DOING BUSINESS IN VIETNAM – EVERYTHING ABOUT A REPRESENTATIVE OFFICE

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What is a representative office of a foreign investment company in Vietnam?

A representative office allows a company investing in Vietnam – within certain limits – to scout for business opportunities for, and promote the business of, the foreign headquarters. It must not have a business of its own aimed at generating profits. Although it is not a separate legal entity, a representative office may conclude employment contracts, rent office space and open a bank account in its own name. Liabilities incurred by the representative office are ultimately borne by the foreign parent company (headquarter).

What A Representative Office Can do

Representative offices can rent office space, hire staff, have their owned seal, and open a bank account. In this regard, they are treated like a legal entity.

Other business transactions (e.g. the sale of goods, or the provision of a service) have to be conducted directly between the foreign investment parent company and the Vietnamese business partner. This means that the contract with the Vietnamese business partner has to be signed by an authorized person from the foreign parent company.

The chief of the representative office can sign such a contract only if he or she has a power of attorney from the foreign parent company. This power of attorney cannot be a general power of attorney for “all business transactions of the headquarter relating to Vietnam”, but must make reference to the specific transaction. The power of attorney has to go through a so-called legalization procedure by which a Vietnamese diplomatic mission to the home country of the parent company certifies that the power of attorney is genuine.

What A Representative Office Cannot do

Representative offices must not engage in own profit-generating business, but are restricted to the following activities: (a) exercise of the function of a liaison office; (b) facilitation of projects with Vietnamese parties; (c) market research to promote opportunities for the sale of the parent company’s products and services; and (d) monitoring performance of contracts which the foreign parent company has signed with Vietnamese parties.

As a representative office is not allowed to engage in profit-orientated activities, money out of transactions between the parent company and a Vietnamese business partner should not flow through the bank account of the representative office in order to avoid misunderstandings. The permit to operate a representative office (so-called “representative office license”) is usually valid for 5 years. It can be renewed. The application for renewal has to be filed 30 days prior to the expiry of the license at the latest. The license is granted for a shorter period if the business registration of the foreign company in its home jurisdiction expires in a shorter time.

The Chief Representative

A representative office must have a person registered to act on its behalf (so-called “chief representative” or “chief rep”). This person may be a foreigner who is not resident in Vietnam. However, in this case the chief rep has to issue a power of attorney to a person resident in Vietnam to assure that all obligations of the chief rep are met in time. The power of attorney does not have to be registered with the authorities.

The Vietnamese tax authorities are in practice of the opinion that a non-resident chief rep has to submit at least part of his or her income to Vietnamese personal income taxation. In order to register the exchange of a chief rep, or the closure of the rep office, proof is required that the previous chief rep met all his or her tax obligations in Vietnam. This proof is difficult to provide if the non-resident chief rep did not file personal income tax returns, or the representative office did not withhold personal income tax from his or her salary.

The Representative Office’s Obligations

A representative office must file an annual report about its activities with the local Department of Industry and Trade prior to the last business day in January of the following year. There are presently no legal restrictions on the number of employees a representative office can have, but a high number of employees could indicate that the representative office operates beyond its permissible business scope. The sanctions for engaging in commercial activities are, in this order, (i) warning, (ii) fine, (iii) suspension or withdrawal of the license.

How To Set Up A Representative Office

Office Rental Contract: The application for a representative office license requires, amongst others, the submission of a rental contract over office space to be used by the future representative office. As the representative office is not yet in existence and therefore cannot conclude the rental contract, the parent company usually signs a memorandum of understanding with the landlord outlining the contents of the future rental contract. This memorandum of understanding is part of the application file for the representative office license. The authorities do not accept contracts with providers of virtual office space. Furthermore, unless the office space is rented from a company specializing in the letting of offices, it is necessary to check whether the landlord is allowed to let the office and whether the memorandum of understanding or the rental contract have to be notarized.

Tax Registration Number or Tax Code: As a representative office is not allowed to engage in profit-orientated activities, it is neither required to employ a chief accountant nor to have an accounting system in place. No corporate income tax or VAT returns have to be filed. There is no minimum taxation on the activities of representative offices like e.g. in China. Nevertheless, a representative office must obtain a tax registration number (so-called “tax code”) in order to enable it to withhold personal income tax from salary paid to its employees. A representative office is not allowed to issue so-called red invoices. These are invoices that can be used by the recipient to claim an input VAT set-off and deduct business expenses from their corporate income tax base. A red invoice issued to a representative office cannot be used by the representative office to claim an input VAT deduction.

Legalized Documents: Documents issued outside of Vietnam (such as the business registration certificate, the articles of association or the audited financial statements of the parent company) have to be legalized. Legalization is a procedure to certify the authenticity of foreign documents. In practice, most applicants (i) make a copy of the original, (ii) have a notary in their home jurisdiction certify that the copy corresponds to the original, (iii) have a competent body certify that the notary acted within his or her powers and finally (iv) obtain a statement from a Vietnamese mission to their home country that the procedure was followed correctly. All documents in a foreign language must be translated into Vietnamese; the translation must be certified as correct by a Vietnamese notary. Sometimes, translation into Vietnamese is done by the Vietnamese diplomatic mission that has legalized the document.

The application dossier for a representative office license has to be filed with the local Department of Industry and Trade and comprises, amongst others, (i) the application, (ii) legalized copies of the parent company’s articles of association, its audited financial statement of the previous year, evidence of business registration, (iii) notarized copy of the foreign passport or the Vietnamese ID card of the chief rep (must be legalized if notarization was done by a notary abroad).

The official time frame for the issuance of the representative office license is 15 days after the Department of Industry and Trade has received the complete (complete in the Department’s view) application dossier. Within 45 days after the issuance of the license, the representative office has to announce its establishment in the newspaper, inform the authorities of the details of its employees, open a bank account and register its seal (so-called “post-licensing procedure”).

Special rules exist for representative offices in particular domains (banks, financial services, legal services, culture, education, tourism, non-profit trade promotion organizations).

Important Sources Of Law:

Commercial Law dated 14 June 2005, in particular Articles 16-18 (National Assembly, No. 36/2005/QH11)

Decree 72 dated 25 July 2006, as amended by Decree 120 dated 16 December 2011, providing detailed regulations for implementation of the Commercial Law with respect to representative offices and branches of foreign business entities in Vietnam (Government, No. 72/2006/ND-CP

Circular on representative offices and branches of foreign business entities in Vietnam dated 28 September 2006 (Ministry of Trade, No. 11/2006/TT-BTM)