause are required to set up branches or representative offices in Vietnam”. After that, Decree 53/2022/ND-CP took effect on October 1, 2022, guiding a number of articles of Law on Cybersecurity 2018, and this Decree has more specific requirements on data storage and establishment of branches or representative offices of foreign enterprises in Vietnam.

Comparison with the new regulation in Decree 71/2022/ND-CP

On the effective date of Decree 71/2022/ND-CP, the provision of management and use of television services in Vietnam, including providing cross-border services through the internet in Vietnam, will be applied in accordance with the provisions of this Decree and relevant laws. In other words, when foreign enterprises provide cross-border services through the internet in Vietnam, they will be governed by Vietnamese laws.

According to current regulations, for the provision of paid television services, the provider must have a License for provision of paid radio and television services. To be granted this license, the supplier must be an enterprise legally established and operating in Vietnam, and in the case of foreign-invested enterprises, it must be adopted by the Prime Minister.  Due to this regulation's requirement that internet-based suppliers of cross-border television services establish a legal entity in Vietnam, Netflix's efforts to open an office may not succeed.

Providing television services is a sector in which foreign investors have conditional market access

The supply of television services is a conditional business line for foreign investors, according to Appendix I, which came into effect together with Decree 31/2021/ND-CP[4]. Conditions for foreign investors shall be stipulated by Vietnamese law and treaties to which the Socialist Republic of Vietnam is a signatory[5].

Comparing to Vietnam's commitments when taking part in international treaties, typically WTO[6] and CPTPP[7], it can be seen that the country has not made any commitments to provide cross-border television services through the internet. In the meantime, Vietnam reserves the application of the requirements of Vietnamese laws, including registration and licensing[8]. According to the provisions of Article 17 of Decree 31/2021/ND-CP, for Vietnamese business lines that have not committed to allow foreign investors to access Vietnamese market, in case Vietnamese laws is stipulated including regulations on restricting foreign investors's business lines, that shall apply the provisions of Vietnamese laws.

Therefore, we must take into account Vietnamese laws, notably the provisions of Law on Cybersecurity 2018 and Decree 71/2022/ND-CP, in order to understand market access conditions for the supply of cross-border television services through the Internet. As previously noted, Law on Cybersecurity 2018 mandates international businesses need to establish branches or representative offices in Vietnam if they collect and use personal information and data generated by service users in Vietnam. In the case of Netflix, providing services to consumers in Vietnam requires it that users provide personal information, therefore, Netflix must at least set up branches or representative offices in Vietnam for data storage purposes in the spirit of Law on Cybersecurity 2018. However, this is only a condition related to data storage. In case Netflix wants to provide radio and television services in Vietnam, this company must fulfill the conditions of specialized laws, specific regulations on the establishment of enterprises in Vietnam by Decree 71/2022/ND-CP.

Therefore, it is clear that the requirement of establishing an enterprise is a mandatory condition for Netflix if it wants to provide paid television services in Vietnam. Netflix's intention to set up a representative office in Vietnam seems unfeasible.

Challenges in establishing a legal entity and obtaining licenses for providing paid radio and television services 

Regarding Vietnam's commitment to WTO,  foreign investors are only allowed  to invest in audiovisual services through business cooperation contracts or joint ventures with Vietnamese partners who are authorized to provide these services.  The foreign capital contribution cannot be greater than 51% of the joint venture’s legal capital[9]. Accordingly, under the terms of this commitment, Netflix is not allowed to establish a 100% foreign-owned enterprise in Vietnam, but only a joint venture with at least one Vietnamese partner who has been granted permission to offer these services in Vietnam. The issue is that, in accordance with the provisions of the current Law on Investment, foreign investors must apply by the appropriate channels in order to obtain an Investment Registration Certificate. In addition, foreign enterprises must get the Prime Minister's approval for regulations regulating the terms of paid radio and television services. There will therefore be two scenarios: (i) a foreign-invested enterprise registering a business line of paid radio and television services at the beginning or (ii) a foreign-invested enterprise initially starting business in another sector (not requiring special conditions), then carry out procedures to apply for a Licenses for provision of paid radio and television services.

For the first case, the question is whether an investment project to establish a foreign-invested enterprise needs to be adopted by the Prime Minister, or whether the Prime Minister only approves the policy on the issuance of licenses for provision of paid radio and television services, or these two procedures will be carried out concurrently because one of the documents to be granted a Licenses provision of paid radio and television services is an Investment Registration Certificate, which is only available when foreign investors are allowed to invest in the field of registration.. We acknowledge that this issue is yet unsolved and requires more detailed guidance from the relevant authorities.

For the second case, the procedure seems to be simpler, then the foreign-invested enterprise will need to be approved by the Prime Minister before being granted a Licenses for provision of paid radio and television services. However, in this case,  there are still some issues to be noted regarding the ratio of foreign capital in foreign enterprises, when recently, a foreign enterprise in Vietnam was approved by the Prime Minister to allow to provide paid television services but with a percentage of foreign investors’s ownership are at very low levels (not exceeding 0.002%). The company then had to divest its foreign investment to zero percent in the course of providing paid television services. We do not have specific information about the regulation limiting the ownership ratio of foreign investors when applying for a license to provide paid television services as mentioned in the case, however, if this is widely applied, it is likely that this will be a considerable problem that Netflix and other foreign units face in the Vietnam.

It can be seen that Vietnam's legal framework is gradually improving to be able to create a healthy playground for domestic and foreign television service providers. New policies in terms of regulation of paid radio and television services can be considered in progress when both facilitating management and meeting commitments when participating in the WTO. However, in order for foreign units providing television services through the Internet in Vietnam such as Netflix to meet the requirements of the new regulation, competent agencies need to soon issue more specific regulations and guidelines, related to the establishment of businesses and operation licenses for this type of business.