FOREIGN INVESTMENT IN VIETNAM: WHAT TO CHOOSE – A REPRESENTATIVE OFFICE, A BRANCH, A SUBSIDIARY OR A JOINT-VENTURE?

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Foreign investment companies wishing to do business in Vietnam with own staff on the ground (i.e. personnel who do not attend to the business on a fly-in basis only, but live in Vietnam) must obtain a permit and register a presence in Vietnam. According to the Vietnam Foreign Investment Law, This presence can take the shape of a (i) representative office, (ii) branch, (iii) subsidiary or (iv) a joint venture.

A representative office is allowed – within certain limits – to scout for business opportunities for, and promote the business of, the foreign headquarter. 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).

A branch, in contrast, may engage in profit-orientated activities. It is in many aspects treated as a separate legal entity in practice, but does not shield the foreign investors in Vietnam from liabilities incurred in Vietnam. Liabilities of the branch are ultimately borne by the foreign parent company (headquarter). In practice, it is only possible to open branches of law firms, insurance companies and banks as implementing guidelines are missing for other sectors.

A subsidiary is a separate legal entity with its own business aimed at generating profits. Liabilities of the subsidiary are – with the possible exception of cases where the parent company  fraudulently uses a subsidiary to shield itself from liabilities vis-à-vis creditors – not borne by the foreign parent company. A subsidiary can therefore shield the foreign parent company that invests in Vietnam from liabilities incurred in Vietnam.

A joint venture – Foreign investors wishing to do business in Vietnam may also choose to solicit the cooperation of a Vietnamese business partner and form a joint venture. A joint venture can be established in the shape of a (i) joint venture company or (ii) business cooperation contract. A joint venture company is a separate legal entity (usually in the legal form of a limited liability company – LLC – or, less commonly, joint stock company – JSC) having the joint venture partners as its shareholders. The joint venture company shields the foreign investment partners from liabilities derived from the joint enterprise. A business cooperation contract is an agreement between the joint venture partners to cooperate in, and share the profits of, a specific project. It does not create a separate legal entity and therefore does not shield the foreign investor from liabilities incurred in Vietnam, although for tax purposes, the business cooperation is treated as an entity of its own. Contrary to what one might expect, a business cooperation is not “easier” to establish or dissolve when compared to a joint venture company. In both cases, the foreign investor has to obtain a permit to invest in Vietnam (so-called investment certificate) which can be a time-consuming and cumbersome procedure. The liquidation procedure is also essentially the same. It is sometimes suggested that a business cooperation is more flexible than a joint venture company as it would allow the parties to agree freely on profit distribution. However, this should in practice also be possible for the shareholders (“members” in Vietnamese legal parlance) of an LLC.