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

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

“In the recent investment report 2021 of the United Nations Conference on Trade and Development (UNCTAD), Vietnam ranked among the top 20 countries attracting most FDI in the world. For business expansion in Vietnam, investors can set-up subsidiaries to explore the market before establishing independent companies in Vietnam. Such subsidiaries and dependent entities are generally subject to fewer obligations than independent legal entities.”

Currently, there are two types of subsidiaries that foreign investors can consider: (i) representative offices and (ii) branches. To select the right type of subsidiary, let’s compare the basic differences between these two types.

 

CatalogRepresentative officesBranches
Licensing authoritiesDepartments of Industry and TradeMinistry of Industry and Trade
FunctionMarket research and several trade promotion activities.Carrying out appropriate purchasing and trading activities and commercial activities.
Signing business contractsForeign traders (parent company) must sign business contractsCan enter into contracts directly with partners
TaxMust declare and pay personal income tax on behalf of employees working at the representative office.

Corporate income tax

Value-added tax

Licensing fee

Import and export tax (if any)

Special consumption tax (if any)

Personal income tax paid on behalf of employees

Profit Not allowed to directly conduct profit-making activities in VietnamHas the right to carry out profitable activities and remit such profits abroad.
Term of operation licenseUp to 5 years, but not exceeding the remaining term of the business registration certificate or a document of equivalent value of the foreign trader, provided such document has provisions on the term of business registration.
Conditions of establishment

·        Foreign traders falling under the laws of countries participating in international treaties to which Vietnam is either a party or is recognized by the laws of those countries.

·        Foreign traders have been operating for at least one year from the date of establishment.

·        In case the foreign investor’s business registration certificate or equivalent document mentions the term of operation, such time limit must be at least one year from the date of application submission.

·        The operational agenda of the representative office must be consistent with Vietnam’s commitments in international treaties to which Vietnam is a party.

·        In case the operational agenda of the representative office is not consistent with the commitments of Vietnam or if the foreign investor is not a country or territory participating in an international treaty to which Vietnam is a party, the establishment of such representative offices must be approved by the ministries or heads of specialized ministerial-level agencies.

·        Foreign traders falling under the provisions of the laws of countries participating in international treaties to which Vietnam is either a party or is recognized by the laws of those countries.

·        Foreign traders have been operating for at least five years from the date of establishment.

·        In case the foreign investor’s business registration certificate or equivalent document mentions the term of operation, such time limit must be at least one year from the date of application submission.

·        The operational agenda of the branch must be consistent with Vietnam’s commitment to open the market in international treaties to which Vietnam is a member and with the business sectors of foreign investors.

·        In case the operational agenda of the branch is inconsistent with the commitments of Vietnam or if the foreign investor does not belong to a country or territory participating in an international treaty to which Vietnam is a party, the establishment of such branch must be approved by the Minister of specialized management.

Head person

The head of a representative office cannot concurrently hold the following positions:

·        Head of Branch of the same foreign investor.

·        Heads of Branches of other foreign investors.

·        The legal representative of that foreign investor or other foreign investors.

·        The legal representative of an economic organization established in accordance with the laws of Vietnam.

The Head of the branch cannot concurrently hold the following positions:

·        The head of the representative office of another foreign investor.

·        Head of representative office of the same foreign investor.

·        The legal representative of an economic organization established in accordance with the laws of Vietnam.

 

For an enterprise already established under Vietnamese law, expanding operations through the establishment of a representative office or branch is a simple procedure. However, for foreign investors, the establishment procedure is complex, especially for establishing a branch. The branch of a foreign investor must be approved by the Ministry of Industry and Trade along with compliance with strict conditions. Hence, usually the establishment of a branch takes a lot of time for the investor. Currently, to carry out business activities in Vietnam, establishing a business in Vietnam is preferred by foreign businesses because of the convenience of this method. Enterprises operating in only some industries must consult the Ministry of Industry and Trade. However, this does not apply to all cases.

Writing period: 30/08/2021

The article is based on applicable law at the time noted above and may no longer be relevant at the time the reader approaches this article due to the change in applicable law and the specific case in which the reader wishes to apply. Therefore, the article has only reference values.

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