Vietnam is one of the fastest growing economies in the world and third-largest market in South Asia. After the country achieved independence from France, the government committed to move from purely agrarian economy to global economic integration. Young population, stable political system, low inflation, fast-growing middle class, trade openness, strong manufacturing sector, and increasing FDI inflows are some of the factors which make Vietnam an attractive destination for international businesses looking for market expansion. From being one of the poorest countries in the world to now ranking 38th globally with GDP of USD340 billion, the country’s transformation is astonishing.
Foreign investors now want to set up their companies in Vietnam and the country is projected to replace China in its leading position among strong Asian economies. Half of the Vietnamese inhabitants are below the age of 30 years. The third largest population in Southeast Asia is relatively young and well-educated, which has become one of the major assets for Vietnam. Along with literacy rates over 90%, the country has the highest Internet penetration levels and foreign investors are taking advantage of the cheap workforce and technological awareness. Besides, a solid entrepreneur community and country’s openness to new idea are some of the factors that encourages enterprises to invest in Vietnam. The country’s free trade agreements (FTAs) and highly regulated business environment make starting a business in Vietnam simple and easy.
Thriving middle-income economy has witnessed GDP per capita increase threefold over the last two decades to almost USD3000. While other developed and developing nations were struggling during the pandemic to keep their economy, Vietnam increased its GDP by 2.9% in 2020 and 6.6% through 2021. The country has become a leading economic force among the Association of Southeast Asia Nations (ASEAN) with Japan, China, and South Korea.
Owing to its strategic location in the heart of Southeast Asia and proximity to some of the world’s busiest shipping lanes, Vietnam has set an ideal stage for Foreign Direct Investment. Rapid economic growth, favourable policies to boost the investment climate are expected to bring more international investments. However, the investors and businesses planning to penetrate in Vietnam market must conduct a thorough market research so that they can make better decisions. Market research involves gathering, analysing, and interpreting data that can assist in strategizing and gauging demands of the intended market, devise business strategies, and gain insights into the country’s constantly shifting market.
Establishing a company requires a moderate or high amounts of investment capital and can take up to several months to complete all steps in the process. Although Vietnam permits 100% foreign ownership of a business for most sectors, it is important to consider different aspects of the target entity types, differences in structure, legal liability, statutory compliance requirements, time required to establish it, and what type of activities it can engage in. Here are the various types of entities that a business can choose from while making entry into Vietnam.
Limited Liability Company (LLC)
Limited Liability Company (LLC), or Wholly Foreign-Owned Enterprise can be set up in 3 to 4 months in Vietnam. LLC is best suited for small and medium-sized firms as the company’s simple organizational structure requires one founder, which might be advantageous to individual investors. However, a representative office can be established in half that time. The companies need to apply for the required Investment Registration Certificate (IRC) to the Department of Planning and Investment (DPI), which can take up to 15 working days. If the intended operation of the sector does not come under the World Trade Organization agreements, obtaining licenses will prolong registration. Some sectors might even require a ‘Pre-Investment Approval’ before setting up their enterprise. Subsequently, the organization may pursue for securing a physical business address, Enterprise Registration Certificate, and Post Licensing procedures.
Foreign LLCs are required to open a capital account with a local bank, required for share capital injection and transfers of future earnings abroad. The company is required to obtain approval for a foreign investment certificate (FIC), required by the Vietnam government to invest in Vietnam. The approval requires a minimum investment of USD10,000 but it might be higher for some industries. The Vietnamese LLC are required to provide authorities with a registered address in Vietnam, a bank certificate of deposit for the amount of share capital, which will be needed to be transferred 12 months after incorporation is complete. LLCs can both trade with Vietnamese and foreign customers, have local manufacturing operations or render services.
All foreign-owned LLCs must provide authorities with an annual return, audited financial statements, and submit annual audited financial statements.
Partly Foreign-Owned LLC
Establishing a joint venture is a popular method by foreign companies to enter the Vietnamese market. The partly foreign owned LLC or joint venture company involves a foreigner (client) and one Vietnamese shareholder. The joint venture helps to utilize the expertise of all participating parties and a know-how of the local regulations regarding the foreign ownership. The procedure of setting up a joint venture shares similarities with that of a foreign-owned enterprises in Vietnam. The main aim of setting up a JV is to benefit all parties while minimizing risks or potential conflict of interest during the decision-making process.
Companies need to identify if the target industry is prohibited in general. Foreign investors cannot operate in catching or exploiting seafood, notary services, labour export, direct waste collection from households, import and dismantle used vessels, and manufacturing and trading of military weapons, equipment, and devices in Vietnam. Although Vietnam has no general minimum capital requirement for joint ventures, some industries are regulated such as :
Consumer finance company: 500 billion VND (22 million USD)
Financial lease company: 150 billion VND (6.5 million USD)
Real estate: 20 billion VND (870 000 USD)
Audit services: 6 billion VND (260 000 USD)
Air transportation (cargo and passenger): 100 billion VND to 1000 billion VND (4.3 million USD to 44 million USD), depending on the nature of the business and the number of aircraft
Insurance (life and non-life): 200 billion VND to 1000 billion VND (8.7 USD to 44 USD), depending on the nature of the business
Foreign investors need to obtain the Investment Registration Certificate (IRC) and the issuance of the Business Registration Certificate (BRC) when establishing a JV in Vietnam. The average processing time is around 10 to 15 working days for IRC and 5 to10 working days for BRC.
The Vietnam government continues to have foreign ownership limits (FOLs) in industries that are considered important in regard to the national security. Some US investors also face challenges such as confusing tax regulations and retroactive changes to laws including tax rates, tax policies, and preferential treatment of state-owned enterprises.
Favourable Policies for FDI in Vietnam
Witnessing the high rate of economic growth over the past two decades, the government is keen on increasing Vietnam’s attractiveness to foreign investments. The Politburo issued Resolution 55 that intends to prioritise fast and sustainable energy development and foster favourable conditions for all economic sectors is expected to attract USD50 billion in new foreign investments by 2030. The government has also revised laws on investment and enterprise in addition to passing the Public Private Partnership Law, which is further anticipated to encourage high-quality investments and promote the adoption of advanced technologies and environmental protection mechanisms. The new revised Investment Law states that the government must treat foreign and domestic investors equally as earlier the foreign investors faced many challenges to get ordinary government approvals. In January 2020, the Vietnam government removed FOLs on companies in the eWallet sector and reformed electronic payment procedures for foreign firm, which has provided more regulatory certainty and instilled greater confidence among investors.
The Ministry of Planning and Investment (MPI) is the national agency in Vietnam, charged with promoting and facilitating foreign investments. Foreign investors can gather information and understand regulations and policies from the MPI and local investment promotion offices. Vietnam also conducts semi-annual Vietnam Business Forum for facilitating meetings between foreign investors and Vietnamese government officials.