Vietnam remains open to foreign direct investment (FDI), and the government has implemented policies that are generally favorable to incorporate abroad companies in Vietnam. Factors such as ongoing economic reforms, participation in new free trade agreements, a young and increasingly urbanized population, political stability, and competitive labor costs have all contributed to Vietnam’s appeal to foreign investors.
Before embarking on your investment journey in Vietnam, it’s crucial to be aware of certain considerations. We have identified the top seven points that we believe are essential for foreign investors to understand. Familiarizing yourself with these key factors will enhance the effectiveness of your market entry strategy and potentially save you money.
Investment Incentives
Numerous businesses in Vietnam are eligible for tax incentives, particularly those involved in social development or high-technology sectors. Projects in the following areas may qualify for investment incentives, which can include reduced corporate income tax rates, import tariff exemptions, and favorable land rental rates: high-tech industries; research and development; new materials development; energy production; clean energy technologies; renewable energy projects; energy-efficient products; automotive manufacturing; software development; waste treatment and management; primary or vocational education initiatives.
Furthermore, foreign investors are exempt from import duties on goods imported for their exclusive use when such goods cannot be sourced locally. These include machinery, vehicles, machinery and equipment components, spare parts, raw materials, inputs for manufacturing, and construction materials. Additionally, remote and mountainous provinces have the authority to provide supplementary tax breaks and other incentives to attract potential international business formation in these areas.
In the manufacturing sector, many industrial parks offer lower rental rates and, in some cases, waive certain utility fees as part of their efforts to attract foreign investment into their local economic zones. It’s important to note that these incentives are subject to change and may vary from one province to another.
The legal transformation toward foreign investment from 2021
Vietnam’s legal system includes provisions aimed at encouraging foreign investment. The New Investment Law of Vietnam, which came into effect in 2021, has introduced a “negative list” approach to foreign investors. Under this approach, foreign businesses are generally permitted to operate in all sectors except for six prohibited ones, which include activities related to illicit drugs, wildlife trade, prostitution, human trafficking, human cloning, and other commerce linked to illegal activities.
Furthermore, the new Investment Law has streamlined the non-domestic company incorporation process by implementing an online application system and eliminating or relaxing certain business requirements. However, it introduced National Security as one of the criteria for local government approval of foreign investments. This addition temporarily caused delays in processing paperwork for a few months as the Department of Planning and Investment (DPI) needed time to figure out how to evaluate this factor. Consequently, many out-of-country companies’ registrations in Vietnam were delayed for weeks without receiving approvals during that period.
Incorporation timeline
The Law on Investment 61/2020/QH14 also stipulates that foreign and domestic investors should receive equal treatment in cases of nationalization and confiscation. However, there are differences in the business-licensing processes and restrictions between foreign and domestic investors. Vietnamese companies with a majority of foreign investment are subject to foreign-investor business-license procedures. While it takes only 1 week to establish a 100% local company, the timeline for an overseas business setup in Vietnam is typically 4-8 weeks. It can be longer if the business falls into Conditional and Restricted business categories in Vietnam.
Capital Investment
According to the law, the injected capital is accessible and can be used for the benefit of the company. This means that the capital you invest can be used to cover expenses such as company rent and employee salaries. If you have used up all of your capital and need to inject more, you will need to amend your business license, which can take some time.
You are only required to inject capital after the company has been successfully established. You have a three-month window to do this. However, it’s important to note that if you miss the deadline for capital contribution, the company may be forced to close, or you may face a significant penalty if you request an extension.
While many businesses do not have a minimum capital requirement, having a substantial amount of capital can be beneficial if you intend to use the company to sponsor your investor visa. Some specialized businesses may require a specific amount of capital. Therefore, it’s advisable to consult with Iris International before making a decision.
Employment Policies and Practices
Recruiting staff in Vietnam can pose challenges for many foreign companies due to language and cultural differences. Additionally, Vietnam’s labor law is known for being quite stringent when it comes to resolving employment disputes. While a new labor law that came into effect in 2020 introduced some changes that give both employees and employers more flexibility in terminating contracts, significant hurdles still exist.
Vietnamese law specifies that employers can only hire foreign nationals for high-skilled positions such as managers, managing directors, experts, or technical workers. Local companies are also required to demonstrate that their efforts to hire suitable local employees were unsuccessful before recruiting foreigners. This justification must be approved in writing by the local authority and/or the national government. However, this requirement does not apply to board members elected by shareholders or capital contributors.
In recent years, the government has issued decrees aimed at simplifying the process for foreign investors and workers to obtain visas, work permits, and residence permits.
Tax compliance
Vietnam has a unique tax and accounting system that is highly localized, requiring the use of a separate reporting system. All tax reports must be prepared in Vietnamese and comply with VAS (Vietnamese Accounting Standards).
Depending on the volume of transactions, a company may have either a monthly or quarterly reporting cycle. However, even in months with no activity, tax reporting is still required by default. Failure to submit reports on time or missed submissions may lead to consequences such as the blocking of the tax code, financial penalties, and the need to go through a process to unblock the tax code.
Companies opened in Vietnam are also required to undergo mandatory annual audits of their financial statements.
Cost of owning a business
The costs associated with owning a business in Vietnam can be categorized into two main categories: establishment costs and post-establishment costs (or operational costs). Here are the key points for each category:
Establishment Costs:
1. State fees
2. Business address arrangement
3. Resident Representative (optional)
4. Service fee for the agency (optional)
5. Administrative fees (translation + notarization)
6. Capital investment (varies depending on the type of business)
Post-Establishment Costs:
1. Business license tax
2. Recruitment and hiring
3. Office setup
4. Tax and accounting compliance
5. Annual audited financial statement
6. Various taxes including Personal Income Tax (PIT), Value Added Tax (VAT), Corporate Income Tax (CIT), Foreign Contractor Tax (FCT), and import tax.
The exact cost of each item can vary, so it’s advisable to contact our consultant for specific inquiries and cost estimates.
Contact us for more information.
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