Attorney Vu Manh Quynh is the Managing Partner of ECOVIS Vietnam Law, advising international investors on Foreign Direct Investment (FDI), corporate governance, and regulatory compliance in Vietnam.
Vietnam as a China+1 Manufacturing Destination: The Legal Reality
Vietnam absorbed more China+1 supply chain diversification than any other Southeast Asian country over the past decade. Electronics, textiles, footwear, furniture, automotive components, and precision manufacturing operations have relocated or expanded into Vietnam from China — driven by tariff exposure, supply chain risk diversification, rising Chinese labour costs, and customer compliance requirements.
Chinese-background investors and multinationals using Vietnam for China+1 production ask a distinct set of legal questions that differ from pure market-entry investors. The questions centre on supply chain structure, related-party compliance, rules of origin, and the regulatory difference between genuine Vietnam-origin manufacturing and tariff circumvention. ECOVIS Vietnam Law addresses the most important of these questions.
Structure and Ownership
How does Vietnam’s FDI structure differ from China’s WFOE model?
Chinese investors familiar with China’s wholly foreign-owned enterprise (WFOE) model will recognise the underlying concept in Vietnam’s foreign-invested enterprise (FIE) — both are 100% foreign-owned legal entities permitted for most manufacturing activities. However, the regulatory framework differs in important ways. Vietnam’s approval sequence is IRC-first, ERC-second — unlike China’s business licence-first approach. Vietnam’s provincial-level approval authority (DPI or IPC management board) plays a more active role in project assessment than China’s market supervision bureau for most registrations. Vietnam does not have a China-style negative list for the manufacturing sector in most product categories, but sector-specific approval requirements from MOIT and other line ministries apply.
The governance structure also differs: Vietnam’s LLC requires a legal representative resident in Vietnam, with specifically delegated authority recorded in the company charter and member resolutions. China-based parent companies that apply WFOE governance documents directly to Vietnam subsidiaries without Vietnam-specific adaptation create authority and enforceability gaps in banking, contracting, and authority dealings.
Can a Chinese parent company own 100% of a Vietnam manufacturing subsidiary?
Yes, for most manufacturing sectors. Vietnam’s Law on Investment 2025 (Law No. 143/2025/QH15) does not discriminate between investor nationalities for the purposes of ownership conditions — a Chinese investor has the same market access rights as a German, Japanese, or American investor in most manufacturing categories. Ownership conditions that apply do so sector-by-sector, not nationality-by-nationality. The practical difference for Chinese-background investors is in due diligence and compliance positioning: as Vietnam’s FDI oversight has become more sophisticated, projects with Chinese ownership in sensitive supply chain positions or product categories may face longer DPI review timelines or additional sector pre-approval requirements in practice.
Rules of Origin and Tariff Compliance
What rules of origin apply for Vietnam exports under CPTPP and EVFTA?
Vietnam benefits from preferential tariff access to CPTPP member markets (including Japan, Canada, Australia, Mexico, and others) and EU markets under EVFTA, subject to rules of origin requirements. Rules of origin differ by agreement and product category, but typically require one of: substantial transformation (a change in tariff heading at the HS 4-digit or 6-digit level through processing in Vietnam); a regional value content (RVC) threshold (commonly 40% in CPTPP); or specific processing requirements for certain sensitive products. Products assembled in Vietnam from Chinese inputs without sufficient transformation or local value addition do not qualify for preferential tariff treatment under these agreements — and claiming EVFTA or CPTPP preference without meeting the rules of origin constitutes false certification, which carries serious trade and customs penalties in Vietnam and the importing country.
How do customs authorities assess whether a Vietnam operation is genuine manufacturing or tariff circumvention?
Vietnamese customs and trade authorities have developed increasingly specific criteria for assessing whether Vietnam-exported goods genuinely originate in Vietnam or are circumventing tariffs through minimal processing. Indicators of genuine manufacturing include: substantial fixed-asset investment in Vietnam (factory, machinery, tooling); local employment at meaningful scale with Vietnam payroll compliance; local supplier relationships for inputs and materials; actual production processes in Vietnam that result in HS-code transformation; and consistent, auditable production records. Indicators of concern include: the majority of inputs sourced exclusively from the Chinese parent company with no value addition in Vietnam; minimal fixed assets relative to export value; production timelines inconsistent with the scale of declared manufacturing operations; and product flow from China to Vietnam to export destination with short dwell times.
Multinational companies using Vietnam as a China+1 base should structure their Vietnam operations to demonstrate genuine manufacturing substance — not only because of Vietnam customs compliance, but because US, EU, and other importing-country customs authorities are conducting origin verification audits on Vietnam exports and applying penalties (including retroactive duty assessment) when they find insufficient origin substance.
What documentation must a Vietnam manufacturer maintain for rules of origin compliance?
Rules of origin documentation for EVFTA exports requires a REX (Registered Exporter) registration and a Statement on Origin for consignments above EUR 6,000 (self-certification by the registered exporter). For CPTPP, certificate of origin Form CPTPP or approved self-certification is required. The documentation chain includes: Bill of Materials showing the origin and HS classification of all inputs; production records demonstrating the transformation process; value content calculations for RVC-method products; and supplier declarations for locally sourced inputs. Companies that cannot produce this documentation chain on request from customs authorities in the importing country — or in a Vietnam customs audit — risk loss of preference and retroactive duty assessment.
Related-Party Transactions and Transfer Pricing
What transfer pricing risks arise from supply chain transactions between a Vietnam FIE and its Chinese parent?
The most common transfer pricing risk pattern for China+1 operations in Vietnam is: the Vietnam entity purchases raw materials or components from the Chinese parent at above-market prices (compressing Vietnam profit), and sells finished goods to the Chinese parent or group trading entities at below-market prices (further compressing Vietnam profit). This results in very low or negative profit margins at the Vietnam entity level, which triggers transfer pricing audit risk in Vietnam — particularly if the Vietnam entity is in a CIT exemption or preferential period, creating an incentive to shift profits out of Vietnam before the incentive period expires.
Vietnam’s transfer pricing rules apply to all related-party transactions. Annual TPD, including comparability analyses for both input purchases and output sales, must be maintained. The Vietnam tax authority has increased the sophistication of transfer pricing audits and benchmarks related-party margins against industry comparables. Loss-making or margin-compressed Vietnam entities in China+1 supply chains are a high-priority audit category. Arm’s-length pricing must be demonstrable on both the input and output legs of the production chain.
Supply Chain Contracts
How should supply contracts between a Vietnam manufacturer and its Chinese parent be structured?
Supply contracts between a Vietnam FIE and its Chinese parent must be structured as arm’s-length commercial agreements — not internal cost-allocation arrangements — with: specific product specifications; pricing that reflects market rates (or is defensible under transfer pricing comparability analysis); quantity and delivery terms consistent with actual production capacity; quality standards with audit rights; and payment terms that comply with Vietnamese foreign currency payment rules and FCT obligations. The contract should be executed in bilingual form (English and Vietnamese) if it is to be relied upon in Vietnamese administrative or legal proceedings. Foreign contractor tax applies to any service components of the agreement where the Chinese parent provides services to the Vietnam entity — this must be planned into the payment structure.
Frequently Asked Questions
Does Vietnam manufacturing provide a tariff advantage over China for US exports?
It can — Vietnam-origin goods exported to the US are not subject to the Section 301 tariffs that apply to Chinese-origin goods (which in many categories run at 25%–145%). However, Vietnam-origin preference requires genuine Vietnam origin under US Customs rules — not minimal processing of Chinese inputs. US Customs and Border Protection has increased enforcement of Vietnam-origin verification for product categories previously manufactured in China, including electronics components, furniture, and garments. Companies that rely on Vietnam as a re-export point without genuine manufacturing substance face antidumping, countervailing duty, and tariff evasion penalties under US trade law — in addition to Vietnam customs penalties.
What is the minimum Vietnam value addition required for EVFTA rules of origin?
It depends on the product. For most manufactured goods under EVFTA, a 40% regional value content (RVC) requirement applies, or a change in HS tariff heading at the 4-digit level. Some products (textiles, garments, certain electronics) have more specific requirements — garments, for example, typically require “double transformation” (yarn to fabric in EVFTA zone, fabric to garment in Vietnam). The applicable rule is determined by the HS code of the exported product and the EVFTA product-specific rules schedule. Companies should confirm the applicable rule for their specific product before claiming EVFTA preference — the consequences of incorrect origin claims are severe in both Vietnam and the EU.
How is the genuine substance of a Vietnam manufacturing operation assessed?
Key indicators assessed by Vietnamese and importing-country authorities include: capital invested in Vietnam fixed assets relative to export value; headcount of Vietnam employees relative to production volume; local materials sourcing percentage; production cycle time relative to declared manufacturing complexity; HScode transformation between inputs and outputs; and historical consistency of the production record. A Vietnam manufacturing operation that exports USD 50 million of goods annually but has fewer than 20 employees, USD 2 million of fixed assets, and sources 95% of inputs from China will be scrutinised. Building a Vietnam operation with genuine manufacturing substance — meaningful investment, employment, local sourcing, and production capacity — is both a compliance obligation and a sustainable competitive position.
Structuring a Vietnam China+1 manufacturing operation or reviewing your supply chain compliance position? Contact Attorney Vu Manh Quynh at ECOVIS Vietnam Law for a supply chain legal review. Email: vietnam@ecovislaw.vn | Website: www.ecovislaw.vn
This material is for general informational purposes only and does not constitute legal, tax or professional advice. Investors should seek specific advice based on their business sector, ownership structure and investment location in Vietnam. Legal and regulatory references reflect the position as of August 2026.
Attorney Vu Manh Quynh is the Managing Partner of ECOVIS Vietnam Law, advising international investors on Foreign Direct Investment (FDI), corporate governance, and regulatory compliance in Vietnam. Email: vietnam@ecovislaw.vn | Website: www.ecovislaw.vn