Again this week a Vietnamese e-commerce company is in the news for receiving multiple millions of dollars in funding from international Venture Capitalists. Fika, a dating app targeted at female users (see TechinAsia story here) was funded with one and a half million. The founders, while not Vietnamese, live and work in Vietnam and their staff is entirely Vietnamese. The same was true of Sky Mavis (which I discussed last week in my article NFT Gaming and Vietnam). In each case, and in multiple other instances, e-commerce companies that are founded and operated in Vietnam have a corporate structure in which a holding company is created offshore–usually in Singapore–and which is the entity that receives the bulk of foreign investment.
The Preferred Investment Structure
We recently helped a tech company that was founded in Vietnam open a Singapore company to act as the holding company of the Vietnam entity. To do this we had to not only setup the company in Singapore, but then we had to create the paperwork for the Singapore company to become the sole investor in the Vietnamese company, creating a 100% foreign owned company in Vietnam. We did this for two reasons. One, the company in question is interested in foreign expansion in the midterm and believes that having a parent company in Singapore will simplify that process. And two, the foreign investor insisted that the FDI, and their share of the ownership of the entity, happen in Singapore rather than Vietnam.
While this is a boon for lawyers and corporate service companies, it has negative implications for the international perception of Vietnam. Vietnam is seen as a difficult jurisdiction in which to do business. There is a great deal of administrative paperwork and with each administrative approval required the possibility for graft and corruption is multiplied. This has also contributed to the fact that Vietnam has yet to have a company list on a foreign stock exchange (though companies like Vinfast and a few others are pursuing reverse mergers of SPAC transactions in the near future). Vietnam is simply seen as a difficult jurisdiction in which to base internationally minded companies.
Why Vietnam Is Not a Regional Investment Hub
There are several reasons that companies choose Singapore as the central hub for their holding companies. While not a tax haven, corporate taxes are limited and setup of companies is simple. It is possible to setup a company in Singapore in a matter of days and the company has few restrictions on international operation. Singapore has access through its cultural diversity to much of the Asian region and has an infrastructure and government that is friendly to international corporates.
Vietnam, on the other hand, is in a much different situation. On average it takes one to two months to setup a company in Vietnam and the minimal invested capital required is relatively high. In Vietnam, the initial investment capital can be a nominal $1 Sing. This discourages companies from setting up companies that may not necessarily be targeted at a Vietnamese market. The corporate governance is complex and corporate secretarial services practically nonexistent. The authorities still balk at the use of virtual offices as the registered headquarters of a company in Vietnam. This makes it difficult for internationally minded firms to consider Vietnam as a corporate home.
Perhaps the biggest reason that Vietnam is not a regional hub for corporate investment, however, are the strict regulations regarding outward investment.
In order for a holding company to be able to properly hold subsidiaries in different countries it needs to be able to easily input capital from its home jurisdiction to the jurisdictions of its subsidiaries. This involves not only the input of capital to the subsidiary but also an output of capital from the parent company. While Vietnam has gone a long way towards making the input of capital for FDI purposes much easier over the last twenty years, the process for the output of capital remains extremely difficult.
Offshore investment by Vietnamese citizens (including corporations) is limited to a few specific forms. Namely,
- Establishment of an economic organization in accordance with the law of the investment recipient country;
- Investment on the basis of an offshore contract;
- Capital contribution, purchase of shares or purchase of a capital contribution portion in an offshore economic organization to participate in management of such economic organization;
- Purchase or sale of securities or other valuable papers or investment via securities investment funds or other intermediary financial institutions in a foreign country;
- Other investment forms in accordance with the law of the investment recipient country.
Restrictions exist for the raising and export of capital, the obtaining of loans by Vietnamese invested enterprises from foreign banks (which remains under the auspices of the state bank of Vietnam), and foreign exchange.
Without going into specifics, the procedure for obtaining an offshore investment registration certificate is largely similar to the procedure for obtaining an investment registration certificate for foreign investors investing in Vietnam. A properly prepared dossier must be submitted to the authorities and approval granted. Offshore invested companies must make financial and management reports to the authorities of Vietnam on a regular basis, and the injection of further capital–if it originates in Vietnam–must be approved. In general, Vietnam retains a great deal of control over outward investment.
This need to control the outflow of capital, intellectual property, and human capital greatly hinders Vietnam’s possibilities for becoming a regional corporate hub. It is also one of the primary reasons that so many Vietnamese e-commerce companies have set up a holding company in Singapore. Startups are founded with the intention to eventually scale beyond their original jurisdiction. That means that at some point they will have to create a corporate structure wherein there is a parent company and subsidiaries in different countries. If the parent company were to remain Vietnamese, then each time they tried to set up a subsidiary in a different country in their efforts to scale their startup, they would have to go through a months-long process to seek approval. This not only deters founders from using Vietnam as their corporate home but it deters investors from investing in Vietnamese startups and encourages the outflow of intellectual property and technical knowhow as startup founders seek other havens in which to base their companies.
While I understand that Vietnam wants to continue to monitor its citizens and has yet to completely convert from all of its pre-Doi Moi mores, it would behoove the government to eliminate the outward investment procedures. Not only would it encourage companies to remain Vietnamese owned and based, but it would have a minimal impact on Vietnam’s economy. Vietnam’s dollar surplus is so huge that the outflow of dollars through unregulated outward investment would be so minimal, and the inflow of profits from the same increased, that the balance of payments problem that the government may fear will occur is unlikely to happen.
Furthermore, Vietnam has expressed an intention to become a technologically developed home to startups and SMEs in the tech sector. The types of individuals who are entrepreneurial and interested in founding these companies are also interested in scaling beyond Vietnam’s borders. If Vietnam truly wishes to lure the talent and the intellectual property necessary to meet its goals, it will have to make it easier for these companies to expand regionally and even globally. Until then, e-commerce companies will continue to seek out jurisdictions like Singapore to house their parent companies because Vietnam’s regulatory requirements are simply too complex.