If you’re looking to invest in a fast-growing economy with a strategic location and a young, energetic population, Vietnam is the place to be. In recent years, the country has become a magnet for foreign investment, and it’s not hard to see why. However, setting up a foreign company in Vietnam is no walk in the park. The legal and regulatory framework can be a bit tricky to navigate, especially if you’re not familiar with the Vietnamese business environment.
In this guide, we’ll walk you through the key steps and important things to keep in mind when establishing a foreign-owned enterprise in Vietnam. We’ll cover everything from picking the right business structure to getting all the necessary registrations and licenses sorted out.
By the end, you’ll have a clear understanding of what it takes to set-up a company in this promising emerging market.
Brief Overview of Vietnam as a Business Destination for Foreign Investors
Vietnam has become a prime destination for foreign investors, and several factors contribute to its appeal.
Vietnam’s economy has shown impressive resilience, with a GDP growth rate of 5.05% in 2023 and projections of around 6% growth in the coming years. Vietnam is expected to maintain one of the highest annual GDP growth rates globally over the next few decades, making it an attractive market.
Geographically, Vietnam is well-positioned in Southeast Asia, providing easy access to major markets like China, Japan, and other ASEAN countries. The country has also signed numerous free trade agreements, reducing barriers to trade and making it easier for foreign businesses to operate.
With a population nearing 100 million, Vietnam has a young and increasingly educated workforce. This dynamic labor pool is ready to meet the demands of various industries, making it an appealing option for companies looking to expand.
Despite uncertainties in the global economy, Vietnam continues to attract significant foreign direct investment (FDI). In 2023, registered FDI capital reached around $36.6 billion, the highest FDI capital in recent years. Global credit rating agencies have also taken notice, with Fitch Ratings upgrading Vietnam’s credit rating, which reflects confidence in the country’s economic future.
Importance of Understanding the Legal and Regulatory Framework
Vietnam has made significant efforts to reform its business laws and create a more competitive and attractive environment for foreign investment. However, the legal framework still requires further improvement to simplify regulations and address ongoing challenges faced by businesses.
The primary laws governing investment and business activities in Vietnam are the Law on Investment No. 61/2020/QH14 and the Law on Enterprises No. 59/2020/QH14. These laws apply to both domestic and foreign investors and cover various aspects such as enterprise law, tax law, competition law, and intellectual property rights law.
By familiarizing themselves with the legal framework, investors can ensure compliance with regulations, protect their intellectual property, and engage in fair and transparent business practices.
Understanding the regulatory environment also helps investors navigate administrative procedures, obtain necessary licenses and permits, and avoid potential legal issues.
Furthermore, staying updated on recent reforms and amendments to business laws is crucial, as Vietnam continues to streamline regulations and simplify administrative procedures to enhance the ease of doing business.
Consulting with legal professionals, such as Russin & Vecchi, or seeking guidance from government agencies can help investors stay informed and make informed decisions when establishing a business in Vietnam.
Key Laws Governing Foreign Investment
The legal framework for foreign investment in Vietnam is primarily governed by two pivotal laws: the Law on Investment and the Law on Enterprises.
Law on Investment
The Law on Investment (LOI) regulates business investment activities in Vietnam and specifies the rights and responsibilities of investors. The latest version, Law on Investment No. 61/2020/QH14, which took effect on January 1, 2021, introduced several enhancements aimed at improving the investment climate.
Foreign investors can participate in various types of investment, including:
- Incorporation of New Co: This involves establishing wholly foreign-owned enterprises or forming joint ventures with Vietnamese partners.
- Merger and Acquisition: Investors can acquire shares in existing Vietnamese companies.
- Business Cooperation Contracts (BCC): This allows collaboration with local partners without creating a new legal entity.
The current Investment Law allows Investors to invest in most industries in the Vietnamese market, except for those industries with limited market access or conditional businesses.
To operate in Vietnam, foreign investors must complete investment registration procedures which may be varied depending on the type of investment.
Additionally, foreign-invested enterprises must adhere to Vietnam’s commitments under international treaties, ensuring their activities are in line with these agreements.
Law on Enterprises
The Law on Enterprises (LOE) governs the establishment, management, and operation of businesses in Vietnam. The most recent version, Law No. 59/2020/QH14, effective from January 1, 2021, streamlines administrative processes and improves transparency.
In addition to the investment registration procedure, foreign companies are required to obtain an enterprise registration certificate from the provincial-level Department of Planning and Investment for specific activities, particularly in retail and distribution. This may also involve obtaining approvals from the Ministry of Industry and Trade for certain business operations.
Foreign enterprises are expected to prioritize hiring Vietnamese citizens and may only employ foreigners for positions requiring specialized skills that cannot be fulfilled by local talent. They must also comply with labor laws, including employee rights and obligations.
Additional Considerations
- Tax Obligations: Foreign companies must comply with local tax regulations, including income tax for both foreign and Vietnamese employees, as well as applicable export and import duties.
- Labor Regulations: In addition to hiring practices, foreign companies must comply with Vietnam’s labor laws, which cover aspects such as working hours, employee benefits, and workplace safety.
- Insurance Requirements: For certain special assets, enterprises must obtain insurance for property and civil liabilities from local insurance providers.
- Environmental Compliance: Companies are required to adhere to environmental protection laws to ensure their operations do not negatively impact the local ecosystem.
These laws and regulations establish a framework that encourages foreign investment while ensuring compliance with Vietnamese legal standards and protecting local interests.
Types of Enterprises
Foreign investors can choose from various business structures when setting up a company in Vietnam. The most common types are the Limited Liability Company (LLC) and the Joint Stock Company (JSC).
Each structure has its advantages and disadvantages, which should be carefully considered based on the business’s goals and requirements.
Limited Liability Company (LLC)
An LLC is a popular choice for many foreign investors due to its relatively simple and flexible structure. An LLC can be established by one or more investors, with the liability of each member limited to their capital contribution. There are two main types of LLCs in Vietnam:
- Single-Member LLC: Owned by a single investor (individual or organization).
- Multi-Member LLC: Owned by two or more investors, with a maximum of 50 members.
Advantages of an LLC:
- Limited liability protection for investors.
- Simplified management and operational structure.
- Lower minimum capital requirements compared to a JSC.
Disadvantages of an LLC:
- Limited ability to raise capital due to the restriction from issuance of shares.
- Restrictions on the transfer of ownership stakes.
Joint Stock Company (JSC)
A JSC is a more complex structure suitable for larger businesses and those planning to raise capital through public or private share offerings. A JSC must have at least three shareholders, and there is no maximum limit on the number of shareholders.
Advantages of a JSC:
- Ability to issue shares and raise capital from the public.
- Greater flexibility in transferring ownership.
- Suitable for larger-scale businesses and public listings.
Disadvantages of a JSC:
- More complex management and regulatory requirements.
Other Business Structures
In addition to LLCs and JSCs, foreign investors in Vietnam can also consider:
- Representative Office: An extension of a foreign company that can do market research and promote the parent company’s business, but cannot engage in direct commercial activities or generate revenue.
- Branch Office: An extension of a foreign company that can conduct business and earn revenue in Vietnam, unlike a representative office.
- Business Cooperation Contract (BCC): A form of investment where foreign and Vietnamese parties cooperate based on a contract, without forming a new legal entity. BCCs are common in sectors with foreign ownership restrictions or local partnership requirements.
The Process of Setting Up a Foreign Company in Vietnam
Establishing a foreign company in Vietnam involves navigating a series of legal and administrative steps. This guide outlines the step-by-step process to help foreign investors successfully set up their businesses in Vietnam.
Step 1: Pre-Investment Approval
Before initiating the company registration process, foreign investors must determine if their investment requires pre-investment approval from Vietnamese authorities. This is particularly essential for projects in sensitive sectors such as construction, transportation, and energy.
If approval is necessary, investors must prepare and submit the required documentation, which may include project proposals and financial statements, to the relevant authorities.
Step 2: Investment Registration Certificate (IRC)
Once pre-investment approval is secured (if applicable), the next step is to apply for the Investment Registration Certificate (IRC). This certificate is mandatory for all foreign-owned investment projects and confirms the investor’s right to operate in Vietnam.
The processing time for the IRC is typically 15 working days, although it may take longer for sectors not governed under Vietnam’s WTO commitments.
Step 3: Enterprise Registration Certificate (ERC)
After obtaining the IRC, the next step is to apply for the Enterprise Registration Certificate (ERC). This certificate is essential for legally operating the business in Vietnam.
The ERC application process usually takes between 3 to 6 working days.
Step 4: Post-Registration Procedures
Once the Enterprise Registration Certificate (ERC) is obtained, several crucial post-registration procedures must be completed to ensure compliance with Vietnamese laws.
These procedures are essential for the legal operation of the business and include the following steps:
- Obtain a tax code and register for Value Added Tax (VAT).
- Opening a company bank account (both a Direct Investment Capital Account and a Current Account).
- Create a company seal.
- Register for social insurance for employees.
Completing these post-registration procedures is vital for the lawful operation of the enterprise in Vietnam and helps avoid potential legal issues in the future.
Other Requirements for Establishing a Foreign Company
There are several other important requirements that investors must navigate to ensure compliance and successful operation.
Headquarters’ Location
Investors must provide a legal address for the company. This involves signing a lease contract and obtaining necessary legal documents, such as a certificate of land use rights. The competent authority will verify the physical location and related documentation during the licensing process.
Charter Capital and Financial Requirements
Vietnam does not impose a specific minimum capital requirement for most sectors. However, the registered capital must be sufficient to cover the business’ operational expenses until it becomes profitable.
Investors must demonstrate their financial capacity, often through bank statements, and are required to transfer the registered charter capital to the company’s account within 90 days of obtaining its ERC.
Compliance with Business Regulations
Certain business sectors may have specific restrictions or conditions that foreign companies must adhere to. Investors should ensure they comply with these regulations to avoid legal complications.
For instance, industries like finance, banking, and education may require additional licenses or approvals from relevant authorities.
Legal Representative
A company must appoint a legal representative, who is a resident of Vietnam. This representative will handle legal matters and ensure compliance with local laws.
Why Choose Russin & Vecchi?
For expert legal guidance, we at Russin & Vecchi are here to help. With a presence in Vietnam since 1966, we have extensive experience in the local regulatory landscape. Our team specializes in providing tailored legal support for both local and international clients, ensuring compliance and operational success.
We pride ourselves on being at the forefront of Vietnam’s development, assisting clients with everything from entry strategies to daily operations. With offices in Hanoi and Ho Chi Minh City, our strong team of four partners and twenty lawyers is committed to delivering high-quality, practical solutions.
With Russin & Vecchi, you can confidently navigate the complexities of setting up business in Vietnam with ease.
