Many Vietnamese employees of multinational companies that operate in Vietnam hold shares in the overseas parent by participating in the parent's employee stock ownership plan ("ESOP"). The employee receives free or discounted shares from the parent and has the opportunity to participate in the increased value of the worldwide company. It is generally believed that an ESOP motivates an employee in Vietnam because she has a stake in the worldwide success of the company.
Ownership is subject to exchange control regulations. If the ESOP is registered with the State Bank of Vietnam ("SBVN"), a Vietnamese person can legally own foreign shares and can legally remit monies out of Vietnam to purchase them. The local employer (also known as the "Local Entity") will file the ESOP with the SBVN and then meet periodic post-registration reporting requirements.
The SBVN approval process
The ESOP is either an award of free shares or an offer to sell shares on preferential terms. That is, an employee can receive shares in the parent at no cost or the parent can give an option to the employee to purchase shares at a discount. Some plans take the form of a matching share award (ie, if a participant agrees to purchase a certain number of shares, she will be granted matching shares in the form of restricted stock -- a conditional right to a number of shares received free of charge).
The period within which to act is often tight. The parent usually has a prefixed, world- wide grant date when ownership by participating shareholders begins. Both the Local Entity and the parent have to cooperate to prepare and submit documents at least five months prior to the grant date or prior to the beginning of the subscription period and to receive approval. Like the grant date, the subscription period is fixed by the parent globally and cannot be moved.
Under the statutes, the application must contain a registration letter from the Local Entity to the SBVN, documentation describing the employee rights and features of the plan (such as a vesting period and conditions, subscription pool, payment method, early redemption, and lock-up period), incorporation documents of the parent and the Local Entity. It must describe any onshore/offshore subsidiaries which directly or indirectly own the Local Entity. It must also provide minutes and resolutions of the parent's shareholders and board of directors which approve the ESOP, and provide a list of the participating Vietnamese employees. Many foreign documents need to be notarized, authenticated and legalized by a notary public, foreign government agency and/or Vietnamese embassy or consulate. These may be procedural steps, but they add to the time pressure.
To approve the ESOP, the SBVN will satisfy itself that the ESOP grants obvious incentives to local employees, and that the purpose of the ESOP is to provide benefits to employees rather than to increase the capital of the parent.
All documents must be translated into Vietnamese. The approval process can be lengthy and uneven. The SBVN often requests the parent or the Local Entity to clarify the terms and conditions of the ESOP or to adjust documents which have been submitted. There is no government fee.
The SBVN has 15 working days to respond to the Local Entity counting from receipt of a complete dossier. Despite this requirement, SBVN takes more or less a month in a free share offering and three to five months for a plan which gives preferential treatment to employees to acquire shares. In our experience, a share purchase plan is likely to be approved more quickly if the share price is a nominal amount or is highly discounted as compared to the market price or if at least some free shares are given. The SBVN may refuse to approve a share purchase plan if it concludes that an employee is not much benefited from subscribing the shares.
Opening a local currency account
After the SBVN has approved the ESOP, the Local Entity must open a foreign currency account ("Account") to transfer ESOP funds in and out of Vietnam. The Account is used to (i) receive amounts from the qualified local employees to pay for the shares, receive foreign currency from dividends and from the sale of the shares, and (ii) pay other expenses, such as fees or charges. All ESOP transactions must be conducted through the Account. Use of the Account is largely problem-free.
The Local Entity can set up its Account as soon as practical in order for qualified employees to remit monies to meet the parent's schedule to pay for shares, assuming they are not free shares.
The Local Entity must file reports with the SBVN by the 20th day of the first month of each quarter. The report includes the list of Vietnamese participants, outbound funds the Local Entity has remitted abroad on behalf of the local employees who purchase shares; inbound remittances the Local Entity has received to pay the local employees (say, dividends or proceeds from the sale of shares).
If the Local Entity fails to meet the reporting requirements, the SBVN will decide whether to impose monetary fines. The SBVN can also challenge future share offerings.
The Local Entity must declare, withhold and pay personal income tax ("PIT") on behalf of an employee upon the employee's sale of the shares. In other words, the local employer will withhold PIT in favor of its employees when the shares are sold irrespective of whether the shares are granted for free or the shares are purchased by the employee. As all proceeds of sale and dividends are repatriated through the Account, the Local Entity withholds PIT and then transfers the balance to the employees. The current tax regulations only regulate tax declaration and payment in cases where an employee receives bonus shares from the local employer. In this connection, the Local Entity should obtain a tax ruling from the tax authorities to ensure its compliance with tax withholding obligations, the taxable amounts, and the applicable rates of tax.
Participation of an expatriate employee in an ESOP
While the SBVN only regulates an ESOP offering to Vietnamese employees, an expatriate may participate in an ESOP and participation is not subject to the SBVN's approval. She may be awarded free shares or she may purchase shares of the parent individually or through the Local Entity. If she pays for the shares, she may remit funds directly to the parent or to an intermediary financial institution as designated by the parent without going through the Account. In these circumstances, the Local Entity will not withhold PIT in respect of income that an expatriate will generate from the dividends and the sale proceeds of ESOP shares. She is required to declare and pay PIT by herself on each sale and on receipt of dividends.
In order for ESOPs to be successful, many offshore parents strengthen their connection with the employees of their subsidiaries by designing a long-term policy to encourage the employees to become shareholders and in many cases, to increase their shareholding. It means that local employees have both the opportunity and motivation to be fully engaged in creating value and achieving success for the group through their ownership of the share capital of the parent.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.