How To Set Up A Manufacturing Business In Vietnam

When setting up a manufacturing business in Vietnam, investors need to consider a lot of factors and conduct profound researches on locations in which the factory will establish. No matter who you are, what your nationality is, understanding clearly about regulations and procedures of setting up a manufacturing business in Vietnam is certainly important.

This article today will provide you with must-know regulations and procedures for establishing a manufacturing business in Vietnam.

Regulations of setting up a manufacturing business in Vietnam

Four fundamental regulations mentioned in this sub-part are minimal capital requirements, special requirements, tax reporting, and resident director.

First, minimal capital requirements. In fact, the Vietnamese government currently has no requirement about the minimum capital for investors to open a business. Nevertheless, the project will merely be approved by the authority when you present sufficient capital to cover all planned activities. Plus, regarding shareholding, the highest ownership allowed for manufacturing businesses for foreign investors is 100%. 

Second, special requirements in terms of environmental impacts, foreign contractors, and the location of the manufacturing business. Depending on the project, a foreign firm needs to provide an environmental impact assessment, which is used to evaluate the potential negative environmental impact of enterprises, while determining the risks and necessary precautions.

Furthermore, foreign contractors, including general contractors, main contractors, joint venture contractors, and subcontractors are legally obliged to obtain a proper license (construction permit) in order to operate in Vietnam. In the aspect of the location that the manufacturing business is set up, once the foreign firm has agreed on the location to establish operations, the coming significant step is obtaining the certificate of land use.

There are many types of land usage rights; nevertheless, under current law, foreigners are entitled to retain a land-use certificate for only 50 years, while locals can have one indefinitely.

Third, tax reporting. When you own a business, you need to have a tax report. The tax report of a business should include the following types of tax: corporate income tax, business license tax, value-added tax, foreign contractors without holding tax, and some other taxes namely specific sales tax, export and import duties, natural resources tax, property tax, and registration fee. 

Finally, the resident director. It is required that a resident director who has a resident address in Vietnam is appointed if you are a foreign investor and would like to set up a business in Vietnam. In case the director is not a founder and a foreigner, he/ she must have a work permit in Vietnam. 

Steps to set up a manufacturing business in Vietnam

Choose the main corporate form

There are three main options for setting up a business in Vietnam for your firm to consider and prepare before setting up a company in Vietnam

1. Establishing a new business entity

2. Investment via Merger and Acquisition

3. Other forms of investment such as participating in contractual business forms of buying stakes of an existing enterprise.

These options are available for several corporate forms such as Limited-Liability company; Joint-stock company; Partnership; Business cooperation contract; and Public-Private Partnership Contract.

Registration process

As Vietnam requires multiple layers of restriction, the verification and review procedure to form a business in Vietnam might be more complex than the US or Singapore. 

-The first step is applying for licensing to establish a foreign company

-Then, foreign investors must register their investment with licensing authorities through two steps: obtain the Investment Registration Certificate (IRC) and obtain Enterprise Registration Certificate (ERC)

Required documents

Business owners should prepare the following documents:

- A request for implementation of the investment project; 

- A copy of ID card, 

- Passport or business certificate of registration; 

- A proposal of the project's investment; 

- Demand for land use, 

- Explanation of technology application

Engrave the seal

After receiving IRC and ERC, the company needs to engrave the seal and apply for the company's seal specimen. 

Publicize the company establishment on a national information portal

Investors are required to provide the authorities with fundamental information regarding the company's profile. Such information is essential for validations and verifications. Investors have to provide the registered name of the company, business address of the company, charter capital or investment capital of the intended company as well as the registered business lines. 

Furthermore, investors are also obliged to justify the company business location by providing the following documents:

- A certified lease contract of headquarters

- A certificate of land use right

Tax declaration

The final step involves applying for the initial tax declaration at the Department of Taxation where enterprises are established. Within five to seven working days, the submitted documents will be verified for validation.

Factors to be considered in deciding the ideal location for manufacturing

When considering the best location to set up a manufacturing business, the following factors are important aspects that can signify the long-term business plan. Four factors that should be considered are infrastructure development, labor, incentives, and types of industries.

Infrastructure development

When it comes to infrastructure development, business owners can reckon whether the location is suitable for supply chain infrastructure, logistics, and access to customer markets. The location of the manufacturing business has connectivity with the global supply chain.

Connectivity matters since it can easily make the difference between seamless production and endless delays. Hence, understanding how products and components will be able to be shipped between various stages of production is of monumental importance for foreign investors. Besides, moving the manufacturing plant closer to the customer base can aid profit maximization or increase market share through advantages such as speeding up delivery times, reducing inventory as well as cost-cutting solution.

Furthermore, the industrial zone (IZ) provides a much-needed solution and has been growing increasingly popular among foreign investors because of its competitive advantage in infrastructure. Many IZs throughout Vietnam have close proximity to key road networks, ports, and rail systems, which significantly reduce disruptions and wait times. Some popular industrial zones in Vietnam are Dinh Vu Industrial Zone, Hoa Khanh Industrial Zone, and Vietnam - Singapore Industrial Zone. 

Labor

The business owner should also consider the labor force when choosing a location. Each region in Vietnam has different minimum wage range. Vietnam's key attraction to foreign investors is the low cost of labor. The minimum wage is ranged from US$125 to US$180 per month, varied by regions. Major cities such as Hanoi or HCMC demand higher minimum wage compared to Vinh Phuc, Phu Tho or Bac Giang. In addition, industrial workers and managers are expected to earn from $US500 to $US 180 on a monthly basis. 

According to a report published by Vietnam Briefing about “Vietnam’s key regions and economic zone”, the Northern labor force also has a competitive advantage in terms of qualification. Cities in the North such as Hai Phong or Ha Noi have an abundant supply of qualified workers. As the talent pools are more focused on heavy industry and natural resources than other regions in the Central and South Vietnam.

Whereas regions in the Central such as Da Nang, Quang Nam, Quang Binh have more scared talent resources compared to the North and the South, since workers in technical fields often find greater opportunities in the other two regions, making it challenging to find the right workers in the Central.

While Ho Chi Minh City (HCMC) has an ample talent pool, the environment between employers for talent is highly competitive. As such, the Turnover rate might result in significant delays for companies that seek to initiate production. 

Incentives

Preferential tax rates are also available in several industrial zones in Vietnam, which are determined on a zone-by-zone basis and can be extended to both personal and corporate rates. This enables investors to offset the higher wages and rental fees that are often found in these areas. The Vietnamese emerging market has been quietly undergoing one of the most competitive tax regimes throughout Southeast Asia, a standout feature of Vietnam's tax regime. Specifically, there are three forms of incentives that are available to operate companies:

1. Reduction or exemption of import tax on goods imported as fixed assets on raw materials

2. Application of lower rate of corporate income tax, which is currently levied at a rate of 20 percent on locally sourced profits

3. Exemption of land rents.

Notably, Land Rental Incentives are also applied depends on the scale on condition of one's project. According to the Land Law 2013, the government allows up to the whole rental period for the project that invests in especially encouraged investment sectors. Moreover, mega-projects that having total capital of at least VND 6,000 billion in especially encouraged investment sector also benefited from the exemption.

Types of industry

Foreign Investment Enterprises (FIEs) should compare if the geographic location's elements are aligned with the company's purpose and distinct features. This process requires careful weighing the advantages and disadvantages of different locations.

Options can be narrowed down by geographical concentration of industries as some regions host more enterprises from a specific industry than others do (see infographic above). Representing some of Vietnam’s main export sectors, garment and textile manufacturing are concentrated in both north and south Vietnam, while footwear and furniture manufacturing are both concentrated in south Vietnam.

The north is arguably the better choice for an enterprise importing input goods from China, while the south has the advantage of being near the largest commercial port in Vietnam. Proximity to key destinations such as airports, seaports, major cities, main highways, and borders are also important. As some regions are specialized in a specific industry than others do, the options can be narrowed down by geographical concentration of industries.

While the garment and textile manufacturing are populated in both the North and the South, footwear and furniture manufacturing are concentrated in South Vietnam. On the other hand, the North is evidently a wiser choice for firms that import goods from China as input as the region is consistently in need of machinery and capital to facilitate the heavy industry and natural resources.

In conclusion, the three most significant points to open a manufacturing business are fundamental regulations of setting up a manufacturing business, steps to set up a manufacturing business and categories to be considered to set up a manufacturing business. Vietnam is trying to become an ASEAN hub to attract more foreign investors to create more projects in Việt Nam.

Hope that the article provides you helpful insights so that you can make a wise decision when setting up a manufacturing business in Vietnam. If you need any help for incorporating a company, we're ready to help you.