For the last 10 years, under an exponential increase in foreign trade and supply chain diversification, Vietnam has been identified as a key supply chain and export hub in the ASEAN region. Since then, foreign investors operating in trading have been entering the market in Vietnam consistently to conduct import-export activities, without any specific licensing restrictions in the majority of cases.
Many of these investors have taken the market entry route of establishing processing facilities in dedicated Export Processing Zones (EPZs). In this article, we seek to provide a clearer understanding of Export Processing Enterprises (EPEs) operations and the related benefits of these structures.
Requirements imposed on EPE
According to Decree 35/2022/ND-CP, an EPE is a company engaged in processing activities within an Export Processing Zone, Industrial Park, or Economic Zone (Non-tariff Zone). Processing activities refer to exclusive production for export, service provision for export production, and export-related operations. EPEs are entitled to special tax and customs incentives but must comply with strict regulatory conditions to maintain their status:
- The EPE must be physically separated from non-EPE areas with hard fencing and designated entry/exit gates.
- 24/7 surveillance cameras must be installed at entry/exit points and storage areas, ensuring full monitoring at all times (including holidays).
- The company must implement specialised software to manage duty-free imported goods and provide periodic reports on import-export-stock reconciliation to the customs authority.
To be officially recognised as an EPE, the company must complete company establishment procedures (obtain IRC and ERC), set up the factory to ensure compliance with the three mandatory conditions mentioned above, and submit an EPE Confirmation application to the Customs Sub-Department for approval. In practice, the EPE recognition process is time-consuming, often taking 2-3 months. Until the company obtains the EPE Confirmation, it should not import or start production.
Given the long processing time and strict compliance requirements, the company should carefully evaluate whether pursuing EPE status is beneficial compared to the tax incentives it would receive.
Tax benefit comparison
The below analysis provides an outline comparing EPE and Non-EPE companies in terms of import-export and VAT regulations, to assist international investors in deciding whether their Vietnamese entity should pursue EPE status.
Import & export duty
| Activities | EPE | Non-EPE |
| Imported material from overseas for manufacturing and export (Manufacturing-Export: Exporting products that are manufactured entirely or partially from imported materials to foreign countries or into a non-tariff zone) | Non-taxable (Art 2.4 Law on Import Export Tax) (Materials exported from domestic: export taxable) | Import tax exemption (Art 16.7 Law on Import Export Tax) (Material from local market: No import/export tax) |
| Imported material from overseas for manufacturing under the contract (Contract Manufacturing) | Non-taxable (Art 2.4 Law on Import Export Tax)
| Import tax exemption (Art 16.6 Law on Import Export Tax)
|
| Exporting final products
| Non-taxable (Art 2.4 Law on Import Export Tax)
| * In case of Manufacturing-Export: There may be an export tax under FTA(s) and WTO Commitment. Kindly send us the HS Codes of the finished products to assess if there may be any potential export taxes on your finished products. * In case of Contract Manufacturing: tax exemption (Art 16.6 Law on Import Export Tax). Of note, materials constituting the products that are domestically sourced and subject to export tax are not exempted from tax for the value of the domestically sourced raw materials. |
Regarding import tax, the benefits provided by Non-EPE and EPE do not have any significant gap. Nonetheless, EPEs are not subject to export tax under any circumstances, whereas Non-EPE may be subject to export tax depending on the HS Code of the products and Vietnam’s tariff reduction commitments under WTO and Free Trade Agreements signed with the importing country.
VAT compliance and exemptions
Regarding VAT, EPEs are not subject to VAT when importing raw materials or goods from overseas and are not required to declare or pay VAT. According to Article 5.27 of the Law on VAT, the company dealing in goods not subject to VAT is not eligible for input VAT refunds. Therefore, if a local company (non-EPE) provides services or goods to an EPE company but these services are used outside the factory premises of EPE or the non-tariff zone, the EPE company will not be eligible for a refund of the input VAT (e.g., taxi fees). In practice, the value of such input goods and services is usually insignificant.
| Activities | EPE | Non-EPE |
| Imported material from overseas for Manufacturing-Export – (A)
| Non-VAT (Article 5.20 of Law on VAT) | Non-VAT (Article 3 of Law on VAT) |
| Imported material from overseas for Contract Manufacturing – (B)
| Non-VAT (Article 5.20 of Law on VAT) | Non-VAT (Article 5.20 of Law on VAT) |
| Other services and goods provided by local companies that constitute the final product – (C) | VAT 0% (except for services and goods directly provided to the EPE but consumed outside the non-tariff zone, as stipulated in Article 9.1(b) of the Law on VAT) | Bearing VAT for all local procurement, but this could be refunded by the tax department, subject to meeting conditions. |
| Exporting final products – (D)
| Non-VAT (Article 5.20 of Law on VAT) | VAT 0%
|
In contrast, Non-EPEs may not pay VAT when importing raw materials for manufacturing export, but pay VAT for other services and goods provided by local companies. However, when exporting the final products, a 0% VAT rate will be applied. According to Article 13 of the Law on VAT, Non-EPEs may file for VAT refund if the refundable VAT amount exceeds 300 million VND. In practice, the procedures and time required to complete the VAT refund process can be lengthy.
| EPE | Non-EPE | |
| Pros | No VAT payments for (A), (B), (C) and (D) | Be entitled to a VAT refund for (C) |
| Cons | Not eligible for a VAT refund on (C) that are used outside the factory premises | – VAT payment for (C); – Time-consuming procedure to claim VAT refund |
Comparing the VAT schemes of Non-EPEs and EPEs, it is evident that EPEs hold a slight advantage in terms of VAT, as they are not required to pay VAT.
By understanding the requirements and benefits of EPE status, companies can make informed decisions about their operations in Vietnam. Vieter Vietnam is here to support businesses through the complexities of establishing and maintaining EPE status, ensuring compliance with local regulations and maximising the available incentives.