What are the differences between a service company and a trading company for setting up a sourcing platform in Vietnam?

A service company is a Limited Liability Company (LLC) that has as its core activity the provision of services to third parties. Foreign investors involved in sourcing activities use this type of company for activities such as providing market and supplier research, quality control, product development, design and logistical support services. A service company is the easiest type of LLC to establish, as it requires a shorter time frame and a lower capital requirement compared to a trading or manufacturing company.

Service companies have proven to be great alternatives to representative offices (ROs), especially when an RO’s operations start to grow and its costs begin to rise. A basic review of expenses and available business model alternatives will highlight how this type of structural change may help reduce tax burdens while also increasing the flexibility of its operations.

If, however, a business wishes to engage in import and export activities as well as domestic distribution (i.e., retail, wholesale and franchising trade activities) in Vietnam, the most common method chosen is establishing a trading company. Generally, a trading company is inexpensive to establish and can be of great assistance to foreign investors by combining both sourcing and quality control activities with purchasing export facilities, thus providing more control and quicker reaction times compared to sourcing purely while based overseas.

Trading companies are also the ideal choice for foreign companies that need to source in Vietnam in order to resell in Vietnam. Without a Vietnamese trading company, the alternative would be to buy from overseas, and have the goods shipped out of Vietnam before then reselling back into Vietnam via local distributions (which would mean additional logistical costs, customs duties and VAT).

Trading and distribution is still a sensitive sector for foreign investors. Therefore, the licensing process can vary 4-6 months from the date of submitting the application dossier to the licensing authority, until the business license can be used.