It is common practice for many foreign investors and traders to initially establish a representative office (RO) in Vietnam as a means of conducting market research before deciding whether to set up a full legal entity or subsidiary in the country.
One of the key reasons for this approach is that ROs are not subject to corporate income tax (CIT) in Vietnam. However, in practice, the activities of an RO may deviate from its originally intended scope. In some cases, ROs (through their local staff) engage in activities that are deemed revenue-generating. This can lead the Vietnamese tax authorities to reclassify the RO as a Permanent Establishment (PE) of the foreign entity. As a consequence, the RO may become liable for CIT in Vietnam. This PE risk is particularly prevalent among ROs operating in sectors such as pharmaceuticals and industrial products with a high volume of employed local staff.
Risks for Representative Offices in Vietnam
At HTH & Partners, we have recently assisted several representative offices in Vietnam during tax inspections by local authorities. In these cases, the tax authorities determined that certain activities conducted by the ROs over the past 05 years constituted revenue-generating operations, resulting in significant CIT liabilities being collected (of course with associated penalties and late payment interest as well).
We recommend that foreign investors/traders carefully monitor and manage the activities of their ROs in Vietnam to avoid unexpected PE risk and tax exposures in the future. If you would like to proactively manage similar PE risks associated with your ROs in Vietnam, please contact HTH & Partners at:
jamesphan@hthpartners.com.vn or legalenquiries@hthpartners.com.vn
