Is it a good idea to establish a foreign representative office in Vietnam?

Is it a good idea to establish a foreign representative office in Vietnam?
Is it a good idea to establish a foreign representative office in Vietnam?

To invest in Vietnam, there is a better option than establishing a company with 100% foreign capital or purchasing shares for an enterprise in Vietnam. Instead, foreign investors can set up a commercial presence in the form of a representative office of a foreign trader. According to the data system of the Department of Industry and Trade of Ho Chi Minh City, from 2010 up to now, more than 3,600 representative offices of foreign traders have been established. Foreign investors have also established representative offices parallel with established subsidiaries in Vietnam. The following article will analyze the rights and obligations of the representative office of foreign traders to evaluate whether this is a suitable choice of investment for foreign investors.

1. Definition of Representative Office of Foreign Trader

According to the definition of the Commercial Law 2005, a representative office of a foreign trader is a dependent unit of a foreign trader. It is established by the laws of Vietnam to study the market and carry out several trade promotion activities permitted by Vietnamese law.

Unlike a 100% foreign-owned company that has legal status and can independently conduct business activities and create assets, a foreign representative office is only a dependent unit of foreign investors. Its roles are to act on behalf of foreign investors to carry out some activities to research the Vietnamese market (such as advertising, displaying, introducing goods and services, organizing and participating in fairs, trade shows, etc.) without making profits.

2. Rights and obligations of Representative Office of Foreign Trader

In terms of operational functions, the foreign representative office is a contact point to do market research and promote investment opportunities for the traders it represents. Accordingly, a representative office has the following rights:

– Rent an office and purchase the necessary equipment for the operation of the representative office;

– Recruit Vietnamese and foreign workers;

– Open an account in Vietnam dong with foreign currency origin at a bank that is licensed to operate in Vietnam and may only use this account for the operation of the representative office;

– Have a stamp bearing the name of the representative office.

Corresponding to these rights, a representative office of a foreign trader has the following obligations:

– To not conduct profit-making activities directly in Vietnam;

– To carry out trade promotion activities only within the scope permitted by law;

– To not enter into contracts, amend, or supplement signed contracts of foreign traders, unless the head of the representative office has a lawful power of attorney from the foreign trader or enters into labor contracts, contracts to rent the office, or open an account for the office;

– Pay taxes and fees while fulfilling other financial obligations following Vietnamese law;

– Report on the activities of the representative office.

3. Evaluation of pros and cons of the foreign representative office

A representative office is a feasible option if investors want to research the market before implementing an investment project. The reason why the model of setting up a representative office is currently attracting a lot of investors’ attention comes from many advantages that this form brings, which can be pointed out such as:

Representative office in the capacity of the legal representative of foreign investors in Vietnam will be entitled to act on behalf of investors to carry out activities such as market research (source of goods, the demand of consumers, supplier networks, Vietnamese government policies, etc.). Doing so will be promoting business contracts, developing customer sources for the traders, and preparing necessary issues for the plan of setting up a business in Vietnam.

The procedure for establishing a foreign representative office is simpler than that of a company. Investors do not have to inject much capital into operating costs and do not need a complicated personnel structure (helping investors save management costs in the process of researching the market before deciding to invest).

The representative office is not subject to taxes (such as value-added tax (VAT) and corporate income tax) and does not have to meet complicated requirements for bookkeeping. It only needs to declare it and on behalf of the employees to pay the personal income taxes. Finally, if the investor wants to terminate the representative office, the procedure is also much simpler and faster than terminating an investment project following the enterprise laws.

However, as a dependent unit of a foreign investor, the operation of a foreign representative office has many limitations, such as:

– The operation term of the representative office is 05 years only and the renewal procedure must be carried out at least 30 days before the license expires. Meanwhile, the term for the investment project is from 50 to 70 years.

– Foreign representative office can not directly conduct commercial advertising activities for foreign investors, but may only sign contracts with traders providing commercial advertising services when authorized by foreign investors. Similarly, it is only allowed to display and introduce goods and services of the trader at its head office. In case it is authorized by the trader, the representative office has the right to sign a contract with the trader providing goods and service displays. As for the right to organize and participate in trade fairs and exhibitions, the foreign representative office is also not allowed to directly organize or participate in trade fairs and exhibitions unless authorized by the parent company.

Thus, the scope of activities of the foreign representative office is limited. Trade promotion activities require authorization from the parent company and are limited in operation time every 5 years. To serve its operations, a foreign representative office has only basic rights, such as renting an office, recruiting employees, opening a bank account, and having a stamp. In other words, foreign representative offices have no business functions and do not make profits.

Meanwhile, the presence in Vietnam with the form of company establishment will be independent when conducting business activities and have the right to enter into and perform contracts on their own. They can also promote investment activities of foreign investors, make profits, and develop a business image in Vietnam’s market. Furthermore, investors can also open additional dependent units of the company (such as branches, representative offices, and business locations to conduct market survey activities).

In general, the establishment of the representative office of a foreign trader is meaningful in the early stages when the foreign trader intends to research and invest in the Vietnamese market. This is because the foreign representative office will be the intermediary to contact, survey the market and domestic customer tastes, find customers, and source goods and services at a low cost. When achieving the target of the market survey, investors need an independent organization with a tight organizational structure capable of operating with its assets and conducting transactions to generate profits. At this time, the role of the foreign representative office is no longer appropriate. Therefore, it will be depending on the intention of the investor to establish a representative office or directly establish a company for both researching the market and generating profits.

The article is based on applicable law at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable law has changed and the specific case that the reader wishes to apply. Therefore, the article is only for reference.