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Conditions and forms of investment in Vietnam

According to Vietnam’s Investment Law that takes effect on January 1, 2021, foreign investors must meet two basic conditions for investing in Vietnam:

Firstly, conditions for market access include the ratio of foreign investors’ ownership of charter capital in economic organizations, and various forms of investment, scope, and capacity of investors and partners participating in investment activities, and other conditions (if any).

Secondly, business investment conditions that individuals and organizations must meet when conducting business investment activities in conditional business lines.

Investors can enter the Vietnamese market in one of the following ways:

1. Investment in establishment of a business organization
2. Investment in the form of capital contribution or purchase of shares or stakes
3. Execution of an investment project
4. Investment in the form of a business cooperation contract
5. New forms of investment and types of business organizations as prescribed by the government’s regulations

In fact, the two types of investment most used by investors are establishing economic organizations (establishing subsidiaries and joint ventures), contributing capital, purchasing shares, and buying capital contributions in an existing company in Vietnam.

In this article, we shall focus only on these two forms of investment.

According to Vietnamese law, a pharmaceutical distribution business must meet market access conditions for foreign investors and is a conditional business line.

WTO commitments

Along with cigarettes and cigars, books, newspapers, magazines, videotapes, precious metals and gems, explosives, crude and processed oils, rice, cane sugar, and beet sugar, pharmaceuticals also are excluded from the scope of WTO commitment. This means that Vietnam is not bound to open to foreign investors for pharmaceutical distribution in Vietnam. Implementation depends entirely upon the decision of Vietnamese authorities, based on the current regulations.

EVFTA Agreement

Based on Vietnam’s specific commitments in Annex 8-B, pharmaceuticals together with cigarettes and cigars, books, newspapers and magazines, video items, precious metals and gems, explosives, crude oil and processed oil, rice, cane sugar, and beet sugar are still excluded from the scope of investment. It shows that Vietnam is consistent in its protectionist policy for products that are essential to the economy.

However, the difference between the WTO commitments and the EVFTA Agreement is that in the EVFTA Agreement, there are more favorable provisions. According to Article 2.15 of the agreement:

“Viet Nam shall adopt and maintain appropriate legal instruments allowing foreign pharmaceutical companies to establish foreign-invested enterprises for the purposes of importing pharmaceuticals which have obtained a marketing authorisation from Viet Nam’s competent authorities. Without prejudice to Viet Nam’s schedules included in Annex 8-B (Viet Nam’s Schedule of Specific Commitments), such foreign-invested enterprises are allowed to sell pharmaceuticals which they have legally imported to distributors or wholesalers who have the right to distribute pharmaceuticals in Viet Nam.

2. The foreign-invested enterprises referred to in paragraph 1 are allowed to:

(a) build their own warehouses to store pharmaceuticals which they have legally imported into Viet Nam in accordance with the regulations issued by the Ministry of Health, or its successor,

(b) provide information relating to pharmaceuticals, which they have legally imported into Viet Nam, to health care professionals in accordance with EU/VN/en 19 the regulations issued by the Ministry of Health, or its successor, and Viet Nam’s other competent authorities, (and)

(c) carry out clinical studies and testing pursuant to Article 3 (International Standards) of Annex 2-C (Pharmaceutical/Medicinal Products and Medical Devices) and in accordance with the regulations issued by the Ministry of Health, or its successor to ensure that the pharmaceuticals which they have legally imported into Viet Nam are suitable for domestic consumption.”

According to Clause 1 of this Article, foreign-invested enterprises can import pharmaceuticals and are allowed to sell imported pharmaceuticals to other distributors or wholesalers who have the right to distribute pharmaceutical products in Vietnam. However, it should be noted that this right to import must not exceed Vietnam’s commitments in Appendix 8-B. It can be seen that Vietnam has not yet fully opened to foreign investment in pharmaceutical products. Therefore, it is necessary to study specific internal regulations in this case.

Vietnamese law

Vietnam promulgated the Investment Law on June 17, 2020 and this law took effect on January 1, 2021, along with ‘Decree 31/2021/ND-CP’ providing guidelines on its implementation. Pursuant to Appendix I, Section A.16, of the investment law “exercises the right to export, import and distribute goods on the list of goods which foreign investors and economic organizations having foreign-invested capital are not allowed to to export, impot, or distribute.”  This restricted market access for foreign investors. However, this list does not specify any detailed activities. So, it is necessary to compare applicable legislations.

According to ‘Circular 34/2013/TT-BCT’ on announcing the roadmap for goods trading and activities directly related to purchase and sale of goods by foreign-invested enterprises in Vietnam, the pharmaceutical products in Appendix 3 of the goods are not included in the right to distribute. This means that foreign-invested enterprises are not allowed to distribute wholesale or retail in the Vietnamese market. This Circular took effect on February 5, 2014, and is still in effect currently.

Hence, Vietnam’s law is still restrictive and does not allow business in imported pharmaceuticals. Currently, it is almost impossible for foreign investors to set up subsidiaries or buy capital directly from Vietnamese companies to import pharmaceuticals. However, the Vietnamese market still remains very attractive to investors.

How are foreign investors accessing the Vietnamese pharmaceutical market?

There are certain solutions to help foreign investors access pharmaceutical market and carry out pharmaceutical distribution activities in Vietnam. They include:

Indirect ownership

A typical example of this is the LC pharmaceutical delivery system. LC is owned by A, where A is majority-owned by B. B in-turn is owned by 49% foreign investors. By indirectly owning through multiple subsidiaries, foreign investors can break into Vietnam’s market.

Joining the production chain

Vietnamese law now allows pharmaceutical manufacturers to trade and distribute the products they produce. Therefore, foreign investors can buy back shares or set up pharmaceutical manufacturing companies in Vietnam. This means that investors need a long-term vision for investments and a plan for transfer of production technologies to Vietnam. Some famous pharmaceutical production transfer companies such as Hau Giang Pharmaceutical (owned by 53.95% foreign investment capital), Pymepharco Joint Stock Company (owned by 49% foreign investment), Davipharm (owned by 70% foreign investment) and Domesco (owned by 45.94% foreign investors).

Currently, the proportion of domestic drugs only meets approximately 50% of the demand of the domestic market. Therefore, the Vietnamese pharmaceutical market is still an attractive destination for foreign investors. However, allowing foreign-invested enterprises to trade in imported pharmaceuticals in Vietnam seems to be a long way off as the Government is encouraging the relocation of large pharmaceutical manufacturers to Vietnam, aiming to become the leading pharmaceutical manufacturer in Southeast- Asia.