Foreign investors engaged in the exchange of shares or capital contributions within Vietnamese enterprises must adhere to the regulations stipulated in the foreign exchange ordinance. This involves navigating through various procedures at commercial banks where the designated account for payment is established.
The prevalence of Capital Transfer Transactions involving foreign investors in Vietnamese enterprises is on the rise. However, ensuring the compliance of such transactions with Vietnamese law is no straightforward task. Apart from addressing general considerations, both parties involved need to pay meticulous attention to specific aspects:
- Capital transfer transactions are required to be conducted through banking channels;
- Adherence to the agreed-upon timeline outlined in the capital transfer contract is imperative for smooth transaction execution.
The feasibility of a transaction is directly influenced by several crucial factors that warrant careful consideration. The following article will outline key aspects that parties must bear in mind when facilitating payments in capital transfer transactions involving foreign investors.
1. Choice of bank cccount for Capital Transfer Transactions
As mentioned above, capital transfer transactions must be conducted through banking channels. However, determining the appropriate type of bank account depends on the capital source of the target company (whether it has foreign direct investment) and the tax residence status of the transaction participants, specifically:
1.1 Is the target company a Foreign Direct Investment (FDI) Company?
To determine whether the target company qualifies as an FDI company, businesses can refer to the provisions outlined in Article 3.2 of Circular 06/2019/TT-NHNN. For transactions involving such companies, two types of bank accounts, both to be opened at a licensed bank providing foreign exchange services in Vietnam, must be considered:
- Direct Investment Capital Account (“DICA”)
- This account, regulated by Circular 06/2019/TT-NHNN, is designated for the target company to conduct transactions related to foreign direct investment activities in Vietnam.
- This includes activities such as the establishment or acquisition of shares/capital contributions in companies with foreign direct investment in Vietnam.
- Indirect Investment Capital Account (“IICA”)
In the case of a foreign investor, the IICA, as regulated by Circular 05/2014/TT-NHNN, serves as a payment account in Vietnamese Dong. It facilitates authorized revenue and expenditure transactions linked to foreign indirect investment activities in Vietnam.”
1.2 Tax residence status of the parties involved in the transaction
According to the guidance of the State Bank in Circular 06/2019/TT-NHNN, in case the target company is an FDI company, the tax residence status of entities involved in capital transfer transactions significantly influences the designated bank account for use. The specifics are as follows:
- Capital/Share transfer transactions involving resident individuals and non-resident individuals, particularly between foreign investors and Vietnamese individuals/organizations:
As per regulations, such transactions must be executed through the target company’s DICA. Consequently, DICA acts as the intermediary account, receiving the transfer price payment from the Buyer and subsequently transferring this amount to the Seller. - Capital/Share transfer transactions between non-resident individuals, where both the buyer and seller are foreign investors:
In this scenario, Vietnamese law generally prohibits the use of DICA for such transactions, without explicitly specifying the type of account to be used.
Consequently, it can be interpreted that the seller and buyer can mutually agree to conduct transfer price payment transactions through their respective bank accounts located outside the territory of Vietnam. However, it is important to ensure the legitimacy of these accounts and compliance with the regulations of the host country to guarantee the legality of the aforementioned transfer transaction.
2. Note on cash flow management in Capital Transfer Transactions
After determining the appropriate type of account for payments by legal regulations, the subsequent crucial consideration for the involved parties is the management of cash flow. It is crucial to make sure that the money the buyer transfers for the transfer price is received legally by the seller.
Additionally, another pivotal factor demands attention: the capital contribution/share transfer transaction triggers income tax obligations for the concerned parties.
Under Vietnamese law, this requirement must be reported and fulfilled within a set timeframe, typically within 10 days from either the date of signing the transfer contract or the date of concluding the money transfer.
Depending on whether the Direct Investment Capital Account (DICA) is utilized in the payment execution process, cash flows associated with the transfer price payment and the corresponding tax amount will manifest in distinct ways.
Typically, when DICA is employed, investors acquiring capital or shares in a Vietnamese company will transfer the entire transfer amount, with or without the tax component, to DICA. Subsequently, funds from this account will be directed to the seller’s account, whether it be overseas or domestically. The stipulated payment methods are designed to enable Vietnamese state agencies to effectively regulate and oversee tax-related matters.
It should be noted that the legal regulations concerning this matter are not explicitly and comprehensively detailed within a single legal document; instead, they must be synthesized from various provisions scattered across ordinances, circulars issued by the State Bank, and circulars from the Ministry of Finance. This lack of consolidated guidance poses challenges for investors in executing transactions, introducing unnecessary complexity and inefficiency. To ensure both legal compliance during payments and the mitigation of potential risks, the involved parties should seek professional advice during the drafting and implementation of capital transfer contracts.
3. Currency
As mentioned above, capital transfer transactions involving foreign investors are subject to foreign exchange laws. A critical consideration in this context is the determination of the valuation currency for the payment of the capital transfer value. This determination is primarily contingent upon the tax residence status of the entities participating in the transaction:
- If all transaction parties are non-resident individuals, foreign currency is permitted;
- Capital contribution/share transfer transactions between residents and non-residents, as well as transactions between residents, must be conducted in Vietnamese Dong.
Violation of regulations regarding the currency used in the transaction may result in the transaction not being possible in practice or, in the worst case, the transaction being declared invalid.
4. Consultation with the bank
- Before initiating payments in capital transfer transactions involving foreign investors, the parties need to consult with the commercial bank where the Direct Investment Capital Account (DICA) is held (in case DICA is used). This consultation ensures clarity on appropriate payment methods and prevents potential disruptions due to differing perspectives between the parties and the commercial bank regarding payment procedures. Key issues to clarify with commercial banks include:
- The designated account for payment during capital transfer transactions.
- The currency for payment, whether in Vietnamese Dong or another foreign currency.
- The required documents to be submitted to commercial banks.
- Other requirements.
In today’s business landscape, capital transfer transactions have become a necessity for companies. Possessing legal knowledge in the realm of capital transfer, particularly in the presence of foreign investors, empowers companies, organizations, and businesses to proactively navigate their activities while effectively mitigating risks associated with such transactions.
