Entrepreneurs, and those in the start-up community, are often conflicted as to when do they need to incur costs and incorporate/establish a formal entity for their endeavour. In Vietnam, this decision is further compounded by the high establishment costs, especially for foreign invested companies, together with the ongoing compliance costs and time requirements for maintaining a compliant entity in Vietnam.
Five key factors to help determine the need to establish your own company in Vietnam, particularly for entrepreneurs and start-ups in Vietnam.
1. You have employees in Vietnam
When you have put together a team in Vietnam, you will at some stage face the need to formalise their employment through a legal structure. Withholding and remitting the required Personal Income Tax, paying Insurances (which includes a pension plan, unemployment provisions, sick leave, workers compensation and maternity leave provisions), and being compliant with labour laws, leads to the need for a structure to engage staff. Although there are options for Vietnamese individuals to start a “household enterprise” (essentially, an unincorporated “sole trader”), there are significant limitations to the number of employees (10) and the operations permitted. The result is that a company establishment is a practical option in Vietnam, and is the only real option for foreign individuals. Do note that this will also permit the legal employment of other foreign individuals in Vietnam, which is a crucial need for many.
2. You have domestic sales/revenue in Vietnam and need to issue “Red” VAT Invoices
Local businesses in Vietnam require a VAT Invoice (locally called a “Red Invoice”) in order to claim expenses as tax deductible. As a result, local businesses are reluctant to buy goods or services from anyone unless they can provide a legitimate VAT Invoice. Once you have established a company, registering for taxes and VAT is relatively straight forward, and this permits the issuance of E-Invoices (electronic VAT invoices, issued via the Tax Office website), which will facilitate your ability to make local sales.
3. You are creating or acquiring assets in Vietnam, and you want to protect these for commercialisation.
Creating or acquiring assets in Vietnam, for example a brand name, a Vietnamese .vn website, or production moulds for a product, may necessitate a structure in Vietnam to allow you to protect and best commercialise these. In particular, a company owning these assets will allow you to more easily earn revenue from them (see point 1, above), and will ensure the assets sit within an investable structure which is crucial should someone wish to invest in your vision.
4. Foreign entrepreneurs wishing to stay in Vietnam long term
Foreign individuals who choose to base themselves in Vietnam, do so with the knowledge that immigration/visa laws do not provide long term certainty for their stay. However, where a foreign individual is listed as an owner of a Vietnamese company, they gain the right to hold a Temporary Resident Card (replacing the need for visas), and which have a term of up to 3 years. Whilst the foreign individual remains an investor, they can keep renewing the Temporary Resident Card indefinitely.
5. You are seeking to raise funding from external investors
External investors look for legal certainty and a vehicle to make returns, and the only way is to do this via an investment in a company. When an entrepreneur has a business or vision that is ready for investment, a corporate structure is almost exclusively required or created to facilitate the investment – be it by way of loans or equity. Without the corporate structure, investors have little comfort for their transparency or governance needs, and more particularly they don’t have any legal protection (for all parties) to fall back on – especially as they are looking to make a return in the future on their investment.
Looking forward, entrepreneurs based out of Vietnam and with a Vietnamese company, may be faced with the need to create or use an offshore structure (often via a Singapore or Hong Kong company, which will own all or part of their Vietnamese company). This need arises due to:
- Investors wanting a structure that is easier for them to invest into, and for future capital raising to be simply facilitated into. An offshore company may take a matter of days for an investment round to be processed and shares/structured debt issued, whilst the same process in Vietnam can take months.
- Using the offshore structure for non-Vietnamese trading activities is common. This allows the offshore vehicle to undertake regional (non-Vietnamese) sales, and to pay regional costs associated with those sales. If the regional sales occurred in Vietnam, repatriating funds to pay for foreign expenses can get difficult – especially due to withholding taxes and required documentation for foreign expenses, but also due to limitations on business licenses in Vietnam to what revenue streams, and therefore expenses, are permitted.
- The offshore structure may form a foundation for a regional corporate group. Given the difficulties (time and cost) in getting approval for outbound investment from Vietnam, the common approach is that the regional holding company (ie, Singapore) will hold the equity investment in other companies across the region as the group expands. The Vietnam entity simply becomes one of the subsidiary companies in the group (albeit, potentially the foundation and most important entity!).
- Exits are much simpler for the disposal of an offshore structure, compared to that of a Vietnamese structure. Foreign investors acquiring a Vietnamese structure need to deal with investment approval and registration process (which can take months, in practice), and tax clearance/remittance issues can arise. However, if an offshore entity is sold, the process (including the receipt of the profits by the sellers) can take days.