The first task when setting up a business in Vietnam is to select the type of entity. This article will provide clarity on this subject.
I. 100% foreign owned or Joint Venture
The 1st setup in setting up a business in Vietnam – Choose the type of entity
100% foreign owned enterprises (FOE’s)
As the name suggests, foreign investors hold all the equity in these forms of businss. The investors can be individuals or corporations. Wholly owned foreign enterprises (WFOE’s) is another name for these types of businesses.
Joint Venture (JV’s)
There are some sectors in Vietnam which are classified as conditional businesses. In order to protect local interests in these sectors, the investment law consequently requires foreign investors to enter into partnerships with local investors e.g. for trading of medicines. Hence, these partnerships or joint ventures are essentially forms of business in which the equity is shared between foreign investors and local investors. The investment law typically specifies the equity sharing ratio for the sector which requires it. Investors on both sides can be either individuals or companies.
II. Limited Liability company (LLC), Joint Stock Company (JSC), Representative Office (RO), Branch Office, Special purpose VEHICLES (SPV)
The 2nd setup in setting up a business in Vietnam – Choose the form of the entity
1.Limited Liability Company (llc)
A LLC can be setup as fully foreign owned of as a joint venture. In these types of companies the members are only liable for the debts of the company up to the limit of the paid up capital.
A LLC can have a either have single member who is a foreigner or multiple members. Contributing member can either be foreigners or a mix of foreigners and locals. The maximum number of contributing members permitted in this type of entity is 50.
Advantages – This type of entity is one of the most simplest forms of entities to setup and operate. They are the ideal choice for either local and international trading, manufacturing or providing services in Vietnam.
Disadvantages – This type of entity cannot issue shares.
2.Joint stock Company(jsc)
A joint stock company issues shares in the form of share certificates to its members. A JSC requires a minimum of 3 shareholders. These 3 shareholders must select a legal representative from amongst them to represent the interests of the company.
A JSC can be setup as an FOE or a JV and its members can be individual investors or corporations. There is no limit on the maximum number of shareholders. In a sense, a JSC is very similar to private limited company or a public limited company.
Advantages – A JSC can issue securities and bonds. It can raise capital with an IPO. In addition, the members can also opt to list the company on a stock exchange to trade shares.
Disadvantages – A JSC has a complex organisational structure and internal workings. It has to audit its annual returns.
3.REPRESENTATIVE office (RO)
The foremost criteria to setup an RO is that the overseas parent company must have been in operation for at least 1 year. The main function of this type of entity is to carry market research and promotion of the parent company’s business with local customers. Although, these entities are not permitted to carry our any revenue generating activity they are required to submit their annual returns to the department of Industry & trade.
Advantages – An RO is the best form of entity if a company wishes to have a local presence to source customers or products. This type of entity is not subject to taxation and has lower reporting requirements.
Disadvantages – There is one main drawback for this type of entity i.e. A RO’s is not permitted to generate any revenue either through local trade or manufacturing activities.
4.branch office
An overseas company may choose to setup a subsidiary in Vietnam in the form of a Branch office.The overseas parent company must have been in operation for at least 5 years inorder to register it as a Branch office. This type of entity can generate revenues. Additionally they are also permitted to remit profits back to the overseas to the parent company.
Advantages – A branch office is very similar to setting up a new LLC company and has no real advantage in most cases. It is mainly suited to big corporations who wish to build an existing brand.
Disadvantages – This type of entity can only carry out activities registered in its business license.
4.Special purpose vechiles (SPV)
SPV’s are not registered entities in the true sense. They are essentially business cooperation contracts intended to attract foreign investment in large scale infrastructure projects. They main goal of SPV’s are to provide a means for private government partnerships. SPV’s are of 4 types.
i. Build operate transfer contracts (BOT)
ii. Build transfer operate contracts (BTO)
iii. Build transfer contracts (BT)
iv. Business corporation contracts (BCC)
Advantages – Foreign entities and local companies can be signatories to a BCC. These serve as means of doing business without the need for setting up a local company.
Disadvantages – This is a form of private financing without transferring ownership to a foreign entity.
Refer to our post on Applying for a business license to learn more about setting up a company in Vietnam or get it touch with us by clicking here.