Guide to Establishing an Economic Organization for Foreign Investors

Vietnam is becoming an attractive destination for foreign investors (FDI) thanks to its favorable business environment and attractive incentive policies. One of the popular methods to enter the Vietnamese market is by establishing an economic organization. However, the legal process and administrative procedures can be complex without thorough preparation. This article will provide detailed information on the conditions, processes, and benefits of establishing an economic organization in Vietnam.

1. What is the establishment of an economic organization?

1.1. Definition of establishing an economic organization

Establishing an economic organization is the process in which an individual or organization contributes capital and registers the establishment of a business entity in Vietnam to carry out investment and business activities. According to the 2020 Investment Law, economic organizations include:

• Enterprises (limited liability companies, joint-stock companies, private enterprises, partnerships)
• Cooperatives, cooperative unions
• Other organizations that engage in business activities according to Vietnamese law.

With strong economic development, more and more foreign investors are choosing to establish economic organizations in Vietnam to take advantage of market opportunities, tap into abundant human resources, and benefit from investment incentive policies.

1.2. Common types of economic organizations in Vietnam

When establishing an economic organization in Vietnam, investors can choose from the following legal models:

1.2.1. Single-member Limited Liability Company

• Owned by one individual or organization.
• The owner is liable for the company’s debts only to the extent of their capital contribution.
• Suitable for investors who want to have full control over the company without the involvement of many shareholders.

1.2.2. Limited Liability Company with Two or More Members

• Has 2 to 50 members contributing capital.
• Members are liable for debts within the scope of their capital contribution.
• Cannot issue shares to raise capital like joint-stock companies.

1.2.3. Joint-stock Company

• Has at least 3 shareholders, with no upper limit on the number of shareholders.
• Can issue shares, making it easy to raise capital from the public and investment organizations.
• Has a more complex organizational structure compared to a limited liability company but offers significant advantages in terms of business expansion.

1.2.4. Sole Proprietorship

• Owned by one individual who is personally liable for all debts and obligations.
• Does not have a separate legal entity status, and all business activities are tied to the owner.
• Suitable for small-scale businesses that do not require substantial capital.

1.2.5. Cooperative, Cooperative Union

• Operates based on the principles of cooperation and linkage among members to develop the economy collectively.
• Members have the right to participate in management and operations and share in the profits based on their contributions.
• Suitable for sectors such as agriculture, small-scale industries, and community-based economic activities.

1.3. Differences between economic organizations and other forms of investment

Foreign investors entering the Vietnamese market can choose between establishing a new economic organization or contributing capital and purchasing shares in an existing economic organization. Here are the key differences:

In summary, if the investor wants full control and management of the business in Vietnam, establishing a new economic organization is the most suitable option.

1.4. The Role of Economic Organizations in Attracting FDI

FDI (Foreign Direct Investment) is one of the key drivers of Vietnam’s economic growth. Establishing economic organizations with foreign investment brings the following benefits:

• Promoting technology transfer: FDI enterprises bring advanced technologies, improving productivity and product quality.
• Creating jobs and enhancing labor skills: Attracting local workers and improving their skills through professional training.
• Increasing export turnover: Foreign-invested economic organizations contribute significantly to export activities, expanding international markets for Vietnamese products.
• Increasing state budget revenue: Contributing to corporate taxes, personal income taxes, and other related fees.
• Improving infrastructure and supply chains: FDI promotes the development of industrial parks, transportation infrastructure, and logistics networks.

With these advantages, Vietnam has implemented many incentive policies to encourage foreign investors to establish economic organizations in the country.

Learn more: Attracting FDI in Vietnam: Factors & Opportunities for Investors

1.5. Legal Framework for Establishing Economic Organizations in Vietnam

Foreign investors who wish to establish an economic organization in Vietnam must comply with the regulations of the Vietnamese legal system, including:

• Investment Law 2020: Specifies the forms of investment, the rights, and obligations of foreign investors.
• Enterprise Law 2020: Provides guidance on procedures for establishing, organizing, and managing businesses in Vietnam.
• Decree 31/2021/ND-CP: Provides guidelines for the implementation of certain provisions of the Investment Law.
• Circular No. 03/2021/TT-BKHDT: Details the procedures for foreign investment.

In addition, depending on the specific industry, investors must also comply with the regulations of individual sectors such as finance, real estate, information technology, healthcare, education, and others.

2. Conditions for Establishing an Economic Organization in Vietnam

2.1. Legal Conditions for Foreign Investors

Foreign investors who wish to establish an economic organization in Vietnam must meet the legal conditions set out in the 2020 Investment Law, including:

• Having an investment project before completing the procedures for registering the establishment of an economic organization (except in special cases such as startup businesses).
• Complying with market access conditions for foreign investors, ensuring that the business activities do not fall under prohibited or restricted categories.
• Meeting specific requirements for certain sectors, such as finance, banking, telecommunications, and education.
• Proving financial capacity, ensuring sufficient capital to implement the investment project.
• Fulfilling tax obligations and investment reporting requirements as per Vietnamese law.

Additionally, foreign investors must comply with international commitments Vietnam has entered into, especially in free trade agreements (FTAs) and the WTO.

2.2. Sectors with Restricted Market Access for FDI

While Vietnam has many open policies to attract foreign investment, there are still certain sectors that are restricted or require special conditions. These sectors are divided into two groups:

• Prohibited sectors:
  • National defense and security activities
  • Trade in drugs, explosives, and hazardous chemicals
  • Hazardous waste collection and treatment services
  • Production and trading of fireworks
• Sectors with conditions for foreign investors:
  Some sectors require special conditions, including:
  • Financial services, banking, insurance: Minimum charter capital is required and must be licensed by the State Bank of Vietnam.
  • Telecommunications, information technology: Foreign investors can only hold a maximum share in companies operating in this field.
  • Real estate: Foreign investors are only allowed to invest through capital contribution or joint ventures with Vietnamese businesses.
  • Education, healthcare: Requirements for certification of capacity and infrastructure before obtaining a license.

Investors need to check the List of Restricted Market Access Sectors published in Decree 31/2021/ND-CP to ensure compliance with the regulations.

2.3. Capital Requirements for Foreign Investors

Although Vietnam does not have a general minimum capital requirement for foreign investors when establishing an economic organization, certain sectors have specific statutory capital requirements, such as:

Sector	Minimum Statutory Capital
Real estate	20 billion VND
Banking, finance	From 500 billion VND upwards (depending on the type)
Insurance services	300 billion VND
Transport services	70 billion VND
Education with foreign elements	30 billion VND

Additionally, investors must prove their financial capacity to ensure they have sufficient capital to implement the project through documents like financial statements, bank balance certificates, loan agreements, or funding commitments from partners.

2.4. Requirements for Joint Venture Partners in Certain Sectors

Some sectors require foreign investors to partner with a Vietnamese business under a joint venture or partnership model, rather than establishing a 100% foreign-owned economic organization.

Sectors requiring collaboration with domestic enterprises include:

• Advertising services: Foreign investors cannot hold more than 99% of the charter capital.
• Cargo and passenger transport: Foreign investors can only hold a maximum of 49% ownership.
• Postal and telecommunications services: Foreign investors can only hold up to 49% of the shares.
• Port and railway operations: Foreign investors must partner with a Vietnamese company.

These requirements are intended to safeguard economic security and protect domestic businesses’ interests in some critical sectors.

2.5. Incentive Policies for FDI Economic Organizations

Foreign investors establishing an economic organization in Vietnam can enjoy various incentives, including tax benefits, land lease incentives, and financial support, especially when investing in priority sectors or key economic areas.

2.5.1. Tax Incentives

• Corporate income tax (CIT): Exemption for 2-4 years and a 50% reduction in the following 4-9 years for businesses investing in high-tech, component manufacturing, and renewable energy.
• Import tax: Exemption for machinery and equipment used for production in priority sectors.
• VAT: A preferential tax rate of 0% applies to export businesses.

2.5.2. Land Incentives

• Exemption or reduction of land rental fees for 5-15 years for investment projects in industrial zones or export processing zones.
• Investors are allowed to lease land long-term (up to 50 years) for building production and business facilities.

2.5.3. Financial Support and Human Resources Training

• FDI businesses can access government investment support funds in Vietnam.
• Support for recruitment and training of human resources, particularly in high-tech industries.

Learn more: Investment Incentives: A Comprehensive Guide for FDI Enterprises

3. Benefits of Investing by Establishing an Economic Organization

3.1. Having Legal Entity Status for Easier Business Operations

When a foreign investor establishes an economic organization in Vietnam, the company will have independent legal entity status. This allows the investor to carry out business transactions, sign contracts, and expand the market without relying on any intermediary partners.
With legal entity status, the business has the right to own assets, fulfill legal obligations independently, and safeguard the investor’s rights in case of commercial disputes. This is a significant difference compared to the business cooperation contract (BCC) model, which does not establish a legal entity and carries more legal liability risks.

3.2. Easier Expansion and More Effective Capital Management

Establishing an economic organization allows investors to freely expand their production and business scale without being constrained by the limitations often found when cooperating with Vietnamese businesses through capital contribution or business cooperation contracts.
Additionally, with an independent economic organization, the investor can easily control finances, allocate capital according to their own business strategy, and avoid the influence of domestic shareholders or partners. The company can also issue shares, bonds, or raise funds from investment funds to mobilize the necessary financial resources for large-scale projects.

3.3. Access to a Domestic Market with Great Potential

Vietnam is one of the fastest-growing economies in the ASEAN region, with a population of over 100 million and an increasingly high demand for consumption. This provides a significant advantage for foreign investors looking to access the domestic market.
Some benefits of establishing an economic organization in Vietnam to exploit the domestic market include:

• Direct access to customers and business partners in Vietnam, rather than relying on distributors or intermediaries.
• Competitive advantages in pricing and production costs, especially in sectors such as consumer goods, food, textiles, and processed industries.
• The ability to expand the business into other ASEAN countries through trade agreements that Vietnam participates in, such as RCEP, CPTPP, and EVFTA.
  Additionally, Vietnam’s rapidly growing e-commerce market provides opportunities for FDI businesses to engage in online retail, digital services, and fintech.

3.4. Easy Collaboration and Capital Raising from Investment Funds

Vietnam is currently an attractive destination for many foreign investment funds, international financial organizations, and venture capital firms. When establishing an economic organization in Vietnam, businesses can take advantage of this opportunity to raise funds from:

• Venture capital funds and private equity funds, which specialize in supporting startups and innovative businesses.
• Banks and international credit institutions with branches in Vietnam, which are ready to provide loans for FDI businesses.
• The Vietnamese stock market, where businesses can list shares to raise capital from individual and institutional investors.
  Moreover, establishing an economic organization in Vietnam helps investors build trust with domestic partners, enhancing the potential for strategic cooperation in production, technology, trade, and services.

4. Process and Procedures for Establishing an Economic Organization in Vietnam

Establishing an economic organization in Vietnam requires foreign investors to follow legal procedures. This process may vary depending on the type of business entity and the business sector. Below are the key steps that investors need to follow to ensure legal compliance and to operate their business legally:

Step 1: Apply for an Investment Registration Certificate (IRC)
Step 2: Establish a Foreign-Invested Enterprise
Step 3: Register Conditional Business Sectors
Step 4: Open a Bank Account and Register for Taxes
Step 5: Apply for Additional Licenses (if applicable)

Learn more: Company Formation Services – Reliable & Fast at Wacontre

Establishing an economic organization in Vietnam is an effective way for foreign investors to access a market full of potential, leverage advantages in production costs, and benefit from attractive investment incentive policies. However, this process requires a clear understanding of the legal procedures, business conditions, and necessary administrative formalities.

To optimize time and ensure full legal compliance, foreign investors should consider utilizing consulting services for establishing an economic organization from professional firms. This will not only help reduce the procedural burden but also facilitate the quick operation of the business, enabling it to access customers and expand operations in Vietnam.

If you have any questions, please contact our Hotline at (028) 3820 1213 or email us at [email protected] for prompt consultation and support. With an experienced team, Service thanhlap.wacontre.com is always ready to serve customers in the most enthusiastic and efficient manner. (For Japanese customers, please contact Hotline: (050) 5534 5505).