Very often, while most foreign investors should have a general idea on how to invest in Vietnam, some, as I experienced, simply do not. Even so, there should be no harm if we take a closer and deeper look at investment avenues available to foreign investment.
In this post, I discuss major vehicles (or commercial presences) that a foreign corporate investor may choose to invest in Vietnam, namely
- A representative office of the headquarter (RO);
- A branch of the headquarter (Branch); and
- A wholly-owned subsidiary (or joint venture company) of the headquarter (Subsidiary)
It bears noting that there also exist variants of these vehicles. For example, a multi-national may choose to join forces with a local partner under a business cooperation contract (BCC for short) where parties basically form a non-legal entity business and share profits/revenues deprived thereof. Similarly, when it comes down to ‘Subsidiary’ vehicle, the investment can be effected via either a greenfield investment or an M&A arrangement including investment via funds. These particular variants will be analyzed in next posts.
For ease of reference, I would give a comparison of each of the aforementioned vehicles in the below table.
RO vs. BRANCH vs. CORPORATE ENTITY (THE SUBSIDIARY)
| VEHICLES
CRITERIA |
RO | BRANCH | SUBSIDIARY |
| Presence | Formal presence, 5 year term and renewable | Formal presence, 5 year term renewable | Formal presence, perpetually but in fact subject to projects’ lifespan.[1] |
| Legal entity status | No | No | Yes |
| Liability | Unlimited | Unlimited | Limited |
| Office | Lease property | Lease property | Lease or acquisition of property/land |
| Investor qualifications | 5 years of experience with the remaining operational term, if any, not being less than one year | Same as the Rep Office | No |
| Licensing steps | 1 step only | 1 step only | 02 steps (registering the project and establishing the project company) though basically done simultaneously. For M&A deals, the registration of project can be skipped. |
| Licensing period | Less than one month | In theory very similar to the RO. Nevertheless, as a matter of fact, the establishment of branch of foreign company is not welcomed, if not restricted. The only exception is branch of some special types of companies such as insurers or banks. | From two months to six months, depending on size and project’s nature |
| Licensing difficulty | Relatively straight-forward and simple | Extremely difficult in practice | Depending on specific licensing authorities and business lines registered but relatively straightforward |
| Labor | Direct recruitment and intra-corporate transferee | Same as the branch | Direct recruitment and intra-company transferees |
| Operation principles | Narrow i.e. – do what clearly stated in license | Narrow i.e. – do what clearly stated in license | Wide i.e. – do what the laws not restrict/prohibit |
| Business operations | |||
| *Research, market exploration; | Yes | Unclear, but presumably Yes | Yes |
| *Source business | Yes but limited to licensed activities | Unclear, but presumably Yes | Yes |
| *Function as an independent profit center | No | Limited as an dependent profit center | Yes |
| *Execute contracts on behalf of head office | Yes but with ad-hoc authorization of the head office | Yes but in line with activities listed in the operation license | Yes |
| *Liaison office | Yes | Unclear, but presumably Yes | Yes |
| *Autonomy | Limited | Limited | Relatively unlimited for wholly foreign owned company. Joint venture companies subject to parties’ agreement on veto rights |
| Tax liability
*Corporate perspective
*Individual perspective |
No
Yes |
Yes, corporate income tax, value added taxes, import duties, etc. Yes |
Same as branch
Yes |
| Market Access Costs | Moderate: Few thousand US dollars for licensing process + office lease + employment of local labor | N/A because as said the establishment of branch is not welcomed and may be impractical. | Generally higher but varies with scales of investment.
Rule of thumb is US$100,000 as minimum paid-up equity of service providers. Some entities in Ho Chi Minh City have paid up equity of US$50,000 only. |
| Having dependent units | No | No | Yes, representative offices, branches and business locations inside or outside the head office’s province. |
| Best suited for | *Research & investment preparations;
*Head office listening post; *Ongoing supports for sale of services/products in Vietnam; *Liaison with local partners/authorities. |
In specific sectors where the laws set out a special set of rules for market access such as financial companies, insurance companies or banks. | *Substantial investment;
*Profit making activities; and *Infrastructure and property development. |
| Conclusion | An RO’s operations are strictly limited to what clearly stated under Vietnamese law or its own license.
It is a popular way to set up an initial presence in Vietnam, either as a corporate listening post or to pave the way for more substantial investment. |
Not practically feasible due to the difficulties in applying for the branch of a foreign company. | While a corporate entity can do what an RO and a branch can, it may engage in profit making activities and act as an independent entity.
A corporate entity is best suited for substantial investment. |
***
[1] It is noted that although the investment project to establish a corporate entity in Vietnam has a term of 50 years or 70 years in special circumstances under the 2014 Investment Law, the corporate entity once established will de jure continue to exist after the investment project has expired. However, this company will de facto be dead without the attached investment project. It would then either need to undertake a different investment project or be dissolved.
