In the context of Vietnam being a highly potential consumer market, foreign companies’ entry into the Vietnamese market through franchising is significantly increasing. However, alongside opportunities for brand expansion and profit growth, such an approach model also entails strict legal requirements relating to franchising conditions, contracts, taxation, and business operations management. A thorough understanding of the legal framework from the outset is a main factor enabling foreign enterprises to implement franchising effectively and sustainably in Vietnam.
In the context of Vietnam being a highly potential consumer market, foreign companies’ entry into the Vietnamese market through franchising is significantly increasing. However, alongside opportunities for brand expansion and profit growth, such an approach model also entails strict legal requirements relating to franchising conditions, contracts, taxation, and business operations management. A thorough understanding of the legal framework from the outset is a main factor enabling foreign enterprises to implement franchising effectively and sustainably in Vietnam.
I. Current situation of foreign companies’ entry into the Vietnamese market through franchising
At present, the participation of foreign companies in the Vietnamese market through franchising is becoming increasingly common, particularly in sectors such as food and beverage, retail, education, and services. Vietnam is an attractive destination due to its large market size, rising purchasing power, and growing demand for international brands.
However, in practice, many foreign enterprises still have difficulties due to a lack of understanding of the legal regulations governing commercial franchising, resulting in risks related to registration, contract execution, system management, and dispute resolution. It highlights the necessity for thorough preparation and a clear legal strategy when entering the Vietnamese market.
II. Understanding of foreign companies’ entry into the Vietnamese market through franchising
1. Importance of foreign companies’ entry into the Vietnamese market through franchising
The participation of foreign companies in Vietnam via franchising contributes to significant economic and commercial implications. Such a model enables foreign enterprises to rapidly expand their brands, reduce direct investment costs, and mitigate operational risks, while still maintaining a certain level of control over the business system.
For the Vietnamese market, franchising contributes to the diversification of products and services, enhances management quality, and promotes the transfer of modern business models.
At the same time, it facilitates domestic enterprises’ access to international brands, allowing them to gain management experience and improve their competitiveness.
2. Main considerations for foreign companies’ enter into the Vietnamese market through franchising
When entering the Vietnamese market through franchising, foreign companies must pay particular attention to several important legal and practical issues. First and foremost are franchising conditions, including the requirements that the business system must have been in operation for a minimum period as prescribed by law, and that disclosure obligations must be fulfilled prior to franchising in Vietnam.
In addition, the franchise agreement must be carefully drafted, clearly defining the rights and obligations of the parties, scope of brand usage, franchise fees, training obligations, quality control mechanisms, and termination conditions. Furthermore, foreign enterprises must also take into account tax obligations, foreign exchange control, and compliance with competition laws in order to minimize dispute risks and ensure stable and efficient franchising operations in Vietnam.
III. Legal regulations governing foreign companies’ enter into the Vietnamese market through franchising
1. Main legal provisions to be noted
The Commercial Law 2005 provides a general legal framework governing franchising activities and serves as the primary legal basis for foreign companies to implement such a model in Vietnam.
- Accordingly, commercial franchising is defined as a commercial activity whereby the franchisor permits and controls over the franchisee’s business operations in accordance with a uniform business model associated with trademarks, trade names, and business know-how (Article 284).
- A franchise agreement must be made in writing or in another legally equivalent form to be valid (Article 285).
- A foreign company acting as franchisor has the right to collect franchise fees, organize promotional activities for the system, and supervise the franchisee’s operations (Article 286). At the same time, it must fulfill obligations such as providing system documents, delivering training and technical support, ensuring intellectual property rights, and treating franchisees equally (Article 287).
- The franchisee in Vietnam has the right to request technical support (Article 288), but must pay fees, comply with the franchisor’s control, maintain confidentiality of business know-how, and cease the use of intellectual property rights upon termination of the agreement (Article 289). Sub-franchising is only permitted with the franchisor’s consent (Article 290).
- Notably, prior to conducting franchising activities in Vietnam, a foreign franchisor must register its franchising activities with the competent authority in accordance with legal regulations (Article 291).
They are critical requirements that foreign companies must strictly comply with to avoid legal risks when entering the Vietnamese market through franchising.
2. Violations related to foreign companies’ entry into the Vietnamese market
Pursuant to Article 24 of Decree No. 35/2006/ND-CP, foreign companies engaging in franchising in Vietnam may be subject to sanctions for the following violations:
- Conducting franchising activities without satisfying the statutory conditions;
- Franchising goods or services that are prohibited from business in Vietnam;
- Failing to fulfill or inadequately fulfilling information disclosure obligations to franchisees;
- Providing false or misleading information in the franchise disclosure document;
- Failing to register or violating regulations on franchising registration;
- Violating notification obligations during the franchising process;
- Failing to comply with tax obligations as prescribed by law (not rising to criminal liability);
- Failing to comply with inspection or audit requests from competent State authorities;
- Other violations as stipulated under Decree No. 35/2006/ND-CP.
Depending on the nature and severity of the violation, these acts may be subject to administrative sanctions. Additionally, if material damage is caused to organizations or individuals, the foreign company must compensate for such damages in accordance with applicable laws.
IV. Questions regarding foreign companies’ entry into the Vietnamese market through franchising
1. What conditions must be satisfied for a foreign company to franchise its brand in Vietnam?
To franchise its brand in Vietnam, a foreign company must ensure that the franchising activity meets the definition of commercial franchising under Article 284 of the Commercial Law 2005. Specifically:
- The sale of goods or provision of services must be conducted under a uniform business model established and controlled by the franchisor, and associated with trademarks, trade names, business know-how, slogans, symbols, or brand identity systems;
- The franchisor must have the right to control and the obligation to provide technical assistance to the franchisee during operations.
Additionally, pursuant to Article 285, the franchise agreement must be in writing or an equivalent legal form, clearly stipulating the rights, obligations, scope of franchising, and control mechanisms.
Furthermore, under Article 5 of Decree No. 35/2006/ND-CP (as amended by Article 8 of Decree No. 08/2018/ND-CP), franchising is only permitted when the business system intended for franchising has been in operation for at least one year. Such a requirement ensures that the business model has been operated practically and possesses a certain level of stability.
Before conducting franchising activities in Vietnam, the foreign franchisor must complete the franchising registration procedure with the competent authority in accordance with Section 2 of Circular No. 09/2006/TT-BTM.
Thus, a foreign company may only franchise its brand in Vietnam when it satisfies all legal conditions, executes a lawful franchise agreement, and complies with Vietnamese regulations.
2. Is a detailed contract required when a foreign company franchises to a Vietnamese agent?
Entering into a detailed and clearly structured franchise agreement is essential and plays a decisive role in the effectiveness of franchising implementation. The agreement not only serves as the legal basis governing the relationship between the parties but also helps prevent risks and disputes.
The agreement should clearly address main provisions such as rights and obligations, scope of brand usage, franchise fees, training and support obligations, quality control, tax obligations, amendment and termination conditions, and dispute resolution mechanisms.
A well-drafted agreement, compliant with Vietnamese law and international practices, enables foreign companies to safeguard their interests and effectively manage their franchise systems.
3. What rights does a foreign company have if the franchisee fails to fulfill its obligations?
In cases where the franchisee fails to perform or improperly performs its contractual obligations, the foreign company, as franchisor, has the following rights under Article 286 of the Commercial Law 2005:
- To require the franchisee to properly fulfill contractual obligations, including payment of fees and compliance with the agreed business system;
- To conduct periodic or ad sudden inspections and supervision of the franchisee’s operations to ensure system consistency and quality standards;
- To apply contractual remedies, including warnings, requests for rectification, or termination/cancellation of the franchise agreement in cases of fundamental breach or agreed termination conditions.
These rights enable the franchisor to protect its brand, business model, and system integrity.
4. What tax issues should foreign companies be aware of when franchising in Vietnam?
Taxation is a critical issue for foreign companies engaging in franchising in Vietnam. Under Vietnamese tax laws, franchise fees, management fees, and brand usage fees paid by Vietnamese franchisees to foreign companies are generally subject to foreign contractor tax, which includes value-added tax and corporate income tax on income derived in Vietnam.
In addition, foreign companies must determine the appropriate tax declaration and payment method (whether withheld and remitted by the Vietnamese party or directly registered), and consider the applicability of double taxation avoidance agreements (if any) to prevent double taxation.
Clearly allocating tax obligations in the franchise agreement is essential to minimize risks and disputes.
5. What procedures must be followed for termination of a franchise agreement by a foreign company?
If a foreign company (as franchisor) intends to terminate a franchise agreement, such termination must comply with legal grounds and procedures, particularly Article 16 of Decree No. 35/2006/ND-CP:
- First, lawful grounds for termination must be established, such as: The franchisee no longer holding a valid business license; dissolution or bankruptcy; serious legal violations affecting system reputation; or failure to remedy contractual breaches within a reasonable period despite written notice;
- Second, written notice must be provided, especially for non-fundamental breaches;
- Third, a termination decision must be issued in accordance with contractual terms and legal provisions;
- Fourth, post-termination obligations must be fulfilled, including cessation of IP usage, settlement of outstanding payments, and compensation (if applicable).
Accordingly, termination must strictly comply with statutory grounds and procedures to avoid legal risks and disputes.
V. Do you need legal support for franchising in Vietnam?
Given the complexity and strict compliance requirements of Vietnam’s franchising legal framework, engaging legal counsel from the outset will help foreign companies minimize risks and effectively implement franchising operations. NPLaw provides comprehensive support, including legal advisory, franchising registration, contract drafting and review, and dispute resolution, enabling businesses to expand in Vietnam lawfully and sustainably.
The above information is for reference purposes only. For detailed advice on specific cases, please contact NPLaw for prompt assistance.
