REPRESENTATIVE OFFICE VS 100% FOREIGN OWNED COMPANY
While representative offices (RO)only have the function of contacting, exploring the market, promoting the business opportunities, the Company can carry out business activities to bring about profits. When conducting them, foreign traders may get incentives in the investment policy of the Government of Vietnam.
The company is a legal entity so it is possible to sign and execute contracts, transactions and enhance competitiveness on the market. With the independent source of capital, the company can actively carry out business investment activities, thereby quickly catch up with opportunities, fluctuations of the market, optimize profits for foreign traders wanting to invest in Vietnam.
Because of its independence, once it has come to stable development, the company is capable of operating independently and making a profit without the parent company’s management. At this time, foreign traders can implement other business investment projects as well.
In general, the most fundamental difference between a representative office of a foreign merchant and a 100% foreign owned company is that the company can carry out business investment while the representative office does not. This difference in fundamentals leads to other differences in organization, management, operation, rights and obligations as follows:
- The company has a hierarchical management system that is tighter and more complex than a representative office.
- The management of the company complies with the law of enterprises.
- When conducting business activities, the company has to notify the tax office and pay tax to the government. The taxes and duties to be paid depending on the business size, the profit level, the sector and the law. The only tax obligation of RO is to declare and pay personal income tax on behalf of the employees.
- The reporting and management system of the company is more complex than the representative office. Consequently, it requires a high level of human resources with legal knowledge to ensure compliance with the company’s obligations in Vietnam.
Thus, compared to representative offices, managing and operating a company is complex and expensive. Establishing a company requires a much larger investment than just establishing a representative office. However, the comparison is only meaningful if the only purpose is to explore and invest in the Vietnamese market. RO only function as intermediaries for communication, research, and understanding of the domestic market. This is only a short-term task, and the long-term goal is profit. For this function, the representative office is not allowed to perform, this is the time when foreign businesses need to think of establishing a company to continue their investment after careful research.
Some criteria to evaluate and compare:
Totally foreign owned company
|There is no business function, only play a liaison role, promoting business opportunities of foreign traders
|Has a business function.|
|Entity signing business contracts||
Overseas traders are signers of contracts
|Self-contract with partners|
|Contract performance||Overseas traders have the responsibility to perform contracts with partners in Vietnam. Meanwhile, representative offices shall act as liaisons and supporters.||
To implement the signed contracts
The RO will only declare and pay personal income tax on behalf of the employee working at the Rep.Office. Nevertheless, foreign traders are obliged to pay taxes in accordance with the tax regulations of the country where the trader is a citizen.
|A 100% foreign owned company established in Vietnam bearing Vietnamese nationality shall be liable to tax in accordance with the law of Vietnam. For example, taxes to be paid: Corporate income tax, excise tax, value added tax, personal income tax. depending on the business lines, it may be subject to additional taxes: excise taxes, import tax, land rent, fees, fees or other taxes.|
|Profit||Representative offices do not make any profits. Foreign traders earn profits from their business activities.||In case of profitable business, it needs to fulfill tax and other financial obligations as provided by law and ensure payment of all debts and property obligations on time. Then the foreign trader shall receive the profit. The transfer of profits to the country shall be subject to the laws of the country of which the trader is a national.|
|Companies need to register business capital so they will need a large investment. Moreover, the procedure of establishment is relatively complicated and requires many steps. The duration of its establishment is approximately five weeks, in the case of conditional investment or other complex cases, it may be extended.
Estimated investment cost:
|Duration of operation under license||
Long service life obviously goes with high investment costs. Its establishment is suitable for traders who intend to develop a long-term, stable business in Vietnam.