Export Processing Enterprises in Vietnam: Eligibility and Alternatives
Export processing enterprises are a popular way to reduce tax liabilities in Vietnam, however, they can be somewhat challenging to establish. This brief overview outlines the requirements and the alternatives.
Many investors eyeing Vietnam as a new manufacturing hub aim to set up an ‘export processing enterprise’ (EPE). This structure is for where they intend to export 100 percent of their products to overseas markets and means they can be exempted from value-added taxes.
However, Dezan Shira & Associates has found that applying to set up an EPE is currently not as easy as it used to be with more conditions added and with each province responsible for granting licenses in their own jurisdictions. It is common for a company to find a ready-built factory in the perfect location for its business activities, but it cannot apply for an EPE because the factory for lease is not qualified.
In this article, Dezan Shira & Associates will explain what exactly an EPE is, the eligibility criteria, and alternative options so that the company can still benefit from the tax incentives associated.
What is an EPE?
Taking a closer look, EPEs are companies that are established and operate within an export processing zone (EPZ) or specialize in manufacturing products for export and operate in an industrial park (IP) or economic zone.
Vietnamese law has certain requirements in terms of facilities for EPEs. In particular, they are required to be separated by fence systems, have ports, entrance and exit doors, and fulfill requirements by customs authorities related to non-tariff areas and rules on import and export duty, such as camera installation. EPEs are often strangled by red tape and are subject to stringent tax and customs controls.
EPEs can only be located in EPZs or certain IPs meeting specific requirements. Currently, there are only four EPZs in Vietnam, out of which two are fully occupied. Investors are advised to look into other options at normal IPs. They should also check carefully whether the locations they are considering meet the above-mentioned requirements. This is not an issue for companies leasing land and then building the factories themselves but may be a concern for companies that are planning to lease a ready-built factory.
How to set up an EPE
To establish an EPE, firms must:
- Apply for an Investment Registration Certificate (“IRC”);
- Apply for an Enterprise Registration Certificate (“ERC”);
- Apply for Certification of Eligibility for Export Processing Enterprises from the customs authority;
- Apply for an Environment License if the factory produces emissions or other waste that needs to be treated before being released into the environment; and
- Apply for any product-specific permits.
After receiving their IRC and ERC, companies wishing to establish an EPE shall apply for Certification of Eligibility for Export Processing Enterprises from the customs authority. The customs office will conduct a field inspection. It may be inspected multiple times until all the requirements are met.
It is also important to note that a company must be qualified as an EPE within 12 months from the date the IRC is issued. After 12 months if the company has not yet been qualified, it will be changed to non-EPE.
EPE or non-EPE: tax incentives
The alternative to an EPE is a normal manufacturing company (or non-EPE). These firms can produce goods for the domestic market or for export. Non-EPEs can be more flexible in selecting their manufacturing location (any industrial park will do) and don’t have to set up a fence or install cameras for the customs authority to inspect their operation.
Regarding investment incentives, both EPEs and non-EPEs are entitled to corporate income tax incentives and land rental incentives based on their location and business lines. The key difference lies in the incentives in terms of customs duties and value-added tax (VAT).
An EPE is exempt from paying duties on imports and exports, as well as VAT. On the other hand, for manufacturing companies, custom duties for raw materials are not exempt but may be refunded if certain conditions are met. The ordinary VAT is also applied for manufacturing companies, and they have to conduct monthly, or quarterly declarations. It’s important to note here that where a normal manufacturing company has export activities, the equivalent creditable input VAT shall be refundable if the amount equals or exceeds VND 300 million (US$12,222). Note that VAT refunds are capped at 10 percent of export revenue.
|Investment incentives||Export processing enterprise (EPE)||Manufacturing enterprise (non-EPE)|
|CIT||Preferential rate, exemption, and reduction period based on location and business lines.|
|Custom duties||Zero duties for imports and exports.||Custom duties for raw materials are not exempted but may be refunded down the track if certain conditions are met.
Normal export duties are applied.
|VAT||Exempt.||Ordinary VAT rate is applied.
Where a company has export activities, the equivalent creditable input VAT shall be refundable if the amount equals or exceeds VND 300 million (US$12,222). Note that VAT refunds are capped at 10 percent of export revenue.
|Land rent and land use tax||Exemption or reduction of land rent and land use tax based on the location and the business lines.|
VAT plays a crucial role in cash flow and the taxation aspect of corporate budgets. It frequently serves as a primary motivator for businesses to dedicate resources towards establishing an EPE.
Nevertheless, it is imperative for companies to be aware of the challenges that can emerge during the EPE certification process. Collaborating closely with local consultants and industrial park developers is essential to ensure that all necessary prerequisites are satisfied.
In cases where a company does not qualify as an EPE but intends to export all its products, Dezan Shira & Associates recommends setting up a manufacturing enterprise specifically for the purpose of exporting manufactured goods. Subsequently, the company can request the local supervising tax department to refund the creditable input VAT that is directly associated with the export processing activities.
Lastly, companies should be aware that the assessment process can be time-consuming, and they may encounter challenges when striving to successfully secure a tax refund and optimize the refund amount. Planning for these delays is key to effectively managing cash flow and company budgets.
For support or advice with respect to establishing an EPE, contact the business advisory experts at Dezan Shira and Associates.
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Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region. We maintain offices in Hanoi and Ho Chi Minh City, as well as throughout China, South-East Asia, India, and Russia. For assistance with investments into Vietnam please contact us at firstname.lastname@example.org or visit us at www.dezshira.com
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