FDI regulations and setting up a subsidiary company in Vietnam

Foreign Direct Investment Regulations

Ever since adoption of the Doi Moi in 1986, Vietnam has attracted foreign direct investment. Rich in natural resources, disposing of a favourable geographical location and counting on a young, very skilled work-force, Vietnam has benefited from steady economic growth over the past two decades. WTO membership and a number of recently agreed or signed Free Trade Agreements further contribute to the attractiveness of Vietnam for foreign investors. Efforts by the Vietnamese government, together with a favourable political environment and increased competitiveness have led to a real investment boom in recent years. The Vietnamese government implemented a variety of policies and adjustments within the banking sector that target at stabilizing a previously high inflation rate.

Setting up a foreign owned company

Foreigners intending to set up their own company in Vietnam have different possibilities for doing so. A foreign investor, like any local investor, can choose from the following types of legal entities:
  1. A private enterprise (sole proprietorship)
  2. A general partnership or a limited liability partnership
  3. A limited liability company (LLC): either single-member (SLLC) or with two or more (max. 50) members (MLLC)
  4. A shareholding or joint stock company (JSC): company with at least three shareholders but no maximum number of shareholders
Any of these entities can be fully foreign owned. A brief description, including advantages and disadvantages, of all four types of these legal entities are described below.

1. Private Enterprises

This is the most simple business entity in Vietnam. A private enterprise is owned by an individual who is liable for all of its operations with his/her entire property. Advantages: Procedures for establishing a private enterprise are simple; Full decision-making power by owner; Owners of private enterprises do not pay PIT after they have paid for CIT. Disadvantages: The owner of a private enterprise remains fully liable.

2. Partnerships

A partnership enterprise has at least two partners who are co-owners of the company. A partnership can also have limited partners, who are liable for debts of the partnership only to the extent of their capital contribution. Advantages: Generally a partnership consists of only a few members managing the company based on mutual trust and under majority rule; due to the partners’ liability, a partnership can easily gain trust from customers and business partners. Disadvantages: Assets of partners and limited members are required to be fully in partnerships possession; if the company cannot pay incurred debts, the members will be responsible for payment of debts using their personal assets.

3. Limited Liability Companies (LLC)

There are two types of limited liability companies in Vietnam, which are a multi-member LLC and single-member LLC.
  • Multi-member LLC is a company of which members may be organizations and/or individuals and must not exceed the number of 50. They are responsible for debts and other property liabilities of the enterprise within the amount of capital that they committed to the enterprise.
Advantages: Members have limited liabilities to the extent of capital that they have contributed to the enterprise; purchase and transfer of capital between members are strictly regulated by law, limiting the penetration of strangers into the company. Disadvantages: No entitlement to issue shares; strict organizational structure: they must have a members’ council, chairman of the members’ council and director or general director, if there are eleven or more members a control board is needed as well; credibility with customers and partners may be difficult at the beginning due to a limited scope of liability.
  • Single-member LLC is an enterprise owned by one organization or individual. The owner is liable for debts and other property liabilities of the company within the charter capital of the company.
Advantages: Organizational structure is not too complicated; owner has full authority on all business operations of the company but is only liable within the company’s charter capital; considered a safe option for enterprises owned by an individual or an organization. Disadvantages: No entitlement to issue shares; owner is entitled to withdraw the capital only by transferring part or whole of the charter capital to another organization or individual; if the capital is withdrawn from the company by another way, the company owner will be liable for all debts and other property liabilities of the company.

4. Joint Stock Company (JSC)

A joint stock company is an enterprise where charter capital is divided into equal portions (shares). The minimum number of shareholders is three with no restrictions on a maximum number. Shareholders may be organizations and/or individuals, and are able to freely transfer their shares in most cases, except for those prohibited by Law on Enterprises. Advantages: Liability of a shareholder is limited to the value of the capital that he/she has contributed to the company; ability to raise capital through the issuance of shares; flexible capital structure; high ability to raise capital and to freely transfer/ purchase shares. Disadvantages: Management and operation can become difficult if shareholders are split into groups with different objectives; rather complicated and strict organizational structure with shareholders’ meeting, management board, the director or general director and control board, if more than eleven shareholders, either being individuals or with a shareholder being an organization holding with more than 50% of total shares.

Land ownership

In Vietnam, all land belongs to the people and land ownership is therefore theoretically not possible. In practice, this limitation is circumvented by issuing so called ‘Right to Use Land (LUR)’, which is a land lease. There are different kinds of LURs with different duration, in Vietnam often referred to as Green book (25 years) or Red book (50 years). For residential, commercial and business construction purposes, LURs are usually granted for 50 years. Where investment projects require large investment capital, but suggest a slow capital recovery rate, the duration of lease of land can be exceptionally granted for up to 70 years.