How to Open a Company in Vietnam?
Vietnam is an emerging economy with a lot of potential for foreign companies. The lower labor costs compared to other surrounding countries has attracted massive growth in foreign direct investment (FDI). From January to October 2019, FDI in Vietnam rose 7.4% to USD $16.21 billion, and clearly companies around the world are taking notice. This article will give you the information it takes to open a company in Vietnam.
- Types of entities in Vietnam
- Setup process
- Common mistakes
- Accounting & Bookkeeping
Vietnam Business Requirements
Vietnam allows for complete foreign ownership in most business sectors. IT, trading, education, and manufacturing sectors are all welcoming towards foreign investment. That said, there are some business lines such as tourism and advertising that require foreign firms to partner with a Vietnamese company in a joint venture. Once you know the type of activity your company will engage in, NNRoad can help you setup your company in Vietnam.
Because Vietnam is part of the World Trade Organization (WTO), foreign ownership in different business sectors is regulated by the WTO. However, if your company is engaging in a business sector not covered by WTO rules and there are no specific local laws, your company will require Ministry-level approval.
Minimum capital requirement
Unlike other countries, Vietnam does not have a minimum capital requirement for foreign companies registering a company in Vietnam. Before a foreign company can expand into Vietnam, it must have approval from the Department of Planning and Investment. To receive that approval, the planned minimum capital contribution must comply with your company’s actual planned expenses.
In working practice, it is possible to set up a service company with as little as USD $3,000. For a manufacturing company, the funds set aside should be more than the cost of machinery.
A common starting amount of capital on hand in Vietnam is USD $10,000. This is a lot less than minimum amounts in other countries. For example, in Indonesia the minimum amount of capital is USD $175,000. Some special business lines in Vietnam including language centers, real estate companies, and vocational schools do have a set minimum capital requirement, and your company should carefully consult government regulations.
Every company incorporated in Vietnam must have a registered address. Service-based companies are permitted to use a virtual office, while manufacturing companies or companies which require business or retail space must have physical location in Vietnam. Sometimes, Vietnam’s Department of Planning and Investment will inspect the address before incorporation is possible. Other times, it is enough to present to the Vietnamese government an offer letter or a memorandum of understanding (MOU) which states that the property will be used to conduct the company’s activities when it is set up.
All companies setup in Vietnam require a resident director. The appointed individual does not need to have residency status at the time of incorporation, but they must have and maintain a Vietnamese residential address. It is important to remember that landlords in Vietnam must register any foreign nationals leasing their property with the police. If the director is not a founder of the company and is also a foreign national, they will need a work permit. However, if the resident director is one of the founders who originally incorporated the company in Vietnam, they are not required to have a work permit.
Types of entities in Vietnam
Opening a branch office in Vietnam is a popular method amongst foreign companies expanding in Vietnam. It is essentially a subsidiary of a foreign entity, created within the law of Vietnam to conduct buying and selling activities and enter into contracts within the country.
To set-up a branch office in Vietnam, the foreign company must have conducted business in foreign countries for at least five years. An annual return must be filed by the branch office with the Industry and Trade Department office.
Pros and Cons
A pro of setting up a foreign company in Vietnam through the branch office method is that it is useful in highly regulated industries such as finance, banking, or insurance. In those industries, a foreign reputable entity being registered versus a subsidiary will make the licensing process simpler.
However, going through the process of incorporating a company in Vietnam requires complex procedures, and exposes companies to total liability for losses.
Foreign companies are permitted to open a representative office in Vietnam if they can prove they have conducted business internationally for more than one year. The Vietnamese government has several restrictions on representative offices, centering around prohibition of commercial or production-related activities.
Companies that choose to set up a representative office in Vietnam may only engage in promotion of the overall company and market research. It must annually submit returns to the Industry and Trade Department office and have a resident representative.
Pros and Cons
There are certainly pros to opening a representative office in Vietnam. One is that compared with opening a full branch office, it doesn’t have to pass as many legal hurdles, and can behave in a nimbler way. However, there is the huge con of not having the legal capability to manufacture products or conduct trade.
Because many industries within the Vietnamese economy are restricted by the government, joint ventures are common. Foreign companies can partner with a domestic stakeholder to set up a company in Vietnam. The electronic games business, agriculture and forestry, conventional and online advertisement, and transportation services are all examples of restricted industries in Vietnam. In these industries, the permissible level of foreign ownership can range from 49% to 99%.
Pros and cons
Many foreign companies chose the joint venture path because of the potential to take advantage of the local knowledge that a Vietnamese partner can provide. Depending on how the joint venture is set up, foreign companies can also be under less risk because they are sharing that risk with another partner, than if they were to operate through a branch office.
There are also cons in setting up a joint venture in Vietnam. One is that there will inevitably be longer delays in the licensing process than some of the other options. Approval for a foreign investment certificate must also be obtained. Before monies can be remitted to the parent company, the joint venture must submit annual financial statements to the government.
Foreign Owned Enterprise / Limited Liability Company
An enterprise that is totally foreign-owned can operate under two different structures: Limited Liability Companies, and Joint Stock companies. Similar with other countries, opening a company in Vietnam under the Limited Liability structure is a safe and common form of foreign investment for companies because of its relatively low risk level. Joint Stock companies spread out liability through having many different shareholders.
Pros and Cons
A pro of entering the Vietnamese market through a completely foreign owned enterprise is that it removes the cultural differences that exist when working with a Vietnamese market. There are several cons to a completely foreign owned enterprise. One is that they miss out on local expertise gained from partnering with a Vietnamese company. Another is that because they are totally foreign owned, there is often a longer approval period than some of the other Vietnamese market entry methods, usually lasting 2 to 4 months.
Public Private Partnership
Public Private Partnerships (PPPs) are agreements between domestic or foreign companies and the Vietnamese government in order to complete critical infrastructure projects. This type of business deal is being aggressively pursued to try and fill gaps that are being left as the role of state-owned enterprises is declining.
Pros and Cons
A pro of this method of opening a company in Vietnam is that the company will be working directly with the Vietnamese government on a guaranteed project, so the pressure of competing against other companies is largely removed, once a contract is received. A con is that it can often be hard for completely foreign owned companies to gain these types of contracts, as the government will be more likely to go with a homegrown company.
PEO services in Vietnam
A common alternative used by foreign companies to enter the Vietnamese market is using PEO services in Vietnam (Professional Employment Organization). Also known as Employer of Record (EOR). It allows companies to outsource their complete employment operations and hire employees in Vietnam without a legal entity.
As an experienced EOR, NNRoad takes care of as all employment operations in order to legally hire employees in Vietnam; including running payroll, deducting individual income tax, managing social security contributions, work permit application, business expenses management and office rental. When employees are hired through this method, they are legally employed through the PEO, but they will work on your company’s behalf.
Pros and consUsing PEO services in Vietnam provides a quick market entry and avoidance of having to establish a subsidiary or branch office. This is a huge pro, as it lets companies get in the game quickly while keeping low risks and investments. Another pro is that the foreign company still can utilize local knowledge from the Professional Employment Organization provider, while operating through an already-established company.
In special industries that have government restrictions on foreign ownership, a PEO method may not be the best way forward, and foreign companies considering an expansion to Vietnam should work with companies like NNRoad to understand the possibility of using PEO services in Vietnam.
Before you set up a company in Vietnam, there are several steps that must be taken.
1. Pre-investment approval
The Vietnamese economy is still a largely planned economy, so many foreign investment projects must have government approval prior to starting. Therefore, it is important for foreign companies to know whether they will need to apply in accordance with application processing times and prepare required documentation.
2. Investment registration
If your company is planning on being 100% foreign owned, an Investment Registration Certificate (IRC) is required. Essentially, it gives foreign enterprises the right to invest within Vietnam. To apply for this license, investing firms must:
- Submit a detailed application for the implementation of the investment project;
- Write a proposal detailing lease agreements or land use needs of the investment project;
- Proving financial viability of the investment by submitting financial statements for the past two years of the company’s operation.
3. Enterprise registration
Every project which seeks to set up a new entity within Vietnam must obtain an Enterprise Registration Certificate (ERC). In accompaniment with the ERC, firms will also be issued an official tax number. In the application process in opening a company in Vietnam, the firm must prepare:
- A list of all board members;
- An application for enterprise registration
- A company charter;
- Letters of appointment and authorization;
- A list of legal representatives.
Every piece of foreign information or foreign documents provided by the company must be notarized, made legal by consular officials, and translated into Vietnamese through competent authorities.
4. Post-licensing procedures
After the IRC and ERC have been issued by the government to the company, there are still several following steps to be taken:
- Labor registration;
- Seal carving;
- Charter capital contribution;
- Bank account opening;
- Business license tax payment; and
- Public announcement of company establishment.
Common mistakes when setting-up a company in Vietnam
As foreign companies enter the Vietnamese market, there are several mistakes that tend to happen. Avoid them by reading this list!
Investing the wrong amount of capital into the business
The majority of business sectors in Vietnam have no minimum capital requirement, which means you don’t need a high amount of capital in order to set up a company in Vietnam. However, you still will need official approval from the government, and they check to see that you have enough capital to meet expected business needs.
Using an unreliable nominee
Foreign companies quickly get into trouble when they enter into an agreement with an untrustworthy nominee. Trusting individuals may seem like a good decision initially but can carry huge risks. The safest thing to do is to work through a professional service company like NNRoad instead of an individual person.
Ignoring local regulations
Another common mistake is failing to comply with local tax reporting requirements and laws. It is crucial to keep in mind that foreign companies in Vietnam are often under higher scrutiny than local ones. It is therefore more important to do careful research to make sure your company is complying with local regulations in Vietnam.
Failing to ask for VAT invoices
Many companies decline to issue VAT invoices unless they are requested for on the same day or before a purchase. Not every receipt is a VAT invoice. Keep VAT invoices for expenses incurred even before company registration, as all VAT invoices can be recorded as expenses. This can reduce the corporate tax rate.
Wrong market entry vehicle to set-up a business in Vietnam
Many foreign companies go through the hassle of setting up a full company only to discover that it would have been much cheaper and less time consuming to just outsource their needs to a company like NNRoad.
Lack of time to set-up a company in Vietnam
The time needed to set up a legal entity in Vietnam is usually around 3 months, which is much longer than the time typically required in developed countries. Getting all the required documents in order can often be the most time-consuming of the whole process. NNRoad can help your company get all the required documents in order and prevent unnecessary setbacks of registering a company in Vietnam.
Taxation in Vietnam
For any foreign investor, taxes are an unavoidable matter. There is currently a massive shift going on in the Vietnamese system towards modernization, and so investors should be sure they understand their liabilities both as a business and as an individual. You should seek to understand whether you are under any exemptions or relief. Below we provide a brief guide, however, you are welcome to get in touch with us to learn more details.
Corporate income tax
A corporate income tax (CIT) is only levied against incorporated entities like JSCs, LLCs, and commercial branches bringing in profits. The standard CIT rate is 25 percent, and this is universal for both foreign and domestic enterprises. There are also special rates ranging from 32 percent up to 50 percent, this high level of taxes is normally seen in the sectors of petroleum and other rare and precious resources.
Value added tax
A value added tax (VAT) is a tax on the added value of nearly all goods and services generated in the process of production, circulation, and consumption. There are three VAT rates: 0 percent, 5 percent, and the standard 10 percent. The government often uses VAT tax to incentivize exports and disincentivize imports.
Business license tax
A business license tax (BLT) is an indirect tax that is inflicted on entities which are conducting business activities in Vietnam. It is annually paid for by the enterprises themselves. The amount of BLT a company is obligated to pay is based on the amount of registered capital. All companies in Vietnam, including factories, branches, and shops, are subject to this tax.
Special consumption tax
A special consumption tax (SCT) is applied to goods and services considered to be luxury items. There are basically two categories of luxury items: physical items, such as cigarettes, cars, and motorbikes, and certain services, such as massages, karaoke, and lottery tickets. The SCT rate varies by item.
Customs duties on items entering Vietnam must be paid prior to customers clearance, or the goods will not be released. Customs duties owed depend on the country from where the item is imported from, and on the type of item. Most goods and services being exported are exempt from this tax, however.
Foreign contractor tax
In Vietnam, foreign contractor tax is not actually a separate tax, but instead is a combination of VAT, CIT, and personal income tax (PIT). Essentially, if a foreign company comes into Vietnam and performs a service or provides a good contracted out to a company based in Vietnam, they must pay taxes in the country.
Accounting & Bookkeeping
When opening a company in Vietnam, it is crucial to understand the accounting and bookkeeping laws governing the business world. Mismatches in revenues and expenditures and recording expenditures and revenues in the wrong time period, is common. Your accountants should make sure they understand the local rules.
Annual finalization of all your company’s financial statement, personal income tax, and corporate income tax are due on the 90th day of the new year. Except in leap years, this will occur on the 1st of April. In accordance with regulation, this report must be filed with these offices:
- Tax office at the provincial or city level;
- The general statistics office;
- The ministry of planning and investment.
Retention of documentation
Depending on the document, accounting documentation must be preserved for 5 years, 10 years, or for an indefinite period. The Vietnamese Tax Department has the right to check whether companies are calculating their taxes correctly, and for foreign companies, it is even more important that documentation is properly preserved.
The Vietnamese economy is increasingly becoming a hotbed of manufacturing, and a leader in developing markets. If you are interested in setting up a business in Vietnam, NNRoad is here to help. We would love to get in touch with you and help you through the exciting process of opening a company in Vietnam.
Contact us today!