Vietnam is regarded as a favourable market entry location for international investors, due to its economic and strategic positioning in the region, as well as the benefits of its geographical location. Recent changes and economic reforms, combined with political stability and the government’s drive to engage Vietnam in multiple favourable agreements and treaties, have created a significant opportunity for international investors to take advantage of the regional growth prospective and focus their attention on Vietnam.
In order to establish a company in Vietnam, foreign investors are required to have a place of business for their operations, as one of the core criteria of incorporation. In this article, we delve into the prerequisites and regulations which apply to the “business location” of an entity operating in Vietnam, seeking to clarify conditions, rules, purpose and best practices in choosing an appropriate and compliant business location, upon registering a company in Vietnam.
Why is business location important?
In addition to answering the question “Which business lines/activity will the newly established company provide?” for purpose of incorporation, investors should ensure they have a broad understanding of the business location significance in Vietnam:
It is an essential information which is stated in the Investment Registration Certificate (the IRC) and Enterprise Registration Certificate (the ERC) of a foreign owned company in Vietnam. Please refer to our discussions on these two types of licenses we have covered in previous articles.
It is also one of the key elements that the authorities will look at to assess the capacity of investment project implementation, including but not limited to the following:
- The business location has an impact on some of the specific investment activities such as manufacturing, real estate, education, agriculture, and others, as the location must meet certain conditions, which we will discuss further in the final section of this article
- The business location is one of the factors that will determine if a company may qualify for a government financial investment incentive for the project, such as: project in disadvantaged areas, project in industrial parks, export-processing zones, high-tech zones, and economic zones, etc.
- The Vietnamese authorities may request further supporting documents and/or may strictly review the application should the business location of the investor is located near the border, seashore, security and national defence areas, which may result in complications in the incorporation process.
Market entry strategies in choosing a business location for the company incorporation purpose
- Direct approach: When establishing a business, one of the rights of the investor is to receive land through a government’s decision or to lease land from the government. As a result, the investor is granted a Land Use Right Certificate for the land and the property on that land. In terms of the licensing process, the investor is required to obtain the government’s decision in advance within a separate procedure. This approach is suitable with residential housing construction investment projects and projects that need special land usage right such as power plants or other similar projects
- Indirect approach: Investors are also allowed to have a business location via a non-government third party by signing a lease agreement with the landlord of a property in an industrial zone, high-tech zone, building, or house. The landlord is either the owner of the property or a sublessor under a sublet agreement with the property’s owner. Nonetheless, we refer to this as the indirect approach because the authority will not issue a Land Use Right Certificate (LURC) to the investor but will keep the landlord/property owner’s name on the certificate.
The latter indirect approach is the most commonly used market entry model when choosing a business location because the landlord has already completed all the necessary ownership documentation and procedures prior to leasing the property, thus making it is easier for the investor to demonstrate to the relevant authorities their right to use the location for the incorporation purpose.
Key provisions to be considered when signing a lease agreement with a landlord
If the investor chooses the indirect approach, the following considerations should be evaluated in respect to choosing a business location:
- Ownership rights of the landlord: according to real estate law, an enterprise should register real estate trading in order to be able to lease or sublease properties in Vietnam, thus it is important to ensure that the landlord, if a company, operates in a compliant manner, under the correct business lines. Furthermore, in many cases the landlords sublease a property/premises without the permit of the property’s owner. Thus, to avoid potential compliance implications or cost-consuming litigation, investors should carefully review the right of the lessor before signing the lease agreement.
- Type of leased area/space: there are many types of leased spaces such as building, a floor of a building, co-working place, separate house, factory with additional office space, etc. According to the regulations of the Law on Housing 2014, it is forbidden to use a residential room in an apartment building as a business location. Therefore, the authority examines the leasing area based on its nature and approves or disapproves the Vietnam company’s location accordingly. For example, when investors choose a commercial purpose building for their business location, it is rarely challenged by the authority. On the other hand, when investors use a complex building with multi-purpose use (office, commercial, residential) for their business location, the authorities commonly request additional documents to demonstrate that the leased area is not constructed for residential purpose.
- The business location is located in sensitive areas: as mentioned above, for business locations located near the border, seashore, security and national defence areas, the procedure of incorporation will be more complicated and the documentation and approval level will be more substantial.
Special cases where business lines and operational scope affect the location requirements of a business in Vietnam
In many cases, the “operational objectives” and business lines of the investors seeking to enter the market in Vietnam may influence the company’s choice of business location. For these specific operational objectives, in addition to ensuring that the business location is reviewed according to the above notes, investors should also ensure the business location meets the legal requirements for their specific activities.
The following are some of the most common examples of cases where we have advised foreign investors on specific operational objectives and business location prerequisites:
|Operational Objectives||Business location requirements|
|1||Medical field||Depending on the size of the general or specialized hospital, the hospital must be designed and built in the form of a block house and must satisfy the following conditions:|
· For general and specialized hospitals, the construction floor area must be at least 50m2/bed or more.
· The width of the front (facade) of the hospital must be at least 10 m.
· Fixed, separate location; arranged in a high, cool, safe place, far away from pollution sources.
· An area suitable for business scale but at least 10m2, must have an area to display and store drugs and an area for drug buyers to contact and exchange information on drug use with retailers.
|2||Education||Kindergarten, preschool, and nursery school|
· Located in a residential area, ensuring the regulations on safety and environmental sanitation.
· The minimum average construction land area depending on the geographical area is 8 to 12m2 per child.
· Certificate of land use rights or lease contract for kindergarten, preschool, nursery school with a minimum term of 5 years.
Primary school: The minimum average construction land area depending on the geographical area is 8 to 12m2 per student.
|3||Sports||According to the standards of facilities in the subject of Fitness:|
· The practice room has an area of at least 60 m2, the distance from the floor to the ceiling is at least 2.8 m.
· the training space must be well ventilated.
· The distance between training equipment is guaranteed from 10cm to 30cm.
|4||Manufactory||Area is not an assessment factor, but environmental impact assessment and local planning therefore manufacturing industries to be located in industrial parks or clusters industrial.|
For example, in Ho Chi Minh City, the Investor can register chemical and fertilizer production only if the investment project is located in industrial parks, industrial clusters
The above information is general in nature, and under each specific situation of the investor’s operational scope in Vietnam, the business location prerequisites may differ. If you need any assistance with these or any other matters relevant for international investors in Vietnam, our experts are ready to work with your company to ensure you understand how the above will apply to your specific situation in Vietnam.
Ngo Hoang Thuc Quyen – Officer Incorporation, Licensing and Secretarial Services – email@example.com
Vo Thi Thanh Phuong – Head of Incorporation, Licensing and Secretarial Services – firstname.lastname@example.org
Matthew Lourey – Managing Partner – email@example.com