The use of Representative Offices in Vietnam has traditionally been a common preference for many international groups seeking a physical presence in Vietnam.
However, in recent years there has been a noted push by Vietnamese authorities to decrease the use of Representative Offices, partly to negate the perceived tax avoidance opportunities that Representative Offices provide to their parent companies.
In 2016 we have seen two significant releases by Vietnamese Authorities that change the case for using Representative Offices in Vietnam for many, and we suggest international groups reconsider or review their current Representative Office operations in Vietnam. Further, we suggest that those seeking to open a Representative Office in Vietnam also reconsider this choice to ensure it remains appropriate given recent changes.
“In 2016 we have seen two significant releases by Vietnamese Authorities that change the case for using Representative Offices in Vietnam for many, and we suggest international groups reconsider or review their current Representative Office operations in Vietnam.”
The 2016 changes passed by Vietnamese authorities are both licensing related (additional limitations on permitted activities) and more stringent tax compliance and enforcement. Details of both these changes are detailed below.
The Vietnamese Government issued Decree 7/2016/ND-CP (“Decree 7”) on 25 January 2016, outlining updated rules for establishing a Representative Office in Vietnam for foreign companies, which came into effect on 10 March 2016.
Significant change
This Decree removed the ability of new Representative Offices in Vietnam of foreign companies 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”.
This is a significant and restrictive change, with the remaining permitted service lines for Representative offices under the Decree now being:
- undertaking market research;
- acting as a liaison office; and
- promoting investment opportunities for the foreign parent.
This change is significant in the Vietnamese context, as many Representative Offices are established to manage contracts with Vietnamese manufacturing or service partners. Foreign companies will now have to reconsider how they intend to structure their operations to manage these contracts when considering establishing a Representative Office in Vietnam, or renewing their existing license when it expires.
Taxation – official letter detailing permanent establishment risk for representative offices
On 23 June 2016, the General Department of Taxation issued Official Letter No. 2826/TCT-DNL which referred to implications of the Double Taxation Agreement (“DTA”) between Vietnam and Russia. However, it is the broader context of the Tax Office’s interpretation of Representative Office functions and its application of taxation laws that is of significant interest, particularly when combined with the effects of Decree 7.
Pursuant to this Official Letter, where a foreign organisation has a Representative Office in Vietnam and the Representative Office conducts commercial promotions such as marketing, client meetings with Vietnamese customers, participating in the negotiation of contracts, and monitoring or participating in the performance of contracts, then these activities may be treated as part of business activities and the foreign organization would be deemed to constitute the establishment of a Permanent Establishment (“PE”) in Vietnam.
The implications of having a PE in Vietnam is that the foreign organisation would be liable to tax in Vietnam on income attributable to Vietnam operations, defeating the purpose of establishing a Representative Office.
The application of this Official Letter would depend on the specific wording of each DTA, however the broad interpretation of the Tax Offices view should not be understated.