Increasing Investment Capital from Reinvested Profits: Legal Provisions and Practice in Vietnam

Using retained earnings to increase investment capital for a project has become an increasingly popular financial strategy for investors, particularly foreign investors, in Vietnam. This approach not only optimizes available resources but also demonstrates flexibility, which is crucial in a volatile capital market. 

However, applying this mechanism in Vietnam’s legal environment presents its own set of challenges. Below is a detailed analysis of the legal basis, practical procedures, and the advantages and disadvantages of this option. 

1. Legal framework and the nature of increasing capital from reinvested profits 

Currently, Vietnamese law does not have a direct provision on using after-tax profits to increase charter capital. Nevertheless, this activity is recognized and carried out in practice by applying relevant provisions from the Law on Enterprises 2020 (amended in 2025) and the Law on Investment 2020. 

The Law on Enterprises allows limited liability companies and joint-stock companies to increase their charter capital in various ways, including by mobilizing capital contributions from owners/members/shareholders or issuing new shares. Essentially, using retained earnings to increase charter capital is similar to the owner or members contributing additional capital, with the key difference being that the source of funds comes from the company’s accumulated profits rather than external mobilization. 

Although the Investment Law does not specifically regulate, it does regulate or limit the forms of increasing investment capital to implement the project. Therefore, the owners/capital contributors/shareholders who are also investors increasing their capital contribution to implement the project through the form of converting undistributed profits are not contrary to the provisions of law. 

• To legally implement this plan, the source of retained profits used must ensure the following conditions: 

• Profits have been determined after completing all tax obligations and other financial obligations as prescribed by law. 

• Ensure full payment of debts and other property obligations due after profit distribution. 

• Financial statements must be independently audited to verify the transparency and legality of the source of profits. 

Investors can refer to the following article to better understand the legal framework of this form of capital increase. 

2. Practical Implementation in Vietnam 

In practice, increasing investment capital from reinvested profits is a popular choice for many FDI companies in Vietnam, especially in contexts with foreign exchange limitations or when leveraging existing financial resources without seeking external capital. 

a. Implementation Process 

Due to its cross-cutting nature, investors must carry out two procedures: 

• Procedure 1: Adjusting the charter capital on the Enterprise Registration Certificate at the provincial-level enterprise registration authority where the company is located. 

• Procedure 2: Adjusting the Investment Registration Certificate to update the total investment capital and capital contribution structure at the provincial-level investment registration authority where the project is located. 

Strict adherence to both procedures is mandatory. If only one is completed, the company may face legal risks such as administrative penalties under Decree 122/2021/ND-CP, or be unable to perform actual money transfers, which would severely impact the project’s timeline. 

b. Advantages and Common Difficulties 

Using undistributed profits for reinvestment is a cost-effective solution as the company does not need to raise additional foreign currency from abroad, thereby reducing money transfer fees, bank charges, and foreign exchange risks. Additionally, the company gains autonomy in expanding its business without relying on loans, which reduces pressure from interest rates and debt. 

However, in practice, the company must prove that the profit source is legal, that all tax obligations have been met, and that the financial statements have been independently audited. Any errors in declaring or verifying the capital source could lead to tax arrears or administrative penalties as stipulated in Decree 125/2020/ND-CP on administrative penalties for tax violations. 

Increasing investment capital from reinvested profits is a smart and effective financial solution, particularly suitable for companies with stable operations in Vietnam. However, it is not an “easy” option if a company lacks thorough financial and accounting preparation and a firm grasp of complex legal regulations. To ensure success, companies need to cooperate closely with legal and financial consultants to execute the process accurately and completely, avoiding unnecessary risks. 

Date Written: 20/07/2025

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