(Biz Hub)—Representative offices (ROs) typically have a limited scope of operations in Vietnam. Parent companies with an operations scope that includes purchasing goods, banking, placing manufacturing/processing orders and tourism tend to keep ROs around longer than parent companies that operate in the services, management consulting, technical consulting, manufacturing and trading sectors. Businesses that work in these sectors typically close their ROs and establish a legal entity (i.e., a completely foreign-owned entity, or a 100 percent foreign-owned enterprise (FOE)) to conduct business activities in Vietnam.
Since Vietnam promulgated its 2005 Law on Investments that applies to all foreign and local investors, and became an official member of the World Trade Organization (WTO) in 2007, the legal red tape involved in establishing a 100 percent FOE in Vietnam has lessened, increasing the number of foreign investors upgrading their ROs into 100 percent FOEs.
For instance, IBM initially established its presence in Vietnam in 1994 by setting up an RO, and upgraded it to a 100 percent FOE in 1996, establishing IBM Vietnam. Another example is South Korea-based Shinhan Bank, which entered Vietnam by creating an RO in 1993 before upgrading it into a branch in 1995. After Vietnam joined the WTO, the bank upgraded into Shinhan Bank Vietnam Limited in 2008, and it is now one of five fully licensed and completely foreign owned banks in Vietnam.
Evaluating RO operations
RO operations are usually reflected in the total number and value of its transactions, contracts and projects during any given year, in addition to the total number of its staff (both foreign and local workers). Moreover, an RO must completely comply with the relevant laws and regulations during its operation term, including compliance with the limitation of its operating activities, tax regulations (personal income tax for the chief representative and its employees), Vietnamese labor and social insurance laws, and submission of other periodical reports as made necessary by the relevant state authorities.
Reasons to upgrade
Depending on the case, businesses typically aim to upgrade their ROs into a legal entity (normally an enterprise) for the following reasons:
· ROs are not allowed to directly sign contracts with any clients without a valid power of attorney from the parent company;
· ROs cannot directly issue financial invoices;
· ROs cannot officially bid on projects that are only open to companies with permanent establishment status;
· ROs do not enjoy any tax, land or labor cost incentives;
· To take advantage of the ASEAN Free Trade Area; and
· To take advantage of and benefit from any of Vietnam's free trade agreements, such as:
o ASEAN–China Free Trade Area;
o ASEAN–India Free Trade Area;
o ASEAN–Korea Free Trade Area;
o ASEAN–Japan Comprehensive Economic Partnership;
o ASEAN–Australia –New Zealand Free Trade Area;
o Vietnam-United States Bilateral Trade Agreement;
o Vietnam-United States Trade and Investment Framework Agreement; and
o Vietnam-Japan Economic Partnership Agreement.
After spending time accustoming themselves to Vietnamese practices, many businesses find that they need to upgrade their RO into a 100 per cent FOE to take advantage of the benefits of being a legal entity. Once a legal entity is successfully established, the business can conduct profitable activities in Vietnam. Conducting business in Vietnam through a legal entity also allows investors to be more proactive in the local business community, resulting in increased trust from local partners.
From RO to…?
Normally, when an investor chooses to upgrade a business into a legal entity, they can choose to set up a branch, a 100 percent FOE, or a joint venture (JV) with a local partner(s).
If an investor wants an independent entity to operate in Vietnam, they will need to establish an enterprise as a joint stock company (JSC) or as a limited liability company (LLC). Choosing between these two will depend on the intended goals of the company, and the advantages offered by each structure. Depending on a number of factors, however, including the business plan and the relevant sector, investors might alternatively choose to establish a JV.
There are some sectors in which the establishment of a JV is required for foreign investors to conduct business, but these sectors periodically change based on Vietnamese State policy and the WTO's assessment of Vietnam. For example, manufacturing, trading and software design companies can currently set up with 100 per cent foreign owned capital, but the transportation services, advertising, tourism and travel sectors require JVs with a Vietnamese partner and a specific foreign-to-local capital ratio (decided on a case-by-case basis).
For help deciding which of these company structures is right for your business, and to fully understand the specific establishment procedures for the structure you end up choosing, foreign investors are encouraged to contact a Vietnam or Asia-based consultancy.
Procedures
Pursuant to the prevailing laws and regulations of Vietnam, there are no direct procedures to follow to upgrade an RO into an enterprise; the closing of an RO and establishment of a new company follow two completely different and independent procedures. If a foreign business chooses to set up a 100 percent FOE in Vietnam, it can do so while closing an existing RO.
ROs and companies are subject to the management of different state authorities (i.e., the Department of Industry and Trade and the Department of Planning and Investment). Furthermore, different types of ROs are subject to the management of specific authorities, such as the State Bank of Vietnam for ROs in the banking industry, the Ministry of Education and Training for ROs in the education industry and the Ministry of Information and Communications for ROs that act as publishers/distributors.
An RO and a company can also close their operations simultaneously, provided that the chief director of the RO is not also the company's legal representative. The procedures to close an RO are regulated by the Ministry of Industry and Trade, and implemented by the Department of Industry and Trade in each respective city where an RO is located.
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This article was first published on Vietnam Briefing.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia.
For further details or to contact the firm, please visit www.dezshira.com.