Are you interested in investing in Vietnam, one of the fastest-growing economies in Southeast Asia? If so, you might want to consider setting up a foreign invested enterprise (FIE) in this dynamic market. A FIE is a business entity that is established by foreign investors in Vietnam, either wholly or partially owned by them. FIEs can enjoy many benefits, such as access to a large consumer base, preferential tax policies, and protection of intellectual property rights. However, FIEs also face some challenges, such as complex regulations, cultural differences, and competition from local firms. In this article, we will explain what a FIE is, what types of FIEs exist, what advantages and disadvantages they have, and how to set up a FIE in Vietnam. This article is brought to you by Vninvestment, a leading platform for foreign investors who want to explore the opportunities in Vietnam.
| What is a FIE? | Types of FIEs | Advantages of FIEs | Challenges of FIEs | How to set up a FIE? |
|---|---|---|---|---|
| A business entity that is established by foreign investors in Vietnam, either wholly or partially owned by them. | There are two main types of FIEs: 100% foreign-owned enterprise (FOE) and joint venture (JV) with a local partner. | FIEs can enjoy benefits such as access to a large consumer base, preferential tax policies, and protection of intellectual property rights. | FIEs also face challenges such as complex regulations, cultural differences, and competition from local firms. | To set up a FIE, foreign investors need to follow a series of steps, such as choosing a suitable investment form, obtaining an investment registration certificate, and registering the business license. |
What is a foreign invested enterprise (FIE)?
A foreign invested enterprise (FIE) is a legal structure under which a company can participate in a foreign economy. The term, “foreign invested enterprise (FIE)” primarily relates to operating in Asian countries, mainly China. In China, FIEs tend to have tight government regulation at several important junctures, which can limit how much a company can profit from foreign ventures, as well as the amount of control that a foreign parent has over the FIE that is established in the foreign country.
Foreign Invested Enterprise (FIE) Law
As of January 1st 2020, China implemented a new Foreign Investment Law (FIL), consisting of 42 articles across 6 chapters. The New Law encourages foreign investment, bolsters its protection, while imposing new legal liabilities on both foreign investors and Chinese regulators. Likewise, China’s 2019 Negative List and Encouraged Industries Catalog further promotes and supports foreign investors.
The Negative List
The Negative List aimed to remove restrictions on foreign investors in specific sectors. For instance, the oil and gas exploration sector no longer requires you to have a joint venture with a local partner. The Negative List can help you identify the sectors that are open or restricted for foreign investment in China.
The Encouraged Industries Catalog
The Encouraged Industries Catalog, in contrast, provides incentives to invest in certain sectors. Among these sectors are:
- Pharmaceuticals
- Modern agriculture
- New materials
- Intelligent manufacturing
- Advanced services and technology
Investors in these sectors, among others, will enjoy preferential benefits such as:
- Exemptions from customs duty on imported equipment for self-use
- Income tax rate of 15% for certain sectors and operating regions
- Land supply given on a priority basis for qualified investments. Plus a 30% discount on the minimum price for granted land use rights
The Encouraged Industries Catalog also includes a sub-catalog that promotes foreign investment in certain regions within western, central and eastern China. You’ll enjoy the same preferential benefits mentioned above by investing in these specific regions. The Encourage Industries Catalog can help you select the best sectors and locations for investment in China.
Types of foreign invested enterprises (FIEs)
In China, there are four main types of FIEs that foreign investors can establish, depending on their ownership structure, investment objectives, and business activities. These are:
- Wholly foreign-owned enterprise (WFOE): A limited liability company that is fully owned and controlled by foreign investors. WFOEs are suitable for foreign investors who want to have full autonomy and flexibility in their operations, as well as protection of their intellectual property rights.
- Equity joint venture (EJV): A legal entity with limited liability that is established by Chinese and foreign parties, who share the profits, risks, and losses according to their equity ratio. EJVs are suitable for foreign investors who want to cooperate with local partners and benefit from their resources, networks, and market access.
- Cooperative joint venture (CJV): A contractual arrangement between Chinese and foreign parties, who agree on the terms of cooperation, management, and distribution of benefits. CJVs can be either pure or hybrid, depending on whether they establish a separate legal entity or not. CJVs are suitable for foreign investors who want to have more flexibility and control over their operations than EJVs.
- Foreign-invested companies limited by shares (FICLS): A type of joint-stock company that foreign investors can establish with Chinese or other foreign shareholders. FICLS are suitable for foreign investors who want to raise capital from the public or list their shares on the stock market.
Advantages of foreign invested enterprises (FIEs)
Foreign invested enterprises (FIEs) are businesses that are established by foreign investors in a host country, either wholly or partially owned by them. FIEs can bring many benefits to both the investors and the host country, such as economic growth, human capital development, technology transfer, and market diversification. In this section, we will discuss some of the main advantages of FIEs in more detail.
Economic growth
One of the most obvious advantages of FIEs is that they can boost the economic growth of the host country. FIEs can create jobs, increase incomes, and improve living standards for the local population. FIEs can also contribute to the tax revenue of the host country, as well as attract more foreign exchange and capital inflows. According to a study by the World Bank, a 10% increase in FDI inflows is associated with a 0.6% increase in GDP growth. FIEs can also stimulate the development of local industries, especially small and medium-sized enterprises (SMEs), by providing them with access to markets, suppliers, customers, and partners.
Human capital development
Another advantage of FIEs is that they can enhance the human capital development of the host country. Human capital refers to the skills, knowledge, and competence of the workforce. FIEs can provide training and education opportunities for their employees, as well as share their best practices and standards with local firms. FIEs can also foster innovation and creativity among their workers, as well as encourage them to adopt new technologies and methods. According to a study by the OECD, a 10% increase in FDI stock is associated with a 0.7% increase in labor productivity. FIEs can also help to reduce the brain drain problem in developing countries, by offering attractive wages and career prospects for talented workers.
Challenges of foreign invested enterprises (FIEs)
Despite the many advantages of FIEs, foreign investors also face some challenges when operating in a foreign country. These challenges can vary depending on the host country’s political, economic, legal, and cultural environment. Some of the common challenges that FIEs encounter are:
- Cultural and language barriers: Doing business in a foreign country means dealing with a new culture and language, which can make communication and building relationships more difficult. Foreign investors need to understand and respect the local customs, values, and norms, as well as learn the language or hire interpreters. Cultural and language barriers can also affect the management and motivation of local employees, as well as the negotiation and cooperation with local partners and authorities.
- Legal complexities: Establishing a FIE often requires navigating complex legal regulations and bureaucracy, which can be time-consuming and costly, especially if you are not familiar with the local laws and regulations. Foreign investors need to comply with various rules and procedures regarding investment approval, business registration, taxation, labor, environmental protection, intellectual property rights, and dispute resolution. Legal complexities can also create uncertainty and risks for FIEs, as laws and regulations can change frequently or be inconsistently enforced .
- Currency and financial risks: Operating in a foreign currency can be risky, as exchange rates can fluctuate rapidly. Foreign investors need to hedge against currency risks or use financial instruments to reduce their exposure. Currency and financial risks can also affect the profitability and cash flow of FIEs, as well as their ability to repatriate profits or capital. Foreign investors also need to deal with the local banking system, which may have different standards and regulations than their home country.
- Political instability: Doing business in a foreign country exposes FIEs to political instability, which can affect their operations and performance. Political instability can include changes in government policies, social unrest, civil war, terrorism, corruption, or sanctions. Political instability can create uncertainty and volatility for FIEs, as well as increase their operational costs and risks. Foreign investors need to monitor the political situation and adapt to the changing environment.
- Increased competition: Entering a foreign market means facing increased competition from both local and other foreign firms. Foreign investors need to compete for market share, customers, suppliers, talent, and resources. Increased competition can also affect the pricing and quality of products or services, as well as the innovation and differentiation of FIEs. Foreign investors need to conduct market research and analysis, as well as develop effective marketing and branding strategies.
How to set up a foreign invested enterprise (FIE)?
To set up a FIE in China, foreign investors need to follow a series of steps, such as choosing a suitable investment form, obtaining an investment registration certificate, and registering the business license. The specific procedures may vary depending on the type and location of the FIE, but the general steps are as follows:
- Choose an investment form: Foreign investors need to decide which type of FIE they want to establish, such as WFOE, EJV, CJV, or FICLS. They also need to select a business scope and name for their FIE, as well as a registered address and legal representative.
- Obtain an investment registration certificate: Foreign investors need to submit an application and relevant documents to the Ministry of Commerce (MOFCOM) or its local branches for approval. The documents may include the articles of association, feasibility study report, joint venture contract (if applicable), and other supporting materials. The MOFCOM will issue an investment registration certificate within 30 working days if the application meets the requirements.
- Register the business license: Foreign investors need to apply for a business license from the State Administration for Market Regulation (SAMR) or its local branches within 30 days after receiving the investment registration certificate. The documents may include the investment registration certificate, articles of association, legal representative’s identification, and other relevant materials. The SAMR will issue a business license within 15 working days if the application meets the requirements.
- Complete other post-registration procedures: Foreign investors need to complete other post-registration procedures within 30 days after obtaining the business license. These procedures may include opening bank accounts, registering for tax and social insurance, applying for customs clearance and foreign exchange registration, and obtaining other permits or licenses as required by the laws and regulations.
Conclusion
Foreign invested enterprises (FIEs) are a popular and effective way of investing in a foreign country, especially in China. FIEs can bring many benefits to both the investors and the host country, such as economic growth, human capital development, technology transfer, and market diversification. However, FIEs also face some challenges, such as cultural and language barriers, legal complexities, currency and financial risks, political instability, and increased competition. Therefore, foreign investors need to carefully plan and prepare before setting up a FIE in China. They need to choose a suitable investment form, obtain an investment registration certificate, register the business license, and complete other post-registration procedures. They also need to conduct market research and analysis, as well as develop effective marketing and branding strategies. By doing so, foreign investors can maximize the potential and performance of their FIEs in China.
