When foreign enterprises seek to establish a commercial presence in Vietnam, the most common approach used is to establish a foreign owned company in Vietnam as the appropriate vehicle. Usually this is the correct (or, often, the only) choice. However, representative offices can also be used in Vietnam as a suitable structure for establishing a commercial presence in certain situations.
There are significant misunderstandings though, when it comes to representative offices, which often come from a combination of historical laws and regulations which have since changed, and a desire to minimise taxes and trapped capital in Vietnam.
Representative offices in Vietnam provide a limited scope of operations, and based upon current laws and practices, are only suited to a restricted range of activities. This is a deliberate approach by the authorities so that commercial activities are undertaken through a taxable entity (usually a company).
What can representative offices do?
Representative offices of foreign corporations, which are registered in Vietnam, are permitted to:
- Undertake market research,
- Act as a liaison office, and
- Promote investment opportunities for the foreign parent.
In order to undertake these activities, the representative office can employ individuals (including foreign individuals) and rent an office within Vietnam. With recent banking changes, opening a bank account for a representative office is more challenging that previously (as the representative office is not a legal entity in its own right), but these can be arranged through the Chief Representative or the parent entity.
What are representative offices restricted from doing?
Changes from March 2016 removed the ability for representative offices to “monitor and promote the performance of contracts signed with Vietnamese partners or those relating to the Vietnamese market on behalf of its foreign parent.”
The effect of the above is that representative offices are not permitted to engage in commercial activities or support their parent entity with their commercial activities in Vietnam.
Further to this, there have been cases where the Vietnamese tax authorities have deemed representative offices to be undertaking commercial activities in Vietnam, thereby creating a Permanent Establishment and subjecting the foreign entity to taxation in Vietnam. Specifically, the authorities have deemed that where the representative offices in specific cases have been conducting “…client meetings with Vietnamese customers, participating in the negotiation of contracts, and monitoring or participating in the performance of contracts…” then those activities were deemed to part of business activities and therefore taxable.
Can representative offices be useful in Vietnam?
An example of the effective use of a representative office is where the foreign parent appoints an independent third-party distributor of products in Vietnam, through which the foreign parent directly liaises and negotiates. The local distributor is responsible for all commercial activities in Vietnam. The foreign entity can also establish a representative office in Vietnam, which monitors the market for further opportunities, and liaises/reports to the foreign parent with recommendations and actions to further their brand or product offerings in the country.
Representative offices are also an effective market entry mechanism, providing a method to create an initial formal presence in Vietnam which can legally employ staff. This allows the foreign entity to gain an understanding of the market, create strategies and use the representative office as a stepping stone to later establishing a foreign-owned company.
The historic yet common practice of (effectively) running commercial business operations in Vietnam via a representative office of a foreign entity are no longer something that should be considered. The representative office cannot be used to sign and participate in commercial activities, and the risks arising if it is deemed to be a commercial arm of the foreign parent are significant.
Those considering their market entry or corporate structuring strategies should keep the above in mind, and ensure any representative office structure is appropriate before going down that path.