The Vietnamese economy seriously opened up to foreign investment in 1988 and has grown rapidly since then. From a centrally planned economy, it has developed into a market-oriented environment.
Vietnam's foreign investment laws were based on those of the People's Republic of China and left plenty of scope for ministerial interpretation. The government listened to foreign investors who were seeking greater certainty and in recent years much legislation has been passed, creating a detailed legal framework.
This led to the growth in the need for legal services and foreign law firms entered Vietnam in increasing numbers. By early 1995, there were 29 foreign law firms advising on inward investment into the country. These are mainly from Europe (UK and France), Hong Kong, Australia and the US.
The Ministry of Trade was responsible for permitting the presence of foreign law firms in Vietnam and, until early 1995, granted representative office licences. New licences have not been granted since early 1995, pending the implementation of legislation on the conduct of business by foreign law firms.
Until the issue of Decree 42 in July, foreign firms were not permitted to practise in Vietnam. Their operations were limited to those of a representative office which, although giving a permanent presence in the country, prohibited revenue-generating activities.
The authorities had to tackle the following problems:
the distinction between liaison activities and the direct provision of services to clients;
the position of local Vietnamese lawyers, whose market was threatened;
the fear that foreign firms would limit the growth of local expertise;
foreign firms conducting business without paying tax or being regulated.
Decree 42 permits foreign law firms to open up fully-operational branch offices in Vietnam. However, licences issued by the Ministry of Justice will only be granted to those foreign law firms which meet the following criteria:
having sufficient foreign clients doing business in Vietnam, or intending to do so;
have a good reputation;
display goodwill towards Vietnam;
have suitable facilities for their practice.
A maximum of two branch offices will be permitted per firm and each branch must be staffed by at least one foreign qualified lawyer in addition to the managing lawyer. All are required to have at least five years' qualified practising experience with a foreign firm.
If granted, a licence will last for five years, and may be renewed thereafter for periods of up to three years at a time. Under Decree 42, firms may offer advice “only on foreign and international laws in respect of trade and investment”. They may not advise on documents governed by Vietnamese law. Similarly, foreign lawyers may not act as defence counsel or represent a client in litigation in the Vietnamese courts.
Clearly such restrictions are inhibiting and the problem cannot be solved by employing Vietnamese lawyers directly, as this is also prohibited.
Decree 42 and the implementing circular (No 791) issued in September, made it clear that advice on Vietnamese law may only be given by a Vietnamese consultancy.
Circular 791 also makes it clear that branches will be required to take out professional indemnity cover with a Vietnamese insurance company and to pay tax on profits and turnover. As yet, the rates have not been fixed, though it has been suggested that profits tax may be 45 per cent and tax on turnover levied at 4 per cent.
Decree 42 was designed to promote and strengthen the local legal establishment and put it in the same position as the profession in many other countries vis a vis foreign lawyers.
Ordinarily, foreign firms would be keen to recruit and train local staff, with the aim of replacing most expatriates. With the prohibition on direct employment this is unlikely to happen.
The position of trainees, unable to advise on Vietnamese law or take up positions with foreign law firms on completion of their training, is also uncertain.
An original draft of the law is believed to have permitted joint ventures with Vietnamese law firms, which might have been preferable.
Foreign investors are likely to continue to rely on international law firms and the cost of obtaining legal advice for a potential investor in Vietnam may increase, but the position of foreign firms in the long-term may not be greatly affected. Any clarification of the position has to be for the good.