1. What is undistributed profit?
Undistributed profit or undistributed profit after tax is a term reflecting the results of production and business activities of an enterprise. Owners/contributors/shareholders or a third party can assess the profit or loss of a business enterprise in the respective financial year.
Profit distribution conditions: Profit is used to distribute to the company’s owners/contributors/shareholders after fulfilling tax and other financial obligations as prescribed by law and ensure the full payment of debts and other due property obligations after the distribution of profits.
Time of profit sharing: according to the provisions of the Company’s Charter.
2. Legal regulations in the form of increasing contributed capital based on undistributed profits
(i) For enterprises with 100% Vietnamese capital
An enterprise may increase its charter capital in the following cases:
- Increase in capital contribution of members: Clause 1, Article 68 of the Law on Enterprises;
- Company owners contribute additional capital. The company owner decides on the form of increase and the increase in charter capital: Clauses 1 and 2, Article 87 of the Law on Enterprises;
- Offering shares to existing shareholders – Clause 1, Article 124 of the Law on Enterprises.
Regarding the form of capital increase, the law does not specify or limit specific forms of capital contribution. Therefore, the owners/capital contributors/shareholders can contribute capital through the conversion of undistributed profits not contrary to the law.
In addition, for the conversion of undistributed profits into capital, the tax law provides as follows:
- Taxable income Personal income: Income from capital gains or dividends from stocks is an income from capital investment and is subject to personal income tax (Article 2.3.g Circular 111/2013/TT – BTC);
- Time of determining taxable income: The time of determining income from capital investment is the time when an individual transfers capital, withdraws capital, or from the time when an individual transfers shares. (Article 10.3.a,b Circular 111/2013/TT – BTC);
- Taxpayers who declare and pay tax: Individuals who receive dividends in shares or recorded capital gains are not required to declare and pay tax on capital investment upon receipt. When transferring capital, withdrawing capital, and dissolving enterprises, individuals shall declare and pay personal income tax on income from capital transfer and income from capital investment. (Article 26.9 Circular 111/2013/TT– BTC). Organizations where individuals have contributed capital/where individuals are shareholders who receive bonuses from securities are responsible for declaring tax on behalf of, and paying tax on behalf of income from capital investment when individuals transfer capital / transfer securities, capital withdrawal (Article 7.5.d Decree 126/2020/ND-CP).
Thus, it can be seen that the Law on Enterprises does not specifically stipulate the form of capital contribution with profit, but the tax law does provide for this form through the regulation of tax obligations and the time of declaration income tax return.
(ii) For foreign-invested enterprises
For owners/capital contributors/shareholders who are foreign investors, the capital contribution to the company must comply with Article 24 of the Law on Investment. Forms of capital contribution and share purchase include:1
- Purchase of shares issued for the first time or additionally issued by a joint-stock company;
- Contributing capital to a limited liability company or a partnership;
- Contributing capital to other economic organizations other than those specified at Points a and b of this Clause.
For capital contribution to foreign investors, the capital contribution must be through the direct investment capital account or the indirect investment capital account (“Capital Account”). Therefore, in case a foreign investor contributes capital, it is necessary to transfer profits to the corresponding Capital Account.
However, the revenue and expenditure transactions related to the Capital Account on the receipt of profits and the recognition of capital contribution by investors are not specified. Therefore, in order to transfer profits from the current account to the Capital Account and record the capital contribution of the Investor, the Enterprise needs to contact the bank where the Capital Account is opened to seek opinions and comply with the provisions of this Law. banks before carrying out capital increase procedures at the Department of Planning and Investment.
3. Time to register for capital increase
Pursuant to Clauses 1, 2, Article 30 and Clause 4, Article 28 of the Law on Enterprises, an enterprise must register with the business registration agency when changing its charter capital with the company within 10 days from the date of change. Specifically:
“Article 30. Registration of changes to the business registration certificate
- An enterprise must register with the business registration authority when changing the contents of its enterprise registration certificate as prescribed in Article 28 of this Law.
- Enterprises are responsible for registering changes in the contents of the Certificate of Business registration within 10 days from the date of change.”
As such, the owner/contributors/shareholders must register with the business registration authority to amend the Enterprise Registration Certificate within 10 days from the date of completion of the use of undistributed profits o raise capital.
Disclaimer: This article is for general information only and is not a substitute for legal advice. Apolat Legal is a Vietnamese law firm with experience and capacity to advise on matters related to Business and Investment. Please click here to learn more about our services and contact our lawyers in Vietnam for advice via email email@example.com.