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Setting up a Vietnam sole proprietorship

Content Team5 minute read26 Aug 2021

Sole proprietorship or private enterprise might be the most accessible type of business to establish in Vietnam. But is it an ideal option for foreign investors besides so many choices such as LLC or JSC? Enjoy a brief overview of Sole Proprietorship in Vietnam and what to expect if you’re taking an interest in it.

setting-up-vietnam-sole-proprietorship

1. Benefits and Drawbacks of Sole Proprietorship in Vietnam

According to Law on Enterprises 2020 (which takes effect at the beginning of 2021), a sole proprietorship is an enterprise owned by one individual who has full control over the company’s operations and capital. Though this is the simplest type of business structure, it is also a double-edged sword to all investors. Let’s dive into the benefits and drawbacks of sole proprietorships in Vietnam.

benefits-of-sole-proprietorship

1.1. Typical benefits of sole proprietorships

Some typical benefits of a sole proprietorship are:

  • The owner takes full control over the company’s operations as well as increases or decreases of the capital investment during the operation
  • The owner will get all the profit of the company for himself or herself
  • Required documents, as well as registration procedure, are simple and easy to obtain
  • One owner also means that you can avoid any conflict of interests between company’s members over the course of business.

1.2. Typical drawbacks of sole proprietorships

Drawbacks of sole proprietorships may not be significant, but bypass them is not something you want to:

  • The owner has to take responsibility for the company’s operations with all of his or her properties – this also means that the captain goes down with his ship if the business doesn’t turn out well
  • Cannot issue any kind of shares
  • Each investor can only establish one sole proprietorship and he or she cannot be a partner of a partnership at the same time
  • Cannot contribute capital to the establishment as well as buy shares or stakes in partnerships, limited liability companies, or joint-stock companies

2. Sole Proprietorships eligibility

The owner of a sole proprietorship must be 18 years old and above. Like any other type of business in Vietnam, this owner has to have enough mental capacity, doesn’t have any criminal records (both current or has been erased), and isn’t a state official or serving in the army.

Each person can only be the owner of one sole proprietorship.

3. Required documents to register for a sole proprietorship

registration-procedure-sole-proprietorship

As per Law on Enterprises 2020 (takes effect on January 1st of 2021), required documents to register for a sole proprietorship include:

  • Application form for business registration
    • Name of your business
    • Headquarter address, phone number, fax number, and email address
    • Business lines
    • Capital invested by the owner
    • Tax registration information
    • Estimated number of employees
    • Full name, signature, permanent residence, nationality, ID or passport number of the owner
  • Copies of the ID card or equivalent of the owner

4. Registration procedure

According to Law on Enterprises 2020, the registration procedure for a sole proprietorship is quite simple:

  1. The owner submits the application as listed above to the business registration authority directly, by post or through an online portal.
  2. Within 3 working days, after the application is well-received, the business registration authority will consider the legitimacy of the application and issue the certificate. With rejected applications, a notification with explanations and instructions of adjustment will be sent to the applicant.

After approximately 6 working days, you can obtain a sole proprietorship certificate or at least an instruction to show you what you’re missing to get one.

5. Tax duties of a sole proprietorship

As a company who operates a business in Vietnam and involves in profit-generating activities, there are tax duties that a sole proprietorship is obligated to.

tax-duties-sole-proprietorships

5.1. Licensing Fee

As stated in Decree No. 139/2016/ND-CP, the rate of licensing fees is as below:

  • VND 3.000.000 per year with companies has investment capital over 10 billion Dong
  • VND 2.000.000 per year with companies has investment capital less than 10 billion Dong

You have to pay for the licensing fees no later than the last day of January of each year. However, if your company is established within the last six months of the year (which is from the first of July to the end of December), you only have to pay 50% of the license fee. With companies established in the first six months of the year, you will have to pay for a full license fee. But here is great news, in the first year of establishment, a sole proprietorship doesn’t have to pay a licensing fee as stated in the Decree No. 22/2020/ND-CP.

5.2. Corporate Income Tax

In Vietnam, Corporate Income Tax (CIT) is based on the net income that companies obtain while operating their businesses, normally in one business year cycle.

Formular

Formular

CIT calculation formula according to Circular No. 78/2014/TT-BTC:

CIT = (Taxed Income – Deductible Science and Technology Development Fund) x CIT rate

In which:

Taxed Income = Taxable Income – (Tax Exempted Income + Carried Forward Losses)

Taxable income = (Turnover – Deductible Expenses) + Other Incomes

Also stated in this Circular, the general CIT rate of sole proprietorships is 20%. However, this rate also depends on the business lines of your company.

5.3. Value-Added Tax (VAT)

required-documents

All goods and services that your company is doing business with are subject to value-added tax. There are two calculation methods:

  • Deduction method: Payable VAT = Output VAT – Creditable Input VAT
  • Direct method: Payable VAT = VAT of sold Goods & Services x VAT rate

VAT rates

VAT Rate Items
0% ●     Exported goods and services

●     International transportation

5% ●     Essential goods and services

●     Specific types of goods and services (as regulated)

10% ●     Standard rate for goods and services
Exempt ●     Certain goods and services (as prescribed)

5.4. Personal Income Tax

As repeatedly mentioned earlier, a sole proprietorship is not a legal entity and is owned by a single investor. Plus, according to Circular 11/2013/TT-BTC and Law on Corporate Income Tax, a sole proprietorship is not a subject to personal income tax as the income it generates through its business is not coming from wages, remunerations, and the other amounts paid as wages or remunerations.

Other taxes may apply to your business depending on your business lines such as Special Consumption Tax, Import – Export Tax and so on.

6. Sole Proprietorship… maybe not ideal for foreign investors

It seems to have lots of gray areas in the Vietnam law whether foreign investors can establish sole proprietorship or not.

The Prime Minister will provide regulations about private enterprises established by foreign investors. However, up until the present day, there aren’t any official regulations of the government regarding this issue.

Moreover, according to the Law on Investment 2020 (takes effect from 2021), “enterprises with foreign capital” of foreign investors in Vietnam do not include private enterprises or sole proprietorships.

But don’t sweat, if you’re interested in the Vietnam market, there are plenty of choices to invest in such as Liability Limited Company, Joint-Stock Company, or even Partnership.

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