Q&A – Vietnam Business Establishment and Operation
Market Entry and Business Establishment
Which is a better way of doing business in Vietnam? A representative office or a foreign-invested company in Vietnam?
A representative office of foreign companies is not allowed to perform profit-making activities, and their activities are limited to market research, business development, and other non-for-profit activities. In case you do not yet have sufficient information to make a decision to invest in Vietnam yet, it would be suitable foothold in Vietnam. Generally speaking, initial and operating cost of representative office are much lower than those of having a subsidiary company. On the contrary, having a subsidiary in Vietnam in the legal form of either Joint Stock Company (JSC) or Limited Liability Company (LLC) is a better form of investment for an investor who intends to do manufacturing in Vietnam or to conduct distribution activities (wholesale and/or retail). As long as you follow the local regulations, establishing a foreign-invested company in Vietnam gives you more flexibility in business activities although statutory compliance costs can be a lot higher.
When we think of exit costs, which is a better form of doing business in Vietnam? A representative office or a foreign-invested company in Vietnam?
It normally takes 3 to 6 months to close a representative office from the time of submitting an application for closure to completion. The most time-consuming process is the procedure to close the tax code (tax ID number) where you need to work with tax authorities until they accept the closure of tax code. Tax authorities audit tax returns filed in the past during this procedure.
In case of closing a foreign-invested company in Vietnam, you are given 2 options, namely sell or close. “Sell” means that you transfer capital investment or shares to other party or parties. After buyer and seller agree on transfer of capital or shares, they must amend investor information on the investment license and business license, and the seller files a CIT return on capital transfer, even if there is no capital gain.
“Close” means liquidation of the company, which usually takes more than 6 months, typically a year. As with the closure of a representative office, it takes time to finalize tax obligations in Vietnam and obtain an approval to close the tax code from the tax authorities. If the seller can find a buyer, the administrative process is normally quicker than the closure of company. In addition, given the time value and administrative cost, closure of a representative office is often considered less expensive. The information contained here is based on our experience. The length of closing process could be longer or shorter, depending on specific cases.
Employment and HR-related matters
How many local employees do we need to hire at minimum?
There is no minimum requirement. A company or a representative office can be operated by only one foreigner.
Are there any requirements (such as size of the company) in order to apply for a work permit for foreign workers?
No. The size of the company does not matter when you apply for a work permit for foreign workers. However, foreign employees must be in a good health condition, have clean criminal records, have some educational background and/or work experience in the area which the foreigner plan to work for and meet all other requirements. There are some exemptions from filing a work permit, such as an individual investor investing in a limited liability company where he/she works for.
Does a company need to pay compulsory insurance (health insurance, social security and unemployment insurance) for a staff during his/her probation period?
In case a probation contract is signed separately from the labor contract, the company does not need to pay compulsory insurance for a new staff during his/her probation period. Upon completion of probation period, if a labor contract is signed, the company can choose to pay compulsory insurance either from the effective date of labor contract or from the date of the probation contract (start date of probation period) retrospectively. On the contrary, if the probation period is stipulated in the labor contract, the company needs to pay compulsory insurance from the start date of probation period.
What is the basis of salary used to calculate social security insurance?
The basis to calculate compulsory social security insurance includes basic salary registered at the insurance office, but it is limited to 20 times of the basic salary (or 26 million VND effective from July 1, 2017). The salary above 26 million VND a month is not subject to social insurance.
From January 1, 2016 to December 31, 2017, the basis to calculate compulsory insurance includes both registered salary at the insurance office and salary-like allowances shown in the employment contract. After January 1, 2018, social insurance is calculated based on the salary, salary-like allowances as well as other amounts shown in the employment contract.
I am a foreigner and I currently work for a company in Vietnam. Do I need to pay compulsory health insurance?
Foreigners working for companies in Vietnam under an employment contract need to pay compulsory health insurance.
Can we make a company in, say, HCMC and establish branches in other municipalities/ provinces? What are the tax filing requirements for that case?
Yes, you can make a company headquartered in HCMC and establish branches in other municipalities or provinces. In terms of taxation, personal income tax (PIT) and value added tax (VAT) are, in general, declared at each jurisdiction the office locates. Therefore, if your head office is located in HCMC, PIT and VAT are declared in HCMC as well as in jurisdictions the branches locate. On the contrary, corporate income tax (CIT) can be declared in either of two methods: (1) HCMC head office declares CIT including branches in other municipalities/ provinces or (2) HCMC head office and branch offices declare CIT separately at each jurisdiction the office is located. In case a branch is established as a manufacturing site, tax needs to be allocated and paid to the local tax office where the branch (manufacturing plant) is located.
What type of tax returns do we need to submit monthly and quarterly?
Value added tax (VAT) is declared quarterly in case turnover declared in the previous taxable year is less than 50 billion VND. Newly established companies can declare VAT quarterly too. Personal income tax (PIT) is declared quarterly in case a company declares VAT quarterly, irrespective of the withholding tax amount. And if a company declares VAT monthly and the amount of personal income tax which the company must pay is less than 50 million VND in the first month the Company incurs personal withholding tax, the company can file and pay personal income withholding tax quarterly.
VAT is declared monthly in case turnover declared in the previous taxable year is 50 billion VND or more. Companies eligible for quarterly declaration can apply monthly declaration after informing tax authorities of applying monthly declaration in writing. Personal income tax is declared monthly in case the amount of personal income tax which the company must pay in the month tax obligations firstly arise is 50 million VND or more. Currently corporate income (CIT) tax return is not required to submit quarterly, but tax payment is still required if you have tax liabilities.
What is the tax rate in general in Vietnam?
Corporate income tax (CIT): 20% (from January 2016).
Personal income tax (PIT): Progressive rate from 5 to 35% is applied to salaries, wages and income from business for resident individuals. Flat rate of 20% is applied to salaries and wages for non-resident individuals.
Value added tax (VAT): 10% (this standard rate is applied to goods and services other than items listed below) 5% (water services, medical and educational equipment, etc) 0% (export of goods and services, sales of goods and delivery of service to EPE, international transportation service etc.) Exemption (land use right, financial service, computer software, education and training, etc.)
When is the deadline for monthly/quarterly tax returns?
The deadline for tax returns required to be submitted monthly is the 20th of the following month. And the deadline for tax returns required to be filed quarterly is 30th of the month following the quarter. For example, your January VAT tax return is due on Feb 20; while 2Q PIT tax return is due on July 30.
Who is treated as a resident of Vietnam for tax purpose?
In general, if one of the following criteria is met, you (non-Vietnamese citizen) are treated as a resident of Vietnam for tax purpose.
– a person who has been present in Vietnam for 183 days or longer in a calendar year or for 12 consecutive months from the day on which that person arrives at Vietnam
– a person who has either a permanent residence card or temporary residence card in Vietnam
– a person who rents accommodation in Vietnam under a contract or contracts that last 183 days or longer in total during the tax year (accommodation includes a house, an apartment, a hotel, a guesthouse etc whether they are rented by that person or by the employer)
Does our country have a tax treaty with Vietnam?
The following countries have tax treaties for the avoidance of double taxation (usually known as DTA) that have come into effect: Azerbaijan, Australia, Austria, Bangladesh, Belarus, Belgium, Brunei, Bulgaria, Canada, China, Cuba, Czech Republic, Denmark, Finland, France, Germany, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Republic of Korea, North Korea, Kuwait, Laos, Luxembourg, Malaysia, Mongolia, Morocco, Myanmar, Netherlands, New Zealand, Norway, Oman, Pakistan, Palestine, Philippines, Poland, Qatar, Romania, Russia, Saudi Arabia, Serbia, Seychelles, Singapore, Slovak Republic, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Tunisia, Ukraine, United Arab Emirates, United Kingdom, Uzbekistan and Venezuela.
Countries that have concluded tax treaties but have not manage to make them effective: Algeria, Egypt, East Uruguay, Iran, Kyrgyzstan, Macedonia, Mozambique, San Marino, Turkey, and United States.
I am a citizen of the United States (a country without an effective tax treaty in Vietnam) and I came to Vietnam in May 2015. I stayed in Vietnam for the rest of year 2015. My local tax accountant in US says I will need to pay personal income tax for year 2015 in US. Can I use tax credit for taxes paid in US when filing PIT return in Vietnam? I pay personal income tax, social security tax, Medicare tax and property tax in the US. Do I need to include payroll paid in US prior to coming to Vietnam (January 2015 to the day of arrival in Vietnam) when filing PIT return in Vietnam?
You need to file PIT return for the income earned on a world-wide basis. If you are from a country without a tax treaty in Vietnam, you need to include income earned in your home country prior to coming to Vietnam. So, for your case, you need to include income earned from January 2015. You can deduct personal income taxes paid on income earned overseas as tax credit with certain limitation. If you are required to pay compulsory insurance premiums required by the country where the person holds the nationality or works that are similar to that in Vietnam, such as social insurance, health insurance, unemployment insurance, professional liability insurance and other compulsory insurance, you can deduct such payments in PIT return. You can deduct social security tax and Medicare tax paid in US, but not property tax paid in US.
I am a citizen of a country that has a tax treaty with Vietnam. What is the main difference in tax treatment described in above question?
If you are a citizen of a country or territory that has entered into an agreement on double taxation and prevention of tax avoidance with Vietnam, you are required to calculate personal income tax from the month you arrived at Vietnam (if you came to Vietnam for the first time) to the month in which the labor contract expires and you leave Vietnam. So, you do not need to include salary paid in your county prior to coming to Vietnam.
The Parent Company pays moving expenses and provides housing and school allowances. How are these benefits treated in tax returns?
In general, moving expenses paid for foreign expatriates coming to Vietnam (not the expenses paid to go back to the home country) are non-taxable. The house rent paid directly by the employer on behalf of the employee shall be included in the taxable income according to the actual amount paid, which must not exceed 15% of the total taxable income (excluding house rent). If the tuition is directly paid by the employer and meets certain requirements, the fee for children of foreign employees in Vietnam to study in Vietnam is not taxable. Please note that if such rent or tuition was paid by the employee and was reimbursed by the employer, such expenses are treated as taxable income of the employee.
I am paid both by Parent Company and its subsidiary in Vietnam for my work in Vietnam. Tax is withheld for gross salary paid in Vietnam. Which form(s) do I need to use to file salary paid in my home country?
If the employer (company in Vietnam) pays PIT on oversea income for you, the payroll paid in your home country needs to be included in Form 02/KK-TNCN . In the case either your employer in your home country or you need to pay personal income tax on salary paid by Parent Company, you need to submit Form 07/KK-TNCN for salary paid in your home country and pay tax quarterly. At year-end, you need to file Form 09/KK-TNCN to finalize your personal income tax on a world-wide basis. If your employer does not take care of your personal income tax on income earned outside Vietnam, you are still responsible for your personal income tax.
Which documents to prepare and keep in order to make VAT deductible?
You need to keep the following documents in order to make input VAT deductible:
– Legitimate VAT invoices for purchases, receipts of VAT payment on imported goods, or receipts of VAT payment on behalf of foreign organizations, who do not have legal status in Vietnam, and foreigners who do business or earn income in Vietnam.
– Voucher of non-cash payment for the purchase that costs VND 20 million or more (VAT included) except for some specific cases.
– Contract and documents relating to customs clearance in case of import of goods
Can I write some acronyms or abbreviations in a VAT invoice?
In general, you are requested to write complete information in VAT invoices. However, if the information is too long to write, you can use some common acronyms, such as acronyms for city, district and industrial zone.
How should I cancel an issued VAT invoice?
If an issued invoice has not been given to the buyer, the seller shall void the invoice and keep the voided invoice. Then, the seller should re-issue a new invoice to the buyer.
If an issued invoice was given to the buyer and you noticed a mistake before the time that goods are delivered or services are provided, or before the time the buyer and the seller declare tax, the buyer and seller shall make an agreement to void the invoice. The seller obtains the issued invoice from the buyer, voids the invoice and keeps the voided invoice. Then, the seller should re-issue a new invoice to the buyer.
If an issued invoice is already given to the buyer and goods are delivered or services are provided, and seller and buyer already declared tax, the buyer and seller shall make an agreement, which states clearly the details of errors, and the seller shall issue an adjusted invoice to the buyer.
Can I issue a VAT invoice in English and in US dollar?
Invoices must be written in Vietnamese. If the seller has to issue an invoice in foreign language, foreign text must be placed to the right of the text written in Vietnamese in bracket or must be placed under the text written in Vietnamese. You should use a font smaller than the one you use for Vietnamese text. In case the seller has the right to sell goods/services and collect money in US dollar, the seller can write USD amount on the face of invoice with a description in Vietnamese (USD amount in Vietnamese language). Exchange rate between USD and Vietnam Dong is required to be written in the invoice in that case.
What is the tax status of an Export Processing Enterprise (EPE)?
Export Processing Enterprise is a company that operates within Export Processing Zone (EPZ) or a company that operates in an industrial park or a special economic zone and sells all manufactured products to a company that exports products to abroad. In general, if a company meets the requirements to be an EPE, it is exempted from value added tax (VAT) and import duties. An EPE does not need to file VAT returns since it is considered to be located in a “VAT-free” area.
What should I be aware of regarding to the tax regulation of fixed assets (plants, properties, and equipment)?
If an asset meets the following three conditions, it will be recorded as fixed assets.
– It is certainly possible that the use of asset generates future economic benefits
– Estimated useful life is equal to or greater than one year
– Price can be measured reliably and it must be 30 million VND or above.
As for depreciation methods, you can apply one of the following three methods. However, since the situation you can apply a method other than straight-line method is limited, the majority of companies has applied the straight-line method.
– Straight-line method
– Adjusted declining-balance method
– Unit of production method
Useful life is based on estimates, but the Ministry of Finance sets the standard useful lives for certain asset categories. Depreciation and amortization calculated in excess of the depreciation and amortization which is calculated by using the standard useful lives set by the Ministry of Finance is not deductible for CIT purpose.
What are the typical nondeductible expenses? Can we deduct entertainment expenses?
We site some examples of typical nondeductible expenses as follows:
– Salary, allowance, bonus, and other benefits that are not written in the labor contract, labor regulation, financial policy of the company and the likes of those.
– Expenses without VAT invoice and/or other supporting documents
– Expenses not related to business activities
– Depreciation expenses of fixed assets that are not used for business operation
– Depreciation expenses over those calculated using useful life stipulated by the Ministry of Finance
– Expenses for employee clothing without VAT invoice
– Unrealized foreign exchange loss resulted from year-end revaluation of asset items such as cash on hand, cash in bank, and account receivables.
You can deduct entertainment expenses (except for certain expenses, such as golf membership fee) as long as you meet the requirements to be deductible for tax purpose. There is no threshold for entertainment expenses to be deductible.
What kind of welfare costs can we deduct in CIT?
You can deduct welfare costs such as company trip expense, condolence payment for family members affected by natural disasters. You must obtain supporting evidence such as VAT invoice when paying to a supplier and you need to maintain internal regulations when paying directly to the employees. The total expenditures incurred in the tax year must not exceed the practical average 1 month’s salary in the tax year.
What are the conditions to deduct expenses for tax purpose?
Expenses must meet the following 3 conditions in order to be deductible for tax purpose.
– Actual expenses related to business activities
– Expenses evidenced with VAT invoice and other supporting documents
– Expenses with an evidence of payment for payments over 20 million VND (payments over 20 million VND need to be made via non-cash payment method, such as bank transfer.)
You must obtain and keep VAT invoice, payment evidence, and other supporting documents such as contracts. Please keep in mind that regulations in Vietnam are much more strict in terms of level of detailed requirements in supporting documents as compared with other countries, such as in US.
What do you need to prepare in order to deduct labor cost for tax purpose?
Nature of payments and amount must be written in the document such as labor contract, collective labor agreement, labor regulation, financial policy of the company. If there are variable payments (eg. performance-based bonus), you must stipulate the detailed method how to calculate the bonus amount in the document.
Is there a withholding tax requirement for an overseas company that conducts business with local Vietnamese companies? (Please also refer to the question that follows)
Yes. In Vietnam, withholding tax for an overseas company (located outside of Vietnam territory) is called “foreign contractor tax” (FCT). In case an overseas company signs a service contract with a Vietnamese company and provides service in Vietnam, Vietnamese company needs to withhold FCT on behalf of the overseas company, when paying fees to the overseas company. FCT consists of 2 components: CIT and VAT. The tax rate varies depending on the type of service the overseas company provides. The overseas company is charged for FCT regardless whether it has permanent establishment (PE) in Vietnam or not.
Are there incoterms we should pay special attention to?
Yes, when you import goods, you should pay attention to trade terms as well as service provision. When goods are imported from abroad to companies in Vietnam under the trade term of CIF or FOB without any service elements in the contract, such as installation service, the transaction is not subject to foreign contractor tax (FCT). However, if the contract includes incoterms that indicate the seller takes risk and responsibility for cost incurred in Vietnam, such as DDU (Delivered Duty Unpaid) or DDP (Delivered Duty Paid), the transaction as a whole becomes subject to foreign contractor tax. DDU or DDP indicates that the seller takes responsibility for domestic transportation in Vietnam, thus the seller is considered that it performs some service in Vietnam and the transaction becomes subject to FCT.
Accounting/ Financial Reporting
Does the fiscal year have to end on December 31?
No, it does not. Companies in Vietnam are allowed to select a fiscal year-end from the end of March, end of June, end of September, and end of December. If a company wants to select a fiscal year-end other than December 31, it must inform the tax authorities of selected fiscal year-end. In case the company does not inform it, the tax authorities consider December 31 the company’s fiscal year-end.
Can we use accounting software from my home country?
Yes, you can. However, the chart of accounts, accounting books and financial statements exported from the accounting software must comply the Vietnamese Accounting Standards (VAS). The books and reports need to be prepared in Vietnamese. Therefore, most companies decide to use accounting software developed in Vietnam that is already compliant with VAS (most of the time, you can use the software both in Vietnamese and English).
The accounting regulations in Vietnam require the use of specific general ledger account codes and description for each asset, liability, equity, revenue and expense item. The way to record each transaction is also defined in detail.
What is the basic revenue recognition principle?
Revenue from sales of goods is recognized when all of the following 5 conditions are satisfied:
– the Company has transferred to the buyer the significant risks and rewards of ownership of the goods;
-the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
– the amount of revenue can be measured reliably;
– it is probable that the economic benefits associated with the transaction will flow to the Company;
– the costs incurred or to be incurred in respect of the transaction can be measured reliably.
For service providing companies, revenue is recognized when the outcome of such transactions can be measured reliably, i.e when following 4 conditions are satisfied:
– the amount of revenue can be measured reliably;
– it is probable that the economic benefits associated with the transaction will flow to the Company;
– the percentage of completion of the transaction at the balance sheet date can be measured reliably; and
– the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
When should a company issue an invoice?
Timing to issue an invoice is clearly defined in the invoice regulation. The following is some of the principles stated in the regulation.
– Product sales: The day of issuing an invoice is the day on which the ownership or the right to use a product is transferred from the seller to the buyer.
– Service revenue: The day of issuing an invoice is the day service is completed or the day on which payment is received.
– Export sale of goods or service: VAT invoice is not required for export sales, just issuing commercial invoice.
Does Vietnam use accrual basis of accounting?
Yes. Accrual basis of accounting is used in Vietnam.
How should we deal with the expenses incurred before obtaining the investment license and the business license (establishment of the company)?
Investors often pay expenses incurred to establish a company in Vietnam before obtaining the investment license (Investment Registration Certificate) and the business license (Business Registration Certificate). In practice, it is difficult to remit money to overseas investors (please ask your bank for details). In order to reimburse expenses to the investors, the company might want to offset the payable with outstanding receivables from investors, if there are any. In order to offset payable with receivables, the company needs to prepare appropriate documents; a reimbursement agreement and an additional clause to the existing sales contract that specifically states that sales invoice is paid by offsetting against outstanding payables. As an additional note, such expenses paid by investors can be treated as deductible expenses for CIT and can be included in input VAT of the Company in Vietnam if the company follows certain requirements of CIT Law and VAT Law.
How should a company record NG (no good) goods and damaged goods?
The Company should record NG goods and damaged goods directly to cost of goods sold account in the period incurred.
How should a company convert financial statements presented in USD to VND?
The method of translating financial statements presented in foreign currency (US dollar or other currencies) into Vietnam Dong is as follows:
– Assets and liabilities are translated into Vietnam Dong at the telegraphic transfer (TT) exchange rate of a commercial bank where the Company has a main bank account and conducts majority of transactions with at the reporting date
– Owner’s equity (contributed capital of owners, share premium, other capital, bond conversion option) is translated into Vietnam Dong at the actual exchange rate at the date of capital contribution
– Foreign exchange difference and asset revaluation difference are translated into Vietnam Dong at the actual exchange rate at the date of valuating of such items
– Retained earnings and other funds which are distributed from retained earnings are translated into Vietnam Dong by using the historical exchange rates used to translate each period’s income statement
– Profit and dividends paid to shareholders are converted into Vietnam Dong at the actual exchange rate at the date of payment
– Income statement and cash flow statement are converted into Vietnam Dong at the actual exchange rate at the date of transaction. In case the average exchange rate of accounting period approximates the actual rate (the difference does not exceed 3%), the average rate can be applied.
How should a company record transactions denominated in foreign currency?
For a company that uses Vietnam Dong as its accounting currency, the Company should record these transactions in Vietnam Dong by using exchange rates defined in regulations to convert from foreign currency to Vietnam Dong. As requested by regulations, the Company also has to maintain record of transaction amount in original foreign currency.
How should a company classify items as short-term or long-term when preparing financial statements in according to Circular 200?
Except for some specific cases, the principles to classify items as short-term or long-term in the financial statements are listed below:
– Assets and liabilities items that are recovered or paid within 12 months (or 1 business cycle) from the date of reporting are classified as short term in the balance sheet
– Assets and liabilities items that are recovered or paid after 12 months or more (or 1 business cycle) from the date of reporting are classified as long-term in the balance sheet.
Note: the classification of long-term and short-term prepaid expenses is determined based on the original term of such prepaid expenses, not based on the remaining term.
What documentation should a company prepare in order to record revenue?
In general, below listed documents are prepared to record revenue (not necessary to have all of them in every case):
– Purchase order/quotation
– Custom declaration for export sales
– Delivery notes/completion minute/handover minute
– VAT invoice that is prepared in accordance with regulations (for domestic sales only)
Can we record transactions in US dollars or other foreign currencies?
A company that mainly conducts business in a certain foreign currency (US dollar or other currencies) can select that specific foreign currency as its monetary unit in accounting and record all transactions in that selected foreign currency.
The criteria to determine the monetary unit in accounting is described in the accounting law and regulations. If a company selects accounting currency other than Vietnam Dong, they are required to send a notification to the tax authority.
Appointment of chief accountant vs use of outsourced accountant
Companies normally need to employ a chief accountant. If the company decides not to employ a chief accountant, the company has an option to use outsourced accountant from an accounting firm that has an appropriate business license.
Does an FDI company need to have its financial statements audited?
All foreign invested companies, regardless of the ownership percentage of foreigners, need to be audited annually. The company is required to submit audited financial statements to the tax authorities and some other authorities (statistics, business licensing) within 90 days from its fiscal year-end.
Finance/ Capital-related matters
What type of capital contributions can be made?
Vietnamese Dong (VND), convertible foreign currencies, gold, rights to use land, intellectual property rights, technologies, technical know-hows and other assets that can be assessed in VND.
How do we receive charter capital from foreign investors?
The company must open a capital contribution account at an authorized commercial banks (most of them are) and receive capital contribution from foreign investors through its capital contribution account. Capital contribution account is a demand account a foreign-invested company opens either in foreign currency or Vietnamese Dong in order to perform direct investment activities in Vietnam.
What are the minimum capitalization requirements?
There are no minimum or maximum legal capital requirement except for financial, bank, real estate and some regulated business sectors.
Can we receive proceeds from loan from the overseas financial institutions or foreign companies?
Yes. The company can receive oversea loans either from financial institutions or foreign companies. However, the proceeds from mid-term and long-term loans need to be received via a capital contribution account. Under Circular 05/2016/TT-NHNN, proceeds from short-term loans are allowed to be received via either a capital contribution account or a foreign loan account. For long-term loans, you are also required to register the loans at the State Bank of Vietnam (central bank), either at the provincial branch or the headquarters in Hanoi, depending on the size of the loan.
Is there a deadline by when charter capital needs to be paid in?
The company needs to contribute charter capital within 90 days from the day the Business Registration Certificate (also the official date of incorporation) is issued.