(first published 2016 -updated June 2018)
Establishing a company in Vietnam is a significant step for many foreign investors, and hopefully the beginning of a successful business undertaking. Anyone that has gone through the process of preparing for and submitting an IRC application (Investment Registration Certificate) for approval will understand the frustrations and substantial paperwork required in Vietnam just to commence the process.
Investors will usually use lawyers or professional service providers to undertake the (complicated and time consuming) company registration process for them, and will rely on these advisors to understand as much about the ongoing requirements that arise for their new company when it is established.
10 Common Mistakes Foreign Investors Make After Starting a Company in Vietnam (updated)
Notwithstanding, we constantly see problems arising due to poor or missing advice, or investors not appreciating their Vietnam specific initial obligations once their company has been established.
So, here are 10 of the most common mistakes that foreign investors make when establishing a new company in Vietnam:
1. Not Understanding the Need for Red Receipts and Limits on Cash Payments
Vietnam’s requirement for “Red Receipts” confuses many, and can cause losses for companies. Put simply, companies that make payments for goods or services require an official tax receipt (“Red Receipt”) otherwise the expense will not be deductible for Corporate Income Tax, the VAT included will not be creditable to the company, and the payment may be subject to personal income tax to employees as a fringe benefit. Therefore, it is critical to ask for and obtain a Red Receipt for all company transactions.
Foreign payments cannot be made (or reimbursed if an individual makes them) unless there was withholding tax declared and paid (which creates a Red Invoice) on the foreign payment, or if the expenses are incurred as a travel cost (see below for travel discussion). This frustrates many but is simply a requirement that you cannot get around.
Keep in mid that one additional complication is the requirement that all payments above 20,000,000vnd (around USD900) must be made via non-cash means (ie, bank transfer), otherwise it will be non-deductible regardless whether you have a Red Receipt.
2. 90 Day “Charter Capital” Requirement
In Vietnam, the “Charter Capital” of the company (akin to share capital or paid-up capital) must be contributed into the company within 90 days of the Enterprise Registration Certificate (“ERC”) being issued (ie, the start date of the company). For foreign investors, this Charter Capital needs to be sent from a foreign bank account by the investor into the Vietnam company’s “Capital Account” established at their chosen Vietnam bank, and the amount transferred must match the agreed capital in the company’s ERC. Failure to complete this within 90 days can have significant consequences for the company as the 90 day date is inflexible, and failure to complete this is very difficult to rectify.
3. Lending Cash Personally to the Company to Get Operations Moving.
Although advancing cash sounds like a normal and logical move to help a company get operating, as a foreign investor withdrawing cash from their personal bank account and lending it to the company often has an unintended consequence: repayment of that money not being able to be deposited back into the investors personal bank account in many cases. The effect is that the foreign investor is stuck with VND cash when the company repays them. Where these funds are large, this can be quite problematic. Instead, investors should always loan funds to the company from their foreign bank account held abroad into the company’s Capital Account, which will ensure that the loans can be returned and repaid into the investor’s foreign bank account that the funds came from.
4. Legal Representatives and the 30-Day Residency Requirement
Each company in Vietnam requires at least one Legal Representative, and this individual (or individuals) is/are named on the ERC as the those who have responsibilities and liabilities for the operations of the company. The law requires if the Legal Representatives are out of Vietnam for more than 30 days (ie, no Legal Representative for the company is in Vietnam) then they must appoint and register another individual to take on the role.
Although this may sound rather benign, it brings 2 issues to the fore:
a) If a foreign investor is not generally residing in Vietnam, they will need to appoint someone else in addition to themselves to represent them and the company in Vietnam, and
b) Appointing another Legal Representative will result in certain control being passed to that other individual, with the risk that that person may be able to control your company as they decide.
5. Using a Vietnamese Nominee Investor to Start a Company
This is a common approach for investment in Vietnam. In order to avoid the delays and complications in getting a company established, a Vietnamese individual is asked to establish the company as the owner (on behalf of the foreign investor, and using the foreign investor’s money), with the intention that the ownership of company will be transferred to the foreign investor at a later stage.
Notwithstanding the control issues (as mentioned in point 3, above) with someone else owning or controlling your company (note that there is no real concept of “nominee law” in Vietnam), this presents additional complications:
- The nominee reneges on their deal or requires an additional payment for you to buy them out;
- The additional cost of applying for a transfer to foreign ownership is usually the same cost as the original foreign application – so you end up paying more (once for the initial company establishment, then again for the transfer to foreign ownership)
- When lending money to the nominee investor to start the company, the foreign investor will later have to buy the nominee investor out and legally pay the owner for the capital. As a result, the foreign investor will pay twice…and even if the nominee investor does agree to return the second payment, the cash is likely trapped in Vietnam in VND, and
- When transferring to foreign ownership, the company will not be able to open a Direct Capital bank account, making it more complicated to send profits out of Vietnam.
6. Not Registering Promptly for Tax
Tax registration is important, and it is time sensitive to avoid penalties. But, the implications for this extend to the ability to receive VAT refunds or credits. If you don’t undertake your tax registration and VAT election promptly, you may not be able to enter the VAT credit system for the first year, denying you the ability to receive refunds or VAT credits to carry forward. For start-up companies, the refunds or credits can be substantial – so this can be a real cost to the company.
7. Making Undocumented Loans or Not Registering Foreign Loans.
Loans from abroad must go through the Vietnam company’s Direct Capital Account at their Vietnamese bank (or through an “Offshore Loan Account” specifically opened for loans), which will ensure loans can be repaid back to where they came. Loans from domestic sources can be made into the company’s current bank account.
Problems that arise include:
- Loans that are not documented with proper loan agreements are often regarded as revenue by the tax authorities, and taxed accordingly. It is not pleasant for an investor to pay Corporate Income Tax on their own money.
- Foreign loans that are not registered with the State Bank of Vietnam (all foreign loans greater than 12 months in length must be registered) can have implications, potentially resulting in the loss of the ability to repatriate the loans and the loans becoming taxable revenue to the company.
8. Not Appointing a Chief Accountant, and Not Understanding Their Role
Every company must have a Chief Accountant in Vietnam. Further, a Chief Accountant can only act for one company (unless they are employed by a licensed service provider or operate a licensed service business).
Vietnamese Law treats the Chief Accountant position in high regard – they are required for opening bank accounts, signing bank withdrawal documents, registering and lodging taxes, and complying with many compliance requirements with authorities.
Not having a Chief Accountant ready when the company is established will make it difficult to be compliant, and will cause delays to the company commencing operations.
9. Business License Tax Not Being Paid
Business License Tax is a relatively modest payment that all companies must pay each year in Vietnam – akin to an annual company registration payment. The first payment is due immediately after the company is established, and is often overlooked by investors. Although only a modest amount, late payments can result in penalties but also much wasted time and effort in rectification, which often needs to be done in person at government offices.
10. Business Travel and requirements
Once the business commences, there is often a need for foreigner owners to travel. However, there are requirements and documentation required and restrictions on the payment for travel.
Specific issues include:
- Before commencing any business travel, individuals need a business travel decision signed by the General Director approving their travel.
- There are specific documentation requirements when buying flight tickets, and in some case the boarding pass needs to be returned to the company as part of the required documentation.
- Payment for travel for an individual who is not an employee, or is not connected to a commercial contract (ie, has no formal documented connection with the company) will usually result in the tax authorities denying tax deductibility for the travel for that individual.
Matthew Lourey is Managing Partner at Domicile Corporate Services. Matthew is based in Ho Chi Minh City and assists foreign companies enter Vietnam, ensure ongoing compliance with Vietnamese requirements, and undertake their international reporting and similar obligations.