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How Foreign Entity Could Set-up a COMPANY in Vietnam

How Foreign Entity Could Set-up a COMPANY in Vietnam:  A foreign business entity or a foreign trader is allowed to set-up a branch in Vietnam to conduct business activities.

Explain which type of structure is suitable for a start-up company in Vietnam: Vietnam offers some choices for setting up a business in the country. The principal types of business license are business cooperation; joint venture; a company with 100% foreign owned capital; branch of an overseas company; and the representative office of an overseas company.

New Laws on Investment and Enterprise

 

These come into effect on 1 July 2015 and may lead to changes to certain of the issues dealt with below.

 

# The Limited Liability Company (“LLC”);

# The Joint Stock Company (“JSC”);

# The Partnership Company (“PC”);

# The Business Cooperation Contract (“BCC”); and

# Public – Private Partnership (“PPP”) projects.

 

Forms of Business

 

A foreign entity may establish its presence in Vietnam as a limited-liability company with one or more members,

 

A joint-stock company, a partnership, a branch, a business cooperation contract or a representative office.

 

Foreign investors may also buy an interest in an existing domestic enterprise, subject in some cases to ownership limitations which vary depending on the industry sector.

The choice of investment vehicle will depend on factors such as the number of investors, industry, and size of the project and whether there is any intention to list.

 

1. Limited-liability Company

 

A limited-liability company is a legal entity established by its members through capital contributions to the company. The capital contribution of each member is treated as equity (charter capital). The members of a limited-liability company are liable for the financial obligations of the limited-liability company to the extent of their capital contributions.

The management structure of a limited-liability company would normally consist of the members’ council, the chairman of the members’ council, the general director and a controller (or board of supervisors where the limited-liability company has more than 11 members).

 

# A limited-liability company established by foreign investors may take the form of either:

# A 100% foreign-owned enterprise

 

(Where all members are foreign investors); or A foreign-invested joint-venture enterprise between foreign investors and at least one domestic investor.

 

2. Joint-stock Company

 

# A joint-stock company is a limited liability legal entity established through a subscription for shares in the company.

# Under Vietnamese law, this is the only type of company that can issue shares. The charter capital of a joint-stock company is divided into shares and each founding shareholder holds shares corresponding to the amount of capital the shareholder has contributed to the company.

# A joint-stock company is required to have at least three shareholders. There is no limit on the maximum number of shareholders in such companies.

 

# The governance of a joint-stock Company includes a General Meeting of shareholders, the board of Management, the chairman of the board Of management, the general director And a board of supervisors (where the Joint-stock company has more than 11 individual shareholders, or if a corporate shareholder holds more than 50% of the shares of the joint-stock company).

# A joint-stock company may either be 100% foreign-owned or may take the form of a joint venture between both foreign and domestic investors.

 

3. Partnership

 

A partnership may be established between two individual general partners. The general partner has unlimited liability for the operations of the partnership.

 

4. Branches

 

This is not a common form of foreign direct investment and is only permitted in a few sectors. Branches of foreign companies are different from representative offices in that a branch is permitted to conduct commercial activities in Vietnam.

 

5. Representative Offices

 

Foreign companies with business relations or investment projects in Vietnam may apply to open representative offices in Vietnam.

 

A representative office is not an independent legal entity and may not conduct direct commercial or revenue-generating activities (i.e., the execution of contracts, receipt of funds, sale or purchase of goods, or provision of services).

 

However, a representative office is permitted to:

  • Act as a liaison office to observe the business environment;
  • Search for trade and/or investment opportunities and partners;
  • Supervise and assist with the implementation of contracts entered into between its head office and Vietnamese partners;
  • Act on behalf of its head office to supervise and direct the implementation of projects in Vietnam.

Thus representative offices can provide a wide range of ancillary support to

Their head offices overseas. This is a very common form of presence in Vietnam for foreign companies, particularly those in the first stage of a market entry strategy.

 

 

6. Business Cooperation Contracts (‘BCC’)

 

# A BCC is a cooperation agreement between foreign investors and at least one Vietnamese partner in order to carry out specific business activities.

# This form of investment does not constitute the creation of a new legal entity. The investors in a BCC generally Share the revenues and/or products arising from a BCC and have unlimited liability for the debts of the BCC.

 

7. Public and Private Partnership Contracts

 

A Public and Private Partnership (‘PPP’) contract is an investment form carried out based on a contract between the government authorities and project companies for infrastructure projects and public services.

PPP Contracts includes Build-Operate-

Transfer (‘BOT’), Build-Transfer (‘BT’), Build-Transfer-Operate (‘BTO’), Build-Own-Operate (‘BOO’), Build-Transfer-Lease (‘BTL’), Build-Lease-Transfer (‘BLT’) and Operate-Manage (O&M) Contracts.

 

 

Both public and private investors are encouraged to participate in PPP Contracts. The rights and obligations of the foreign investor will be regulated by the signed PPP contracts and the applicable regulations governing such contracts. Investment sectors include:

Transportation infrastructures and relevant services;

 

 

Lighting systems, clean water supply systems, water drainage systems, water/waste collection and treatment systems, social/resettlement houses, cemeteries;

 

 

Power plants and power transmission lines;

 

Infrastructures for healthcare, educational and training, cultural, sport and relevant services, offices for government authorities;

 

 

Infrastructure for commerce, science and technology, hydrometeorology, economic zone, industrial zone, high-tech zone, centralized information technology zone, information technology application;

 

 

Infrastructure for agriculture and rural development, services for enhancing the correlation of agricultural production with processing and consumption of agricultural products; and

 

 

Other sectors according to the Prime Minister’s decisions.

 

Setting up a Business

 

In order to set up a limited liability Company, a joint stock company, a partnership or enter into a business cooperation contract with one or more Vietnamese partners, the foreign investors must obtain an investment registration certificate from the licensing authorities, which may be either (i) the provincial people’s committee (for projects located outside of industrial zones, export processing zones, high- tech zones and economic zones), or (ii) the provincial industrial zone management authority or economic zone management authority (for projects located in industrial zones, export processing zones, high-tech zones and economic zones).

 

After the issuance of the investment registration certificate, the foreign investors must conduct procedures with the licensing authorities to obtain a business registration certificate. Under the regulations, the licensing process should take around 18 working days. In practice, it usually takes longer.

 

Investment in “conditional” sector activities is subject to the more cumbersome appraisal (as opposed to registration) procedures. These require, inter alia, the license application to be reviewed also at the central government ministry level in Hanoi.

 

 

Approval for the establishment of a representative office of a foreign Company is granted in the form of a license issued by the provincial people’s committee.

 

Procedures for setting up a representative office are quite simple in comparison with those for a company and it normally takes 2 - 4 weeks to obtain a representative office license from the date of submission of a complete application dossier.

 

1.Definition:

@ A legal entity that undertakes commercial activities on behalf of an owner government

(Government-owned corporations, limited companies,...)

@ There are Viet Nam 2015

 

2.Advantages:

(1)They base their decisions on the full costs and benefits involved

(2)They can be used to influence economic activity. To boost the country’s output, public

Corporations can be directly encouraged to increase their output.

(3)Ownership of a whole industry by the government makes planning and coordination

Easier. For instance, if the state runs the train system, it can ensure that train timetables

are coordinated.

(4)It is important to ensure that basic industries, such as electricity and transport survive,

charge low prices and produce good quality as other domestic industries depend on

them.

 

3.Disadvantages:

(1)They can be difficult to manage and control. The large size of the organisations may

mean that time has to be spent on meetings and communicating with staff, slowing

down decision making.

(2)They may become inefficient, produce low-quality products and charge relatively high

prices, due to a lack of competition and the knowledge that they cannot go bankrupt.

 

(3)They will need to be subsidized if they are loss-making. The use of tax revenue to

support them has an opportunity cost – it could be used to spend on, say, training more

teachers and nurses.

 

LIMITED LIABILITY COMPANIES

1.Definition:

- A form of business entity that limits the liability of its owners while allowing flexibility

in operation and management and passing through its income to its members with no tax

at the entity level.

- The basic features of a limited liability company are:

+ Its owners have limited liability for the entity's debts and obligations, similar to the

status of shareholders in a corporation

+ Its income and losses are normally passed through to the owners as if it were a

partnership.

 

2.Advantages:

- A limited liability company (LLC) has many advantages as a form of business entity:

(1)Pass-through taxation - under the default tax classification, profits taxed at the

member level, not at the LLC level (i.e., no double taxation).

(2)Limited liability - the owners of the LLC, called "members," are protected from

liability for acts and debts of the LLC.

(3)With "check-the-box" taxation, an LLC can elect to be taxed as a sole proprietor,

partnership, S-corp or corporation, providing much flexibility.

(4)Can be set up with just one natural person involved or, in some states, one owner

which may be an entity itself.

(5) No requirement of an annual general meeting of shareholders.

 

(6)No loss of power to a board of directors (although an operating agreement may

provide for centralization of management power in a board or similar body).

(7)LLCs are enduring legal business entities, with lives that extend beyond the illness or

even death of their owners, thus avoiding problematic business termination or sole

proprietor death.

(8)Much less administrative paperwork and recordkeeping.

(9)Membership interests of LLCs can be assigned, and the economic benefits of those

interests can be separated and assigned, providing the assignee with the economic

benefits of distributions of profits/losses (like a partnership), without transferring the

title to the membership interest (e.g., see Virginia and Delaware LLC Acts).

 

3. Disadvantages:

(1)Earnings of most members of an LLC are generally subject to self-employment tax.

By contrast, earnings of an S corporation, after paying a reasonable salary to the

shareholders working in the business, can be passed through as distributions of profits

and are not subject to self-employment taxes.

(2)Since an LLC is considered a partnership for Federal income tax purposes, if 50% or

more of the capital and profit interests are sold or exchanged within a 12-month period,

the LLC will terminate for federal tax purposes.

(3)If more than 35% of losses can be allocated to no managers, the limited liability

company may lose its ability to use the cash method of accounting.

(4)A limited liability company which is treated as a partnership cannot take advantage of

incentive stock options, engage in tax-free reorganizations, or issue Section 1244 stock.

(5)There is a lack of uniformity among limited liability company statutes. Businesses that

operate in more than one state may not receive consistent treatment.

(6)In order to be treated as a partnership, an LLC must have at least two members. An S

corporation can have one shareholder. Although all states allow single-member LLCs,

 

the business is not permitted to elect partnership classification for federal tax purposes.

The business files Schedule C as a sole proprietor unless it elects to file as a corporation.

(7)Some states do not tax partnerships but do tax limited liability companies.

(8)Minority discounts for estate planning purposes may be lower in a limited liability

company than a corporation. Since LLCs are easier to dissolve, there is greater access to

the business assets. Some experts believe that limited liability company discounts may

only be 15% compared to 25% to 40% for a closely-held corporation.

(9)Conversion of an existing business to limited liability company status could result in

tax recognition on appreciated assets.

 

JOINT STOCK COMPANY

1.Definition :

- A joint-stock company is a business entity where different stocks can be bought and

owned by shareholders.

- Each shareholder owns company stock in proportion, evidenced by his or

her shares (certificates of ownership).

- In modern-day corporate law, the existence of a joint-stock company is often

synonymous with incorporation (i.e. possession of legal personality separate from

shareholders) and limited liability (meaning that the shareholders are only liable for the

company's debts to the value of the money they invested in the company).

 

2.Advantages:

(1) Huge Financial Resources: A company can collect a large sum of money from a large

number of shareholders. There is no limit on the number of shareholders in a public

company. Since its capital is divided into shares of small value even a person of small

means can contribute to its capital by simply purchasing its shares. It facilities the

 

mobilization of savings of millions for the productive purposes. In addition, a company

can borrow from banks to a large extent and also issue debentures to the public.

(2) Limited Liability: The liability of shareholders in a company is limited to the face

value of the shares they have purchased. The limited liability encourages many people to

invest in shares of joint stock companies. If the funds of a company are insufficient to

satisfy the claims of the creditors, no members can be called to pay anything more than

the value of shares held by them.

(3) Perpetual Existence: Due to its separate legal existence, it has perpetual existence.

The life of a company is not dependent die or become insolvent. The members of a

company may go on a company. The stability of business is of great importance to the

society as well as to the nation.

(4) Transferability of Shares: The shares if a public company are freely transferable.

This transferability of shares brings about the liquidity of investment. It encourages many

people to invest. It also helps a company in tapping more resources.

(5) Diffusion of Risk: In sole proprietorship and in the partnership business, the risk is

shared by few persons. But in the company, the number of shareholders is large, so many

persons share risk. Therefore, the burden of risk upon an individual is not huge. This

attracts many investors. It enables companies to take up new ventures.

(6) Efficient Management: In company ownership is separate from management.

A company has enough resources to utilize the services of experts and managers who

may be highly specialized in different fields of management. It can attract talented

persons by offering them higher salaries and better career opportunities. The efficient

management will help the company to take balanced decisions and can direct the affairs

of the company in the best possible manner. It also helps to expand and diversify the

 

activities of the company.

(7) Economies of Large-Scale Production: Large-scale production of modern days is

the result of company form of organization. This results in economics in production,

purchase, marketing, and management. These economies will help a company to provide

quality goods at lower cost to the consumers.

(8) Democratic Management: The company is managed by the elected representatives

of shareholders called the ‘directors’. Directors are responsible and accountable to the

general body of shareholders. Decisions are taken by a majority of votes completely

based upon democratic principles. This prevents in the mismanagement of a company.

(9) Public Confidence: A company enjoys a greater public confidence and reputation in

the market due to legal control, publicity of accounts and perpetual existence. Audit

of Joint Stock Company is compulsory. A company’s financial accounts and statements

are published, circulated and are open to public inspection. Therefore public has

enough faith in it. So, it can get the loan from different financial institutions.

(10) Social Importance: The company provides an opportunity to mobilize scattered

savings of the community. It also creates employment opportunities. Due to large-scale

production consumers get cheaper goods. The society is supplied with enough quantity of

goods. The government gets income in the form of taxes.

 

3. Disadvantages:

(1) Difficulty in Formation: A company is not easy to form and establish. A number of

persons should be ready to associate for getting a company incorporated. It requires a lot

of legal formalities to be performed. The shares will have to be sold during the prescribed

time. It is both expensive and risky.

 

(2) Lack of Secrecy: A company has to observe many legal formalities. Most of the

business activities are decided through meetings. Profit and Loss Accounts and Balance

Sheet is required to be published. So trade secrets cannot be maintained.

(3) Delay in Decisions: In company decisions making process is time-consuming. All

important decisions are made by either Board of Directors of by General Annual

Meetings. So many opportunities may be lost due to delay in decision making.

(4) Separation of Ownership and Management: A company is owned by shareholders

but managed by directors. The shareholders play an insignificant role in the working of

the company. Though directors are owners of some qualification shares only, yet the

result of their activities are to be borne by all shareholders. The profit of the company

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How Foreign Entity Could Set-up a COMPANY in Vietnam

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