Assessing the operational role of representative offices

March 09, 2023 | 11:29
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Foreign corporations seeking to establish a commercial presence in Vietnam usually have two options by setting up a foreign-owned company or setting up a representative office.

The latter option, per the prevailing corporate practice in Vietnam, is suitable for foreign corporations (FCs) whose primary purpose is learning the market and wanting to minimise the risk of taxes exposure and trapped capital in Vietnam.

Assessing the operational role of representative offices
Loc Huynh - Associate, Dentons LuatViet

A representative office (RO) can offer market understanding and evaluation that may lead to market entry in Vietnam by setting up a foreign-owned company (FOC). But there are things to look out for, advantages of ROs compared to FOCs, general conditions of establishment, and practical notes for investors.

Such a RO only can provide a limited scope of operations and is only permitted to act as a liaison office, research the market in Vietnam, promote investment opportunities, employ individuals, and rent an office in Vietnam to perform these activities.

However, there are some significant limitations that the RO is restricted from doing. These are generating income in Vietnam, displaying/introducing goods and services of the FC without authorisation, displaying/introducing goods and services at locations other than RO’s headquarters, directly organising and participating in trade fairs and exhibitions, and subleasing the headquarters.

Instead of entering the market with an FOC without sufficient research and development over the market, risking operating loss or even budget deficit, ROs provide fast inception, no tax, and capital trap risk-free establishment to study and discover the market suitability and compatibility on the ground for any future market entry with an FOC.

Compared to an FOC, the RO has several advantages if it fully complies with the law. It enjoys fast inception when entering the Vietnamese market compared to establishing an independent subsidiary.

The official timeline for registering a RO is typically seven working days from the date of receiving the full application by an industry and trade department or the management board of an industrial zone/other special zones depending on location.

Meanwhile, an FOC needs 15 calendar days for an investment registration certificate and another three working days for the enterprise registration certificate. Both are necessary for FOC inception.

Since a RO shall not carry out any business in Vietnam, it does not need to pay any corporate taxes. It has no investment capital requirement, hence, unlike the FOC, there is no risk of having the capital trapped in Vietnam. Foreign investors who wish to establish a RO in Vietnam should note these conditions of registering.

If a FC is registered and recognised by countries/territories participating in international treaties to which Vietnam is a contracting party, has operated for at least one year, and its certificate of incorporation or equivalent document is valid for at least one year from applying, they are qualified to form a RO in this country.

Furthermore, not all individuals can be assigned or appointed to be the chief of the RO, which is mandatory to register and maintain its status. A chief cannot also concurrently be either the head of a branch in Vietnam of the same or another FC, the legal representative of any FC, or the legal representative of a business organisation incorporated by Vietnamese law.

In essence, if a FC, having been informed about the Vietnamese market through market research reports prepared by an RO, concludes that the market holds profitability potential and the legal framework in Vietnam aligns with their expected business lines, they may proceed to consider investing in Vietnam by completing the necessary procedures for establishing an FOC in Vietnam.

Meanwhile, there are permanent establishment risks in the establishment of the RO. From a tax perspective, if it performed any activities out of the allowed scope in the establishment licence (for instance, generating income activities), the tax authority could deem income attributed from the RO would be subject to tax in Vietnam, and the FC must bear this tax burden. Note that recent moves from the General Department of Taxation indicate that ROs are under the radar due to various inspections discovering that they had been used to avoid income taxes.

In addition, there are some obstacles for FCs in Vietnam. Firstly, if it originates from a country or territory not participating in an international treaty in which Vietnam is a contracting party, the establishment of a RO must be approved at the ministerial level. Getting approval from these authorities is considered difficult, especially for FCs from tax havens such as the British Virgin Islands or the Cayman Islands.

Secondly, the law requires a FC to operate for at least one year before opening a RO in Vietnam. This regulation is not suitable for the current situation, given that there can be cases of businesses taking off in less than a year. This regulation creates an undue restriction on attracting foreign investment to Vietnam.

By Loc Huynh

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