06 Jul REPRESENTATIVE OFFICE OR SUBSIDIARY OR BRANCH? HOW TO TRANSFORM BUSINESS MODELS IN VIETNAM
VIVA would like to share useful tips and lessons based on our practice service for thousands of cases regarding how to transform representative office in Vietnam into subsidiary company.
Vietnam joined the World Trade Organization (WTO) in 2007, since there, thousands of foreign investors have been investing in Vietnam in the form of foreign representative office as a probatory step. Despite many advantages, the representative office is no longer meet the business expectation of the investors and shall be transformed into a subsidiary company.
WHAT IS THE FOREIGN REPRESENTATIVE OFFICE IN VIETNAM?
Vietnam-based representative office of a foreign investor means a dependent unit, a lawful office in Vietnam, allowed to recruit staff to manage and promote sale contracts with local business partners, research and develop products, seeking opportunities for the purchase or sale of goods and provision of services… The expatriate employees who work for representative can obtain work permit and two years multiple visa (temporary resident card) for themselves and their family in Vietnam.
In fact, a representative office in Vietnam can enhance and support a lot for the parent company’s business, such as managing effortlessly, saving cost and avoid risky things from local compliance procedures: No corporate income tax, no accounting books, no financial statement, no independent audit required… And it is easy to be extended or terminated or dissolved.
WHY FOREIGN REPRESENTATIVE OFFICE IN VIETNAM IS NO LONGER EFFECTIVE?
There are several reasons why a foreign investor should consider the effectiveness of a foreign representative office in Vietnam:
- Could not directly conduct profit-generating activities in Vietnam. Not allowed to do any profitable activities (No trading, no provide service, no import-export goods, no inventory, no manufacturing…)
- Has no legal status, not to enter into contracts, not to amend or supplement contracts already entered into by foreign traders.
- Limit operating period for every 5 years.
- Could not transfer the ownership.
- Could not expand more office, branch.
- Only get paid from headquarter for limited activities of the office.
- Has to bear VAT as the end users, PIT, fees and charges, and fulfill other financial obligations provided for by Vietnamese law.
WHY A SUBSIDIARY COMPANY?
I. Vietnam top business opportunities
Foreign investors can grab more business opportunities in the Vietnamese market thanks to the current political and economic context in Vietnam. Transforming representative office in Vietnam into a subsidiary company might help foreign investors have more benefits and positive business development.
- Vietnam has been developing strongly after joining the World Trade Organization (WTO) since over 10 years ago thanks to the expansion of relations and reform policies. The admission to the WTO opened a wide door for the Southeast Asian country to enter the global playground.
- After 10-year membership, Vietnam has attracted over 22,000 foreign direct investment (FDI) projects with a total registered capital of nearly US$300 billion. Particularly, many global leading groups such as Samsung, LG, Toyota, Honda and Canon have selected Vietnam as a manufacturing base.
- Vietnam has already signed 12 bilateral and multilateral Free Trade Agreements (FTA) and concluded negotiations on the EU-Vietnam Free Trade Agreement (EVFTA) and the Vietnam-Korea Free Trade Agreement (VKFTA), including new-generation pacts with high commitments such as the Trans-Pacific Partnership (TPP) Agreement. Vietnam is also forging ahead with negotiations on four other FTAs, including the Regional Comprehensive Economic Partnership (RCEP), which is expected to become a century FTA stipulating all trade activities of the whole ASEAN region.
- Such agreements are opening up opportunities for Vietnam to develop stronger and have free trade relations with 55 global partners, including those in G7 and 15 out of the G20 members.
II. Your rights and chances
Transforming representative office in Vietnam into a subsidiary company guarantee your rights and chances in doing business:
- You can do full business activities such as trading, manufacturing, service… directly.
- No limit operating period.
- Open unlimited number of bank accounts, receive and payment domestic and abroad, transfer of profits to home country.
- Have full legal status and enjoy all rights of a business unit in civil administrative and business regulations such as ownership of properties, expand investment, open new branch, new factory, new office, invest in others business, transfer/sale the portions of capital…
- Enjoy the tax incentives -VAT refund, CIT exemptions, duty exemption on imported goods for manufacture of domestic exports…
- There is only Business Laws system, equal for both local and foreigner investors to do business in Vietnam, deals with the establishment, organization, restructuring, dissolution, and relevant activities of enterprises, including limited liability companies, joint-stock companies, partnerships, sole proprietorships, and groups of enterprises.
And other rights of a company in Vietnam:
- It has separate legal identity than its shareholders and directors.
- It has the rights of a natural person.
- It can sue and be sued in its name.
- It can purchase property and estates for its own use.
- Shareholders and directors’ liability extends only to their amount invested in the shares of the company.
- It is responsible for its own debts and losses.
- Shareholders can transfer their ownership in the company by selling their shares.
HOW TO TRANSFORM THE FOREIGN REPRESENTATIVE OFFICE INTO A SUBSIDIARY COMPANY?
Transforming representative office into subsidiary company should follow 2 key steps:
I. Firstly, Terminate – Dissolve – Closure foreign representative office
There are 03 key steps to shutdown a Foreign Representative Office in Vietnam:
- Prepare for the official dissolution decision and applications, and submit to the competent state agencies for closing any further obligation. This step aims to suspend, terminate any new obligation, especial for the tax reports and other compliance procedures. From the date of proper notice to the local competent state agencies, the office is in closing standby status.
- Collect, complete the compliance business records and arrange for any certificates of obligation completion. Especial for the liquidation of employment, the certificate of tax, social insurance. This is a legal requirement to guarantee that the office has no more pending obligation before allowed to closure under legal procedures.
- Upon the certificates of obligation completion, the office will closure the bank accounts, return the business licenses, return the legal stamp as the final step of rep office’s closing process. This is the final paperwork as completion.
In which, Step 2 is most complicated because of tax inspection procedures. The officers will review all the remittance transactions from head office, all the paid expenses to make sure things comply with local tax, anti-money laundry regulations.
There will be 02 options:
- Option 01: You can provide any business records to the officers and have to pay for any amount upon the officer decisions before obtaining the Completion certificate. The payable amount in this option, usually, is a huge and disaster amount.
- Option 02: You should #001 audit the business records and compliance reports in advance, #002 verify for the exists and risk, #003 fix the records to manage the final payable amount is optimal – reasonable – in a lawful manner.
II. Secondly, setting up a subsidiary company
There are 05 key steps to set up a FDI company in Vietnam:
1. Find a lawful location for your head office:
- Not all properties such as houses and office buildings can be used for office registration.
- There must be an official/ lawful rental contract.
TIPS: There are many investors who could not apply for investment license due to improper rental contract, despite the initial fees had been paid for decoration, makeover, etc.
Instead, you may use the same place as the representative office with a revised rental agreement.
2. Prepare the required legal papers:
- Make sure to have a checklist of required papers.
- Some papers from overseas should be legalized and translated.
- Some required papers are not standards and can be flexible.
- The governmental officer may value the ability of acceptance or rejection based on the submitted papers.
TIPS: You should know the list and legal requirement of each paper and prepare everything right from the first time.
Some assets from the representative office can be transferred to the company as contribution capital.
3. Apply for the investment license and enterprise registration:
- It might take months to obtain the licenses.
Depending on your business type and method of application, you may have to obtain one or all of these licenses: Investment license, Business registration certificate, Business license.
You should follow up and respond to any queries or questions from the officer.
In necessary cases, you may be required to contact with other governmental departments for explanation and getting approval.
- In case the application got rejected, the applicant has to submit the revised application again!
TIPS:The processing time may vary from 30 days to 6 months. Sometimes it depends on the right person and method that you seek for consultation.
4. Initial compliance procedures after obtaining the licenses:
- Registration for a legal stamp.
- Opening capital account, current account, paying up the capital.
- Initial tax declaration, labor declaration…
- And more than 05 other compliance tasks.
TIPS:Fail to complete these tasks properly, your business could not be operated! Some investor ignored these steps and had to face serious fines from the government.
5. Periodically line up compliance tasks with local regulations:
- Monthly, quarterly, annually tax tasks.
- Monthly, quarterly, annually employment – payrolls – compulsory insurances.
- Monthly, quarterly, annually for expat tasks.
- And more than 06 other compliance tasks.
TIPS: Business owners should monitor the execution of compliance tasks with internal management system and internal audit procedures. Do things right from the beginning can help business owners to avoid a long list of risks and optimize your compulsory payable amount.
Do remember to transfer your local staff and the chief of the representative office in Vietnam to the company with a new employment relationship. And remember to renew the work permit – temporary residence cards for your expatriate employees under a new company.
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