Consideration When Operating A Representative Office In Vietnam

September 23, 2024

Representative Offices (ROs) offer foreign investors a low-cost, efficient entry point into the Vietnamese market. While providing advantages such as easy setup and minimal compliance requirements, ROs also come with specific operational limitations and potential risks. Understanding these aspects is crucial for businesses considering this popular form of commercial presence in Vietnam.

What is a representative office in Vietnam?

A Representative Office (RO) is a popular commercial presence for foreign investors in Vietnam. Many foreign investors or traders commonly use the RO as the initial vehicle to enter the Vietnam market. RO operations have proved to be efficient for the purpose of operation management, facilitating trade, and relationships with customers in Vietnam.

Advantages of opening representative office in Vietnam

Opening a representative office (RO) in Vietnam offers several key advantages for foreign investors, particularly those new to the market. For new investors, it’s essential to have a preliminary step to explore the market potential before establishing a complete foreign-invested enterprise.

Easy to set up (6 – 8 weeks to set up)
Cost-saving (No investor’s capital required, minimize operation costs)
Simple operation with limited compliance requirements (annual reporting & Employee tax obligation only)

However, operating a Representative Office (RO) in Vietnam also involves specific considerations, as ROs are legally distinct from other forms of foreign investments. ROs serve to represent foreign companies in activities like market research, business promotion, and partnership development, but they cannot engage in profit-generating activities directly.

*Opening representative office in Vietnam*

Requirements for operating an RO in Vietnam

While representative offices (ROs) in Vietnam offer several advantages, they also come with specific operational requirements and limitations.

Permitted activities

ROs are limited to conducting liaison activities, market research, and promoting the parent company’s business. ROs cannot engage in direct sales or generate revenue locally. While there are specific definitions of the RO’s restriction, there are certain arguments on auxiliary activities and what may be regarded as “directly profit-making activities”. Accordingly, there has been a growing number of inspections of ROs by regulatory bodies and tax authorities. These inspections commonly target those ROs which are alleged or suspected of engaging in prohibited activities.

Recent regulatory and tax inspections have been very coordinated in their deliberations (inspection team comprising both licensing and tax authorities) and sophisticated in their approach (extended scope and length of examination); and rigorous in their actions (strict measures against violations).

Target of the audit/inspection:

ROs in some special industry (i.e., pharmaceutical, trading)
ROs with excessive employment of sales and marketing personnel
ROs have a full organization chart of a normal company
ROs with significant expenditures on promotion and marketing
ROs managing the entire supply chain

The consequence of the audit or inspection may include one or a combination of financial impacts such as administrative penalties, assessment of tax liabilities, or non-financial impacts such as reprimands, withdrawal of the RO license, and exposure to negative publicity

Employment considerations

There is no limitation on the number of employees an RO can have. However, a number of local and expatriate employees, their scopes of work, positions, etc. should be aligned with the scope of the RO’s permitted activities. There are common risks from labor management of the RO:

Without a working permit for expatriates
Violation in registration of the internal labor regulations
Entering a labor contract without proper terms and conditions
Improper employee’s titles and scopes (not in line with the RO’s operation scopes)
Without periodical labor reports to labor authorities

Taxation and accounting – Tax audit pain point

ROs are not subject to corporate income tax (CIT) as they cannot engage in revenue-generating activities. However, they are responsible for personal income tax (PIT) for employees and other mandatory employment contributions such as social insurance, and trade union contributions.

Though not subject to CIT, ROs are still required to maintain proper accounting records and may need to submit reports to authorities for audit or inspection purposes.

A tax audit can technically last for 40 to 70 working days; however, in practice, it could take months or years to complete. Besides the effects of the internal processes and working schedule of the tax authority, labor authority, or social insurance authority, other common issues leading to such a prolonged process result from the simple operation and maintenance of the RO, specifically as follows:

Insufficient personnel having expertise in labor, accounting, and tax, as most ROs only employ sales and technical staff to support the parent company in liaison and development of business opportunities in Vietnam;
No accounting books and vouchers—in some cases, not even a petty cash book is available to track the expenses and payments of the RO;
Tax filings and payments are outsourced to a third party without adequate and diligent supervision and handling, which may lead to loose control and governance. This situation also arises in labor compliance responsibilities and administrative work, such as company policy and financial policy, as well as with other legitimate supporting documents.
There are also potential tax risks for the expenses incurred on activities for production control, analysis and technical testing and other out of RO license scopes would not be accepted by the tax authority and treated as income of the Chief Representative when the RO is liquidated or closed. This would result in a huge tax liability for the Chief Representative and prolong the liquidation process for years.

The longer the RO is operating, the higher the chance that it will fall into one of the risky situations outlined above. Taking appropriate actions and measures is necessary to ensure an efficient operation as well as to smooth and shorten the exit period.

representative office vietnam requirements — *Requirements for operating an RO in vietnam*

RO operation – Planning ahead

First, even though it is not officially required, the RO should prepare, maintain, and regularly reconcile legitimate and adequate documentation such as financial policy, claim forms, invoices and supporting vouchers, bank statements, payroll, statutory reports on the RO’s operation, labor usage, calculation spreadsheets, and tax declaration returns. Without appropriate documentation, additional income tax collection is inevitable and could become significantly material as time passes, and corresponding with the scale of the RO.

Second, the RO should opt for a periodic extensive review of its labor, accounting, and tax compliance positions. The review is to control the documentation status, labor, and tax compliance, as well as other liabilities, if any. Upon identification of any potential issues, the parent company could consider preparing or supplementing the documentation or correcting issues in a timely manner, rather than waiting until the tax audit for the RO’s closure. An estimated costs and budget fund also could be accrued in advance to cover the risks on closure and shorten the time for processing.

Third, revisit business model and consider alternative forms of market presence in Viet Nam, where applicable.

Talentnet’s solution

To address the complexities and requirements of operating a representative office (RO) in Vietnam, Talentnet offers a comprehensive suite of services designed to support foreign companies throughout RO journey.

Licensing & Post-licensing support
Corporate Secretarial Services
Expatriate’s immigration support (visa, work permit, temporary residence card)
Payroll & PIT compliance support
Periodical health check & PIT audit support
Other advisory/ adhoc supports

Contact information

Ms. Doan Thi Kieu Van

Associate Director of Payroll Services and Corporate Services

Email: vandtk@talentnetgroup.com