Vietnam is an emerging economy with a lot of potential for foreign businesses interested to open a company.
The lower labor costs compared to other surrounding countries have attracted a massive growth in foreign direct investment (FDI).
In the first five months of 2019, year-on-year growth of FDI in Vietnam was 69.1%, clearly, companies around the world are taking notice. This article will give you the information it takes to open a company in Vietnam.
- Requirements to open a company in Vietnam
- Types of Entities in Vietnam
- Setup Process
- Common Mistakes
- Accounting & Bookkeeping
Vietnam allows for complete foreign ownership in most business sectors. IT, trading, educational sectors, and manufacturing 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 choose to engage in, NNRoad can help you open a company in Vietnam.
Because Vietnam is part of the World Trade Organization (WTO), foreign ownership in different business lines is regulated by it. However, if your company is engaging in a business line not covered by WTO rules and there are no specific local laws, your company will require a 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 in 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 open a company in Vietnam 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, it 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, 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 on the other hand, manufacturing companies or companies which require business or retail space for going about their activities must have a 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 requires 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 with the police any foreign nationals leasing their property. 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.
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.
Foreign companies are permitted to open a representative office in Vietnam if they can prove they have conducted business internationally for more than 1 year. The Vietnamese government has several restrictions on representative offices, centering around the prohibition of commercial or production-related activities.
Companies that choose to set up a representative office in Vietnam may only engage in the 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.
Because many industries within the Vietnamese economy are restricted by the government, joint ventures are common. Foreign companies can partner with domestic stakeholders 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%.
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 to 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 by having many different shareholders.
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.
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. 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 Cons
Before you open a company in Vietnam, there are several steps that must be taken.
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.
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 in 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 the financial viability of the investment by submitting financial statements for the past two years of the company’s operation.
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.
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.
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 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 Open a Company in Vietnam
The time needed to open a company 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.
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 that 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.
When you decide to open 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 statements, personal income tax, and corporate income tax is 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 to open a company 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.