Foreign direct investment enterprises (FDI enterprises) and foreign direct invested capital export processing enterprises (FDI EPEs) are enterprises that have relatively specific characteristics in terms of legal and commercial activities Vietnamese regulations. Most of these economic organizations were established in Vietnam with their main business activities related to the trade of goods inside and outside the Vietnamese territory.
In order to ensure compliance with legal process and to mitigate tax risks as well as potential penalties that could affect their financial health and business reputation, these FDI firms and FDI FIEs should pay careful attention particular and have a good understanding of the regulations when selling goods and other activities directly related to the sale of goods in Vietnam.
Right of FDI companies to export/import and distribute
In accordance with the regulations in force (the decree detailing the commercial law and the law on the management of foreign trade on the purchase and sale of goods and activities directly related to the purchase and sale of goods by investors, Foreign Investors and Economic Organizations with Foreign Capital in Vietnam, No. 09/2018/NĐ-CP), the right of an FDI company to export, import and distribute is defined as follows:
- The right to export means the right to purchase goods in Vietnam for export, including the right to be named on the export declaration to perform and take responsibility for export-related procedures. Export regulations do not include the right to purchase goods from entities other than traders for export, unless otherwise provided by Vietnamese law or an international treaty to which Vietnam is a contracting party. .
- The right to import means the right to import goods from overseas to Vietnam for sale to traders who have the right to distribute such goods in Vietnam, including the right to be named on the declaration of imported goods for execution and responsible for the procedures related to the import. . The right to import does not include the right to organize or participate in a goods distribution system in Vietnam, unless otherwise provided by Vietnamese law or an international treaty to which Vietnam is a signatory.
- Distribution refers to wholesale, retail and franchising activities, as well as the sale of goods through agents.
- The right to distribute means the right to directly engage in distribution activities.
Regarding the conditions, FDI enterprises with (i) export rights are allowed to export goods purchased in Vietnam, goods processed in Vietnam and goods legitimately imported into Vietnam to a foreign country or area non-tariff duty, or (ii) import duty, are allowed to import goods from a foreign country or a separate customs area in Vietnam, provided that:
- these are goods that are not on the list of goods prohibited from export and import, the list of goods temporarily excluded from export and import and the list of goods not eligible for the export and import as specified in international treaties to which Vietnam is a signatory;
- if the goods are included in the list of goods for export and import under license, or under certain conditions, the FDI company has the relevant license or fulfills the conditions according to the regulations, in addition to register as required by the Investment Law and the Companies Law.
According to the regulations of the World Trade Organization’s Schedule of Specific Commitments in Trade in Services for Vietnam, the market access limitations with respect to FDI enterprises on the lines of business described such as “wholesale, retail” have expired. Therefore, FDI companies are allowed to engage in these activities without restriction.
Right of IDE EPEs to export/import and distribute
With regard to the definition, the EPE is an enterprise specializing in the production of goods that will then be exported, providing services related to the production of exported goods and export-related activities, which was created and operated in accordance government regulations on EPE. Trading of goods between FIEs and other enterprises in the Vietnamese market is considered an import-export relationship and must comply with the provisions of the Export and Import Law.
For production activities intended for export, it should be noted that FDI FIEs that sell goods produced by themselves are not subject to the regulations applicable to FDI companies. Accordingly, FIE FDIs are not required to take steps to apply for a business license or a license to set up a retail establishment, except for the registration provided for by the law on investment and business law. In addition, FDI FIEs are not subject to value added tax (VAT) for production activities intended for export for the goods they produce themselves, so they are not required to declare the VAT with the tax office in this regard.
For all other production activities (i.e. the right to export goods not produced by themselves, the right to import and the right to distribute), FDI FIEs must comply with the regulations applicable to FDI companies and the following VAT obligations:
- The FIE FDI must register for VAT declaration with the national tax authority and separately register the income and the correlated expenses resulting from the sale of goods in the Vietnamese territory. The FDI EPE must also arrange a separate area to store imported and exported goods according to the right to export, the right to import and the right to distribute.
- The sale within the framework of these activities is subject to the issuance of a VAT invoice and a VAT declaration to apply the deduction or reimbursement by fulfilling the conditions of the regulations in force.
In light of the above, FDI companies should evaluate a business registration license application for the business lines of the right to export, the right to import and the right to distribute, in addition to the registration as prescribed in the Investment Law and Companies Law, to fully comply with and minimize the risks associated with legislation, taxes and tariffs.
When FDI FIEs have contracted VAT obligations in the sectors of activity of the right to export, the right to import and the right to distribute, they may be entitled to claim a VAT refund. They must ensure that they meet the conditions of the applicable regulations to benefit from these tax advantages.
Businesses should regularly update themselves on any new regulations or adjustments required for their full implementation, or contact professional advisers if necessary for assistance.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Tran Nguyen Mong Van is Tax Director of Grant Thornton Vietnam.
The author can be contacted at: email@example.com