13/01/2017
INVESTMENT CAPITAL ACCOUNT: SHARING FROM SOME PRACTICAL CASES
Under previous regulations, when conducting investment in Vietnam, foreign investors and foreign-invested enterprises are required to open an invested capital account in a commercial bank operating legally in Vietnam. Dependent on the form of investment, invested capital accounts are classified into direct investment capital account or indirect investment capital account.
However, the current 2014 Law on Investment no longer makes any distinction between the forms of direct and indirect investment. Instead, the investment forms are regulated into (i) investment to set up economic organizations; (ii) investment under the forms of contributing capital to, purchasing shares and acquiring contribution capital in economic organizations; and (iii) investments under the forms of PPP contract and BCC. As a result, the use of the legal terms “direct investment capital account” and “indirect investment capital account” is no longer appropriate. To reach consistency among legal documents, definitions of these capital accounts may be changed accordingly.
Pending new regulations, investors still have to open the types of investment accounts for investing in Vietnam because investment capital account is a means of investment management of the State in supervising investment cash flows into and capital transferred out of the territory of Vietnam, including (i) collection of direct invested capital contribution of foreign investors; (ii) collection of payment for transfer value of investment capital and investment project, for contribution capital transfer and share transfer; (iii) payment for transferred value of investment capital and investment project; and (iv) transmission of profits and other legitimate income resources of investment activities out of Vietnam.
In fact, quite a few investors carry out capital transactions not through investment accounts. This gives rise to a number of legal issues that these investors find themselves at a loss as to how to deal with them. We set out below some cases arising in reality and our proposals to help investors anticipate or avoid troubles that may arise.
Payment for shares and contribution capital purchase not made via investment capital accounts
Ho Nguyen Joint Stock Company is a wholly domestic-invested company established in 2011 by shareholders being three (03) different joint stock companies. Two years later, Biz BHD, a company incorporated in Malaysia, acquired all shares of a shareholder of Ho Nguyen Company. After completion of the transaction of shares purchase and sale, Ho Nguyen Company carried out the procedures for amending the Certificate of Enterprise Registration, recording Biz BHD as a shareholder. However, in the process of purchasing and selling shares, instead of opening an investment capital account and making payment for purchasing shares through this account, Biz BHD transmitted monies directly into the account of the transferred party.
In 2015, realizing the unfavorable investment, Biz BHD desired to withdraw its capital back to Malaysia by transferring all of its shares to another shareholder, but Biz BHD could not transmit monies to Malaysia due to not having an investment capital account opened in Vietnam. Even after consultation with the State Bank, the matter has not been solved so far, resulting in the incompletion of capital transactions.
Use of profits for capital contribution and increase
Mistra Limited Liability Company (“Mistra”) is a 100% foreign-invested company set up in Vietnam by the Korean company Mistra (“the Owner”) in 2008 with its registered charter capital (“Charter Capital”) being USD 5,000,000.
In 2013, Mistra conducted procedures for increasing the Charter Capital from USD 5,000,000 to USD 7,000,000 by using undistributed retained profits to increase capital. When the relevant dossier was submitted at the Department of Planning and Investment (“DPI”), through its financial reports, DPI detected some violations committed by Mistra during its contribution of the Charter Capital, specifically failing to contribute the Charter Capital in full and within the time limit as stipulated by law. Therefore, Mistra’s dossier was forwarded to the Inspector of DPI for treatment.
In the meeting with the Inspector, Mistra explained that they fully contributed to the Charter Capital through various forms. To be specific, in the first instalment they contributed USD 500,000 (equivalent to 10% of the Charter Capital) with handwritten receipts between the Owner and accountant of Mistra; in the second instalment they contributed 20% of the Charter Capital through investment capital account and obtaining a bank account statement as evidence; in the third and fourth instalments they contributed the remaining by retained profits in the fiscal years 2011 and 2012, recorded in the financial reports of the year 2012 and 2013 and the decision of the Owner on the use of retained profits. However, DPI Inspector only recognized Mistra conducting its contribution to the Charter Capital in correct accordance with law in the second instalment through investment capital account, and rejected the contributions in the first, third and fourth installments.
However, after many times of explanations from Mistra, DPI Inspector agreed to and only recognized the additional capital contributions in the third and fourth installments by Mistra and requested Mistra to further contribute USD 500,000 to comply with law and to pay an administrative penalty for untimely capital contribution.
Some experiences to be drawn
From the above actual cases, foreign investors may be aware that failing to conduct capital transactions by way of investment capital accounts will cause many risks and problems to investors. Therefore, when investing into Vietnam, investors need to carry out in-depth research and consult with law firms specializing in investment, on the regulations on investment in general and the opening and use of investment capital accounts in particular, to ensure that their investments go smoothly, avoiding any legal risks that may arise afterwards.
