Vietnam has one of the fastest-growing economies globally as it is a strategic place for many foreign entrepreneurs to invest and expand their businesses. The economy is known for its relatively cheap but highly-qualified population and an appealing tax regime, attracting business people worldwide to set up a company.
Therefore setting up a subsidiary in Vietnam can be favorable to foreign businesses. There are different structures for setting up a business in Vietnam.
It's crucial to understand Vietnam subsidiary laws as Vietnam has strict requirements for foreign investments. Vietnam subsidiary law mandates an Investment Registration Certificate (IRC) for foreign investments in specific sectors as a part of licensing and approval processes.
Subsidiary registration in Vietnam is a straightforward process, but specific guidelines are for foreign-owned businesses. It's essential to understand the requirements and process of establishing a foreign-owned company in Vietnam.
What are the types of subsidiaries in Vietnam?
While Vietnam has 24 business subsidiaries, the most common types of subsidiaries are
- Limited-liability company (LLC)
- Joint-stock companies (JSC)
A limited liability company can have 1 to 50 members, including founders or owners. An essential point to note is that LLCs in Vietnam do not have shareholders. On the other hand, a Joint-stock Company must have a minimum of 3 shareholders, although a JSC does not limit the number of shareholders.
The 24 different types of business entities in Vietnam that are operated are –
Primary characteristics of Subsidiary defined by Vietnamese law:
As per Vietnamese law, a subsidiary (sub) is defined as a business entity or corporation that is partially controlled by another company or fully owned by an external entity. The external entity is termed the parent or holding company. The ownership stake of subsidiaries held by the parent company must be at least 51%.
The characteristics of a subsidiary in Vietnam are
1. Any ACDL Entity
2. Any Subsidiary of the Company that has any contract in connection with any
- ~Business activities involving, or relating to an ACDL Entity
3. Any Subsidiary of the Company that directly or indirectly has made an Investment in an ACDL Entity.
How to Setup a Subsidiary in Vietnam?
Incorporating a foreign subsidiary in Vietnam is similar to how you would ideally incorporate a new business in the country.
The steps to incorporate a foreign subsidiary in Vietnam are as follows
- Investment registration certificate
When a foreign-owned company registers a subsidiary in Vietnam, it is mandatory to have an investment registration certificate. Processing and issuing the IRS is done by the Department of Planning and Investment.
It takes 30 business days to receive an Investment registration certificate.
If no local laws or WTO agreements regulate foreign ownership in business lines (such as businesses with subsidiaries relating to agriculture, recruitment, or logistics), in that case, it will have a longer processing time to get the certificate.
However, the parent company must seek Ministry-level approval from one or more ministries in such cases.
- Business registration certificate
It is mandatory for companies and subsidiaries in Vietnam to obtain a business registration certificate (BRC). The Department of Planning and Investment is responsible for issuing a BRC.
An alternative name for BRC is also known as the Enterprise Registration Certificate (ERC).
- Payment of the business license tax and tax registration
Payment of business tax and registration of taxes is mandatory for the businesses. The requirement ensures that the businesses do their tax registration and pay the business license tax on time. The business license certificate number is the company's tax number. Companies must pay taxes for all their subsidiaries in Vietnam through an online system.
Companies must also submit tax declarations and reports through this system. Businesses must get an electronic signature to gain access to this system.
- Capital contribution
After receiving the business registration certificate (BRC), a foreign company setting up the subsidiary must make the capital contribution within 90 days. Failure to make capital contributions within 90 days will result in fines.
- Apply for sublicenses or permits (if applicable)
Company registration and setting up a subsidiary in Vietnam typically take one month (30 business days).
However, some companies need to apply for sublicenses depending on the business line.
In such cases, the registration process will take longer to process. A few examples of business lines that need sublicenses include
- ~Lodging Trading of special products or services
Certain businesses need to process additional permits. An example of such companies include businesses that distribute or sell cosmetics. Enterprises dealing with cosmetics must register their products earlier as the registration process takes a couple of weeks to several months.
Benefits of Setting Up a Vietnam Subsidiary
With Vietnam's growing economy, several benefits come with establishing a subsidiary in Vietnam. The most common benefits include
The Government's introduction of the 'Doi Moi' or 'Renovation' policy in 1986 pushed the economy towards an era of liberalization, modernization, and competitiveness in Vietnam. Vietnam was primarily an agricultural economy before the 'Doi Moi' policy. This policy ensured that the doors to equal opportunities in the industrial, manufacturing, and service-based businesses flourished, thus making Vietnam transition from an agricultural economy to an industrial market-based economy.
Vietnam's economic growth continues with the number of businesses and subsidiaries being established in the flourishing markets.
With the introduction of new economic policies and driven by the demands of domestic businesses and increased trade, Vietnam is experiencing a construction boom that aims at building better infrastructure. This is a crucial factor in the country's competitiveness compared to other developing economies. A keynote here is that the construction sector receives significant support from the Vietnamese government.
Vietnam has seen considerable investments in the manufacturing industry, especially in the electronics sector, making it an industry that continues to grow. With the sizable investments here, the manufacturing industry ranks the most significant contributor to Vietnam's GDP (marked at a 16.5% share in GDP in 2019). With this highly competitive sector, there has been sizable support for the Vietnamese Government's incentives.
Ease of Doing Business
The Vietnamese Government has made significant changes in the country's regulatory business environment to attract foreign investment and encourage entrepreneurial development. These improvements have made businesses across the globe establish and operate their subsidiaries in Vietnam.
The World Bank recently scored Vietnam as one of the most improved countries areas that include:
- Expanding the accessibility of notifications and information online
- Removing requirements that involve submitting hard copies of VAT returns. Businesses can now do this electronically.
- Lowering the cost of starting a business
- Reducing employers' contribution to the labor fund tax
Key Requirements for a foreign subsidiary in Vietnam
The key requirements for the incorporation of foreign subsidiaries in Vietnam involve
Vietnam's foreign ownership regulations allowing 100% foreign business ownership in most industries. The industries include
However, a few industries restrict foreign ownership, including tourism, logistics, and advertising. In such cases, foreign investors must have a Vietnamese joint venture partner.
For most business lines in Vietnam, foreign ownership is regulated by the World Trade Organization (WTO) agreements. However, some business lines are not regulated by local laws or WTO agreements. In such cases, you must take prior approval from the ministry involved in that industry.
Minimum capital requirement: Vietnamese laws have no provisions for minimum capital requirements for most business lines. However, the minimum capital invested must be enough to incorporate and must be self-sustaining to run the expenses of a subsidiary.
The Department of Planning and Investment assesses if your capital contribution aligns with your line of business. The majority of companies in Vietnam set a capital of USD 10,000. However, you can open a business service company with a capital as low as USD 3,000. A crucial area is a few business lines with minimum capital requirements.
These business lines include
- ~Vocational schools
- ~Finance, and Fin-tech
- ~Banking Insurance
- ~Real estate companies
- ~Language centers
- Your business capital should exceed equipment and setup expenses.
- Your Business Certificate will state your capital contributed. Changing this will also require amending your company’s documents.
Registered address: A foreign company must have a business address to incorporate a foreign subsidiary in Vietnam. Service-based businesses (such as consulting companies) can use a virtual office address. However, most business lines in Vietnam must have a physical location or office. A few business lines in Vietnam include restaurants, manufacturing, and retail trading. The Department of Planning and Investment verifies the registered address during the incorporation process. Submitting all relevant documents to prove your address is mandatory as it states your business location after incorporation.
Resident director: All companies in Vietnam must have at least one resident director. The resident director doesn't need to have residency status at incorporation, although a residential address in Vietnam is necessary.
Also, it is crucial to note that -
- ~If the director is also a founder, they would not be required to have a work permit. Instead, they must apply for a work permit exemption.
- ~However, a foreign national director and not a company founder will need a work permit in Vietnam.
The key requirements for company subsidiary registration in Vietnam that are defined as SMEs include:
- The maximum total capital for SMEs in Vietnam is VND100 billion or USD4.4 million
- Maximum total revenue (of the preceding year) shall not exceed VND 300 billion or USD13.2 million
Subsidiary Laws in Vietnam
The subsidiary laws in Vietnam governing LLCs are relatively complex. Numerous requirements must be complied with, which becomes a rather expensive and time-consuming process.
Even though Vietnam does not clearly outline a minimum capital requirement, it is mandatory to find investors to establish an LLC. Businesses looking to establish a subsidiary in Vietnam can choose a single investor or multiple investors. Multiple investors consist of at least two shareholders or more capped at 50 members. This gives an advantage for the company to operate as a completely foreign-owned enterprise or a joint-venture company that includes both foreign investors and at least one domestic investor.
The management structure must include
- ~A members’ council with a chairman
- ~A director or general director
- ~A controller,
However, if an LLC has more than 11 members, the management requirements include
- ~A board of supervisors
- ~A members’ council with a chairman
- ~A director or general director
- ~A controller
The board of supervisors must also be tasked with making decisions as they are all the capital-contributing members. Subsidiaries must prepare financial statements that include filing a balance sheet and profit and loss statements with the Ministry of Finance and tax authorities at the end of each financial year. Foreign-invested subsidiaries must submit an annual audit by an independent auditor located in Vietnam.
Corporate compliance in Vietnam involves the following:
- ~Accounting and tax reporting includes personal income tax, corporate income tax, and value-added tax
- ~Annual report (Audited): An independent Vietnamese auditing company must review the financial statements of subsidiary entities at the end of each fiscal year
- ~Compliance requirements with employment laws: Subsidiaries must have their employees registered with social insurance. Businesses also need to ensure that all foreign employees have the necessary permits to work in Vietnam.
- ~Annual business license tax payment: Companies and their subsidiaries must pay this starting in their second year of business
- ~Foreign investment reports: The report must include profits, losses, and expenses throughout the year
Timeline for subsidiary registration in Vietnam:
Registration takes 1 month (or 30 business days). However, the timeline for registration would vary depending on the business line and the industry in which the businesses operate. In such cases, the companies must apply for sublicenses, leading to a more extended registration period.
Cost of incorporation
The cost for incorporating a subsidiary would, on average, be at least VND 9,000,000,00, equivalent to USD410.00. The cost includes
- Authentication and photocopy of legal documents
- Registration and setting up a foreign subsidiary in Vietnam
- Posting up the contents of foreign subsidiary in Vietnam
- Cost of seal
- Attorney’s fees (if any)
In addition to the cost of setting up a subsidiary company in Vietnam, the foreign investors shall contribute charter capital (as prescribed). The cost of incorporation may vary depending on the location of the subsidiary.
Taxation of Subsidiaries in Vietnam
The major taxes relevant for foreign businesses and subsidiaries include
- Corporate Income tax (CIT)
- Value-added tax (VAT)
- Foreign Contractor Withholding Tax (FCWT)
- Special consumption tax
- Business license tax
- Stamp duty
- Personal Income Tax (PIT)
- Transfer Pricing (TP)
As far as goods are imported or exported, companies must also observe customs duties. All taxes in Vietnam are levied at a national level. There are no local or provincial taxes.
However, several other types of national tax may apply to a particular business depends on the industry the company operates.
Tax incentives for Subsidiary Company in Vietnam
There are a few tax incentives that subsidiaries owned by foreign enterprises have, that include:
- ~The incentives include subsidiaries in the industries, including education, health care, sport & culture, high technology, environmental protection, research and development, infrastructural development, and information technology.
- ~Eligibility to several forms of import tax exemptions, such as machinery and equipment imported for the formation of fixed assets
- ~Preferential tax rates consist of 20, 15, and 10 percent, lower than the respective preferential rates of 25, 20, and 15 percent applied to domestic subsidiaries.
- ~Entitlement to benefit from longer tax holidays, including a maximum four-year CIT exemption and a 50 percent CIT reduction
- ~Exemption of import tax on raw materials for projects in the especially encouraged locations was available only to foreign-invested enterprises.
Other Important Considerations
Planning well in advance will help in successfully establishing a subsidiary in Vietnam.
If the Vietnamese subsidiary has a non-resident director, it is important for the non-resident director to travel to and from Vietnam, ensuring all relevant laws are considered, setting up a business, running payroll, and hiring employees are critical. Considering all these factors set up a Subsidiary can often be expensive, so setting up a budget at earlier stages is crucial.
With Vietnam being one of the fastest-growing economies globally, it is an economy that is an emerging hub for setting up businesses and subsidiaries.
Starting a business or establishing a subsidiary in Vietnam is exciting for global companies. Form new relationships, onboard new team members, and introduce global horizons as an organization. However, the Vietnam subsidiary setup process can take time, from weeks to months.
Considering where to register a subsidiary and the business factors that align with the business vision is extremely crucial. Therefore, it is important to consider Vietnam's strict foreign investment requirements and understand Vietnam's subsidiary laws. Different regions and cities can have separate rules, costs, and availability that impact your company.
Therefore, partnering with a well-established partner like Multiplier can help expand and employ in Vietnam compliantly.