10 COMMON MISTAKES OF FIRST-TIME FOREIGN INVESTORS IN VIETNAM
During the process of advising foreign investors coming to Vietnam looking to conduct business activities for the first time, we often encounter cases where the investor faces a few bumps on the road due to the fact that they have not been given proper instructions or that they skipped basic and important legal guidlines since the beginning when establishing a new business in Vietnam.
Below are our summary of common mistakes of first-time foreign investors in Vietnam:
1. Transferring money from their own pockets into the company to build up capital and to cover operating costs and business investments
There are various reasons, like speculation or following the advice that the legal process of transferring money is lengthy and complicated. As a result, investors often seek shortcuts to speed up the process. Such transferring methods can cause troubles to the investor as well as their company in: (i) Accounting and tax accounting; (ii) the refund of money to the investor (the Company cannot deposit the refund in the investor’s personal account whether that account is in Vietnam or a foreign country, but can only offer cash refund in Vietnamese currency, even if it is a substantially large amount, the investor cannot transfer the fund themselves into their account in Vietnam or to abroad).
The solution to this is rather simple: all money “poured” into the company, whether in the form of capital contribution or loan, should be transferred from the investor’s account abroad into the Company’s account. This shall ensure that the Company can return the money to the investor by directly transferring into the investor’s account, where that account is.
2. Violating the time of charter capital contribution of 90 days
Vietnam Enterprise Law 2014 stipulates that within 90 days from the grant of the business registration certificate (BRC) to the entity, the business owner must fulfil their obligation to contribute capital. For foreign investors, this contribution must be made by the direct transferring of funds from the investor’s account abroad into the company’s account in Vietnam. The 90-day deadline is fixed and inextensible. Many of foreign investors still violates this rule which led to consequences in the operation of their companies, such as during the process of raising capital, increasing capital, transferring of capital and changing the operational status of the company…
3. Using a local partner to register on legal papers
Many foreign investors chose to use the names of their partners in Vietnam to complete their Company registration in the early stages without clear and reasonable legal agreements. The reason for this tendency is to speed up the process and make it less complicated, as well as cutting unnecessary costs.
However, this method might lead to consequences as legally the investor has invested all powers into their local partner (such as ownership of the company and the right to operate the company)
Investors should consider carefully and seek appropriate advices before resulting to this methods.
4. Violating compulsory requirements where the legal representative is absent from Vietnam for more than 30 days
According to the provisions of the Vietnam Enterprise Law 2014, when the legal representative of an enterprise is out of Vietnam territory for more than 30 days, it should be noted that: there must be written consent for another individual to exercise the power and obligations of the legal representative in accordance with the law during his absent (Clause 3, Article 13 of the Vietnam Enterprise Law 2014), and that under any circumstances the legal representative shall bear all responsibilities for the performance of the actions of the authorized personnel.
Without a written consent, the following situations could occur: (i) Delay in production and business activities due to the absence of managing director on behalf of the company; (ii) the company owner, Board of members, BOD appoint another person to be the legal representative of the company; (iii) the company is subjected to administrative inspection and sanctioned for administrative violations in planning and investment with a fine from 10 to 15 million VND and other relevant remedies.
5. Not grasping the provisions on “red invoice”
In the Vietnamese accounting system, vouchers with high value and legality for an expenditure or a revenue are value-added invoices (with declaration and calculation of value-added tax by the deduction method) and sales invoices (direct tax declaration and calculation), the printed of versions of such invoices are red, hence the name “red invoice”. Please familiarise yourself with people using the term “red invoice” instead of VAT invoice.
When using services and purchasing goods, please ask for the red invoice, which shall be recognized as reasonable expense and deducted from the operation expenses of the business if recorded in accordance with government regulations, before the tax payments arising from investment, production and business activities.
Many foreign investors are not familiar with Vietnam’s “red invoice” regulations, as a result many reasonable expenses for business trips such as transportation, hotel and food… are not deducted into the company’s reasonable expenses due to the lack of valid proof or documents. It is advisable that you follow the instructions of the company accountant on “invoices and documents” to avoid losses.
6. Unaccounted business trips and business expenses:
This is an expense payable to a person on business trips, usually including travel expenses, accommodation allowances, room rentals, baggage allowances (even the transferring of documents, if any), meals…during the business trip.
For such expenses to be recognized as lawful and reasonable expenses of the company and deducted from the revenue tax, it is necessary to follow Circular 96/2015/TT-BTC specifically as follows:
(I) There need to be a written assignment for the personnel to go on such business trip.
(II) The written assignment must be certified by the business dispatching the personnel (including date of departure and return) and the destination (including date of arrival and departure) or confirmed by the place of residence.
(III) Invoices and vouchers received on the business trip: travelling tickets, accommodation service invoice, food and drink invoice. If the cost exceeds 20 million VND, there must be proof of payment from the bank.
(IV) Financial regulations or internal regulations of the enterprise on travelling allowance must specifically include allowance condition and level of embursement.
7. Borrowing foreign loans incorrectly
Enterprises with 100% foreign capital when investing in Vietnam will need funding from the parent company in foreign countries or foreign organizations to implement investment projects. One of the pure speculations about borrowing is that it is based only on the voluntary basis of the parties , and that the borrower can borrow as much as they want as long as they can prove their capability to repay it. However according to Vietnamese law, enterprises are not allowed to borrow foreign capital whenever they needed but are only approved to borrow when satisfying the following requirements:
(i) The purpose of taking foreign loans to implement the company’s investment projects must be consistent with the provisions of Clause 1, Article 5 of Circular 12/2014/TT-NHNN including:
- Any production, business, investing projects using foreign loans.
- Restructure the foreign debts of the borrower without increasing the costs.
(ii) The amount of capital borrowed to start the Company’s project must not exceed the difference between the total investment capital and the contributed capital recorded in the investment certificate; or does not exceed the total loan demand in production, business plans and investment projects already approved by competent authorities in accordance with the law.
(iii) Follow the loan registration procedure:
- A loan must be registered with the State Bank within the following loan registration period:
· Medium, long-term foreign loans (with a loan term of over 1 year);
· The short-term loan (with a term of up to 1 year) is extended with the total term of the loan being over 01 (one) year;
· The short-term loan with no contract of extension, but with outstanding original loan at the time of 01 (one) year from the date of the first capital withdrawal, unless the borrower completes repaying the original loan within 10 (ten) days from the time of 01 (one) year round from the first date of capital withdrawal. And must carry out the procedures for registration for change of foreign loans when falling into one of the circumstances prescribed in Article 15 of Circular 03/2016 / TT-NHNN
(iv) Borrowing: Receiving capital, withdrawing money, repaying capital must be done via direct investment capital accounts
- Loans that do not meet such requirements will be considered illegal and will not be approved to receive funds for project implementation. Foreign investors and enterprises should pay attention to this regulation to ensure the initiative and compliance in arranging capital sources to implement investment projects in Vietnam.