SBLAW would like to provide you some information on the establishment of a Representative office and Branch Company in Vietnam as follows:
1.Differences between a representative office (RO) and a Branch Company:
| Representative Office | Branch | ||
| Taxation policy | Business-license Tax | Because ROs can only carry out activities such as representation, marketing, market research, and is not allowed to conduct production or business activities of goods and services, hence ROs will not have to pay Business-license Tax | Branches will have to pay Business-license Tax as this type of organization is listed as units that are submitted to Business-license Tax, pursuant to Official Dispatch No. 1200/BTC-TCT. |
| Personal Income Tax | Pursuant to Article 24, 25 Circular No. 111/2013/TT-BTC issued by the Ministry of Finance, ROs are responsible for withholding, declaring, and paying personal income tax on income from wages and salaries of ROs’ employees. | Pursuant to Article 24, 25 Circular No. 111/2013/TT-BTC issued by the Ministry of Finance, Branches are responsible for withholding, declaring, and paying personal income tax on income from wages and salaries of Branches’ employees. | |
| Value Added Tax | Because RO can only carry out activities such as representation, marketing, market research, and is not allowed to conduct business functions, and has no income from selling goods or providing services, hence, ROs do not have to issue and use VAT Invoices. | The main function of Branches are business functions and have its own income from selling and providing services activities, hence, Branches will have to issue and use VAT Invoice | |
| Corporation Income Tax | Because RO can only carry out activities such as representation, marketing, market research, and is not allowed to conduct business functions, and has no income from selling goods or providing services, hence, ROs do not have to pay Corporation Income Tax. | Pursuant to Clause 1, Article 2 Circular 78/2014/TT-BTC, Branches are one of the units that are subjected to Corporation Income Tax. | |
| Other taxes | Because RO can only carry out activities such as representation, marketing, market research, and is not allowed to conduct business functions, and has no income from selling goods or providing services, hence, ROs do not have to pay other taxes. | Depending on which kind of business that the Branch conducts, that Branch is submitted to certain kinds of special taxes, pursuant to Vietnamese law. | |
| Structure | Main function | RO can only perform the function of an authorized representative of an enterprise, which means that a RO only has transaction and marketing functions. The purpose of a RO is simply understood as a place to promote the products of the business, a place to answer and advise customers. | Branch can perform both the business function and the authorized representative function. |
| Business function | No business function, only authorized representative function of the Company | Able to register all business lines that its holding company has registered | |
| Seal, license to operate | Has its own seal;
Has its own operating certificate. |
Has its own seal;
Has its own operating certificate. |
|
| Contracting
Invoicing |
Not allowed to sign economic contracts;
Not allowed to use and issue invoices. |
Able to sign economic contracts;
Able to use and issue invoices. |
|
| Tax code | Has its own tax code with 13 digits.
RO declares tax according to the tax code which is the office code recorded in the Certificate of Operation Registration. |
Has its own tax code with 13 digits.
Branch declares tax according to the tax code which is the office code recorded in the Certificate of Operation Registration. |
|
| Tax declaration methods | Independent declaration with the company at the tax authority where the RO is located. | Branch can choose Independent or Dependent accounting methods. | |
| Risk management in tax administration | Risk management in tax administration will be conducted by tax authorities | ||
2.Cancellation procedures and relevant taxes of the representative office.
a) In order to proceed cancelation procedure for RO, the following steps must be conducted:
Step 1: Carrying out decisions to terminate operations and finish obligations to employees.
Step 2: Conducting procedures for invalidation of tax identification numbers of RO.
Dossiers composition includes:
- Request for invalidation of tax identification numbers
- Decision to terminate RO operation.
- A copy of the RO operation license, a copy of the RO’s tax identification number notice.
Step 3: Conducting procedures to return seals or confirm if RO does not use stamps.
Dossiers composition includes:
- Official seal return ofRepresentative Office;
- Seal of Representative Office;
- Certificate of seal sample registration;
- Copy of Representative Office operation license;
- Decide to terminateRepresentative Office operations;
- A copy of the tax agency's document on invalidation of the tax identification number;
Step 4: Prepare dossiers for dissolution of RO.
Dossiers composition includes:
- Notice of termination of operation ofRepresentative Office (Reference form – in Appendix II – 22, Circular 20/2015/TT – BKHDT)
- Decision to terminate RO operation.
- Minutes of the meeting of the Members' Council/General Meeting of Shareholders on the dissolution of theRepresentative Office (if any).
- RepresentativeOffice operation registration certificate
- List of employees as well as corresponding rights of employees in theRepresentative Office.
- List of creditors as well as outstanding debts (if any)
- Tax registration certificate and investment registration certificate copy (if any)
b) Relevant taxes: as mentioned above
3.Regarding "Riskidentification and response plan".
a) Potential risks in tax declaration procedure – tax settlement of RO:
- Theoffice has not yet prepared a valid revenue and expenditure report and cash book.
- After receiving money from the holdingcompany, the office may carry out expenses but do not have valid invoices and documents to prove it, especially business trip expenses and office expenses, house rental expenses, car rent, or payment for another supplier. Valid invoices and vouchers are specified in the current tax and accounting laws.
- Expenses for purchasing machinery and direct production materials, paying bonuses to employees... are not suitable for the function of the RO.
- Commissions for customers, travel expenses, and other meals will be considered as personal benefits for some subjects and will be subject to Personal Income Tax.
- The office calculates and pays social insurance and health insurance based on the basic salary (not on the total salary fund) but has not yet registered the salary scale system as prescribed; or calculated insurance on the total salary fund, leading to large salary deductions, reducing the ability to recruit new employees to serve business activities.
- Theoffice has more than 10 employees but has not yet completed the procedures for registration of labor regulations as prescribed.
- Theoffice has not yet notified the bank account number to the tax authority according to regulations.
- Especially in some cases, the system of records and documents shows that the office is operating in the manner of a manufacturing company without declaring revenue, paying CIT, VAT,… creating serious risks when relevant state agencies carry out specialized inspection activities.
b) Solution to avoid aforementioned risks:
Firstly, clearly define a list of procedures, reports, and records that must be complied with regulations. Implemented compliance reports and procedures.
Secondly, complete sets of documents related to invoices from suppliers, business trip records, salary records in the direction of explanation to avoid tax imposition and tax arrears.
Thirdly, register labor rules, collective labor agreements as prescribed. This procedure helps the office to explain many actual payments such as travel expens and other benefits to employees...
Fourthly, actively prepare income and expenditure books (cashbook, petty cash) for the office with the following main contents:
Collect original documents for every month, including:
Bank statement with valid receipts and invoices.
Cashbook, petty cash with valid invoices and vouchers.
Actual wages and benefits paid with valid payroll and employee records.
Other compliance records and reports must be submitted to government agencies.
Monthly reporting and internal audit of compliance reports and documentation:
Prepare standard cashbook and petty cash reports;
Reviewing the office's operations according to current regulations, establishing the relationship between transactions legally and optimally according to the requirements of the state;
Calculate and optimize payable taxes and insurance, overcome risks and prevent. Complete legal documents for each transaction make each set of documents a legitimate legal basis for legitimate transactions.
Lastly, prepare tax reports of representative offices, tax finalization reports of representative offices, letters of confirmation of tax obligations of representative offices, dossiers of tax exemption and reduction of representative offices.
The aforementioned is our suggestion regarding your questions on the establishment of a RO/Branch Company. If you have any questions, please do not hesitate to contact us.
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