Entering the Vietnamese Market

Vietnamese Market

Vietnam’s astonishing growth over the last 30 years has made the southeastern Asian nation an attractive and compelling target for international companies expanding into the region. From being one of the world’s poorest countries, Vietnam now ranks 38^th globally with Gross Domestic Product of 340 billion US dollars. Vietnam shook off the global trend in 2020 to increase GDP by 2.9% and it is expected to grow to 6.6% through 2021.

Vietnam’s transformation from a closed to a thriving low to middle-income economy has seen GDP per capita increase threefold over the last 20 years to almost US$ 3,000.

The country has become a leading economic force among the Association of Southeast Asian Nations (ASEAN) with Japan, China and South Korea being Vietnam’s leading trading partners in the region, from a list topped by the USA.

Vietnam’s rapid economic development has, however, seen some aspects slow to keep up with the pace, particularly regarding paying taxes and dealing with official and financial institutions, although the government is taking steps to improve these concerns.

Balancing these issues against the plusses means Vietnam remains a challenge for foreign companies planning an international expansion by establishing a subsidiary. Attempting to recruit staff in-country from thousands of miles away is hazardous. Migrating staff from the home country brings into play masses of red tape surrounding work permits and work visas.

Starting a Business into Vietnam

All companies starting a business in Vietnam – local or foreign – operate under the Companies Law, the amended Law on Investment, implemented from January 2021, and the Law on Enterprises. Foreign companies setting up branches or representative offices must comply with the Law on Commerce.

International companies moving into Vietnam typically choose a limited liability entity operating as a Wholly Foreign-Owned Enterprise (WFOE). Registration procedures include:

• Applying for an Investment Registration Certificate (IRC) from the Department of Planning and Investment (DPI). If business activities fall outside World Trade Organization agreements, obtaining extra licenses will prolong registration
• Obtaining a Business Registration Certificate (BRC) / Enterprise Registration Certificate (ERC) from the DPI. The certificate acts as the company’s tax number with the Vietnam Tax Department (Tong cuc Thue) and for following mandatory procedures with the Vietnam Social Insurance Agency (SIA) and the Ministry of Labor
• Complying with the 90-day limit to contribute capital

Foreign companies founding the subsidiary must supply their incorporation certificate, Articles of Association, list of directors and two of their most recent annual financial statements.

Setting up a WFOE as a limited liability in Vietnam requires:

• A minimum one ‘member’ or founder – as the term ‘shareholder’ is not used
• One resident director as the company’s legal representative
• A business bank account
• Approval for a Foreign Investment Certificate (FIC) with a minimum investment, typically
  US$ 10,000
• Bank document certifying deposit of capital
• Registered Vietnam address

Expanding Business into Vietnam

Opening a business in Vietnam brings issues. Moving staff across the word means lengthy processes to obtain visas and work permits. When employees are in place, who will handle payroll? How will your company deal with regulations on taxation, entitlements and benefits, termination, and severance?

Drawing up your expansion blueprint is not enough. Your business plan will have to answer all these questions.

In Vietnam issues surround not just the work culture, but also strictly applied taxation and employment laws, which can also be subject to collective bargaining, workers’ council, and trade union agreements. In this complex geographical and economic landscape where will you find distributors, manufacturers, and offices?

Vietnam Business Facts

• Capital – Hanoi
• Population – 98 million
• Regions – Mekong Delta; Northeast; Northwest; Red River Delta; North Central Coast; Central Highlands; South Central Coast and Southeast
• Official Language – Vietnamese
• Economy and world ranking – US$340 billion ranked 38th in the world
• Leading sectors – Service (41.6% GDP), industrial sector (34.5% GDP), agriculture (14% GDP)
• Main exports – Telephones, mobiles (21%), textiles (12%), computers/electrical equipment (12%), footwear (7%), machinery and instruments (6%)
• Main imports – Computers, electrical items, and parts (18%), machinery and accessories (16%), telephones/mobiles and components (8%), fabrics (5%), iron and steel (4%)
• Main trading partners – China, USA, South Korea, Japan
• Government – Socialist / communist and one-party, unitary state
• Currency – Vietnamese Dong VND

Advantages and Challenges of the Vietnamese Market

Advantages of expanding into the Vietnam economy include:

• Economics:  Steadily growing GDP is highlighting Vietnam as an emerging market and open economy, welcoming foreign investment
• International Trade:  Developing trade agreements with fellow Trans-Pacific Partnership nations and increasing cooperation with the USA
• Foreign Investment: The Laws on Enterprise and Investment favor influx of Foreign Direct Investment with the addition of tax incentives
• Young Employees: Youthful entrepreneurial population ideal for small and medium start-ups and hi-tech developments
• Expansion:  A gateway for international companies eyeing further expansion into southeast Asian nations
• Business Practices:  The World Bank marks Vietnam as improving in ease of doing business
• Payroll:  Vietnam has low labor costs

Challenges of expanding into the Vietnam economy include:

• Government Restrictions:  Foreign involvement in some sectors requires forming a joint venture partnership with a local company
• Red Tape:  Registering a business can take up to four months
• Business Operations:  World Bank ranks Vietnam outside the top 100 nations for ease of paying taxes and three other categories in their ‘ease of doing business’ report
• Taxation:  The standard Corporate Tax rate of 20% can rise to between 32% and 50% for some sectors involving mining, mineral resources

Limited Company / Subsidiary or Branch in Vietnam?

International organizations expanding into Vietnam typically choose to operate a limited liability subsidiary as a Wholly Foreign-Owned Enterprise (WFOE) rather than a branch. Different rules and registration requirements apply.

• A branch is registered with the Department of Industry and Trade; subsidiaries register with the Department of Planning and Investment
• A branch is not an independent legal entity and remains subject to the parent company; a subsidiary is a Vietnamese legal entity independent from the parent company
• A Vietnamese branch is restricted to five years of operation; subsidiaries can operate indefinitely
• Companies applying to open a branch must have been operating for at least five years; no such requirement for a subsidiary
• Start-ups can apply to operate a subsidiary, but cannot operate a branch
• Branches and subsidiaries are both Vietnamese tax residents and must follow full accounting requirements. Subsidiaries are taxed on their worldwide income

Subsidiaries can operate under a different name to the parent company and follow independent business activities.