Vietnam is an increasingly popular destination for Hong Kong companies looking to benefit from a competitive labour force and strategic location. Before any investment can be made, a Company needs to understand the business basics, starting with legal structures and taxation.
Global companies are now moving toward smaller, more localized supply chains to strengthen their operations. This is partly driven by a desire to reduce their exposure to the ongoing US-China tensions[1], leading to the popular "China Plus One" strategy. Vietnam is emerging as a key beneficiary of these trends[2]. The country's economy has also weathered the pandemic remarkably well, maintaining positive GDP growth throughout[3][4][5].Despite these advantages, Vietnam currently only ranks 70th out of 190 countries in the Ease of Doing Business Index maintained by the World Bank[6]. Regulations can often be unclear, so it is essential that companies properly educate themselves before establishing operations there.
Two Crucial Certificates for Registering a Business in Vietnam
Companies looking to register a business in Vietnam must understand two business registration certificates: the Enterprise Registration Certificate and the Investment Registration Certificate. The former is the business registration certificate that all foreign and domestic entities must obtain to register a Vietnam legal entity.
Locals need only concern themselves with the Enterprise Registration Certificate, but overseas businesses considering the formation of a legal entity (where foreign investors hold 51% or more of the charter capital) must first obtain an Investment Registration Certificate. The next step is to apply for the Enterprise Registration Certificate. Note: if a Company is only establishing a representative office – which is not permitted to conduct revenue-generating activities or sign commercial contracts – neither certificate is required.
Once both certificates have been obtained, the company needs to establish its Legal Representative.
The Many Roles of a Legal Representative
All companies in Vietnam are mandated to have a minimum of one Legal Representative who is the official face of the company and, therefore, plays many roles. They are also referred to as "authorized representatives"[7]. Their primary duties include:
A company can have multiple Legal Representatives, but at least one must reside in Vietnam at any given time. Given the importance of a Legal Representative, they are personally liable for any damages caused by a breach in their duties. This is similar to the Director or Board of Directors in other jurisdictions.
The law allows Company’s Directors and/or non-Directors to be appointed as legal representatives providing they hold a managerial position as defined in the Company’s Charter. While the Director can be appointed or dismissed via a resolution from the Board of Directors, the changing of a Legal Representative is a more challenging task. As the Legal Representative's details are listed on the registration certificate, any change will require an amendment to the company's charter and a renewal of the certificate. The legal representative's role is not to be dispensed lightly – they have, in many respects, more power and autonomy than even board members.
Understanding Vietnam's Personal Income Tax Regulations
Vietnamese law defines a tax resident as any who resides in in Vietnam for 183 days or more in either the calendar year or a period of 12 consecutive months starting from the date of arrival. This definition captures many expatriates working in the country and taxes them at similar rates to locals. Vietnamese tax residents are taxed on their global employment income, regardless of where the income is paid or earned. The country follows a progressive tax structure, with a top marginal tax rate of 35%.
Foreign directors may also receive income from their Vietnamese operations in the form of dividends or investment income. These are subject to withholding taxes of 5%, with no additional personal income tax for tax residents.
Foreigners may also find themselves subject to taxes on the worldwide income earned in their home jurisdictions. This can be avoided with double taxation agreements, such as the one signed between Hong Kong and Vietnam[8]. Non-tax residents are taxed at a 20% flat rate, which is only applied to their Vietnam-sourced employment income[9].
The Basics of Vietnam's Tax Filing Requirements
Unlike many countries, personal income tax in Vietnam must be declared and paid monthly or quarterly, either on the 20th day of the subsequent month or the 30th day of the following quarter. This will be carried out on a withholding basis by the employer and reconciled at the end of the tax year. An annual tax return needs to be filed within (i) three months of said date in cases where the employer is required to file on behalf of the employee or (ii) four months of said date where the employee is required to file by themself. All outstanding amounts must be settled within that period, respectively
The tax year begins in the first calendar year of residence (if residing for more than 183 days during that year). Subsequent tax years will also follow calendar years.
Two Important Deductions for Effective Personal Tax Planning
If a foreigner wishes to optimize their personal income tax, Vietnamese law offers two key deductions: the family circumstance and donation deductions.
Donations to approved organizations and charities can be deducted from personal taxable income. The Family Circumstance Deduction also allows taxpayers to deduct VND 11 million each month, with an additional VND4.4 million per month for each tax dependent[10]. Companies can also provide certain tax-free benefits to employees. These include one-off relocation allowances, school fees for expats' children, and once-per-year round-trip airfares.
Look Before You Leap
Vietnam offers many advantages for global companies, especially those based in Hong Kong. The country's unique history and political system have resulted in a sometimes complex regulatory bureaucracy. This article provides some essential guidance on the significant landmarks from both a company formation and personal income tax perspective. Navigating the full extent of the bureaucracy can be tricky, and it is always best to solicit input from domain experts beforehand.
[1] https://www.scmp.com/economy/china-economy/article/3010530/chinese-companies-moving-vietnam-keep-quiet-trade-war-avoid
[2] https://e.vnexpress.net/news/business/economy/pandemic-improves-vietnam-s-chance-to-enter-global-supply-chain-wb-4169369.html
[3] https://www.bloomberg.com/news/articles/2020-03-27/vietnam-s-gdp-growth-slows-in-first-quarter-amid-virus-spread
[4] https://www.reuters.com/article/us-vietnam-economy-gdp-idUSKBN24007X
[5] https://fortune.com/2020/09/29/vietnam-q3-2020-gdp-china-economy-growth-coronavirus/
[6] https://www.doingbusiness.org/content/dam/doingBusiness/country/v/vietnam/VNM-LITE.pdf
[7] http://www.vietnamlaws.com/freelaws/Lw60na29Nov05Enterprises%5B10Apr06%5D.pdf
[8] https://www.ird.gov.hk/eng/pdf/dt_vietnam.pdf
[9] https://home.kpmg/xx/en/home/insights/2011/12/vietnam-income-tax.html
[10] https://www2.deloitte.com/content/dam/Deloitte/vn/Documents/tax/vn-tax-alert-pit-adjustment-family-circumstance-deduction-rates-jun2020-en.pdf