A flood of foreign businesses are setting-up shop in Vietnam, attracted by a technically-sophisticated workforce, close proximity to existing Sino-centric supply-lines, low-wages, and the country’s steady march towards capitalism.
Many top international brands have a lot (or most) of their manufacturing base in Vietnam. In addition, Vietnam’s burgeoning consumer-class, with its youth-heavy 99-million-plus inhabitants represent a massive opportunity to sell consumer goods and services — a market larger than France, Germany and the UK.
Have you thought of starting a business in Vietnam? In this post, we highlight 9 key distinctions and peculiarities about starting and operating a business in Vietnam as a foreigner, including topics like: business-formation, compliance, tax, statutory positions, terminating employees, and more. Especially, we highlight things that seem unusual and/or risky from a Anglo-American perspective.
1) Key Legal Distinctions Between Foreign-Owned and Vietnamese Businesses in Vietnam
Fortunately, there aren’t a lot of legal distinctions between foreign-owned vs domestically-owned businesses in Vietnam.
- Registration – Locally-owned companies must obtain an Enterprise Registration Certificate, which takes approximately 1 week and is not subject to discretionary approval by regulators. For entities with more than 50% foreign-ownership, there is an additional International Registration Certificate (IRC) which takes approximately 5 weeks for approval and is discretionary.
- Audit – Foreign entities, whether publicly-owned or privately-owned, are required to have their financial statements audited annually. Financial reports must adher to a unique Vietnamese accounting system which is neither GAAP and IFRS. Such audits are optional for domestically-owned businesses.
- Charter capital – While all Vietnamese businesses must be well-capitalized from the outset (read more below), foreign-owned entities have additional requirements: i) the amount of charter capital is higher than for local businesses, and ii) the charter capital must arrive from foreign sources and go through a specific Direct Investment Account
- Stricter listing requirements – In order to trade on a Vietnamese stock exchange, a foreign-owned entity must be more profitable, less indebted, and have better cash-flow than what is required of domestic entities (read more below).
- Local representative – A foreign-owned entity must have at least one local representative (link below) who is present in Vietnam year-round; they cannot be outside of Vietnam for more than 1 month a year.
- Foreign-ownership caps – There is a general limit of 80% foreign-ownership for most business-entities in Vietnam, but the limit varies widely by industry. Some examples of foreign-ownership caps by industry are: banks 30%; aviation 34%; land and sea transportation 49%; trading 100% (i.e. no cap); manufacturing 100%; education 100%.
- No foreign ownership industries – There are 25 lines of business that are excluded from any foreign ownership/investment, such as news-media, fishing, ship-dismantling, private security, public-opinion polling, and more. See the graph below.
- Byzantine business culture – The culture surrounding the “Vietnamese way of doing business” is often a source of surprise, confusion, risk, and competitive disadvantage for foreigners. Read our article dedicated to the topic: Business culture and ettiquette in Vietnam.
These stricter regulations have enticed many foreigners to establish businesses that are officially locally-owned, via a dubious structure referred to as the “Nominee structure” (like a trusteeship). Thereafter, the foreigner attempts to acquire their business later via M&A. However, this is significantly risky endeavour and get result in money trapped in Vietnam (read more below)
2) Capitalizing a Business in Vietnam
All legal businesses in Vietnam must be well-capitalized with charter capital within 90 days of the initial business registration. If not, the company is frozen. For foreign-entities, this charter capital must come from outside Vietnam.
Unlike other countries, a Vietnamese legal-entity cannot be formed on paper and then solicit capital investment (such as issuing shares or getting a loan, etc). Instead, a company must have an initial capital injection that is deemed reasonable by government authorities. For instance, the charter capital should be enough to cover operations for the first two quarters (at least), such as enough to pay employees, lease facilities, run operations, etc.
The amount of required charter capital is industry-specific. For small Vietnamese-owned service businesses, the amount could be as little as $500-$1000 USD. The equivalent for a foreigner could be $3,000-$10,000 USD. For distributorships, the capital requirement could be as high as $50,000 USD. For manufacturers, it will be between $50,000-$100,000 USD. The more complex and high-profile the industry, the more you’ll need to consult about the acceptable amount. The Vietnamese government will ultimately decide want is reasonable.
TIP: when applying for business registration, whatever charter capital figure is included on the application is a commitment: that amount must arrive at the business’s Direct Investment Account within 90 days. An accidental extra zero could result in the company being frozen; lacking a zero could have an application denied.
3) Getting Money In and Out of Vietnam
All foreign capital must enter Vietnam though a special Direct Investment Account at a Vietnamese bank. If not, money that has entered Vietnam outside of a Direct Investment Account will be very difficult to repatriate, due to Vietnam’s strict capital controls.
Direct Investment Accounts are special registered accounts used solely for foreigners to move money into and out of Vietnam. Domestically-sourced capital or loans must also move through a separate special purpose account.
Such special accounts can be used for:
- receiving charter capital
- paying for large foreign contracts
- remitting interest and principal to foreign-sourced loans
- paying dividends to foreign investors, and
- returning the profits from the sale of a business.
All these functions are not possible without a Direct Investment Account.
TIP: Money Stuck in Vietnam – Capital which does not arrive via a Direct Investment Account may be stuck in Vietnam. For example, it was once common for foreign entities to send money directly to a local nominee/trustee in Vietnam (which is actually illegal), who then formed the business under the guise of local ownership — the issue was that, upon sale of the business, the initial principal could not be sent outside of Vietnam, because it hadn’t arrived through the Direct Investment Account.
Vietnam has very strict capital controls. Locals cannot simply send money out of the country without an important and provable reason. Need to wire money your daughter studying in London? You better have official school enrollment documents, otherwise no! This may be why Vietnam has such high rates of crypto-currency adoption.
4) Business Structures in Vietnam
Vietnam has a few business structures that will be familiar to most Westerners, and a few novel structures, plus one illegal structure (the so-called “local nominee” structure) that is popular with foreigners. We discuss these further…
A once-common but illegal structure was the so-called “Nominee” structure, whereby a foreigner entrusted a local Vietnamese to assume full legal ownership of a business, thereby having a faster pathway to commercial activity and fewer regulatory hassles.
However, Vietnam has no concept of “trusteeship”, meaning that such nominees have literally been gifted the capital: the foreigner had no legal recourse to take back the money or control the business. The Nominee could literally walk away with the money!
Even assuming that a Nominee acts in good-faith and dutifully tries to remit profit and principal back to foreign owners, they’ll quickly hit the brick-wall of strict capital controls which prevents Vietnamese citizens from sending money abroad without proof of a legitimate reason, of which there are few. You better hope the Nominee has a bunch of children studying abroad in high-profile Western universities (a common avenue to get permission to send money out of Vietnam).
Many foreigners have de facto walked into a Nominee structure without knowing it, such as investing in Vietnamese real estate through a Vietnamese spouse. But once they sell the property and realize a gain — surprise! — they’ll quickly find that they can’t get the money out of Vietnam.
Sole Proprietorship (Quyền Sở Hữu Duy Nhất)
Much like in Anglo-American orbits, a sole-proprietorship is an unlimited liability structure without separate legal status from the sole-owner. This structure is off-limits to foreigners, as they themselves have no legal status in Vietnam to begin with. Therefore, we do not discuss this further.
Limited Liability Companies (LLC, Công Ty Trách Nhiệm Hữu Hạn)
A Vietnamese Limited Liability Company is the most common structure for foreign entries into Vietnam. Much like in the USA, a Vietnamese LLC caps the liability of the company to the capital of the company. An LLC can have a minimum of 1 owner and a maximum of 50.
Vietnamese LLCs cannot issue shares. Instead, owners own a percentage of the company based on the percent of initial charter capital they committed. However, an LLC has the ability to raise additional funds through a variety of instruments, such as issuing bonds, getting loans from domestic or foreign entities, etc.
Joint Stock Companies (Công Ty Cổ Phần)
Vietnamese Joint Stock Companies (JSC) are publicly-traded companies. They must have a minimum of three shareholders, but there can be an unlimited number of shareholders. However, many sectors have limits on the percentage of foreign-ownership, and these figures are frequently tweaked.
JSCs must have a board of management and an inspection committee. There are various statutory obligations regarding meetings and board structure, but in general these are much more lenient than USA listing requirements.
The diversity of share-classes and their structures is much more limited than in the USA. Vietnam recognizes: preferreds and common stock, dividend vs. non-dividend shares, voting vs non-voting shares. These have different prices, seniority and privileges.
In order to be listed on the Hanoi or Ho Chi Minh Stock Exchange, companies must meet various profitability requirements. For example: i) a company must be profitable for at least two consecutive years prior to listing; ii) a company must have a return on equity of at least 5% during the prior year before listing; iii) a company cannot have three years of losses, or will be delisted.
Foreign companies have even more stringent requirements. These requirements have resulted in a more tame IPO market: Vietnamese start-ups generally do not raise capital through IPOs. Alternatively, big Vietnamese unicorns are increasingly looking to IPO outside of Vietnam, such as Singapore or the USA (e.g. see VinFast).
Representative Offices and Branches
Representative Offices are a common market-entry structure for foreign businesses to gain a physical presence in Vietnam without actually incorporating in Vietnam. These are very limited in what they can do, but have lighter reporting obligations and no tax obligations.
A Representative Office cannot conduct commercial operations or support a commercial contract. They can employ people in pursuit of research and acting as a liaison office — think of them like an initial scout prior to the establishment of a proper commercial entity. In order to register a Representative Office, the parent company must have been in existence, abroad, for at least 1 year.
In the past, such offices were used for employing a lightweight (and illegal) commercial support staff — but there has been a crackdown on such uses. Now, most foreign businesses use the office as a stepping-stone to establishing a proper LLC.
A branch is another limited and restricted structure that is mainly used by financial institutions. Somewhat like RO’s, the branch must be backed by a foreign-owned entity that was already been in existence for five years.
Joint Ventures in Vietnam
A joint-venture is not so much an independent legal entity, but a commercial agreement between two already-existence legal entities.
5) Financial Reporting Standards in Vietnam
Not GAPP, not IFRS — the Vietnamese use a special accounting for filing financial statements with the government. The system is based on tax principles, and filing will coincide with quarter tax-remittance.
For foreign-owned private companies, the statements must be audited. Audits are optional for domestic non-publicly traded companies.
One weird quirk of the Vietnamese filing system is that there are only a few accounting software packages that the government allows companies to use for tracking financial information and filing. These software packages have special features such as the inability to go back and edited posted transactions. Furthermore, all transactions must be signed-off by the company’s Chief Accountant.
It is not unusual for foreign entities to use multiple accounting systems for their domestic needs, their operational needs, and for the Vietnamese government.
NOTE: The Vietnamese government has set a goal of transitioning to the IFRS tax system by 2025.
6) Local Legal Representatives are Mandatory for Foreign-Owned Business
Corporate entities do not have ‘personhood’ in Vietnam. Instead, there must be at least one local Legal representative who is appointed as the primary individual to represent the company. They are the key party to sign contracts on behalf of the company, it is they who exercise the rights and obligations on behalf of that enterprise, and control its assets. They also have the greatest person liability for noncompliance with laws.
Having a local representative is trivial for domestic companies, but for foreign entities: a legal representative must be physically present in Vietnam, without gaps longer than 30 day. If the legal representative is outside of Vietnam for more than 30 days, the company must appoint a new representative, or the company could be considered in breach of Enterprise laws.
A company can have more than one Representative, but at least one must be present in Vietnam.
Faux Local Ownership and Faux Representatives
In the murky world of shell companies and shady foreign owners, it is not uncommon for companies to find a local stooge to be the Legal Representative and be gifted minority ownership in the company (in order to abide by foreign ownership caps), all the while the real owners live abroad and maintain an arms-length relationship.
Theoretically, such underlings could liquidate the company and run with the cash, legally. In actuality, most don’t dare exercise their legal rights or seize the company reigns, least they suddenly find themselves prosecuted for a random revelation of corporate maleficence, or get a visit from the mafia.
Does this scenario seem far-fetched? We’ve personally known a junior translator who, by dint of her good looks and passiveness, became a nominal owner and representative of a foreign company in Vietnam with zero executive experience. She was paid a lavish salary to basically fill a seat, while the real bosses ran things from afar. However, this arrangement is far less dreamy than it may seem: if any thing went wrong with the company, it would be she (and perhaps the Chief Accountant) who’d suffer the consequences as the Legal Representative.
This is a very common and super-risky arrangement. Watch out for business consultants who may hint of such an arrangement.
7) Chief Accountants in Vietnam
One unusual statutory position in Vietnamese companies is the Chief Accountant. The Chief Accountant is the primary liaison with many government authorities and regulatory actors (e.g. it is their name registered on any corporate bank accounts). They are in charge of the company’s compliance with financial and accounting laws, and it is they who must sign-off on all financial statements, records, and transactional vouchers — even digital documents must be printed out and signed by them (which many find extremely tedious).
Many foreign-owned companies choose to outsource their Chief Accountant through an accounting services firm, rather than hire one directly. This can be an expedient option, because a Chief Accountant is required to kick-start the company’s registration with tax authorities and to open bank accounts (e.g. to received charter-capital).
However, one must beware of unqualified bench-warmers who may expose the company to significant risks. Theoretically, a Chief Accountant must: i) have a Bachelors degree in accounting; ii) have at least 2 years experience as an accountant; iii) have a certificate of Chief Accountant training, and iv) meet the ethical and knowledge/skill requirements of the laws.
8) Accounting for Expenses in Vietnam
When it comes to tax accounting for legitimate business expenses, most Western countries let businesses freely allocate their capital as they see fit; any unusual activity may trigger additional scrutiny by an audit.
In Vietnam, only “necessary” expenses, as judged by the government, can be claimed as deductible business expenses. A company must also have adequate documentation of the expense (invoices, receipts), including documentation about where the money came from (such as money-transit information).
Unfortunately, there is not a big list of government-sanctioned expenses that are considered deductible. The main government document “Article 4 of Decree 96/2015/ND-CP”, provides only three broad conditions about deductible business expenses:
- It must be an actual expenses incurred in connection with production and the business activities of the company;
- The expense must be accompanied with proper invoices and receipts, as prescribed by law.
- For expenses over 20 million VND (including value-added tax), the payment must be done via “non-cash payment voucher” (e.g. official cheques, bank vouchers, etc.) with details about the Value-Added Tax portion.
Generally, each Vietnamese tax consultant has their own informal list of low-risk deductible expenses, such as this list from ASL Law: Office expenses such as stationery, phone bills, or short-term supplies; utility bills and rent; travel expenses, including petrol and parking, tickets; employee compensation expenses such as wages and pension-payments; uniforms and personal protective gear; legal services and financial premiums such as insurance, accounting and bookkeeping expenses; advertising and marketing expenses; current assets such as raw materials and inventory.
When documenting business expenses, all invoices must be signed by multiple parties, especially the Chief Accountant. Expenses over 20 million VND require official bank-transfers.
The onerousness of expense-documentation has incentivized many foreign businesses to just try and pay for everything in cash and do (fake) invoicing later — however, this results in a lot of risk and loss of VAT credits.
9) Hiring and Terminating Workers in Vietnam
There are three types of labour agreements in Vietnam:
- indefinite-term employees (i.e. permanent salaried employees);
- definite-term employees less than 36 months (i.e. temporary workers);
- independent contractors.
One difference from other jurisdictions is that definite-term workers cannot be re-hired again and again, forever. Instead, after the second definite-term renewal, a worker can only be re-hired as an indefinite-term position (and thereby acrue all the perks that go along with permanent employment, such as restrictions in termination, severance benefits, and more). The two-term limit is meant to prevent employers from exploiting precarious contract-work in lieu of salaried employees.
There are exceptions for foreign employees, elderly employees, for whom a third renewal of definite-term contract is allowed.
Terminating Employees in Vietnam
It is theoretically difficult to fire permanent employees in Vietnam — an employer must seek approval of the Department of Labour, Invalids and Social Affairs with a legitimate business reason. Bizarrely, general lacklustre performance is not considered a legitimate reason for terminating a permanent employee in Vietnam.
A company can only fire a permanent employee “at-will”, without involving the government, under two circumstances: i) Force Majeure (an exogenous disaster impacts business, like a plant-fire), or ii) the company ceases all operations.
For employees who’ve worked for less than 12 months, a company has more latitude in firing therm without involving the government. However, there are still specific guidelines meant to narrow the applicability of just-cause terminations. Two written warnings are required, before resorting to termination.
Although the above restrictions make it theoretically difficult to terminate an employee in Vietnam, in reality, Vietnamese employees often feel like the opposite is true: they have very little recourse if an employer doesn’t follow the letter of the law. Instead, the norm is a wild-west of at-will firings and other under-handed insults. For instance, it is common for Vietnamese employers to be late in paying their good employees; how prompt do you think they will be for a bad employee who they want to leave?
One exception with the employee-employer power-balance is with foreign firms: many Vietnamese employees know that foreign entities lack deep personal connections with labour authorities, and therefore vulnerable: They cannot bend labour rules in the same way that a well-connected domestic company can. Pugnacious employees will use this as leverage to intimidate foreign employers: “if you fire me, I have connections in the government and they will make business impossible for you!“. This is mostly a hollow gesture, but you never know!
Severance in Vietnam
Officially, Vietnamese permanent employees who’ve been terminated are entitled a minimum of two months salary, plus one month for each year of employment.
However, good luck getting this from a Vietnamese employer. Unless they are a big reputable firm, it is a toss-up whether a terminated employee will actually their severance entitlement.
Ease of Doing Business in Vietnam
While Vietnam is not among the world’s easiest countries to start and conduct business, there is a lot of within-country variability among provinces. Any foreigner thinking of starting a business in Vietnam should carefully consider which province they want to choose as their home-base. In particular, one can consult the Provincial Competitiveness Index (PCI), which scores and ranks Vietnam’s 63 provinces by various ease-of-doing-business and transparency indicators.
Developed With the help of the US Agency for International Development, the index was once resisted by the government. Now, it is championed by the government and regional governments actively compete to boost their scores. Since 2014, the PCI become an official target for improving Vietnam’s business environment..
The PCI is based on surveys of over 13000 private businesses, annual. The survey includes measures such as:
- time and cost to start a new business
- land access and property rights
- costs of regulatory compliance
- informal charges (aka bribes and gifts)
- business support services
- quality of trained labour
… and more.
Resources to Start a Business in Vietnam as a Foreigner
The content in this post is primarily based on our experience in Vietnam and those of our colleagues. For more professional advice and consultation, please see the following resources:
- Acclime Vietnam – corporate services for foreign entities in Vietnam (they even have an English-language podcast).
- ASL Law – Vietnamese law firm specializing in doing business in Vietnam.
- Lawkey – Vietnamese legal and tax consulting for businesses.
- PCI – Index to compare Vietnam’s provinces in terms of ease of doing business, start-up costs, workforce training, and more.
- KPMG Vietnam – Risk and operations consulting.
- EY – Doing Business in Vietnam 2021 Report – overview of lVietnamese laws, taxes, and incentives for businesses.