Vietnam is steadily becoming an economic hot spot in Southeast Asia, attracting foreign investors with its dynamic growth and strategic position. While the market offers lucrative opportunities, penetrating the Vietnamese business environment requires strategic maneuvering. Establishing a wholly owned subsidiary (WOS) presents a compelling option for foreign companies, offering control and ownership by a parent company abroad. This guide outlines the process of setting up a WOS in Vietnam, highlighting its benefits and the practicalities involved.
Understanding Wholly Owned Subsidiaries in Vietnam
A WOS offers investors complete control over their business operations in Vietnam. It exists as an independent legal entity, fully owned by the foreign company. This can translate into two forms— a Limited Liability Company (LLC) or a Joint Stock Company (JSC), with the primary difference being the way capital is raised and owner liability. The choice between LLC and JSC should align with your business objectives, risk appetite, and preferred complexity.
Two WOS Structures in Vietnam—Limited Liability Company (LLC) and Joint Stock Company (JSC)
LLC’s typically appeals to small to medium-sized enterprises (SMEs) due to its operational flexibility, simplicity, and governance autonomy. It is a business structure that combines elements of a corporation and a partnership and is commonly used for family-owned ventures, startups, and joint ventures. LLCs can have one or more members who are the owners of the company. An LLC does not have shareholders, and the members are liable for the debts of the company up to the amount of their capital contribution.
On the other hand, in Vietnam’s manufacturing domain, foreign large-scale industries, especially from nations like China, Japan, South Korea, and Taiwan, typically opt for the JSC model. It suits them as it necessitates fewer high-level members and aligns with their production-centric objectives instead of capital fundraising. For example, Samsung established Samsung Electronics Vietnam as a JSC model in 2008 to manage its factories and electronic production in Vietnam.
A Joint Stock Company (JSC) is a more intricate structure suitable for larger corporations, including public companies aiming to broaden their investor base. JSCs have the capability to raise capital extensively through public stock offerings, issuing additional shares, bonds, and other securities. They are categorized into non-public JSCs (private), public JSCs (not listed), and listed JSCs. Currently, JSCs are the prevailing company type in Vietnam. Notably, public JSCs are subject to more stringent regulations than their non-public counterparts.
The table below outlines specific criteria to consider between LLCs and JSCs within the Vietnamese context for informed decision-making.
What are the benefits of setting up a WOS in Vietnam?
Setting up a WOS in Vietnam affords foreign companies several strategic benefits:
Local Presence with Global Backing: The WOS model enables foreign entities to leverage their parent companies’ financial, technological, and brand strengths while retaining maintaining full control over operations, strategies, and quality.
Enhanced Intellectual Property Protection: A WOS allows foreign companies to protect their intellectual property rights, such as patents, trademarks, and trade secrets, from unauthorized use or infringement by third parties. A WOS can also benefit from Vietnam’s commitments to international IP agreements such as the Berne Convention, the Paris Convention, and the TRIPS Agreement.
Strategic Trade Access: A WOS in Vietnam not only provides a local foothold for foreign entities but also serves as a strategic gateway to capitalize on Vienam’s Free Trade Agreements, ensuring favorable tariffs, secure market access, and heightened global competitiveness.
Elevated Regulatory Confidence: The evolving regulatory landscape in Vietnam, guided by recent legal amendments such as the Law on Investment 2020 and the Law on Enterprises 2020, instills confidence in foreign investors. Serving as a reliable compass, this framework transforms into a comprehensive roadmap, navigating challenges with nuanced and precise guidance. This not only facilitates smooth entry into the Vietnamese market but also ensures heightened regulatory compliance and operational efficacy, boosting confidence and success in the dynamic business environment. Recent developments, including potential relaxation of foreign ownership restrictions for public companies and Decree 31/2021/ND-CP, further contribute to regulatory transparency, streamlining the establishment process for Wholly Owned Subsidiaries (WOS) and reinforcing the position of foreign investors in Vietnam.
Reduced Double Taxation Risks: A WOS can utilize Vietnam’s double taxation avoidance agreements (DTAAs) with over 80 jurisdictions. These agreements provide relief from double taxation on income by identifying exemptions or reducing the tax payable in Vietnam for residents of the signatory countries. For example, a WOS in Vietnam that is a resident of Australia can enjoy a lower withholding tax rate of 10% on dividends, interest, and royalties paid to its parent company in Australia, instead of the standard rate of 15%. A WOS can also claim tax credits or deductions for the taxes paid in Vietnam in its home country, subject to the domestic tax laws and regulations of the respective country.
Cost-Effective Global Expansion: Leveraging Vietnam’s low labor costs and business-friendly environment, foreign companies can strategically expand operations, achieving significant cost savings while maintaining high levels of quality and productivity.
What are the disadvantages?
However, establishing a WOS in Vietnam brings its set of challenges that necessitate strategic planning:
Initial Investment: Creating a WOS needs a substantial initial investment, presenting financial constraints for foreign firms. Managing resources, building infrastructure, and hiring skilled staff can become costly.
Navigating Regulatory Complexity: Navigating Vietnam’s regulatory landscape, particularly compliance with foreign exchange controls, transfer pricing regulations, and the intricate legal environment, presents formidable challenges.
Cultural Integration Challenges and Talent Dynamics: Cultural integration challenges, particularly pronounced for foreign companies with a significant cultural distance from Vietnam, exert influence on business practices and workforce dynamics.
Difficult to expand business scope: One of the challenges of operating a wholly foreign-owned subsidiary (WOS) in Vietnam is the limited market access in some business sectors. According to the 2020 Investment Law, foreign investors may face restrictions or conditions in certain sectors that are not committed or specified in Vietnam’s WTO Commitment or other international agreements. Foreign investors from non-WTO territories may also encounter different investment conditions depending on the bilateral agreements between Vietnam and their home countries.
Restricted Sectors for Foreign Companies under WOS:
Foreign companies operating under a Wholly Owned Subsidiary (WOS) structure face limitations in certain sectors outlined by the 2020 Investment Law. Sectors such as tourism, distribution, express delivery, and telecommunications are not committed or specified in Vietnam’s WTO Commitment or other international agreements.
Moreover, several sectors are restricted or closed for foreign investors in Vietnam. These include, but are not limited to:
- Trade in products and services on the list of monopolized products and services
- News-gathering efforts by the press in all forms
- Taking or using aquatic life for food
- Security and investigation services
- Court and administrative services, including court evaluation, bailiff, property sale, notary, and official receiver services
- Services for guest workers
- Services related to the practice of law, medicine, pharmacy, auditing, accounting, taxation, customs brokerage, intellectual property representation, industrial property representation, real estate brokerage, real estate valuation, securities brokerage, securities trading, securities depository, securities registration, securities clearing and settlement, securities investment consultancy, fund management, credit rating, insurance brokerage, and insurance agency.
These sectors are listed in the Government’s Negative List for Market Access, comprising 25 prohibited business lines and 58 restricted business lines. Foreign investors must fulfill specific conditions, such as obtaining licenses and meeting capital requirements, to enter these sectors.
Procedures for Establishing a WOS in Vietnam
Navigating through a series of well-defined procedures, the establishment of a WOS involves obtaining key certificates that lay the foundation for legal and operational frameworks. In a companion article, we delve into the detailed procedures for establishing a WOS in Vietnam, from obtaining an Investment Registration Certificate (IRC) to securing the Enterprise Registration Certificate (ERC).
Final Consideration and Conclusion
While complex, establishing a WOS in Vietnam can be immensely rewarding, offering control, market access, and numerous benefits to foreign investors. With a strategic approach and thorough understanding of the process and potential challenges, companies can successfully navigate Vietnam’s economic landscape and carve a niche for themselves. Careful consideration of the regulatory environment, along with a well-planned entry strategy, can lead to a successful business venture in this dynamic market. Foreign investors considering a WOS in Vietnam are poised to tap into a growing economy with vast potential, provided they are equipped with the right information and resources to overcome the inherent challenges of the market.
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