Vietnam is attracting more investors thanks to its fast-growing market, especially a friendly business destination with great investment incentives. Both pros and cons of doing business in Vietnam will be well clarified in this below article. Find out with us!
1. An overview of Vietnam business environment
Vietnam used to be a low-middle-income country until the country got its social and economic achievements after the 1986 Renovation and a series of participation in international organizations like ASEAN. Throughout the years, you may be impressed by a new Vietnam in terms of the business environment. It is now an attractive investment location and promised land for foreigners starting a business in Vietnam.
Data: GSO
Vietnam has witnessed an ever-growing increase in its performance for developments. Below are some key highlights to help you visualize the Vietnam business environment in recent years:
- Vietnam GDP growth increased by 2.91% in 2021
- Socio-political and macro-economic stability is a stand-out feature for Vietnam potential business growth
- The population of over 97 million people has marked the prospective purchasing power of Vietnam market
- Vietnam is among the world’s top factories for supplying electronic items, mobile phone, textile-garments, and other industries
- Until August 2020, over 32,539 FDI projects selected Vietnam as their home, with total registered capital reaching around US$381 billion
- The EVFTA will eliminate almost 99 percent of customs duties between the EU and Vietnam, expected to be a driving boost to Vietnam’s economy
In recent years, Vietnam business trends are highly focusing on the private sector, together with the open business environment to attract foreign investors into the Vietnamese market. The country has also affirmed its position as a strong base for IT and manufacturing sectors thanks to its competitive and reasonable labor costs.
In what follows, we will delve into a better understanding of the benefits of doing business in Vietnam in various aspects!
2. Advantages of doing business in Vietnam
2.1. Strategic location
Vietnam is located in the center of ASEAN and is one of the most prospective economies in Southeast Asia. The country shares its boundaries with the Pacific Ocean, Gulf of Thailand, Laos, Cambodia and China, providing Vietnam with favorable conditions for international shipping and trading.
Interestingly, most investors eye the Vietnamese market as one of the largest beneficiaries of the shift in supply chains from the “giant” China.
Vietnam is located close to the manufacturing hub of southern China, which is one of the world’s largest economies and most influential trading hubs. Thanks to this proximity, Vietnam also becomes an attractive investment location for foreign investors finding ways to penetrate the Vietnam market but also directly access the supply chains from China.
2.2. High-growth economy plus potential market
Vietnam is a dynamic and emerging market with great potential!
Looking into statistics, Vietnam’s GDP has steadily increased over recent years. Vietnam’s GDP growth rate between 2011 and 2020 was accordingly 6.24%, 5.25%, 5.42%, 5.98%, 6.68%, 6.21%, 6.81%, 7.08%, 7.02% and 2.91%. (Source: GSO). Although the year 2020 has witnessed the lowest increase of the course 2011-2020 in its GDP growth, in the period of Covid-19 pandemic when socio-economic sectors have been considerably affected, this impressive expansion rate has made Vietnam relatively stand-out among the fastest-growing economies in Asia.
Vietnam’s inflation rate remained under control in 2020, at 3.2%, a good performance for stabilizing market prices compared to its targeted level of 4% on-year. From a centralized to a market-oriented economy, the country’s purchasing power is currently based on over 97 million population which makes up the world’s fifteenth ranking.
Vietnam is one of the top countries in terms of growth prospects. The opportunities for its economy boosts seem to not fade away. In particular, the EVFTA and the EVIPA signed in June 2019 are expected to bring positive values for Vietnam’s emerging market itself as well as foreign investments in the upcoming time.
2.3. Competitive labor cost
The cost of starting a business in Vietnam can be a matter of concern to most foreign investors. Among key cost-related factors, it is good to know that Vietnam offers a fairly low labor cost!
Vietnam is structured with a young population and potential workforce. Remarkably, the country’s average wage cost is much more competitive than those of neighboring countries like China. Statista estimates that manufacturing labor costs per hour in China can increase to US$6.5 in 2020, meanwhile those are only around US$3 in Vietnam.
In the context of the recent China-US trade tension, a large number of foreign manufacturers are likely to seek another option of the market, which obviously paves the way for Vietnam to spot on.
2.4. Regulatory framework
In parallel with Vietnam’s significant efforts to improve its economic growth throughout the years, considerable improvements in its legal and institutional framework have been witnessed as well.
Vietnam’s regulatory system is appreciated by its open business environment, transparent investment policies, together with favorable profit-based incentives for enterprises.
For example, the Enterprise Law and Investment Law of 2014 are fundamental laws that govern the incorporation and operation of companies in Vietnam. These laws have standardized individuals’ carte blanche to do business in permitted business areas as well as reduce a broad array of administrative hassle to enterprises.
The private and FDI sectors, among others, have been granted preferable conditions while doing business in Vietnam by virtue of these laws.
Improvements for Vietnam’s regulatory regime in relation to its business and investment environment have contributed significantly to Vietnam ranking in the international era. Strikingly, the country was ranked 70th among 190 economies in the World Bank’s Doing Business 2020 report.
Vietnam’s National Assembly recently passed the Investment Law and Enterprises Law (Amendment), which will come into force on January 1, 2021. Such further updates and changes in respective laws are expected to make doing business in Vietnam less burdensome and benefit foreign enterprises investing in Vietnam.
2.5. Tax incentives
The table below helps you clarify some basis taxes in Vietnam that will impact most business operations and investments in this country:
| Basic types of tax | Tax rates applied |
|---|---|
| Corporate income tax | 20% |
| Personal income tax | Based on the taxpayer’s residency status and nature of incomeEmployment income tax: 5% – 35% for residents, 20% for non-residents |
| Foreign contractor tax | Based on the specific business sector |
| Value-added tax | 0%, 5%, 10% |
| Import duties | Based on the dutiable value and a duty rate (%) applicable to each commodity item |
| Other types of tax | Special sales tax: 7% – 75%Natural resources tax: 1% – 35%Property tax: 0.03% – 0.15%Export duties based on export tariff of each type of goods and productCapital assignment profits tax: 20% |
Vietnam offers a variety of tax benefits for entities doing business in its country. New investment projects can enjoy tax incentives based on the sector, location and size of the project conducted. Business expansion projects meeting specific conditions as per Vietnam regulations can also be granted CIT incentives.
Taxpayers eligible for tax incentives in Vietnam can reap benefits from Preferential Tax Rate and Tax Holiday. Below are some common examples of tax incentives for foreign investors in Vietnam:
| Investment projects based on Location/Sector/Project Scale | Preferential Tax Rate & Tax Holiday |
|---|---|
| Located in Economic Zones or High-tech Zones | 10% for 15 yearsTax exemption up to 4 years, and 50% reduction for the subsequent 9 years |
| Engage in manufacturing of high-grade steel, agriculture-related equipment or craft developments | 17% for 10 yearsTax exemption up to 2 years, and 50% reduction for the subsequent 4 years |
| Qualified large-scale manufacturing/investment projects | 10% for 15 years (subject to certain conditions) |
2.6. Vietnam’s free trade agreements (FTAs)
To speed up the country’s integration into the global economy, Vietnam has been actively entering into a range of free trade agreements, both collective and bilateral agreements. Currently, Vietnam has built diplomatic relations with nearly 190 worldwide countries and signed around 15 FTAs with key trade partners!
Below are some typical Vietnam’s trade pacts:
- Vietnam – Japan Economic Partnership Agreement (EPA) (2008)
- Vietnam – Chile FTA (2011)
- Vietnam – Eurasia Economic Union (2015)
- Vietnam – South Korea (2015)
- Vietnam – EFTA (European Free Trade Association) (on-going negotiations)
- Comprehensive and Progressive Agreement on Trans-Pacific Partnership (2018)
- Vietnam – European Union FTA (2019)
- Comprehensive and Progressive Agreement for Trans-Pacific Partnership
- Other Vietnam’s FTAs signed as an ASEAN member nation with Japan, China, India, Australia and New Zealand, South Korea, Hong Kong
Vietnam’s joining in various free trade agreements has created strong motivations for foreign investors from developed countries to put their first step into Vietnamese markets.
3. Challenges of starting a business in Vietnam
Doing business in Vietnam goes with several potential challenges!
- High corporate tax rates on some certain investments
It should be noted that Vietnam applies a standard corporate income tax rate of 20% on most corporate entities, but on some specific business categories, the imposed tax rate is fairly high.
Pursuant to Article 10, Law on Corporate Income Tax No. 14/2008/QH12, companies with the operation in the exploration and mining of oil, gas and other related precious natural resources industries must be subject to corporate tax rate ranging between 32% and 50%, depending on the location and circumstances of the projects.
- Restrictions of foreign currency
Foreign currency capital for indirect investment in Vietnam is required to exchange into VND, the official currency in Vietnam. What’s more, transactions relating to offerings, payments, quotations, advertisements and other forms alike should be done in the Vietnamese currency as well.
However, the inflow of foreign currency into Vietnam is to date open with minimum restrictions. Similarly, transferring foreign currency overseas has also been considerably made less severe. If you are a foreign investor or foreigner residing in Vietnam for employment purposes, then you are allowed to transfer your gains abroad provided that you have completed all related finance liabilities to the government of Vietnam.
- Business setup requirements
Investors should be ready to deal with a set of requirements for setting up a company in Vietnam. The paid-up capital requirement is a typical example. Normally, the standard paid-up capital for your investment in Vietnam should be at least USD 10,000. And depending on the type of business that you decide to invest in. this amount can be lower or higher.
Licensing procedure may be a challenge for foreign investments engaging in some conditional sector activities as regulated in Appendix 4 of Law on Investment No. 67/2014/QH13. Particularly, you may be required to submit more additional documents like the certificate of business qualification, professional liability insurance, etc.
4. Conclusion
Vietnam is now one of the most prospective markets among ASEAN countries. There have been great achievements in terms of the country’s GDP growth, regulatory system and tax-friendly policies in Vietnam to attract large flows of foreign investment.
Doing business in Vietnam is opening doors of opportunities for foreign investors in different sectors, especially after the huge impacts from the US-China trade war which has led to new waves of investment in the global era.