Vietnam vs. China Part I: Representative Offices
When considering Asia for your business operations, establishing an initial presence in Vietnam can be more economical than doing so in China
By Rosario Di Maggio
Jul. 30 – Many foreign investors operating in China today are looking at Vietnam as a sort of additional “province” or alternative hub to integrate into their current Chinese and Asian supply chain. This is particularly true in sectors where China and Vietnam compete with (or sometimes complement) each other, such as leather, shoes, textiles, furniture and light electronics. The list could go on, as Vietnam is also upgrading its industrial base to high-end and high-tech manufacturing investments. Small-sized companies, however, are often discouraged by the idea that expanding into another country would mean massively increasing overheads or that the returns would not be worthwhile when considering the initial investment.
The cost of doing business in China is undoubtedly increasing and shrewd investors are looking at potential alternatives to expand production, search for new suppliers, or lower sourcing costs in general. In this regard, Vietnam has been attracting some of the late-comers into Asia, or those who have been looking at alternatives to the Middle Kingdom.
The aim of this briefing is to assess how expensive (or cheap) establishing an initial foothold in Vietnam is, especially when compared to its increasingly expensive neighbor to the north. In particular, this article will focus on the establishment of a representative office (RO).
Both countries allow foreign investors to utilize such entities to establish a presence in the market, rent an office, hire local staff and get working visas and resident permits for their expatriate staff (and their families). Through such entities, foreign companies can normally conduct activities such as perform on-the-ground market research, liaise with clients/suppliers, coordinate with the overseas headquarters on sales or purchase activities, coordinate technology transfers, manage a local showroom, perform quality control at the supplier plant, and so on.
Registering an RO in China normally takes at least six to eight weeks while you wait to obtain approvals from five different government bodies (including the Administration of Industry and Commerce, the Public Security Bureau, the Bureau of Quality and Technical Supervision, the National and Local Tax Bureau) and then open the RO bank account. Registering an office in Vietnam is a bit faster and more streamlined, taking four to five weeks and requiring approval from three authorities (the Department of Trade, Police and the Tax Bureau) before opening a bank account.
In Vietnam, however, there is a peculiar additional requirement which is the posting of the granted RO license on three consecutive issues of local newspapers or websites, legally published in Vietnam, within 45 days from the date of establishment.
As far as maintaining an RO in both countries, the efforts and bureaucratic procedures are also very different. China now requires renewal of the Registration Certificates every year (although many cities have now started to concede several years extension), expecting foreign companies to notarize and authenticate most of the documents again and again every time. Notarization can be very costly and time-consuming in certain countries.
Additionally, beginning in 2010, China also requires an “internal inspection” by March of every year which involves the preparation of a long list of documents to be approved by several authorities in order to prove that both the RO and its overseas headquarters are actually operating properly. To add to the cumbersome procedures, a lack of coordination among Chinese authorities, as well as regionalized interpretations of national rules, can make these steps extremely frustrating (and expensive) for the foreign investor.
Vietnam ROs, meanwhile, have only to renew the Certificate of Incorporation once every five years, unless the investor doesn’t plan to relocate, change business scope, or modify the initial business structure, and there are no other compliance requirements.
When it comes to hiring local staff, Chinese authorities require foreign ROs to hire personnel through official or quasi-official HR agents supposedly guaranteeing that the RO pays social security for its staff and complies with Chinese Labor laws. This service has a cost and adds to overheads. If you plan to have more than a few local staff in China, you can be sure that running your operations via an RO will become uneconomical and actually risky, as authorities are increasingly suspicious of the activities conducted by larger offices registered as ROs.
ROs in Vietnam can hire local staff on their own and do not bear additional costs. Authorities are also less doubtful about the real nature of the activities conducted locally and they tend to close an eye on activities which stretch a bit the lawful and approved business scope of the local entity.
Some of the most striking differences between Chinese and Vietnamese ROs, however, relate to each country’s accounting and taxation requirements. An RO in China is required to keep accounting books in order, do proper tax filings every month, and prepare an annual audit by May 31 of the following calendar year. Meanwhile, in Vietnam, all of these procedures are not needed, the only requirement being a simple operation report to be submitted to the Industry and Trade Department by the first semester of the following year. This means that in China, even if an RO is not allowed to actually perform any real business activity, it will have to spend resources and time for booking expenses, perform tax declarations, and go through an annual audit and inspection.
From a tax standpoint, ROs in China need to pay business tax, corporate income tax, and other minor taxes on a deemed profit basis (this is the most used tax computation method) which currently put a tax burden on ROs of at least 12 percent on the official running costs. By comparison, Vietnam does not require ROs to pay any corporate tax but only, as its Chinese counterpart, employees’ personal income tax.
As it appears from the above, at the time of writing, establishing an RO in Vietnam is easier and much more economical than registering the same entity in China. However, this does not mean that foreign investors interested in having a presence in Asia should rush into Hanoi or Ho Chi Minh City, as the right choice of location and structures must always be decided according to business opportunities rather than costs comparisons only. Instead, what this indicates is that conducting proper due diligence on the various investment options in Asia may save a lot of costs to those investors interested in registering and maintaining a presence in this part of the world.
Rosario Di Maggio is Regional Manager for Vietnam at Dezan Shira & Associates and is based in the firm’s Hanoi office after previously being based in the firm’s Guangzhou office for six years. Dezan Shira & Associates is a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia.
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