Please first read this post What Are Major Forms of Commercial Presence in Vietnam? to understand major forms of commercial presences available in Vietnam as well as their pros and cons.
For foreign investors who wish to know more about Vietnamese market before more substantial investment, a resident representative office (RO) could be the most convenient and practical means of initially setting up in the country. This is even more critical given that setting up other forms of commercial presence may be either complicated and time consuming (e.g. – formation of a corporate vehicle) or just impractical (e.g. – branches).
For ease of reference, major legal and practical aspects of setting up and maintaining operations of a RO in Vietnam is discussed in the Q&A format as below.
What is a RO?
Literally, a representative office is ‘a dependent unit of the foreign headquarter established in Vietnam to conduct market survey and a number of commercial promotion activities permitted by Vietnamese law’. In fact, a RO should be best described as a listening post and a liaison office of the headquarter which does not engage in any direct profit-making activities.
What a RO can do and what it cannot?
As a matter of principle, a RO can only do what exactly permitted by either Vietnamese law or described in its license. In essence, below is the list of what a RO can or cannot do.
|· Market research, market exploration and business support
· Execute contracts on behalf of headquarter [as authorized by the headquarter on case by case basis]
· Function as a liaison office
· Promote the formulation of projects
· Monitor and speed up the implementation of signed contracts with [local] partners
· Execute labor contracts with the RO’s employees
· Lease its office space and procure equipment and fixtures for the office of the RO;
· Open bank accounts in Vietnamese Dong or foreign currency for its administrative operations
· Register seal for its administrative operations
· Withhold personal income tax (PIT) of its staff and register its own tax code for the purpose of PIT payment
|· Buy or sell commercial goods (other than supplies and assets used in the office itself) or otherwise engage in trading/sales/service supply activities
· Maintain stocks of merchandise for any purpose rather than display
· Provide services as a profit center or profit-making activity
· Sign commercial agreements without ad-hoc authorization of the headquarter
· Display goods and introduce services of the headquarter at the RO’s office
Have all ROs fully complied with these above limited scopes of activities?
While most ROs tend to stick to what they are permitted, not quite a few are claimed to actually engage in direct profit-making activities by one way or another. For example, in many cases, ROs of foreign trading companies often share the same location with their local distributors, employ a large number of employees and effectively organize themselves as a full-fledged entity. Local distributors, many of which are led by persons nominated by the headquarter are essentially act as ‘zombies. This even resulted in an official letter of Ministry of Finance back to 2005 requesting ROs that generate revenues must declare and pay corporate income tax despite the general principle that ROs must not conduct revenue-earning activities.
Please see part 2 of this series at Representative Offices in Vietnam: Licensing Process, Tax Issues and Other Considerations.