Company formation in brief

Vietnam has embarked on a wide-ranging program of reforming its investment regulations to bring them in line with market economy. Carrying out a number of reforms was a condition for Vietnam's formal accession to the WTO. Recent improvements in the regulatory framework have affected numerous areas, including taxation, intellectual property, trade, price controls, accounting and foreign exchange controls. As for the concerns of foreign investors, fundamental changes occurred in 2005 when Vietnam enacted the Investment Law (“Investment Law”) and the new Enterprise Law (“Enterprise Law”). One of the key goals of those two laws is to provide an equal basis for all investors, regardless of their nationality. In contrast to the former practice, all investors are now subject to the same key laws, although in practice differences in treatment remain.

Investment Regimes and Guarantees 

As stipulated in the Investment Law, in terms of investment policy, the State ensures that all investors in all sectors of the economy and in relations between local and foreign investments have equal rights before the law. The State recognizes and protects the right of ownership of property, investment capital  and other types of income, as well as legitimate rights and interests of investors. The State also guarantees that the investment market would be open in accordance with the schedule of obligations provided for in international agreements to which Vietnam is a party.

In the process of accession to the WTO, Vietnam has ratified the TRIMS. In order to bring national law in line with the TRIMS, the Investment Law provides that the State will not make such requirements to foreign investors as: 

• Giving priority to procurement or use of goods or services of domestic origin;

• Export requirements or import restrictions;
• Balancing of foreign currency;

• Localization of goods produced;
• Achieving a minimum level of research and development in Vietnam;
• Providing goods and services in a specific location;

• Opening the head office in a specific location.

Although Vietnam began discussing bilateral investment treaties (BIT) only in the 1990s, by June 2013, Vietnam has entered into the treaties with 60 countries, including most of its special trading and investment partners. All BITs typically provide for: 

• National investment regime with certain exceptions;

• Equal and fair treatment;

• Most-favoured-nation treatment;

• Protection against nationalization or expropriation (permitted only in public interests and on an involuntary and non-discriminatory basis) and guarantee of immediate (without undue delay, including payment of interest) adequate (usually at the market value as of the date of publishing the expropriation decision) and effective compensation (which may be enforced and freely transferred);

• Rights to profits and assets repatriation;
• Applying to international arbitration.

Access of Foreign Investments 

There are three main legal sources that regulate restrictions on the access of foreign investments: (i) the Investment Law and related regulations; (ii) sectoral laws and regulations; (iii) specific commitments schedule in the area of services within the WTO. 

The Investment Law distinguishes three types of investment sectors: 

• Prohibited access sectors: investment in those sectors is prohibited to both domestic and foreign investors;

• Restricted access sectors: investment in those sectors is allowed under a certain condition both to domestic and foreign investors; and

• Restricted access sectors to foreign investors only: foreign investors are allowed to invest in those sectors only if certain conditions are met.

The Investment Act itself does not fully provide for the nature and extent of the restrictions, and most of the restricted access sectors are subject to stringent licensing conditions in most countries. The precise nature and extent of restrictions on foreign direct investment in restricted access sectors may also be found in sectoral laws and regulations. Typical restrictions include a shareholding of foreign ownership, a requirement to establish a joint venture, and restrictions on activities. 
In addition to the Investment Law provisions and the foreign investment access restrictions provided for by sectoral laws, Vietnam has made a number of specific commitments in the area of services provision in accordance with the WTO Schedule on the Performance of Specific Commitments in the Services Sectors (“Commitments to the WTO”). Under the Commitments to the WTO, Vietnam has to facilitate or remove restrictions on foreign direct investments in most services sectors within the time period determined in advance. Currently, many restrictions still remain, including in very important service sectors such as telecommunications, transportation and distribution. 

State Approval and Registration

The Investment Law and the Law on Enterprises have made a significant breakthrough providing a single legal framework for all investors and enterprises, regardless of their citizenship (foreign or local) and form of ownership (private or public).  However, the key aspect of foreign direct investment has not changed. All foreign investment projects still have to be officially approved by the administration in accordance with the certification procedure for obtaining investment certificates (“IC”). The certification process allows relevant authorities to assess whether proposed investments are in Vietnam's interests even if they meet all parameters, such as the economic sector, the project scope and the permitted foreign ownership’s share. 

There are three degrees of certification requirement that depend on three criteria: (i) investors’ nationality (domestic or foreign); (Ii) scope of investments; and (iii) sectors (with or without access restrictions).  Those three criteria are the basis for the investment to be made without formalities (only for small domestic investments), in accordance with the registration requirement, or to undergo a more stringent evaluation procedure. 

The procedure for obtaining ICs is complex and may require applying to some Government institutions at various levels. The authority to issue ICs has been decentralised and moved to the provincial level. ICs are now issued by the Provincial People's Committee and, if a foreign-invested enterprise is located in a free economic zone, the ICs are issued by the Administrative Committee of those special economic zones (industrial zone, export production zone, high-tech zone or economic zone). 

Forms of Investment

The Investment Law groups all forms of investments into two groups: direct and portfolio investments. 

Direct investments are a form of investment through which the investor invests his capital and participates in the investment management. Portfolio investments are a form of investment, as described below, without the investor's direct participation in the investment management. 

Key forms of the direct investment include: 

• Establishing of wholly foreign-owned enterprises (WFOE), or 100% local capital enterprises;

• Establishing of a joint venture by local and foreign investors (JV);

• Investment in contractual forms, such as: Business Collaboration Agreement (“BCA”); Build-Operate-Transfer (“BOT”) Contract; Build-Transfer-Operate (“BTO”) Contract; and  Build-Transfer Contract (“BT”);

• Purchasing shares or making a contribution (in the charter capital) to participate in the investment management; and

• Investment through merger and acquisition. 

Portfolio investment forms include: 

• Purchasing shares, registered share certificate, bonds and other securities;

• Investment through funds investing in securities; and

• Investment through intermediary financial institutions.

Establishing of a new commercial organization 

A WFOE is an independent legal entity established and owned by a foreign investor. It may cooperate with other existing WFOEs and/or foreign investors to establish another new WFOE. A WFOE allows foreign investors to have independence and full managerial control over the enterprise's business activities but at the same time, foreign investors have to be fully liable for the enterprise’s debts and obligations. 

Commitments to the WTO enable the establishing of a WFOE but not in all sectors of the economy. If access of investments is restricted by the Commitments to the WTO, a foreign investor should have a Vietnamese partner in the joint venture. In this case, a foreign investor must establish a JV with Vietnamese partners. The maximum foreign investor’s share in the JV depends on the economic sector. Typically, a foreign investor may hold a controlling block of shares, except in certain economic sectors where a foreign ownership limit is required. 

Like all commercial forms, a JV has both advantages and disadvantages. On the one hand, a Vietnamese partner can provide (as an input) his important relations with Government employees and customers, the knowledge of the local market, personnel and land use rights. On the other hand, a foreign partner in the JV will have less control over the company than in the WFOE. In addition, disagreements may and often do arise between local and foreign JV partners. Arguments in disagreements arise especially often when a foreign investor tries to increase his share in the company. If a dispute is not settled, the parties may have to liquidate the company at a material cost for all participants. 

Branches and Representative Offices 

The Vietnamese laws enable certain foreign commercial organizations establishing a commercial presence in Vietnam in the form of a branch or a representative office. Both forms must be licensed by the relevant authorities. 

A foreign company wishing to establish a representative office in Vietnam must be duly established for at least one year in accordance with the laws of its jurisdiction. Representative offices are not separate legal entities and therefore, may engage in activities to increase commercial transactions to the extent permitted by law only; they  may not carry out activities directly aimed at making a profit in Vietnam. 

Foreign commercial organizations may establish their branches in Vietnam in accordance with the Commitments to WTO and other international agreements to which Vietnam is a party. According to the Commitments to WTO, foreign commercial organizations’ branches may be opened in Vietnam only in certain areas at a certain stage of opening the market (for example, non-life insurance, securities, computerisation and related services, management consulting services, construction and franchising). 
Foreign companies’ branches differ from representative offices since branches may carry out commercial activities in Vietnam. In order to obtain a permit to establish a branch, a foreign company must be duly incorporated for at least five years in accordance with the laws of its jurisdiction. 

Investing in Existing Enterprises 

Investors may also choose to invest directly in Vietnam by purchasing unlimited shares in existing Vietnamese enterprises subject to the following restrictions: 

• The maximum share of foreign investments in public companies may not exceed 49%;

• The maximum share of foreign investment in companies in certain sectors is determined in special sectoral laws;

• In services provision sectors, the maximum share of foreign investment in enterprises should be consistent with the Commitments to WTO in services area; and

• The maximum share of foreign investments in 100% state-owned enterprises in the process of transforming state-owned enterprises into joint-stock companies is determined by the relevant law. 

Investment in contractual forms 

The Business Collaboration Agreement (“BCA”) is a written agreement between a foreign investor and a Vietnamese partner where its parties agree to collaborate in order to carry out certain commercial activities in Vietnam and to share proceeds or profits from such activities. Such form of investment as BCA is usually used to set up partnerships establishing no new legal entity but having a license to carry out entrepreneurial activities with respect to a specific project in Vietnam. The BCA has main provisions stipulated in the Investment Law and enters into force on the date of the IC issue by the competent Government authority of Vietnam. 

The Build-Operate-Transfer (BOT) Contract is a written document signed between the competent Government authority and an investor for the construction and operation of an infrastructure facility within a fixed period of time, and upon expiration of that period, the investor is obliged, without compensation, to transfer that facility to the State of Vietnam. 

The Build-Transfer-Operate (BTO) Contract is a written document signed between the competent Government authority and an investor for the construction of an infrastructure facility; Upon completing the construction, the investor must transfer the infrastructure facility to the Government of Vietnam, while the Government must provide the investor with the right of commercial operation of the facility within a fixed period of time so that the investor could return the investment and receive a profit. 

The Build-Transfer Contract (BTC) is a form of investment and is entered into between the competent Government authority and an investor for the construction of an infrastructure facility; Upon completing the construction, the investor must transfer this facility to the Government of Vietnam. In its turn, the Government must create conditions so that the investor could complete another project to return the investment and to receive a profit, or it must effect a payment in favour of the investor as agreed in the BTC. 

Foreign investors may enter into BOT, BTO and BTC contracts with competent public authorities for implementing infrastructure construction projects in various infrastructure sectors. However, the Government specifically “encourages” investment in infrastructure facilities, including roads, railways, air and seaports, water supply and waste management, power plants, and transmission lines. In accordance with legal regulation of the BOT, BTO and BTC contracts, the Government’s participation interest in a project may be up to 49% of the total investment. The foreign investors’ rights and obligations are regulated by executed BOT, BTO and BTC contracts. 

Corporate Forms 

Along with the Investment Law, Vietnam adopted a new Enterprises Law in 2005 which combines the legal regulation of all business entities regardless of their form of ownership.

Investors who decide to establish a legal entity in Vietnam may choose one of the following types of legal and organisational form: 

• limited liability company (LLC) which may have a single member (Single Member LLC) or more than two members (no more than 50 members) (Two or More Members LLC). One investor may establish Single Member LLC only. If there are two or more owners, the Two or More Members LLC form should be chosen.

• joint-stock company (JSC) must have at least three shareholders whose liabilities are limited by the capital share contributed by them. JSC may issue common shares and preference shares. JSC management structure is in line with international standards and includes general shareholders’ meeting, management board, general director and audit committee.
• unlimited or limited partnership. Partnership must have at least two persons as general partners (i.e., partners who are liable with all their personal property under the partnership's obligations). This requirement excludes partnership from the adequate investment instruments list.
• private enterprise (i.e. individual business) 

LLC or JSC are most likely to be the most suitable organizational forms for investors, especially for foreign investors who want to set up a JV or a WFOE in Vietnam. Both those legal and organisational forms protect their owners from obligations assumed by LLC or JSC. This means that owners may lose the capital they have contributed or pledged to contribute to LLC or JSC but they are not required to contribute other property for LLC or JSC debts. 

Banks and Finances

Vietnam’s banking and financial system consists of various credit and financial institutions, including banks, non-bank credit institutions, microfinance institutions and people's mortgage funds. Non-bank credit institutions include financial companies, leasing companies and other non-bank credit institutions. The limits and contents of each credit institution’s permitted activities depend on its form and are specified in the license issued to the credit institution. 

Banking activities in Vietnam are regulated by the State Bank of Vietnam Act and the Credit Institutions Act, as well as by a number of implementing regulations, circulars and decisions adopted by the Government, the State Bank of Vietnam (“SBV”) and the Ministry of Finance. 


Corporate Tax (CT)
Enterprises established in Vietnam and foreign entities domiciled in Vietnam are required to pay the CT on income generated worldwide. Foreign entities that are not domiciled in Vietnam are required to pay the CT only on  income earned in Vietnam. 

The CT rate applies to exploration, research and development of oil, gas and  other rare and precious natural items in Vietnam and varies depending on each specific project and commercial entity. 

The CT incentive is  preferential tax rates and the tax exemption period; the tax rate reduction is based on two criteria: incentive (or particularly incentive) sectors; and incentive regions (regions with difficult or particularly difficult socio-economic conditions).

Two preferential tax rates are applicable, respectively, for a period of 15 years and 10 years,  starting from the date of commencement of operations. When the preferential tax rate period expires, the CT is usually charged at the standard rate. CT payers may be entitled to the tax exemption or the tax rate reduction. The incentive depends on the combination of sector and region, if applicable. 

All commercial organisations are subject to VAT regardless of the scope or volume of sales of chargeable goods. Although the VAT is actually paid by the buyer of goods and services, the duty to include VAT in the cost of goods and services to be sold rests with the seller. In case of import sales of goods, the importer pays to the Customs the VAT along with import duties. 
The VAT rate depends on a specific type of goods and services. 

The 0% VAT rate is applicable to exported goods and services, including goods and services sold by companies which are not domiciled in Vietnam; goods processed for export; goods sold to duty-free stores; export services, construction and installation carried out abroad or for export and production companies.

The 5% VAT rate is applicable mainly to the economy areas related to the provision of essential goods and services, such as clean water, fertilisers, teaching aids, books, food, medicine and medical equipment, agricultural feed, various agricultural products and services, technical/scientific services, aqueous dispersion of rubber, sugar and its by-products.

The standard VAT rate is applicable to the activities that are not tax exempt or subject to the 0% or 5% tax rate. 

Import and export duty rates are often subject to change. Import duty rates are grouped into three categories: standard rates, preferential rates and special preferential rates.

Preferential rates apply to imported goods  from countries having the most-favoured-nation regime with Vietnam. After accession to the WTO, the most-favoured-nation regime rates are set in accordance with the Commitments to the WTO and applicable to goods imported from other WTO member countries. 

Special preferential rates apply to goods imported from countries that have special preferential trade agreements with Vietnam.

Foreign contractors doing business in Vietnam or having income in Vietnam without establishing a legal entity in Vietnam are subject to FCT. FCT is imposed on interest, remuneration, services, construction, administrative staff salary, etc. FCT is a combination of VAT (paid by the buyer, i.e. a Vietnamese company) and CT (paid by the supplier, i.e. a foreign contractor) which is imposed on a payment if the payment is made in Vietnam and not abroad. 

Depending on whether  foreign contractors accept Vietnamese Accounting Standards, the FCT may be used by settlement method or deduction method. 

There are good reasons for saying about Vietnam: doing business in Vietnam requires patience and even more patience. Vietnam is not a tax heaven or offshore jurisdiction, and a concept of Vietnam tax exempt company (and/or Vietnam offshore company, International Business Company, trust, foundation etc. registration) does not exist in Vietnam as such. A company formation in Vietnam could be arranged with a professional registered agent providing incorporation, virtual office and other corporate services in Vietnam. To set up a company in Vietnam is possible by correspondence, but to open a bank account in Vietnam will, most probably, require a personal visit.

Vietnam Double Taxation Agreements

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