A representative office of a foreign trading business in Vietnam is a dependent unit of the foreign business and could provide an important step in understanding the local market before officially expanding the business in Vietnam. At a first glance, it seems to be quite a simple business model to establish, run, and manage, with minimum costs. However, in practice, is this assumption actually valid?
Establishment of a Representative Office
Part of the above assumption regarding the establishment of an RO is true, as the main conditions to establish an RO in Vietnam can be considered simple and straightforward, i.e. the foreign trader should be legally established or registered in its home country or territory and operating for at least one year from the date of its establishment.
The RO can have its own physical office, company stamp, and bank accounts to receive operating funds from the parent company, can hire employees and pay salaries. It can conduct liaison activities, market research, and promotion for its parent company’s business in Vietnam.
However, as a result of the simple establishment process, the term of the validity of the RO’s establishment license as well as its scope of activities are quite limited. An RO can only operate for a maximum of five years, after which it will be subject to examination from the licensing authority in order to extend its license.
Regarding the scope of its operations, an RO is only allowed to conduct a restricted number of commercial promotional activities as mentioned above, and cannot generate any direct income. Accordingly, a full accounting regime or independent audit of financial statements is not required.
Regarding taxation, ROs are mostly subject to personal income tax solely for their employees. Occasionally, the RO could be subject to foreign contractor withholding tax for certain expenses settled with foreign suppliers for goods and services imported or rendered in Vietnam.
Everything up to this point is not that complicated in comparison to a company or other type of organization.
The RO may be closed in Vietnam in the following cases:
- In accordance with a decision of the foreign trader;
- When the foreign trader winds up;
- When the RO’s establishment license expires but the RO does not apply for an extension, or its application is rejected by the competent authority; or
- When the RO’s establishment license is revoked.
Before closing, the RO should ensure it has fulfilled all its obligations and should clear all pending issues or liabilities with its employees, partners, and the relevant authorities. Of these clearance procedures, tax clearance and tax code closure, and in some cases social security clearance, are the most time consuming and “miserable” procedures, because the competent authorities could aggressively scrutinize and reassess the RO’s submitted declaration returns and tax payments during the process. This is also the last chance for the tax authority and social security authority to collect any shortfalls in tax and insurance premium payments as well as relevant administrative penalties, fines, and interest.
A tax audit can technically last for 40 to 70 working days; however, in practice, it could take months or years to complete. Beside the effects from 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.
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.
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.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
My Dang is Director of Tax Services, Grant Thornton (Vietnam).
The author may be contacted at: firstname.lastname@example.org