Vietnam has become an increasingly attractive destination for foreign investors looking to establish start-up businesses, owing to the country’s young and tech-savvy population, rapidly developing digital infrastructure, and government initiatives to encourage foreign investment through tax incentives and reforms. The Law on Support for Small- and Medium-sized Enterprises, which came into effect on January 1, 2018 (“the Law”), provided an official term used for a start-up enterprise is “Innovative start-up small and medium-sized enterprises” (“innovative start-up SMEs”) .

The Law provides that innovative start-up SMEs are small and medium-sized enterprises established to implement ideas based on the exploitation of intellectual property, technology, new business models and having the potential for rapid growth. The concept of innovative start-up enterprises, according to the Law, refers to certain enterprises based on their nature and fields of activity, rather than denoting a new legal form of enterprise.

Licensing process

In general, the foreign investors who wish to invest in Vietnam must go through the investment registration process to obtain an Investment Registration Certificate (IRC) and enterprise registration to acquire an Enterprise Registration Certificate (ERC). However, foreign investors establishing innovative start-up SMEs shall be exempt from the IRC requirement[1].

It is important to clarify that the concept of an innovative start-up SME does not denote a new legal form of enterprise, but rather describes certain enterprises based on their inherent characteristics and areas of business activity. In terms of legal entity form, innovative start-up SMEs may be limited liability companies, joint stock companies, partnerships or private enterprises, and they bear all the legal characteristics of these types of enterprises. In summary, enterprises with innovative start-up activities have the operational and management mechanisms of an enterprise in general established in accordance with the provisions of the law on enterprises.

Support measures

Under the Law, the support for innovative start-up SMEs may take the form of loan provision, credit guarantee, preferential corporate income tax, land rental preferences, technology renewal, training, counseling, or human resource development.

• Preferential interest rates: Innovative start-up SMEs are eligible to receive medium and long-term loans from commercial banks at preferential interest rates set below market levels. The state budget will subsidize the difference between the preferential rates given to innovative start-up SMEs and prevailing interest rates.
• Tax incentives: The Law indicates that Corporate Income Tax (CIT) incentives are applicable for Innovative start-up SMEs, which align with CIT regulations[2]. However, CIT laws have not yet been updated respectively to provide CIT incentives specifically for Innovative start-up SMEs. In order to align CIT regulations with the Law's provisions on supporting small and medium-sized enterprises, a revised CIT law is under discussion, aiming to supplement provisions on reduced CIT rates applied to micro and small enterprises. The revised CIT Law is expected to be submitted to the Assembly in October 2024 and approved in year 2025.
  
  Currently, CIT incentives for innovative startups are applied based on general CIT incentive policy principles that are based on specific locations or sectors, specifically:
  • Location-based CIT incentives:

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  • Sector-Specific Incentives: In the case Innovative start-up SMEs have been granted Science and Technology Enterprise Certificate, High Technology Enterprise Certificate or High-tech Application Enterprise Certificate, CIT incentives are available as following:
    • Science and Technology Enterprises: CIT exemption for 4 years, 50% CIT reduction in the subsequent 9 years;
    • Enterprises with High Technology Enterprise Certificate or High-tech Application Enterprise Certificate: 10 % for 15 years, CIT exemption for 4 years, 50% CIT reduction in the subsequent 9 years.

It should be noted that one criteria for CIT incentives is having an Investment Registration Certificate (IRC), which shall be exempt in the case of establishing innovative start-up SMEs. It is recommended that investors obtain an IRC to secure relevant CIT incentives in Vietnam. It is not certain at this stage if there will be any change to this requirement, however, latest draft of the revised CIT Law maintains the IRC requirement.

• Technical facilities, incubation facilities, co-working spaces: Innovative start-up SMEs can receive support covering 100% of equipment usage costs (capped at 20 million VND per year) and 50% of rental costs for incubator and co-working spaces (capped at 5 million VND per month) for a period of 3 years.
• Technology support: Innovative start-up SMEs are eligible for financial assistance covering up to 50% of the consultancy fees for technology searches, evaluation, decoding and transfer projects that are relevant to the enterprise, subject to an annual cap per contract of 100 million VND.

Additionally, innovative start-up SMEs are eligible for specified financial assistance for activities related to intellectual property development and commercialization, staff training, trade promotion, and media visibility.

Conditions to enjoy the support/incentives

The Law sets out two criteria for identifying SMEs: the number of insured employees and the amount of capital or turnover[3]. In particular, SMEs include micro, small and medium-sized enterprises, where each has no more than 200 employees on average per year who are covered by social insurance. In addition, to qualify as an SME, an enterprise must have total capital not exceeding 100 billion VND or total revenue for the preceding year not exceeding 300 billion VND.  

Once categorized as SMEs, innovative start-up SMEs that meet the stipulated prerequisites as mentioned below shall be entitled to receive incentives and support from the government.

a. The conditions on innovative start-up SMEs to enjoy the support[4]:

• Having been in operation for no more than 05 years from the date of initial ERC issuance;
• Not having conducted an initial public offering of securities for joint stock companies.

b. Main criteria for determining if an innovative start-up SME[5] matches one of following criteria:

• Producing or trading products created from intellectual property like patents, software, industrial designs, etc.
• Producing or trading products from pilot projects, prototypes, or award-winning innovations and start-up competitions.
• Having technological solutions or new business models that can increase the enterprise's revenue growth by at least 20% for 02 consecutive years.

The criteria focus on tangible intellectual property, products and innovations stemming from research, development and creative activities, as well as the potential for high growth based on the competitiveness of those new solutions. Meeting any one of these criteria enables classification as an innovative start-up SME.

The competent authority will select enterprises fully satisfying the stipulated essential conditions and requisite criteria to receive the necessary support. The selection process will primarily consider any prestigious awards and pivotal intellectual property protection certificates attained by the enterprises.

Method for selection of innovative start-up SMEs eligible for the support[6]

According to criteria and conditions as mentioned above, the competent authority shall select the innovative start-up SMEs to provide the support and incentives. The eligible enterprises shall be selected through one of the following methods:  

1. Selecting enterprises that have won national or international awards for creative startups or have innovative products, projects, or have been granted patents; or have been granted Science and Technology Enterprise Certificate, High Technology Enterprise Certificate or High-tech Application Enterprise Certificate.
2. Selecting enterprises that have been invested in or committed to be invested in by innovative start-up investment funds; received support or committed to receive support from co-working spaces, creative startup assistance organizations, service providers, incubation facilities, business promotion facilities, innovation centers as prescribed by investment laws.
3. Selection via a council, which is organized by the competent authorities.

Conclusion

Vietnam is making efforts to improve the investment environment by issuing preferential policies to attract foreign investors, especially in high-tech sectors. In principle, foreign startup investment projects must go through investment procedures and enterprise procedures just as normal foreign investment projects do, unless the foreign investors are establishing innovative start-up SMEs that produce and trade products related to intellectual property and innovative products originating from research and development activities.

By law, the innovative start-up SMEs may receive support from the Vietnamese Government in the form of loan provisions, credit guarantees, preferential corporate income tax, technical facilities, technology support, training, counseling, or human resource development. However, in practice, in order to enjoy such incentives, start-up SMEs must attain national or international awards for innovative startups, or have innovative or creative projects, or be granted Scientific and Technological Enterprise Certificates, High Technology Enterprise Certificates, or High-Tech Application Enterprise Certificates, which require expending much effort.

[1] Article 22.1.c of the Law on Investment 2020

[2] Article 10 and Article 18.3 of the Law

[3] Article 4 of the Law on Support for Small- and Medium-sized Enterprises 2017

[4] Article 17 of the Law on Support for Small- and Medium-sized Enterprises 2017

[5] Article 20 of Decree no.80/2021/ND-CP

[6] Article 21 of Decree no.80/2021/ND-CP