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Should Foreign Investors Set-Up A Representative Office Or A Branch In Vietnam?

Legal Guidelines On Business For Small And Medium Investors (Part 1)

Overview of Vietnam’s investment potential and current circumstances

Since the emergence of Covid-19 in early 2020, the world has witnessed many changes like economic difficulties etc. The pandemic also demonstrated the importance of innovation in order to adapt and advance. Numerous small and medium-sized companies opened during the lockdown, and the online business sector also showed resilience. Vietnam, by controlling the pandemic well, has proven that it is a stable and promising investment destination.”

Despite the the pandemic situation dragging down the global economy and forcing many businesses into crisis, Vietnam’s economy has continued to expand at a rate of 2.91 percent, greater than the previous year, according to the General Statistics Office. The country’s economic balance hit US$343 billion, making it Southeast Asia’s fourth biggest economy. Furthermore, many manufacturing businesses have steadily departed China’s vast market and relocated production plants, technological research centers, and warehouses to Vietnam as a result of the US-China trade war. Additionally, as a result of the Free Trade Agreement between Vietnam and the European Union (EVFTA), Vietnam is starting to reap the benefits, particularly in terms of tax rates and investment rates. The scope at EVFTA is more open even compared to Vietnam’s WTO commitments.

Legal system in the field of investment

  • New provisions of the Investment Law 2020

Along with the benefits like good market and human resources, there have also been significant policy shifts. On January 1, 2021, the Investment Law 2020 went into force. It’s also crucial to look at the Enterprise Law 2020. These are two major legal documents that investors must refer to in order to smoothly run their business in Vietnam.

In order to demonstrate the provisions of the new investment law, we should also look at several decrees and circulars which were issued.

  • Vietnam’s commitment to trade in services in the WTO

Vietnam’s WTO commitment in services trade is a list of Vietnam’s commitments in each service industry. Hence, investors in Vietnam should look for information on the competitive conditions and market openness of the services they are interested in. This allows them to modify their business plans accordingly. Vietnam’s WTO schedule of commitments includes 11 service sectors with about 110 sub-sectors.

  • Other legal documents

Apart from the legal documents on business and investment, legal issues for a corporation might also include tax laws, environmental laws, and information technology. Legal matters shall be addressed based on the 2015 Civil Code if there are no particular provisions in specialized legal documents. Specifically, provisions on contracts, compensation for damage, or compensation for damage outside contract.

Business sectors in Vietnam

  • Registering business sector in Vietnam

A corporation can register in a variety of business areas once it has been formed. Thus, businesses should prepare a list of anticipated business operations that includes information about the company’s primary business, and adjacent sectors that support it, and other auxiliary industries. The core business will also determine the types of sub-licenses the company needs and the areas the company is allowed to operate. The lines will be operated according to the individual local planning. In particular, for some industries, there are conditions for charter capital.

  • Potential industries and related investment incentives

Vietnam, with its inherent strength as an agricultural country, exports food and agricultural goods. Thus, Vietnam is an ideal location for food industry, and for  developing facilities that use natural resources because of the availability of a wide range of products, reasonable costs, and well-trained human resources.

With the rapid growth in the internet, science and technology, the optimization of machines, and the increasing demand for online shopping, the Investment Law 2020 has granted incentives to a number of industries and professions, including:

– University education

– Production of scientific and technological results in accordance with the law on science and technology

– Producing products on the list of supporting industry products prioritized for development.

– Preservation of medicines, and production of medical equipment.

– Producing goods and services to create or participate in value chains, or industry clusters.

Vietnam has diversified investment incentive policies such as corporate income tax incentives, tax exemptions, tax reductions and other incentives in accordance with the law on corporate income tax. In addition, investors are also exempt from import tax on goods imported to create fixed assets like raw materials, supplies and components imported for production in accordance with the law on import and export tax.

As for the location of the investment project, since land in Vietnam is owned by the people, the investor cannot privately own land. However, Vietnam has certain exemptions like reduction of land use levy, land rent, and land use tax for foreign-invested enterprises. Hence, they are eligible for incentives.

  • Conditional business lines

Alcohol and tobacco businesses are two of the most interesting conditional businesses in Vietnam. These two industries have long attracted the attention of investors of all types, from tobacco industry giants like British American Tobacco and Philip Morris to smaller retailers drawn by revenues from innovative tobacco products like e-cigarettes etc.

Foreign investors, like those in the alcohol sector, must fulfill specific requirements and are only permitted to conduct business within the scope of their license. After the fulfilling the requirements for company formation, they must apply for a ‘sub-license’. Companies must satisfy a variety of industry-specific conditions set by particular regulatory agencies in order to operate in conditional business lines. Accordingly, to build a successful business, investors should thoroughly acquaint themselves with the laws in order to properly prepare for the formation of a ‘conditional lines’ company.

(Part 2 of this article shall discuss about choosing the right type of company for investors)

Time of writing: June 18, 2021

The article is based on the current law at the time of recording as above and may no longer be relevant at the time readers access this article due to changes in applicable law and specific cases. that the reader wants to apply. Therefore, the article is for reference only.

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