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Vietnam Manufacturing Brief in 2024.

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Vietnam manufacturing brief in 2024

Vietnam has emerged as one of Asia’s most compelling success stories, attracting international investors with its stable political system, commitment to sustainable growth, relatively low inflation, strong foreign direct investment (FDI) inflows, and a youthful, digital-savvy population. The country’s robust manufacturing sector, along with a large domestic market and a burgeoning middle class, offers an extraordinary opportunity for investors looking to capitalize on regional growth prospects. Here’s why Vietnam should be your next investment destination, particularly in the manufacturing sector.

The Vietnam Manufacturing Brief in 2024 will help entrants understand the opportunities and challenges of this industry in the Vietnam market, and sketch out a picture of the investment environment and market entry requirements and conditions for specific manufacturing activities.

Vietnam Manufacturing Brief in 2024.

According to the General Statistics Office, Vietnam’s economy experienced significant growth in the first quarter of 2024, driven by the manufacturing and processing industries, which expanded by an impressive 6.98%. This growth is fueled by increasing domestic consumption, heightened foreign investment, and rising export demand. The Vietnam Manufacturing sector’s inventory index surged by 14.1% compared to the same period last year, highlighting its resilience and potential for sustained growth. These achievements position Vietnam as one of the few economies globally to continue growing amidst turbulent times.

Manufacturing. The backbone of Vietnam’s economy.

Manufacturing plays a crucial role in Vietnam’s economy, accounting for more than 20% of the country’s GDP. Faster growth in manufacturing translates to overall GDP growth, further strengthening the economy. In 2023, foreign investments in Vietnam’s manufacturing industry led with a total investment of over USD 23.5 billion, comprising 64.2% of the country’s total FDI capital, as reported by the Ministry of Planning and Investment.

The General Statistics Office projects a significant rebound in Vietnam’s manufacturing sector in 2024, primarily driven by a recovery in export demand for electronics, computers, and components from key markets like the US, EU, and China. In the first four months of 2024, the export turnover of these products reached USD 21.6 billion, up 34.9% over the same period last year.

Four main pillars of the Vietnam Manufacturing advantage.

Vietnam’s transformation into an export-oriented manufacturing hub is a result of its embrace of globalization and trade liberalization over the past decade. Here are four main pillars that underscore Vietnam’s manufacturing advantage:

  • Strategic Position for Regional Manufacturing Diversification: Vietnam is ideally located to benefit from regional manufacturing diversification strategies.
  • Progressive Taxation and FDI Support Policies: The government offers attractive taxation and supportive policies for foreign investors.
  • Geographical Location and Infrastructure Investments: Vietnam’s strategic location and significant investments in infrastructure enhance its connectivity with global supply chains.
  • Digitalization in Production: Vietnam is rapidly digitalizing its production processes, enhancing efficiency and competitiveness.

Market entry and entity structuring for foreign investors in manufacturing.

The licensing process can be a barrier for investors seeking to enter the market. In general, there are several prerequisite certificates that investors must obtain before conducting investment activities in Vietnam. These include:

  • Investment Registration Certificate (IRC): The IRC is a document issued by the Provincial Department of Planning and Investment or the Provincial Management Board of Industry/Economic Zones (or equivalent agency) to document the legal status of a project and to provide evidence of eligibility for investment incentives. To obtain an IRC, foreign investors must demonstrate that they meet the conditions on nationality, financial capacity, business plan, and other requirements as prescribed by Vietnamese law. The required documents and information must be provided to prove that the foreign investment project has been approved. The statutory timeline for receiving an IRC is 15 days from the date of receipt of a valid application.
  • Enterprise Registration Certificate (ERC): The ERC is a license issued by the Provincial Department of Planning and Investment to recognize the legal status of an enterprise. This document is equivalent to a Certificate of Incorporation in other countries and includes information such as the company name, address, lines of business, company structure, and management. In practice, the ERC is mainly used for operating the company and working with third parties such as tax authorities, auditors, banks, and partners. The statutory timeline for receiving an ERC is 3 working days from the date of receipt of a valid application.

In some special cases, an Investment Policies Decision (IPD) can be required for very large scale and specific project, with significant requirements on land use right transfer, therefore it is sometimes necessary to seek approval for investment policies from relevant authorities. Most of manufacturing projects in Vietnam do not need to receive an IPD.

In scenarios where foreign investor purchase capital, shares, or contributes capital to an existing company engaged in production activities, it may be necessary to obtain approval from the relevant authorities for each transaction (M&A Approval). This is particularly important for transactions related to land use that may affect Vietnam’s national security and defense.

Additional sub-licenses or sub-conditions may be required based on assessments of production processes, emissions levels, and goods. These may include fire safety permits, environmental permits, food safety permits, and construction licenses. Depending on the specific products involved, licenses associated with the export, import, and distribution of products may also be required on a case-by-case basis. These may include trading licenses, regulation conformity announcements/registrations, and others.

Projects granted an IRC typically have a term of 50 years. However, some projects may be approved for shorter or longer terms (up to 70 years) depending on factors such as their operational objectives, scale, location, and degree of socio-economic impact. The project term can be extended at the request of the investor. However, the relevant authorities may refuse to extend the term if the project uses outdated technology that poses a potential risk of environmental pollution or resource depletion.

Financial obligations and investment incentives.

Manufacturing companies are required to pay various taxes and fees, including licensing fees, corporate income tax (CIT), and value-added tax. Depending on the nature of their production activities and other conditions, foreign direct investment (FDI) in manufacturing may also be subject to additional taxes such as import and export tax, natural resources tax, special consumption tax, land use fees, and others.

Investors may be eligible for various tax, fee, and accounting incentives depending on the location of their project. These may include:

  • CIT incentives, such as the application of a lower corporate income tax rate than the standard rate for a definite term or for the entire duration of the investment project, tax exemptions or reductions, and other incentives in accordance with the law on corporate income. Some specific incentives include a 17% tax rate instead of the standard 20% rate, tax exemption for up to 2 years, and a 50% reduction in tax payable for up to the next 4 years.
  • Exemption from import tax on goods imported to create fixed assets, raw materials, supplies, and components imported for production in accordance with the law on import and export tax.
  • Exemption or reduction of land use levy, land lease, and land use tax.
  • Accelerated depreciation, increasing the amount of expenses that can be deducted when calculating taxable income.

For projects which are not located in investment preferential areas, the regular CIT rate of 20% will usually be applied, unless they fall into the fields of investment incentives as prescribed by prevailing tax and investment laws.

New entrants to the Vietnamese market must comply with several important requirements, including:

  • Managing cash flow for capital/share contributions and repatriation of profits abroad through bank accounts.
  • Conducting borrowing and debt repayment activities with domestic and foreign creditors.
  • Using foreign currency in commercial transactions.
  • Engaging in customs activities and exporting and importing goods and production materials.

Vietnam offers many advantages that attract foreign direct investment in manufacturing, including a stable business environment, openness to new-generation Free Trade Agreements, and an abundant labor force. The country’s preferential policies for foreign investors, which include reducing some administrative procedures for investment, further demonstrate its openness to foreign investment.

However, the procedures for obtaining operational and manufacturing licenses can still be quite complicated. To enter the market legally and avoid potential problems, investors should carefully consider legal factors and develop of clear understanding of prevailing regulations and the commercial best practices in Vietnam.

 

Contact our teams for expert support and further information on the manufacturing sector in Vietnam and the opportunities available for investors. Get exclusive content about doing business in Vietnam here.

Rizwan Khan – Managing Partner – r.khan@acclime.com

Vlad Savin – Partner – v.savin@acclime.com

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Updated on June 24, 2024
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