Direct investment capital account and difficulties of enterprises

ARTICLES

Direct investment capital account and difficulties of enterprises

Since July 1st, 2015, when the Investment Law 2014 took effect and replaced the Investment Law 2014, the investment conditions, order and procedures applied to foreign investors have become clearer and more transparent. Although the Investment Law 2014 did a good job of solving the problem of opening a clear mechanism to encourage foreign investment in Vietnam, there was still a problem that makes it difficult for the majority of foreign investors and foreign-invested enterprises to strictly comply with the provisions of law, which is the implementation of capital contribution and capital transfer transactions through direct investment capital accounts.

Under the provisions of the Ordinance on Foreign Exchange 2005 amended and supplemented in 2013, foreign direct investment enterprises are required to open direct investment capital accounts and the capital contribution and the transfer of principal capital, profits and other lawful revenues must be made through this account. However, this provision is inconsistent with the Investment Law 2014 when the definitions of “direct investment” and “indirect investment” has no longer been applied by the Investment Law 2014, leading to the majority of commercial banks are confused in determining which case the enterprise is allowed to open a direct investment capital account. To be safe, most banks at this time require foreign-invested enterprises to have an investment registration certificate to be allowed to open a direct investment capital account, and consequently Vietnamese companies that are partially or wholly acquired by foreign investors are not permitted to open direct investment capital accounts unless having investment registration certificates even though the Investment Law 2014 does not require enterprises, in this case, to register the investment registration certificates in accordance with Article 36 of the Investment Law 2014.

It was not until June 26th, 2019, when the State Bank issued Circular No. 06/2019/TT-NHNN, there is a regulation explaining “foreign direct investment enterprises” include:

  • Enterprises established in the form of investment of establishing a business organization whose members or shareholders are foreign investors and issued the investment registration certificate in accordance with the law on investment;
  • Enterprises that have foreign investors contributing capital, buying shares or capital contributions to enterprises (operating in business lines subject to conditional business or not applicable to foreign investors) lead to foreign investors owning 51% or more of charter capital of enterprises but not having to carry out procedures for issuing investment registration certificates in accordance with the law on investment;
  • Enterprises which are established after a division, merger or consolidation lead to foreign investors owning 51% or more of the charter capital of the enterprise and not required to carry out procedures for issuing investment registration certificates in accordance with the law on investment;
  • Enterprises newly established under the provisions of specialized laws that have foreign investors owning 51% or more of their charter capital and are not required to carry out procedures for issuing investment registration certificates in accordance with the law on investment.

Therefore, the enterprises mentioned above are required to open a direct investment capital account to perform capital transactions, with the notable transactions include:

  • To receive directly contributed capital in foreign currencies of foreign investors and Vietnamese investors;
  • To receive capital surplus from additional shares in order to raise the charter capital;
  • To transfer the profits and legal revenues in foreign currency from foreign investors’ foreign direct investment in Vietnam;
  • To transfer the investment capital in foreign currencies by foreign investors in case of capital reduction, finish, termination of investment projects, BCC, PPP contracts in accordance with the law on investment;
  • To transfer and receive revenues and expenditures of payment value of the capital transfer between non-resident investors and resident investors.

In case foreign direct investment enterprises fail to strictly comply with the provisions of the law on foreign exchange, investors may find it difficult to transfer profits abroad strictly according to regulations of law.

In fact, although there have been specific provisions on foreign direct investment enterprises according to Circular No. 06/2019/TT-NHNN, some foreign-invested enterprises not having Investment registration certificates still faces difficulties when a number of commercial banks have not yet fully implemented the provisions of Circular No. 06/2019/TT-NHNN and forced enterprises to still provide investment registration certificates to open a direct investment capital account. Therefore, in the current period, it is very important for foreign-invested enterprises to pay attention to the issues related to direct investment capital accounts in order to comply with the provisions of law in capital transactions.