Investment through nominee structure in Vietnam

ARTICLES

Investment through nominee structure in Vietnam

To quickly engage in the business in Vietnam, some foreign investors (“Foreign Investor”) are considering the implementation of the investment through nominee structure as follows:

(1) Firstly, a Vietnamese partner of the foreign investor, under an agreement between such Vietnamese partner and the foreign investor, shall establish a local company under the name of the Vietnamese partner (“Local Company”) in order for such Local Company to carry out the business in Vietnam.

(2) Then, the Foreign Investor shall acquire 100% shares/capital contribution in the Local Company in order to be the sole owner of the Local Company replacing the Vietnamese partner (“Acquisition”).

With our practical experience in advising similar cases, there may be some notable legal issues and potential legal implications and conditions occurring from the process of conducting the above steps (1) and (2) in Vietnam applied to the Local Company and the Foreign Investor, such as specific business conditions, licensing procedures, taxation matters, money remittance, foreign exchange, and so on.

1.1. About procedures

  • Step 1: The Vietnamese partner shall establish the Local Company (Establishment).
  • Step 2: The Foreign Investor shall extend a fund to the Vietnamese partner/the Local Company, in the form of a foreign loan (Funding).
  • Step 3: The Local Company shall register the foreign loan from the Foreign Investor (when the loan is made between the Foreign Investor and the Local Company with the term of 1 year or more, if applicable) (Registration of Loan).
  • Step 4: The Foreign Investor shall acquire 100% capital contribution/share in the Local Company from the Vietnamese partner to be the sole owner of the Local Company (Acquisition).

1.2. About legal implications

(a) Establishment

– Assuming that there is one individual Vietnamese partner, the Local Company is likely to be incorporated under the form of a limited liability company with one member. For the establishment and operation of the Local Company under the form of a limited liability company with one member, the Vietnamese partner is required to conduct the below procedures step-by-step: 

(i) Applying for an Enterprise Registration Certificate (ERC) 

  • The Vietnamese partner shall submit a dossier to the local licensing authority to apply for an ERC to set up the Local Company.
  • Statutory timeline: 03 working days from the receipt date of a valid and complete dossier by the local licensing authority.

(ii) Initially tax declaring 

  • The Vietnamese partner shall directly or authorize a third party to liaise with the local tax department for the initial tax declaration.
  • Deadline: Last day of the calendar month in which the Local Company comes into operation.

– After completing the said procedures for the Local Company establishment, during the course of operation, the Local Company shall be required to strictly comply with the Vietnamese corporate regulations such as: labour, management, fire fighting and fire preventing, environment protection, taxation, periodical reporting, etc. Besides, for the purpose of maintaining the stable operation of the Local Company, the Local Company shall need to pay the costs, fees relevant to the Local Company’s operational activities (e.g. recruiting and employing employees, paying taxes applicable to enterprise, etc.).

– Within 90 days from the establishment date of the Local Company under the ERC, the Vietnamese Partner shall be required to be contribute the registered capital of the Local Company in full upon the Local Company’s establishment. Since the Foreign Investor shall acquire the capital/share in the Local Company, to facilitate the acquisition, it is recommended that the Local Company registers to engage in the business line(s), which the Foreign Investor is fully permitted to own 100% of its capital as provided in the WTO Commitments and the local laws of Vietnam.

– By law, the Vietnamese partner, as the current company’s owner, shall be entitled to regulate and decide all material corporate matters relating the Local Company, including but not limited to: deciding development investment projects, sale and purchase of assets, taking or granting company’s loans, and other rights prescribed in law and the company’s charter.[1] Provided the large power of the company’s owner as prescribed by law, for the Foreign Investor’s interest, the parties may enter into a business co-operation agreement or nominee agreement (“Master Agreement”) with call & put option arrangement (“Capital Option”). In addition, the Foreign Investor shall step-by-step exercise the Capital Option to buy out all capital contribution of the Vietnamese partner in order to physically and legally control and fully own the Local Company. Upon the exercise completion of the Capital Option, the Local Company shall become a foreign-invested company.

– To avoid the risk that the Vietnamese partner may take inappropriate actions against the benefits of the Foreign Investor and/or the Local Company, by reaching an agreement with the Vietnamese partner in the Master Agreement, the Foreign Investor may consider arranging an appointed person as the General Director/Director cum the legal representative of the Local Company to legally manage the daily operation of the Company.[2]

(b) Funding

  • For the purpose of offering a fund for Vietnamese partner to establish the Local Company and to enable the Local Company to arrange the business activities, the Foreign Investor and the Local Company/the Vietnamese partner can have an arrangement on cash flow (if the Vietnamese partner could not arrange his/herself) as a nominee/loan agreement.[3]
  • Upon the Acquisition by the Foreign Investor, the loan provided by the Foreign Investor may be offset against the transfer price payable by the Foreign Investor in relation to the share/capital contribution transfer in the below step of Acquisition under the agreement of the parties in the Master Agreement.

(c) Registration of Loan

  • Accordingly, if the loan is made between the Foreign Investor and the Local Company, such loan transaction shall be treated as a foreign loan of a Vietnam-based enterprise and may be subject to registration procedures at the State Bank of Vietnam (“SBV”) if the loan term is from 1 year or more.[4] In addition, the loan must be wired to the foreign loan borrowing and repaying account of the Local Company.[5]

(d) Acquisition

– Upon the entry into of a share/capital contribution purchase and sale agreement (“Capital Purchase Agreement”) between the Vietnamese partner and the Foreign Investor and the completion of the registration for changing shareholding structure of the Local Company, the Foreign Investor may become the sole owner of the Local Company replacing the Vietnamese partner.

– As the Local Company is an existing and operating company before the Acquisition, despite a short operational period only from the incorporation date to the date of the Acquisition, there may still be outstanding legal compliance and financial matters that the Foreign Investor should verify via legal and/or financial due diligence process.

– For the Acquisition, the Foreign Investor and the Vietnamese Partner are required to conduct the below procedures step-by-step:

(i) Obtaining an approval letter for the Acquisition (“Approval Letter”)

  • By law, the Acquisition of 100% capital in the Local Company requires the obtainment of an Approval Letter for such Acquisition.[6] The Foreign Investor and the Local Company shall have to prepare and submit an application dossier to the local licensing authority for the same paper.
  • Statutory timeline: 15 days from the receipt date of a valid and complete dossier by the local licensing authority.[7]

(ii) Applying for an amended Enterprise Registration Certificate (“Amended ERC”)

  • Upon obtaining the Approval Letter as aforesaid, the Local Company shall submit a dossier to the local licensing authority to apply for an amended ERC recording the Acquisition and the Foreign Investor as the new owner of the Local Company.
  • Statutory timeline: 03 working days from the receipt date of a valid and complete dossier by the local licensing authority.[8]

1.3. About tax implications

  • Upon the Acquisition, the Vietnamese partner, as the party receiving income from the Acquisition (if any), may be subject to personal income tax (PIT) at the rate of 20% levied on the taxable income arising from the Acquisition.[9]

If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.

This article is for general information only and is not a substitute for legal advice.

 

[1] Article 75 of the Law on Enterprises

[2] Article 81.2 of the Law on Enterprises

[3] The Foreign Investor should carefully consider this option and require the Local Company and/or the Vietnamese partner to pledge its/their assets (such as capital contribution/shares in the Local Company) as a security for the loan.

[4] Article 9 of Circular No. 03/2016/TT-NHNN dated 26 February 2016 of the SBV on providing several instructions on foreign exchange administration in respect of enterprise’s foreign borrowing and foreign debt repayment of enterprises (Circular 03)

[5] Article 24.3 of Circular 03

[6] Article 26.1 of the Law on Investment

[7] Article 26.3(b) of the Law on Investment

[8] Article 27.2 of the Law on Enterprises

[9] Article 21.2 and Article 23 of the Law on PIT