Representative office or Foreign Direct Investment Company

Differences between Representative office or Foreign Direct Investment Company: How to choose

Are you hesitant about starting a representative office or foreign direct investment company in Vietnam? This article will help you understand better.

Cekindo
Cekindo

Editorial Team

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Vietnam Foreign Business and Investment Outlook

Backed by stable economic growth, political stability, increase in purchasing power and significant improvement in ease of doing business, Vietnam has prepared the stage for foreign investors to set their footprints into the country. Being one of the fastest growing economies in Southeast Asia and experiencing tremendous development, Vietnam’s business and investment outlook looks very promising.

Despite the ample opportunities for investment in Vietnam, investing overseas involves a lot of brainstorming and decision making on the part of investors. Hence it is imperative for investors to explore the modes of entering into Vietnam and figure out which mode will suit their business requirements.

Setting up a Representative Office in Vietnam

The Representative Office (RO) is ideal for foreign entrepreneurs looking forward to analyzing the market conditions and gradually gaining market presence before starting operations in full swing. An RO is not entitled to conduct any business activities that generate revenue and profits.

The reason it is one of the most preferred ways of entering into the Vietnam market is that it is very easy to set up and allows a business to gain presence in the market without following any criteria for requirement of minimum capital. It allows the investor to analyze the current market situations and strategize the expansion accordingly. This helps a business to effectively mitigate risks and make informed decisions.

In order to get started a business is required to apply for a RO license which is a document granted to foreign investors to set up a Registered Office in the country and is renewed once every two or five years.

Entering into Vietnam Using the FDI route

Foreign Direct Investment (FDI) is an investment made by an individual/firm or a company in a foreign country based on business interests. It generally takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign country.
According to Vietnam regulations, foreign direct investment can be made in three forms:

  • Doing business-to-business contract agreement
  • Building a joint venture, and
  • Establishing a 100% foreign capital company.

Factors like Vietnam’s demographic structure wherein 60% of the population are eligible to work and affordable cost of living drives foreign investors to invest into the mushrooming markets of the country.

Following are some of the advantages leveraged by foreign investors while entering the Vietnam market through FDI:

  • Tax incentives by the government
  • Conducting business activities with low labour costs
  • Allowed to conduct profit making business activities with a much greater scope.

FDI in Vietnam is projected to grow exponentially, which will aid in stabilising the position of the country as one of the major Asian countries in terms of untapped investment opportunities.

Deciding between RO and FDI in Vietnam

Depending on the business goals an investor can choose between the RO and FDI. For instance if an investor wants to conduct business activities that generates income, then an FDI company will be ideal. On the other hand, if the idea is to conduct market research activities, then RO would be more appropriate. However, the majority of foreign companies eventually switch from a representative office to a foreign direct investment company in order to make profits and have a wider range of operations. This way a foreign investor can have the best of both the worlds.

Please refer to the below given table to compare the provisions of a Representative office and Companies having 100% foreign capital on different criterias

Criteria Representative office (RO) Companies with 100% foreign capital (FDI)
Licensed by Department of Industry and Trade of Government Department of Planning and Investment
The tax code is issued by Tax Department only Issued at the same time of ERC by DPI and Tax Department
Function
  • Do not have a business function
  • Taking the role of liaison, promoting business investment opportunities for foreign traders
Doing business activities and making profit in the Vietnamese market.
Entity signing a business contract
  • Not allowed to sign contracts
  • An overseas trader is a contract signatory
Entering into contracts with partners
Contract performance Overseas traders take responsibilities for performing contracts with partners in Vietnam, ROs have the role of liaison and support. Self-implementation of signed contracts
Tax, accounting and Report Regime
  • ROs only declare and pay personal income tax on behalf of the employees working at ROs and fees and charges and fulfill other financial obligations in accordance with the laws of Vietnam. Foreign traders are obliged to tax according to the tax regulations of their nationality.
  • Submit annual operating report to Department of Industry and Trade where the ROs are located (under template report of Industry and Trade Department)
  • ROs of foreign trader do not pay business license fee in annually
  • Doing accounting book for operating, tax declaration and tax calculation (if any incurring: PIT, WHT, fee, duties…it doesn’t include CIT and VAT)
  • A company with 100% foreign capital established in Vietnam holding Vietnamese nationality is taxable in accordance with Vietnamese law. Taxes payable: Corporate income tax, license tax, value added tax, personal income tax. In addition, depending on the business of the company, there may be additional taxes: special consumption tax, import-export tax, land leasing, fees, duties or other taxes.
  • FDI must pay business license fee in annually
  • Doing accounting for tax declaration, tax calculation and other purposes for business activities.
Profit Representative offices do not do business activities, so they do not generate profits. Foreign business entities derive profits from their business activities and must pay taxes separately on such profits (if any). If the business is profitable, has fulfilled tax obligations and other financial obligations in accordance with the law and has ensured the full payment of all debts and other due property obligations, the foreign trader is the company owner gets a share of the profits. The remittance of profits back home is subject to the laws of the nationality of the trader.
Cost of establishment and operation Similar
Term of operation under license 5 years and entitled to an extension 50 years and an extension right.
Long uptime with high investment costs required. The establishment of a company with 100% foreign capital is suitable for traders with long-term, stable and serious business development intentions.

How Cekindo can assist

With colossal market potential and considerable support from the government, foreign investment in Vietnam is more favourable than ever. However, breaking into a new market overseas might be intimidating. Cekindo offers a comprehensive range of business solutions to ease the process of registration and incorporation. Our consultants have thorough knowledge of the Vietnamese Market and can help you create a viable roadmap for your business.

Our experienced legal advisors will assist in all statutory and regulatory aspects of your investment. Experts at Cekindo also help in carrying out Due Diligence activities to help you assess the credibility of the company or partner you want to invest in or work with.

To know more about how Cekindo’s solutions can help you make investments in Vietnam, please fill out the form below or talk to an expert on our livechat.

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Loann Vu Cekindo Vietnam
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Loann Vu

As the Head of Business Consulting, her mission is to ensure the sustainable development of our services to foreign investors. Loann has broad knowledge to give expert advice and assist you with your company incorporation.

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