07 important things to know before investing in Vietnam

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07 notes you need to know before investing in Vietnam

Vietnam continues to welcome FDI, and the government has policies in place that are generally favorable to foreign investment. Continuous economic reforms, new free trade agreements, a young and increasingly urbanized population, political stability, and low labor costs are all factors attracting foreign investment to Vietnam.

There are a few things you should be aware of before beginning your investment in Vietnam. We have chosen the top seven points that we believe are most important to foreign investors. Understanding these warning signs will make your market entry strategy more effective and save you money.

1. Investment Incentives

There are a number of businesses in Vietnam are subject of tax incentives, especially those which involve into social development purpose or high-technology. In particular, projects in the following sectors are eligible for investment incentives, including lower corporate income tax rates, exemption of some import tariffs, and/or favorable land rental rates: high-tech; research and development; new materials; energy; clean energy; renewable energy; energy-saving products; automobiles; software; waste treatment and management; and primary or vocational education.

Besides, foreign investors are exempt from import duties on goods imported for their own use that cannot be procured locally, including machinery; vehicles; components, and spare parts for machinery and equipment; raw materials; inputs for manufacturing; and construction materials. Remote and mountainous provinces are allowed to provide additional tax breaks and other incentives to prospective investors.

In the manufacturing area, many industrial parks offer lower rental rates and some free utility fees in order to attract foreign investment into their local economic zones. These incentives are subject to change and vary from province to province.

2.The legal transformation toward foreign investment from 2021

The legal system includes provisions to promote foreign investment. The New Investment Law of Vietnam which starts its effect in 2021 has introduced a “negative list” approach to foreign investors. This approach aims to approve the foreign investment, meaning foreign businesses are allowed to operate in all areas except for six prohibited sectors (illicit drugs, wildlife trade, prostitution, human trafficking, human cloning, and other commerce-related to otherwise illegal activities).

Furthermore, the new Investment Law has simplified the incorporation process by imposing an online application for business incorporation and removing or lifting some business conditions. However, it imposed National Security as one of the criteria for foreign investment approval by the local government. This new add-on caused a brief hiccup in paper processing for a few months because DPI (Department of Planning and Investment) did not know how to evaluate this factor. As the result, many company registrations got delayed for weeks without receiving approvals.

3. Incorporation timeline

The Law on Investment 61/2020/QH14 also requires foreign and domestic investors to be treated the same in cases of nationalization and confiscation. However, foreign investors are subject to different business-licensing processes and restrictions, and Vietnamese companies that have a majority foreign investment are subject to foreign-investor business-license procedures. While it takes only 1 week to open a 100% local company, the timeline for a foreign-owned company is 4-8 weeks. It can be longer if the business falls into Conditional and Restricted business lines of Vietnam.

4. Capital Investment

By the law, the capital investment is accessible and can be spent for the benefit of the company. As the result, the injected capital can be used to pay for company rent, employee hiring, and other operational expenses. If you have spent all of your capital and want to inject more, you must first amend your business license (which takes some time).

You will only inject capital after the company has been established successfully. Eventually, you’ve got three months to do it. However, keep in mind that if you miss the deadline for this capital contribution, the company will be forced to close or you will face a significant penalty if you request an extension.

Generally, many businesses do not have a minimum capital requirement, so you can put any number you want. But, if you want to use the company to sponsor your investor visa, you should have a substantial amount of capital. Some specialized businesses do necessitate capital. Therefore, before making a decision, you can consult with us.

Read our FAQ to learn more about the most concerned topics regarding How to open a business in Vietnam.

5. Employment Policies and Practices

Recruiting staff in Vietnam can be a challenge to many foreign-owned companies in Vietnam, due to the language and cultural differences. Also, the labor law of Vietnam is known for usually giving companies a hard way if there is any dispute in the employment relationship. A new Labor law turned to effect from 2020 gave some more spaces and rights to both employees and employers if they want to terminate the contract, however, the major red tapes still remain.

Vietnamese law states that employers can only recruit foreign nationals for high-skilled positions such as manager, managing director, expert, or technical worker. Local companies must also justify that their efforts to hire suitable local employees were unsuccessful before recruiting foreigners, and their justification must be approved in writing by the local authority and/or the national government. This does not apply to board members elected by shareholders or capital contributors.

Over the last four years, the government has issued decrees that have made it easier for foreign investors and workers to obtain visas, work permits, and residence. The government plans to further streamline this process in 2021.

6. Tax compliance

Vietnam has a distinct tax and accounting system that is highly localized and necessitated the use of a separate reporting system. All tax reports must be completed in Vietnamese and in accordance with VAS standards.

In addition, depending on the volume of transactions, a company may have a monthly or quarterly reporting cycle. However, tax reporting is enabled by default, and the company must still submit reports for months when there is no activity. Late or missed report submissions may result in the tax code being blocked, a financial penalty, and additional time to unblock the tax code.

Foreign-owned company is also subject to mandatory audited financial statement every year.