Undertaking goods processing for foreign traders involves the processor using all or part of the raw materials and supplies provided by the foreign trader, the ordering party, to perform one or more stages in the production process according to the ordering party's requirements in exchange for remuneration. Accordingly, goods processing for foreign traders is carried out on the basis of a contract known as a processing contract for foreign traders. So, how do we understand what a processing contract for foreign traders is and the related issues surrounding processing contracts for foreign traders? Let's join NPLaw to learn about the current legal regulations related to this issue below.
I. Current Status of Implementing Processing Contracts for Foreign Traders
Nowadays, the implementation of processing contracts for foreign traders has become a popular trend in various industries and businesses. This brings many benefits to both foreign traders and domestic enterprises.
However, the implementation of processing contracts for foreign traders is also facing a number of challenges:
- One of the major challenges is ensuring reliability during contract execution. Parties involved need to ensure that they comply with the provisions and commitments in the contract, provide product quality, and meet delivery deadlines as required.
- Quality control of processed products is a critical issue. Enterprises need to have a quality inspection and evaluation system to ensure that products meet the standards and quality requirements of foreign traders.
- Processing goods for foreign traders can carry certain legal, financial, and business risks. Therefore, parties involved need to implement risk management measures to minimize negative impacts.
- Processing goods for foreign traders may involve sharing sensitive information or product designs. This requires enterprises to have strict information security policies in place to ensure safety and non-disclosure of critical information to unauthorized third parties.
Overall, the implementation of processing contracts for foreign traders is developing and bringing many business opportunities. However, the above challenges need to be managed and resolved reasonably to ensure the effectiveness and success of the cooperation process.
II. Legal Regulations on Processing Contracts for Foreign Traders
1. What is a Processing Contract for Foreign Traders?
A processing contract for foreign traders is a type of economic contract between two parties, where one party (the foreign trader) hires or utilizes the services of the other party (the local manufacturer or processor) to produce, process, or manufacture goods according to their requirements.
Through this contract, foreign traders can leverage the resources, techniques, and infrastructure of their local partners to process goods efficiently and cost-effectively. The local partner, in this case, can be a manufacturing enterprise, processing workshop, or goods manufacturing plant.
This contract typically specifies the terms of product requirements, quantity, quality, delivery time, price, and other payment terms. Processing contracts for foreign traders are commonly used in the field of international manufacturing and trade.
2. How is Processing Goods for Foreign Traders Specifically Regulated?
Based on Article 38 of Decree No. 69/2018/NĐ-CP on processing goods for foreign traders, specific regulations are as follows:
- Vietnamese traders are allowed to receive legal processing of goods for foreign traders, except for goods prohibited from export and import; goods temporarily suspended from export and import.
- For goods on the list of conditional business investment, only traders who meet the conditions as prescribed for the production and business of that item are allowed to process for export to foreign countries.
- For imported goods under the form of designated traders under the management of the State Bank of Vietnam, the processing of goods is carried out in accordance with the regulations of the State Bank of Vietnam.
- For goods exported and imported under a license, traders are only allowed to sign processing contracts for foreign traders after being granted a license by the Ministry of Industry and Trade.
3. Unilateral Termination of Processing Contracts for Foreign Traders
According to the provisions of Article 551 of the Civil Code 2015, the following regulations are in place for unilateral termination of processing contracts:
- Each party has the right to unilaterally terminate the processing contract if the continued performance of the contract does not bring any benefit to itself, except in cases where there is an agreement to the contrary or otherwise provided by law, but must notify the other party in advance for a reasonable period of time.
- If the party ordering the processing unilaterally terminates the performance of the contract, it must pay the corresponding remuneration for the work done, unless otherwise agreed. If the party receiving the processing unilaterally terminates the performance of the contract, it shall not be paid remuneration, unless otherwise agreed.
- The party that unilaterally terminates the performance of the contract and causes damage to the other party must compensate for the damage.
Therefore, according to the law, each party has the right to unilaterally terminate the performance of the processing contract when there is a basis to believe that the continued performance of the processing contract will not bring legal benefits to itself, except in cases where the parties have an agreement to the contrary or otherwise provided by law. However, unilateral termination of the processing contract must be notified to the other party in advance for a reasonable period of time.
III. Answers to Some Questions about Processing Contracts for Foreign Traders
1. How can Vietnamese enterprises be penalized for forging processing contracts with foreign traders?
According to Point b of Clause 2 and Clause 5 of Article 45 of Decree 98/2020/ND-CP, which stipulates violations related to processing goods with foreign elements, the following penalties apply:
- A fine of from VND 20,000,000 to VND 40,000,000 shall be imposed for any of the following violations:
+ Consuming on the Vietnamese market machinery, equipment rented, borrowed, or surplus raw materials, auxiliary materials, supplies, waste, and scrap temporarily imported for processing and producting goods for foreign traders in violation of regulations;
+ Forging processing contracts with foreign traders.
- Additional penalties: Confiscation of the corpus delicti for violations of the provisions of Clauses 2, 3, and 4 of this Article.
According to the provisions of Clause 4 of Article 4 of Decree 98/2020/ND-CP, amended by Point b of Clause 1 of Article 3 of Decree 17/2022/ND-CP on the level of fines, the following applies:
- The maximum fine in the field of trade is VND 100,000,000 for individuals and VND 200,000,000 for organizations; the maximum fine in the field of manufacturing, trading in counterfeit and banned goods, and protecting consumer rights is VND 200,000,000 for individuals and VND 400,000,000 for organizations;
- The fines prescribed in Chapter II of this Decree are the fines applicable to administrative violations committed by individuals, except for administrative violations prescribed in Articles 33, 34, 35, 68, 70, Clauses 6, 7, 8, 9 of Article 73, and Clauses 6, 7, 8 of Article 77 of this Decree. In cases where an administrative violation is committed by an organization, the fine shall be double the fine prescribed for individuals.
Therefore, Vietnamese enterprises that forge processing contracts with foreign traders may be subject to administrative penalties with a fine of from VND 40,000,000 to VND 80,000,000 and confiscation of the corpus delicti for the violation.
2. Content of Processing Contracts for Foreign Traders
According to Article 39 of Decree 69/2018/ND-CP, the following is stipulated:
Processing contracts must be made in writing or in another form with equivalent legal value according to the provisions of the Commercial Law and must at least include the following provisions:
1. Names and addresses of the contracting parties and the direct processor.
2. Name and quantity of processed products.
3. Processing price.
4. Payment term and method of payment.
5. List, quantity, and value of imported raw materials, auxiliary materials, supplies, and domestic raw materials, auxiliary materials, and supplies (if any) for processing; norms for the use of raw materials, auxiliary materials, and supplies; norms for consumable materials and the rate of material loss in processing.
6. List and value of machinery and equipment leased, lent, or donated for processing (if any).
7. Measures for handling scrap, waste, and defective products and principles for handling leased or borrowed machinery, equipment, surplus raw materials, auxiliary materials, and supplies after the processing contract expires.
8. Place and time of delivery.
9. Trademark of goods and name of origin of goods.
10. Effective term of the contract.
Therefore, processing contracts for foreign traders must contain the information specified above. Although Vietnamese law currently does not have specific regulations on the form of processing contracts for foreigners. However, when the parties negotiate and sign a processing contract, they must have all the mandatory information as prescribed above.
3. What are Rights and Obligations of Vietnamese and Foreign Traders when Performing Processing Contracts for Goods?
According to Article 42 of Decree 69/2018/ND-CP, the rights and obligations of the party placing and receiving the processing are as follows:
1. For the party placing the processing order:
- Deliver all or a part of the processing raw materials and supplies according to the agreement in the processing contract.
- Receive back all processed products; machinery and equipment rented or borrowed by the processing party; raw materials, auxiliary materials, supplies, and scrap after the processing contract is liquidated, except in cases where they are allowed to be exported on the spot, destroyed, donated, or gifted according to the regulations of this Decree.
- Be entitled to send experts to Vietnam to guide the production techniques and inspect the quality of processed products according to the agreement in the processing contract.
- Be responsible for the right to use trademarks and names of origin of goods.
- Comply with the provisions of Vietnamese law related to processing activities and the terms of the signed processing contract.
- Be entitled to export on the spot processed products; machinery and equipment rented or borrowed; surplus raw materials, auxiliary materials, and supplies; scrap and waste according to an agreement in writing of the parties involved, in accordance with the current regulations on management of export and import of goods and must fulfill tax obligations and other financial obligations according to the law.
2. For the party receiving the processing:
- Be exempt from export duty and import duty according to the law on tax for temporarily imported goods according to the norm and loss rate for performing the processing contract and for exported processed products.
- Be entitled to hire another trader to do the processing.
- Be entitled to supply a part or all of the raw materials, auxiliary materials, and supplies for processing according to the agreement in the processing contract; must pay export duty according to the provisions of the Law on Export Duty, Import Duty for the part of raw materials, auxiliary materials, and supplies purchased domestically.
- Be entitled to receive payment from the party placing the processing order in the form of processed products, except for products on the List of Goods Prohibited from Import, Temporarily Suspended from Import. For products on the List of Goods Imported under License, under conditions, they must comply with the regulations on licenses and conditions.
- Must comply with the provisions of Vietnamese law on export processing, import, production of domestic goods, and the terms of the signed processing contract.
- Carry out the procedures for exporting on the spot processed products; machinery and equipment rented or borrowed; surplus raw materials, auxiliary materials, and supplies; scrap and waste under the authorization of the party placing the processing order.
3. Conditions for exporting and importing on the spot processed products; machinery; rented or borrowed equipment; surplus raw materials, auxiliary materials, and supplies; scrap and waste as stipulated in Point e Clause 1 and Point e Clause 2 of this Article are as follows:
- Must comply with the regulations on management of export and import of goods, on tax and other financial obligations according to the law.
- Must have a purchase and sale contract signed between a foreign trader or a legally authorized representative of a foreign trader and the importer.
Thus, the rights and obligations of Vietnamese traders and foreign traders when performing goods processing contracts are implemented according to the above regulations.
IV. Legal Advisory Services on Processing Contracts for Foreign Traders
The above is all the detailed information that NPLaw of ours provides to support our clients on the issue of processing contracts for foreign traders. If you have any further questions related to the above or other legal issues, please contact NPLaw immediately for our team to directly advise and guide you on how to resolve them.
