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Thriving in international markets demands a meticulous strategic approach, and within the realm of Vietnam's economic landscape, the establishment of Representative Offices (ROs) emerges as a noteworthy alternative for Singapore investors, supplementing the conventional entity establishment route.
This series is made to scrutinize the regulatory frameworks governing their establishment, examining the legal intricacies that foreign investors must navigate. Furthermore, a thorough exploration of the advantages and limitations inherent in this approach will be undertaken, shedding light on the nuanced considerations that inform the strategic choice between a Representative Office and a conventional entity.
For the first part, we will have a deep dive into statutory provisions governing ROs in Vietn
am and a comparative chart with affiliated companies during the business expansion of investors in Vietnam.
What is an RO?
The characterization of a representative office of foreign traders in Vietnam lacks a specific definition within the legal framework. However, within the ambit of Vietnam's World Trade Organization (WTO) Commitment, a representative office is expressly delineated as "a subordinate unit of foreign enterprises, constituted under Vietnamese law with the primary objective of pursuing and fostering trade and tourism opportunities, yet precluded from engaging in direct profit-generating endeavors." Consequently, a Representative Office (RO) of foreign traders assumes the role of a dependent affiliate of foreign investors, operating under the delegated authority of the investors to safeguard their rights and associated benefits, albeit refraining from direct business activities.
Besides, under Vietnam law, the term "foreign traders," referred to herein as investors, designates traders who have duly established and registered their enterprises in adherence to the legal provisions of the jurisdiction where the foreign traders are established or acknowledged under applicable laws. It is imperative to clarify that the term "foreign traders" is employed inclusively, encompassing both corporate entities and individual investors. As long as they are legally recognized and established in their home country, investors are accorded the opportunity to establish a Representative Office in Vietnam, contingent upon compliance with the stipulated legal requisites. This regulatory framework has evolved since Vietnam's accession to the WTO, underscoring the nation's commitment to facilitating the establishment of Representative Offices for investors within an open-market paradigm.
Conditions to establish an RO
The establishment and operation of a Representative Office (RO) within the jurisdiction of Vietnam are contingent upon the fulfillment of specified conditions by prospective investors. These conditions are enumerated as follows:
Nationality Requirement: Investors must originate from countries or territories that are signatories to treaties recognized by Vietnam.
Operational Duration: Investors are mandated to demonstrate a minimum operational history of one year from the date of their establishment or registration.
Validity of Business Registration: The Certificate of Business Registration, or its equivalent document, held by investors must remain valid for a duration of at least one year from the date of submission of the RO application.
Alignment with Commitments: The operational scope of the prospective representative office must align with the commitments outlined in treaties to which Vietnam is a signatory. In cases of misalignment, approval from relevant Vietnamese Ministers is necessitated for RO establishment.
License History: Investors seeking RO establishment should not have incurred the revocation of branch or representative office licenses within the two years preceding the application date for the new RO.
Multiplicity of ROs: While investors possess the prerogative to establish multiple ROs, it is imperative to note that 02 ROs shall not be located in the same central-affiliated cities.
License Duration: The issuance of an RO license is limited to a maximum term of five years, though it should not exceed the remaining validity period of the Certificate of Business Registration, where applicable. This stipulation applies uniformly to both the initial issuance and subsequent extensions of the RO license upon expiration.
Rights and obligations of ROs
The ROs have the rights to:
Operate within the scope and duration stipulated in their establishment licenses.
Rent offices, rent and purchase equipment and facilities necessary for their operations.
Recruit Vietnamese and expatriate employees to work for them according to the provisions of Vietnamese law.
Open accounts in foreign currencies or foreign currency-based Vietnam dong at banks licensed to operate in Vietnam, and to be allowed to use those accounts solely for their operations.
Have seals bearing their names according to the provisions of Vietnamese law.
Other rights as defined by law.
The ROs shall oblige to:
Not directly conduct profit-generating activities in Vietnam.
Conduct commercial promotion activities within the scope permitted by laws.
Not enter into contracts, not to amend or supplement contracts already entered into by foreign traders, except where chief representatives obtain valid letters of authorization from foreign traders or other cases specified in point 2, 3 and 4 above.
Pay taxes, fees and charges, and fulfill other financial obligations provided for by Vietnamese law.
Report on their operations according to Vietnamese law.
Other obligations as defined by Vietnamese law.
Chief of ROs
The executive leadership within Representative Offices (ROs) assumes a pivotal role, with the Chiefs being entrusted with the responsibility for their actions and the overall operational conduct of the ROs, as explicitly designated and authorized by the investors.
In the event of the Chiefs' departure from Vietnam, they possess the authority, subject to investor approval, to delegate their rights and obligations to other individuals. It is noteworthy, however, that the Chiefs retain a measure of responsibility within the bounds of the delegated authorization scope, ensuring accountability even in their absence.
The delineation of roles is further underscored by the prohibition against the head of a representative office concurrently assuming certain titles. Specifically, the head of an RO is precluded from holding concurrently the following positions:
Head of a Branch: Concurrently serving as the head of a branch of the same foreign trader or another foreign trader is proscribed.
Legal Representative: Holding the position of legal representative for the same foreign trader or any other foreign trader is explicitly disallowed.
Legal Representative of a Vietnamese Business Organization: The head of an RO is barred from concurrently serving as the legal representative of a business organization established in accordance with the laws of Vietnam.
These provisions are instituted to uphold organizational integrity, mitigate potential conflicts of interest, and foster adherence to legal and operational norms within the purview of representative offices in Vietnam.
Comparison with company
In juxtaposition to conventional corporate structures, representative offices emerge as a pragmatic and more streamlined alternative, particularly when investors are at a juncture where the initiation of full-scale business operations in Vietnam is yet to be determined. The ensuing chart is proffered as a visual aid, meticulously delineating key considerations for investors contemplating the establishment of a representative office.
Representative Offices | Affiliated Entities | |
Pros | Simple registration procedures Obviate the necessity for investors to make capital contributions | Possessing legal capacity enables engagement in profit-generating transactions and the exercise of decision-making prerogatives in business affairs. |
Being exempt from tax declaration requirements and the submission of numerous annual reports, in stark contrast to corporate entities | The operational duration is capped at a maximum of 50 years, with provision for extension | |
Being exempt from the obligation to remit Corporate Income Tax (CIT) | Facilitation of financial transactions as long as the entities can provide sufficient documents for legitimate purposes | |
Fewer compliance procedures to be applied | ||
Can recruit employees and sign contracts for RO's operation | ||
Cons | Lacking the legal capacity to engage in profit-making transactions or make decisions | Entails additional procedural steps, with potential requirements for approval from higher authorities in certain scenarios. |
The operational duration is constrained to a maximum of 5 years, extendable as per regulatory provisions | Investors are mandated to substantiate their financial capability to contribute capital within a stipulated 90-day timeframe subsequent to establishment. | |
Adhere to more stringent regulations governing the money receipt and disbursement | Obliged to tax declaration and payment | |
Obliged to numerous reports, more compliance procedures to be complied |
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