Establishing a business in a new country is a complex process and can involve potential pitfalls. This article will describe three common mistakes made by businesses with foreign direct investment (FDI) and some ways to address them.
Errors regarding business lines
Foreign-invested enterprises are permitted to operate within the business lines specified in their Investment Registration Certificate. The following are some common errors related to compliance with business lines:
1. The actual business activity is wholesale, which does not require a retail license, but a retail license was applied for.
- Wholesale refers to the sale of goods to other merchants or organizations, excluding direct sales to individual or family buyers for personal or household consumption.
- Retail is the activity of selling directly to the end consumer for personal and household use.
Accordingly, the regulations have clearly distinguished between the concepts of wholesale and retail buyers of goods.
So:
The distribution of consumer goods (food, office equipment, stationery, work safety clothing, etc.) to customers such as factories, businesses, and organizations, for the purpose of equipping their employees or supporting their operations, is understood as exercising the right to wholesale distribution and falls under the category of cases where a retail business license is not required.
2. Engaging in retail activities but failing to obtain a retail license from the Department of Industry and Trade.
Error Case 1:
Foreign-invested enterprises registered in the wholesale and retail sectors and actually engaged in retail activities, but lacking knowledge of legal regulations, have not applied for retail licenses at the Department of Industry and Trade.
Consequences:
- The company is involved in illegal business practices.
- Fined from 10.000.000 VND to 15.000.000 VND.
Error Case 2:
The business engages in retail sales but claims that "Because the percentage of foreign investors is below 51%, a retail business license is not required." This is a misunderstanding.
Businesses with foreign capital (regardless of the percentage of foreign capital) must obtain a retail license.
Business question:
With the approval of the Hanoi Department of Planning and Investment, a foreign investor (100% foreign capital) invested in the form of capital contribution and share purchase of the Technology Joint Stock Company (100% Vietnamese capital). Accordingly, the foreign investor's share of the charter capital in the Technology Joint Stock Company is less than 51%.
The Technology Joint Stock Company currently plans to retail its own software, computers, and peripherals directly at its headquarters without establishing a retail outlet.
Based on Clause 5, Article 5 of Government Decree 09/2018/ND-CP dated January 15, 2018: “6. Economic organizations with retail outlets in Vietnam, after receiving capital contributions and becoming foreign-invested economic organizations, or economic organizations falling under the cases specified in Points b and c, Clause 1, Article 23 of the Investment Law, must complete the procedures for obtaining a Business License and a Retail Establishment License.”
Therefore, the Company understands that it does not fall under the cases stipulated in Points b and c, Clause 1, Article 23 of the Investment Law:
Article 23. Implementation of investment activities by economic organizations with foreign investment capital
1. Economic organizations must meet the conditions and follow the investment procedures prescribed for foreign investors when investing in the establishment of an economic organization; investing in capital contribution, purchasing shares or capital contributions of an economic organization; or investing under a BCC contract in one of the following cases:
....
b) An economic organization as stipulated in Point a of this Clause holds 51% or more of the charter capital;
c) Having foreign investors and economic organizations as specified in Point a of this Clause holding 51% or more of the charter capital.”
Therefore, the Company does not fall under the category requiring the issuance of a Business License or Retail Establishment License as stipulated in Decree 09/2018/ND-CP and other relevant legal regulations.
Through the System for Receiving and Responding to Business Proposals, the Company asks whether its above interpretation is correct. If the interpretation is correct, then when exercising the right to distribute and retail software, computers, and peripherals at its head office, the Company is not required to obtain a Business License or Retail Establishment License as stipulated in Decree 09/2018/ND-CP. Is this correct?
Regarding this matter, the Ministry of Industry and Trade has the following opinion:
According to the provisions of Article 2 and Clause 5, Article 5 of Decree No. 09/2018/ND-CP, economic organizations with foreign investment capital, and economic organizations falling under the cases specified in Points b and c, Clause 1, Article 23 of the Investment Law, that engage in the buying and selling of goods and activities directly related to the buying and selling of goods are subject to the application of Decree No. 09/2018/ND-CP of the Government.
According to Clause 17, Article 3 of the Investment Law: "An economic organization with foreign investment capital is an economic organization in which a foreign investor is a member or shareholder."
The company is an economic organization with foreign investors as members/shareholders, therefore, according to the above regulations, the company is an economic organization with foreign investment capital. Consequently, the company must meet the conditions and follow the procedures for obtaining a Business License and a Retail Establishment License in accordance with the provisions of Decree No. 09/2018/ND-CP when conducting retail activities at its head office.
Chinhphu.vn
3. Software outsourcing companies, lacking knowledge of relevant regulations, have incorrectly applied tax incentives for the software industry.
Error Case 1:
Foreign-invested enterprises that provide software outsourcing services but do not meet the requirements for software product manufacturing still declare and receive corporate income tax incentives.
See the tutorial. Handbook | Guide to identifying software production activities eligible for corporate income tax incentives
Error Case 2:
Foreign-invested enterprises that design websites (graphic design - frontend) for clients but consider this as software production (website programming) still declare and benefit from corporate income tax incentives.
Conclusion:
Website frontend graphic design is not considered software production, therefore it is subject to a 10% VAT rate and is not eligible for corporate income tax incentives.
Error Case 3:
Renting out software online but claiming it as software sales, they declare it as VAT-exempt and still claim corporate income tax incentives.
Conclusion:
Providing software for use online (cloud) is considered leasing a product license, not selling the software itself. Therefore, it is subject to a 10% VAT and is not eligible for corporate income tax incentives.
4. Activities outside the scope of the investment registration certificate.
Businesses are only permitted to operate within the business lines specified in their investment license or business registration certificate.
For businesses operating in regulated sectors, specific business conditions must be met before they can operate.
Errors in investment capital contribution
1. Late investment capital contribution beyond the committed deadline.
Capital investment is made more than 90 days late from the date of issuance of the investment registration certificate, or overdue according to the commitment period stated in the investment registration certificate.
Consequence: The bank will not allow capital contributions if the deadline specified in the investment registration certificate has passed. The business will be subject to penalties and must adjust the capital contribution deadline.
2. Contributing investment capital to the wrong account or following the wrong procedure.
Investors contribute capital to the wrong account (usually the company's payment account instead of the direct investment capital account). The correct regulations for foreign investment capital contributions are as follows:
When making direct investment contributions: The investor's registered account (foreign individual or enterprise) must be used to contribute capital to a direct investment account opened at a bank under the name of a business established in Vietnam.
When transferring shares or capital contributions in enterprises with foreign direct investment:
The payment of the transfer value of shares and capital contributions in enterprises with foreign direct investment is carried out as follows:
- Between non-resident investors or between resident investors not conducted through a direct investment capital account.
- Transactions between non-resident and resident investors must be conducted through a direct investment capital account.
Errors in foreign borrowing.
1. Receiving loan money into the wrong account.
Borrowing money from abroad but receiving it into the wrong account (receiving it into a regular payment account instead of a capital account or loan account).
2. Having medium- and long-term loans but not registering them with the State Bank of Vietnam.
Error Case 1:
They have medium- and long-term loans but have not registered them with the State Bank of Vietnam.
Error Case 2:
Short-term foreign loans become medium- or long-term loans without the knowledge of this, and therefore the registration process is not carried out, including:
- Short-term loans are extended where the total loan term is over 01 (one) year
- Short-term loans without extension contracts but with outstanding principal at the time of one (01) year from the date of the first disbursement, except in the case where the Borrower completes repayment of the loan within 10 (ten) days from the time of one (01) year from the date of the first disbursement.
If your business encounters the aforementioned errors and requires expert advice on how to resolve them, please contact us!