Setting up a Representative Office
Contents
- Introduction
- Key advantages and disadvantages
- Prerequisites, licensing requirements and procedures
- Post-licensing requirements
- Timing and setup costs
- Permissible activities
- Prohibited activities
- Requirement and roles of the Chief Representative
- Hiring employees
- Work visa and work permit requirements
- Bookkeeping and statutory reporting requirements
- Bank accounts and banking requirements
- Taxation of a RO
- Permanent establishment issue
- Taxation of RO’s personnel
- RO’s tax compliance requirements
- Statutory insurance contributions
- The 13th month salary
- Statutory severance and redundancy payments
- Regulatory compliance and tax audits
- Common regulatory and tax issues
- Penalties for non-compliance
- Renewal and closure of a RO
1. Introduction
Representative Office (“RO”) is a permissible legal form business presence in Vietnam. A foreign company or organisation which has business relations with, or foreign investment projects in Vietnam, can apply for a license to set up a RO in Vietnam. It is a popular and simplest form of early market entry to Vietnam to set up, operate, and wind up. It is proper in the early market entry stage to station personnel in the country and/or to hire local staff to explore business opportunities and to provide administrative support to the overseas head office. It helps keep the flexibility for later long-term business setup in Vietnam in the form of a company as the business prospers or a quick exit otherwise.
It takes about one and half month to get a RO license (including one month to prepare the necessary license application paperwork and 2 weeks for the licensing authority to process the application). With a RO, there is no investment capital requirement; minimal statutory bookkeeping is needed; no statutory financial audit is needed; and no corporate tax.
A RO may hire local and expat staff directly as employees without restrictions. It may open bank accounts in Vietnam to receive funding from its overseas head office and to administer local expenditures. A RO must have a Chief Representative who may be a local person, or an expat who needs not be resident in Vietnam on full-time basis. A RO may only perform functions that support the overseas company’s business activities in Vietnam, and it is prohibited from engaging directly in income-generating activities. In practice, this means a RO may only receive funding from its overseas head office but may not invoice customers or collect payments from customers on behalf of its overseas head office.
2. Key advantages and disadvantages
The table below summarises the key advantages and disadvantages of a RO:
| Advantages | Disadvantages |
|
|
3. Prerequisites, licensing requirements and procedures
Unlike companies, ROs are governed by separate regulation and generally licensed by the local Department of the Ministry of Industry and Trade (“DoIT”). For certain business sectors (e.g., health or education), the ROs are licensed by the relevant ministries.
The key prerequisites for a RO licence are[1]:
- The applicant must have been incorporated in its home country for at least one year; and
- If the applicant’s certificate of incorporation or business license in the home country has a date of expiry, then that date of expiry must be at least 1 year from the date of lodgement of the application for the RO license.
To obtain a licence for setting up a RO, the applicant needs apply to the local Department of Industry and Trade. The documents needed for the application include the following[2]:
- A completed standard application form (Form MD-1);
- Copy of the certificate of business registration or certificate of company incorporation (or a similar document) of the applicant (*);
- A letter of appointment of the Chief of Representative of the RO in Vietnam (in original);
- Copy of the audited financial statements (or similar documents) of the applicant’s latest fiscal year (*)
- A copy of the full passport (i.e., all pages) of Chief Representative the RO (*);
- A copy of the office lease agreement with the landlord of the premise where the RO will be situated; and
- A letter authorising the agent or service provider who handles the application on behalf of applicant.
Notes:
- Document No. 6 – The office lease agreement must be provided as part of the application documents. If is not available, it may be substituted by a pre-lease agreement or a MoU between the applicant and the landlord.
- For documents marked with (*) – They must be:
- authenticated by a notary public or an office equivalent to the office of the Ministry of Foreign Affairs in the home country; and then
- legalised by the Vietnamese embassy or general consulate in the home country.
- In some countries, the document authentication and legalisation processes may take up to two months.
- All documents must then be translated to Vietnamese by an accredited translator in Vietnam unless they are in Vietnamese or bilingual.
A RO license is valid up to the date of expiry of the applicant’s certificate of incorporation or business license in the home country (if there is a date of expiry) or 5 years, and it is renewable upon expiry[3].
4. Post-licensing requirements
After the RO license is granted by the licensing authority, the RO must complete the following post-licensing steps:
- Making the RO’s corporate seal and registering it with the local police.
- Hiring employees and executing employment contracts; and
- Registering all employees with the labour office, tax office and social security office.
- The standard timing for the licensing authority to process a RO license application and to issue the RO license is 7 working days following their receipt of all required application documents[4]. In practice, delays may occur if there are requests for more information or documents to be provided by the applicant, or in exceptional cases where the licensing authority needs to conduct internal consultation with their relevant ministries before they can approve the application. Typically, the entire process (from start to finish) for obtaining a RO license takes about one and half month.
- In term of the costs of setting up and maintaining a RO, as there must be at least a registered business address (if a real office is not required), which may be rented from a business center service provider (such as Compass Offices, Regus, We Work etc). The cost of renting a registered business address varies depending on whether sitting space is required. For example, the cost of maintaining a registered business address at some business centers in a prime location in Ho Chi Minh City is about USD100 per month and the cost of each sitting space is about USD300 per month etc.
- A RO’s permissible activities are limited to the following[5]:
- Acting as a liaison office.
- Conducting market research and exploring business opportunities.
- Conducting general service, supervision and monitoring the implementation of projects or contracts between its head office and customers in Vietnam. However, since March 2016 a RO is no longer allowed to conduct these activities, in theory. In practice, the restriction is intended to apply to income-generating activities rather than cost-bearing activities such as procurement activities etc.
- A RO can directly hire local Vietnamese and expatriate personnel to conducts the above activities and perform various liaison, support, and administrative functions.
- A RO is strictly prohibited from engaging directly in income-generating activities in Vietnam. In practical terms, this prohibition means that a RO cannot enter into commercial contracts, issue invoices, or collect payments, on behalf of its head office. Further, a RO may only receive funds from its overseas head office to fund its activities in Vietnam and may not invoice its head office for any services it provides to the head office.
8. Requirement and roles of the Chief Representative
A RO must have a Chief Representative (“CR”) who may be a local Vietnamese or an expatriate. The CR is not required to reside full-time in Vietnam. Whenever the CR is absent from Vietnam, he/she must authorise another person in Vietnam in writing to act on his/her behalf and remain responsible for the acts of such authorised person. Such authorisation must be approved by the head office[6]. If the CR is absent from Vietnam for more than 30 days without authorising another person to act on his/her then the head office must appoint another CR[7].
A CR may not concurrently act as the head of branch in Vietnam, or the legal representative of any other legal entity incorporated under Vietnamese laws[8]. If the CR is authorised to execute or amend contracts on behalf of the head office, such authorisation must be in writing and specific to each time of execution or amendment of each contract[9].
A foreign company may only hire a Vietnamese as an employee directly when it has established legal presence in Vietnam (e.g., a RO or a company). Without legal presence in Vietnam, it must hire employees through a licensed labour agency or the host organisation (i.e.. the local business partner). The labour agency or the host organisation then processes the payroll, withholds personal income tax and statutory insurance contributions, and handles compliance matters, on behalf of the foreign company. The foreign company then reimburses the employment costs to the labour agency or the host organisation. Alternatively, a foreign company can hire a Vietnamese directly as a consultant (i.e., contractors). In which case, the consultant will handle their own compliance matters.
A RO may hire Vietnamese or expatriates directly as employees and must register a list of Vietnamese employees with the labour department and submit periodic reports on utilisation and changes of personnel to the labour office. The employment contract (known as “labour contract”) must be in one of the following three prescribed forms[10]:
- Indefinite term labour contract – is a contract in which the period of contract is not specified;
- Definite term labour contract – is a contract in which the period of contract is specified to be from 12 months to 36 months;
- Casual contract – is contract for a specific or seasonal job for a period below 12 months.
- When a labour contract in (ii) and (iii) expires and the employment continues, the employer and employee must enter into a new contract within 30 days following the date of expiry. If no new labour contract is entered, the expired contract will automatically become an indefinite term labour contract. A labour contract must be executed in the relevant prescribed standard form.
10. Work visa and work permit requirements
All foreigners working in Vietnam must hold a work permit (WP) and/or a valid work visa. In theory, an expatriate assignee to Vietnam must obtain a WP at least 15 business days before arrival in Vietnam. In practice, the application of WP may be made after the individual has arrived in Vietnam under an entry visa. A WP is valid up for a maximum of 2 years and is renewable upon expiry.
11. Bookkeeping and statutory reporting requirements
A RO is subject to minimal bookkeeping and statutory reporting requirements as follows:
- Lodgement of an annual activity report by the last working day of January of each year. This annual activity report must be in the standard from prescribed by the Ministry of Industry and Trade and sent by post to the licensing authority that granted the RO license.
- Registration of employees with the labour office, and tax office, and social security office;
- Keeping basic accounting books and records (including report of funding by the head office, expense ledgers, employees’ payroll, tax returns, and other statutory contribution reports, cash book and bank statements );
- Responding to ad-hoc statistical queries when requested by the
- A RO is neither subject to statutory financial audits nor filing of corporate tax returns.
12. Bank accounts and banking requirements
A RO may open bank accounts in both local currency (VND) and in foreign currency (typically in USD). However, all transactions within Vietnam must be conducted in local currency. If a RO needs to pay a foreign contractor, it may do so using its foreign currency bank account or buying foreign currency from any local bank.
A RO is not a taxable entity and is therefore it does not pay corporate income tax if it operates within its licensed scope of activities and such activities do not give rise to taxable presence (known as permanent establishment) in Vietnam. However, a RO must pay VAT on local expenditures and to withhold and pay Personal Income Tax (“PIT”) and the statutory insurance contributions in respect of the employment of its personnel. In addition, if the RO engages a foreign contractor in Vietnam, it must withhold the applicable withholding taxes, file tax returns, and remit the taxes withheld to the tax office, on behalf of the foreign contractor.
14. Permanent establishment issue
Under Vietnamese domestic tax rules, a RO itself is not considered as a permanent establishment of (“PE”) its overseas head office. However, certain activities undertaken by the RO, or its employees could make it become a PE. The domestic tax rules define a PE as an establishment through which a foreign company carries on business in Vietnam and earns income. It is broadly defined to include (amongst other) the following[11]:
- An establishment supplying services including consulting services provided through its employees or other persons or organisations;
- An agent in Vietnam with the authority to conclude contracts in the name of a foreign company; or without the authority to conclude contracts in the name of a foreign company but habitually delivering goods or supplying services in Vietnam; or
- A Representative Office that involves in negotiation and/or conclusion of commercial contracts[12].
- However, where a tax treaty defines a PE differently, the tax treaty will prevail[13].
15. Taxation of RO’s personnel
All personnel employed by a RO are subject to personal income tax in Vietnam (“PIT”). The taxation is based on their residency, source of income and level of income, regardless of where their income is paid and received.
An individual is considered as a tax resident of Vietnam if:
- he or she is physically present in Vietnam, in aggregate, at least 183 days within a calendar year or in the period of 12 consecutive months from the first date of arrival in Vietnam; or
- he or she has a legal domicile in Vietnam, according to Vietnam’s domicile law; or
- he or she has a place or places of accommodation in Vietnam leased for a period or periods taken together of 183 days or more during a tax year, whether or not his or her legal domicile is in Vietnam.
An individual who does not fall in any of the mentioned tests is considered as a non-resident.
A resident is taxed on world-wide employment and business income at the progressive PIT rates ranging from 5% to 35% of the monthly taxable income after deduction of the following:
- Personal deduction of VND11 million per month;
- Dependant deduction of VND4.4 million per month per eligible dependant;
- All statutory contributions (i.e., social security, unemployment and healthcare insurances);
- Contributions to local voluntary pension schemes; and
- Contributions to approved charities.
The tax rate bands for residents are in the table below[14]:
| Monthly taxable income (VND) | Tax rate | Tax payable (VND) |
| Up to 5,000, 000 | 5% | Income * 5% |
| 5,000,000 up to 10,000,000 | 10% | Income * 10% – 250,000 |
| 10,000,000 up to 18,000,000 | 15% | Income * 15% – 750,000 |
| 18,000,000 up to 32,000,000 | 20% | Income * 20% – 1,650,000 |
| 32,000,000 up to 52,000,000 | 25% | Income * 25% – 3,250,000 |
| 52,000,000 up to 80,000,000 | 30% | Income * 30% – 5,850,000 |
| Over 80,000,000 | 35% | Income * 35% – 9,850,000 |
A non-resident is taxed on Vietnam-sourced income at the flat rate of 20%.
An expatriate whose employer is overseas must:
- apply for a tax code within 10 days following the date of first earning of taxable income in Vietnam:
- file quarterly PIT returns and pay the quarterly PIT directly to the tax office by the 30th day of the following calendar quarter; and
- file an annual PIT return and pay the additional PIT (if any) by the 90th day following the tax year.
Upon departure from Vietnam, an expatriate must file a final departure tax return and pay additional PIT (if any) by the 45th day following the last day of employment in Vietnam. These requirements applies to expatriates who are employed by the overseas head office (rather than the RO) and assigned to the RO in Vietnam, such as the Chief Representative of the RO.
16. RO’s tax compliance requirements
A RO must fulfill the following tax compliance requirements for its employees:
- Registering the employees for a tax code within 10 days following the date of payment of their first month’s salary, for those do not have a tax filing number when they join the RO;
- Filing a quarterly or montly PIT return per each quarter/month and paying the relevant quaterly/month PIT at the same time by the 30th day of the following quarter or the 20th day of the following month, respectively. Quarterly filings apply when the total monthly employee PIT liability is VND50 million (~US$2,200) or less. When it exeeds VND50 million, the RO must change to from quarterly filings to monthly filings;
- Filing an annual PIT return and paying the additional PIT (if any) by the 31th of March of the following calendar year; and
- Filing a departure PIT return and paying the additional PIT (if any) by the 45th day following the last working day, for expatriate employees.
17. Statutory insurance contributions
There are three type of statutory insurance contributions namely Social Security Insurance (SSI), Healthcare Insurance (HI) and Unemployment Insurance (UI) which are compulsory in respect of all local Vietnamese employees. For expatriate employees and assignees, only HI contributions are compulsory. All of them are administered by the social security agency. The current rates of these contributions are below:
| Contribution by | SSI | HI | UI | Total |
| Employee | 8% | 1.5% | 1% | 10.5% |
| Employer | 17.5%(*) | 3% | 1% | 21.5% |
(*) This rate is normally 18%. However, for the period from July 2021 to June 2022, the government has instructed that employers contribute 17.5% and pay 0.5% to employees, as one of the Covid-19 relief for employees.
These contributions are based on the total of salary, bonuses and cash allowances, as specified in the employment contract. However, they are capped at 20 times of:
- the statutory minimum monthly salary of VND1,210,000 (~USD54) which varies from time to time, for social security insurance and healthcare insurance contributions; and
- the relevant statutory area minimum monthly salary ranging from VND2,4 million (~USD107) to VND3,5 million (~USD156), for unemployment insurance contributions.
These contributions are not compulsory for hiring of freelancers or independent contractors.
Although not required by law, it is a common in Vietnam that employers pay their employees another month of salary in the month before Lunar New Year (around January-February). In practice, the lack of payment of 13th salary could demotivate employees (particularly junior staff) and therefore some companies resolve this issue by agreeing with their employees an annual package to be divided in 13 monthly payments.
19. Statutory severance and redundancy payments
Vietnam’s Labour Codes require an employer to pay an employee who has completed at least one year of service either one of the following payments:
- Redundancy payment – applies an employee who loses job because the employer ends the employment as a result of organizational re-structuring. The employer must pay the employee an “allowance for loss of work” i.e., redundancy payment, which must equal to one month of salary for each year of service but not less than two months of salary[15];
- Severance payment – applies to an employee whose employment contract has expired and is not renewed, or who resigns without breaching any provisions of the Labour Codes (e.g., notice period). The employer must pay the employee an “allowance for termination of work” i.e., severance payment, which must at least equal to a half of the monthly salary for each year of service[16].
However, for employees who are covered by unemployment insurance the severance payment will be paid by the social security agency and the employer will be released from such obligation.
Both payments are payable in lump sum within 7 days following the last day of employment and they are exempt from PIT to the extent equivalent to the prescribed amount mentioned above. If a payment exceeds the prescribed amount, the excess will be taxable.
20. Regulatory compliance and tax audits
While a RO is not subject a corporate tax audit because it does not pay corporate tax. However, may be audited for other taxes and regulatory compliance matters, including an audit of employees’ PIT, statutory insurance contributions or an activity audit etc. These audits are often ad-hoc and at short notice. The Chief Rep must be around during these audits to respond to the auditors’ queries. However, the Chief Rep may authorise a representative to attend these audits by a formal letter of authorisation, but the Chief Rep must review and sign off the final audit reports issued by the auditors.
21. Common regulatory and tax issues
A RO may have the following issues:
- Acting beyond its licensed scope of activities by engaging in activities considered as income-generating activities such as delivering services, invoicing, collecting payments on behalf of its head office etc;
- Failure to register the employees with the labour office, tax office or social security office;
- Failure to file employees’ tax returns or statutory insurance contribution reports;
- Failure to report employees’ PIT correctly such as not reporting employees’ benefits (e.g., housing, cars, airfares, allowances, bonuses etc) for PIT;
- Failure to file annual activity reports or statistics reports etc.;
- Permanent establishment issues (as described above).
22. Penalties for non-compliance
A RO may be subject to various penalties for non-compliance, including administrative penalty, tax penalty and interest penalty. The major penalties for tax related offences include:
- Total administrative penalties capped at VND200 million (~USD8,600) for administrative tax offences)[17];
- 20% tax penalty on the tax shortfalls for under-reporting tax liabilities (e.g., employees ‘PIT)[18];
- Daily accruing interest penalty of 0.03% per day (i.e., 10.95% per annum) on tax in arrears[19];
- Up to 300% of the tax shortfall, for tax fraud or tax evasion[20];
There are also various administrative penalties for non-compliance with regulatory reporting requirements. In extreme cases, the licensing authority may revoke a RO’s license in the following situations[21]:
- The RO is dormant for over 1 year and does not communicate with the licensing authority;
- The RO does not lodge the annual activity reports for 2 consecutive years;
- The RO does not provide an explanation requested by the authority concerning its activities within 6 months following the deadline for such an explanation or the date of the authority’s request.
23. Renewal and closure of a RO
When a RO’s license expires it can be renewed by lodgement of an application for renewal to the licensing authority at least 30 days prior to the date of expiry. The licensing authority will then process the application within the next 5 working day following its receipt of all required application documents, including evidence of fulfilment of all applicable tax obligations (i.e., employees’ PIT and statutory insurance contributions) and evidence of the RO’s on-going concerns[22]. In practice, the process of renewal of a RO’s license is quite fast and simple.
A RO may be closed at any time by lodgement of an application to the licensing authority, which will then process the application within the next 5 working days following its receipt of all required application documents, including debt clearance documents such as clearances of employees’ salaries, tax debts and statutory insurance contributions etc[23]. In practice, the process of closing a RO often takes considerable amount of time due to delays caused by the closing tax audit and tax clearance processes.
[1] Art 7, Government’s Decree 07/2016/ND-CP dated 25 January 2016 effective from 10 March 2016 (“Decree 07”).
[2] Art 10, Ibid.
[3] Art 9, Ibid.
[4] Art 11.3, Ibid.
[5] Art 30, Ibid.
[6] Art 33.3, Ibid.
[7] Art 33.5, Ibid.
[8] Art 33.6, Ibid.
[9] Art 33.7, Ibid.
[10] Article 16, Labour Codes.
[11] Circular 78/2014/TT-BCT, Art 2.d
[12] Art 11.1.2.2(a), Cir 205 for interpretation of tax treaty provisions.
[13] Art 2.1, Cir 78.
[14] Art 7.2 and Appendix 1, Cir 111.
[15] Art 17, Labour Codes.
[16] Art 42, Ibid.
[17] Art 6.2(a), Cir 166.
[18] Art 6.2(b), Ibid.
[19] Art 3.3, Cir 130 amending Art 34.2, Cir 156.
[20] Art 6.2 (c), Cir 166.
[21] Art 32 & 43, Decree 07.
[22] Art 22 & 23, Ibid.
[23] Art 36 & 37, Ibid.
