Points to note when FDI companies use retained earnings for business activities
2024/03/15
- US CPA
- Masaya Sakai
Introduction
A company may distribute profits to each investor only after it has fulfilled its tax and other property obligations under the law, and only if it can ensure that each of its other debts and property obligations that become due after the distribution of profits are paid in full. In addition, the principles of distribution of after-tax profits and treatment of losses must be stipulated in the company’s articles of incorporation.
On the other hand, if the after-tax profits are not distributed and continue to be used for reinvestment, this can be interpreted as requiring registration of capital increase, as this profit falls under the registered capital for implementing the investment project. There are some points to keep in mind. In practice, the authorities have not strictly controlled this point until now, but recently there have been a small number of cases in which companies are required to increase their capital. Please refer to the following for details.
① Legal provisions regarding registered capital
According to Article 28 of Decree No. 31/2021/ND-CP Guiding the Implementation of the Investment Law of 2020, the registered capital for implementing investment projects shall be determined based on the following:
(i) Value of money, machinery, equipment, intellectual property rights, industrial property rights, technical know-how, land use rights, civil laws, and other property based on international treaties on investment
(ii) capital to carry out the investment project
(iii) profits for reinvestment
The information “reinvestment profit” is clearly recorded in the Investment Registration Certificate (IRC) form in accordance with Circular 03/2021/TT-BKHDT issued to companies undergoing the registration process of changing the Investment Registration Certificate (IRC).
Thus, (iii) the profit for reinvestment by the investor is considered part of the investment funds of the project. Since the concept of “reinvestment” is not clearly defined in the law, each company needs to determine whether it is “reinvestment” or not. However, Article 3 of the Investment Law of 2020 contains the following provisions that companies may refer to in order to examine the concept of “reinvestment”
・“Management investment” refers to the investment of capital to carry out management activities.
・“Investment project” refers to a medium-term or long-term capital injection proposal to carry out investment activities in a specific region for a specific period of time.
・The term “expansion investment project” refers to an active investment project that is being developed by increasing its size, improving its operating capacity, innovating its technology, reducing pollution, or improving the environment.
② Practical interpretation and processing examples
The information “reinvestment profit” is clearly recorded in the Investment Registration Certificate (IRC) form in accordance with Circular 03/2021/TT-BKHDT issued to companies undergoing the registration process of changing the Investment Registration Certificate (IRC).
Thus, (iii) the profit for reinvestment by the investor is considered part of the investment funds of the project. Since the concept of “reinvestment” is not clearly defined in the law, each company needs to determine whether it is “reinvestment” or not. However, Article 3 of the Investment Law of 2020 contains the following provisions that companies may refer to in order to examine the concept of “reinvestment”
③ Other points to keep in mind
If the amount of capital increase is to be included in the company’s charter capital, procedures for amending the enterprise registration certificate (ERC) will also be required. The deadline for implementing this procedure is within 10 days from the date of the change, which is understood to be the date on which investors decide to make it their charter capital.
Although there is no clear legal deadline for amending the Investment Registration Certificate (IRC), it is conservatively determined that it is better to amend the investment registration certificate (IRC) before it starts to be reinvested in the project. do.
According to Decree No. 122/2021/ND-CP, if the procedure for amending the Investment Registration Certificate (IRC) or Enterprise Registration Certificate (ERC) is not complied with as stipulated, the Investment Registration Certificate (IRC) will be suspended as an administrative violation. may be fined from VND 70,000,000 to VND 100,000,000 for the enterprise registration certificate (ERC) and from VND 20,000,000 to VND 30,000,000 for the enterprise registration certificate (ERC).
Conclusion
In order to be able to determine the procedures required when a company uses its profits for business activities, it is first necessary to ascertain the purpose for which the profits are to be used. If the profits are to be used for business activities as long-term reinvestment, it is likely that they will be considered investment capital and the Investment Registration Certificate (IRC) and/or the Enterprise Registration Certificate (ERC) will need to be amended.
On the other hand, if you decide to use the profits on a short-term and temporary basis rather than reinvesting them, amendments to your Investment Registration Certificate (IRC) and/or Enterprise Registration Certificate (ERC) may not be necessary. However, as practical interpretations and processing cases differ depending on the region, we recommend that you check directly with the competent authority in each region regarding the necessity of such amendments.
If it is determined that an amendment to the Investment Registration Certificate (IRC) and/or the Enterprise Registration Certificate (ERC) is necessary, there is a risk of being fined as described above even if the change is made after the deadline. To avoid this risk, it is recommended that the procedure to amend the Investment Registration Certificate (IRC) and/or the Enterprise Registration Certificate (ERC) to register the new investment when making a reinvestment be carried out within the deadline.
That’s all
*This article was translated by Yarakuzen.
