Avoiding Private Risks in Vietnam for Foreign Missions

To avoid obtaining permanent establishment (PE) status, Vietnamese investors should have a good understanding of the country’s regulatory framework for offices (RO) and PE. This ensures compliance, minimizes tax liabilities and mitigates legal risks.

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Investors entering new markets such as Vietnam often face permanent establishment (PE) risk, a common problem that can lead to double taxation. This risk usually arises when representative offices (ROs) of foreign firms exceed the permitted scope of activity in Vietnam. This article offers a comprehensive overview of the concepts of PE and RO, arming investors with strategies to mitigate unnecessary tax liabilities.

How does Vietnamese law define representation?

According to Clause 2 of Art. 44 Viet 2020 Law on Enterprisesthe representative office of the enterprise is “its subordinate unit, which acts as an authorized person of the enterprise, represents and protects the interests of the enterprise. In addition, the representative office must not be engaged in entrepreneurial activities and generate income.”

Besides, Resolution No. 07/2016/ND-CP dated January 25, 2016, allows the RO only to carry out liaison activities, market research, preparatory or support activities, and to facilitate the trade and investment of its parent company during the period specified in the establishment license. In terms of operational objectives, the RO is only authorized to perform certain functions, including:

• Renting of offices;
• Rental and purchase of equipment and equipment necessary for their activities;
• Hiring Vietnamese and foreigners to work in RO;
• Opening foreign currency or VND bank accounts in licensed banks in Vietnam and using these accounts only for RO transactions;
• Signing contracts for the above-mentioned types of activities to maintain its functioning (i.e. employment contracts, office lease contracts, etc.); and
• The presence of a seal with the name RO.

Vietnam’s regulations also define activities that are outside the scope of RO activities, including:

• Directly conducting profitable activities in Vietnam;
• Trade facilitation activities that go beyond what is permitted by commercial law; and
• Conclusion of any commercial contracts; and
• Making changes or additions to commercial contracts concluded by its parent company, except as permitted when the main representatives are authorized by its parent company to do these actions by means of a letter of authorization.

How does Vietnamese law define a permanent establishment (PE)?

The establishment of a PE in Vietnam is determined by the application of national legislation and tax treaties signed between Vietnam and other countries.

In Vietnam, a PE is defined as “a permanent place of business through which a foreign enterprise partially or fully carries out its commercial or industrial activities in Vietnam”.

According to the national law, the tax authorities of Vietnam determine the PE based on the following three conditions:

• Presence of “entrepreneurial institution”;
• This business establishment must be established; and
• Through this institution, the enterprise fully or partially carries out its economic activity.

Below are the forms of Vietnamese PEs through which foreign companies carry out some or all commercial operations and manufacture according to domestic regulation:

• Branches, representative offices, factories, workshops, vehicles, oil fields or other places of extraction of natural resources in Vietnam;
• Construction sites;
• Service centers, including consulting services through employees or organizations, provided that these services in the related project or projects in Vietnam continue for a period or periods exceeding 183 days in each 12-month period;
• Agents of foreign enterprises; and
• Representatives in Vietnam who have the authority to sign contracts on behalf of foreign companies or representatives who are responsible for the regular provision of goods and services in Vietnam.

If the Double Taxation Avoidance Agreement (DTAA) signed by Vietnam contains other provisions regarding PP, the provisions of this agreement shall prevail.

Overcoming the difficulties of PP in Vietnam: the challenge to improve tax legislation

The Vietnamese tax authorities may consider an RO as a PE if it carries out operations other than those permitted. The following actions may increase the risk of PE:

• Provision of services such as technical support for customers who purchase products from the parent company;
• Sales promotion and sales of products for the parent company in Vietnam; and
• Conclusion of commercial contracts on behalf of the parent company in Vietnam.

In terms of taxation, once the RO is considered a PE of the parent company, the income attributed to the RO will be subject to taxation in Vietnam, which will increase the financial burden on the foreign entity operating in the country. Failure to comply can result in significant penalties, including taxes and penalties that may equal or exceed the original tax liability.

The risk of double taxation can be quite burdensome. According to the World Bank’s Ease of Doing Business Index, businesses in Vietnam must make 32 tax payments each year, which takes approximately 498 hours to complete. This emphasizes the significant administrative burden on business.

In addition, any legal violations may jeopardize the parent company’s future efforts to transform the RO into another business unit for revenue-generating activities. The foreign parent company may face problems in obtaining the necessary licenses to establish a new company in Vietnam from the licensing authority, given that the RO has a history of violating licensing regulations.

Takeaway for foreign companies in Vietnam

Foreign businesses operating in Vietnam may inadvertently create risks for individuals, resulting in significant tax liabilities and future complications. To avoid these problems, it is imperative for companies to have a good understanding of the local laws and regulations where they operate, as well as the relevant tax treaties. This knowledge will help them identify situations that may lead to a PP, understand the associated tax consequences and determine whether they can use a tax treaty to obtain exemptions or lower tax rates.

In addition, overseas businesses must ensure that their ROs are not involved in trading operations or any part of the trading cycle that goes beyond the licensed functions. ROs must also avoid engaging in any activity that generates income for a foreign entity in Vietnam.