1. Introduction
In recent years, Vietnam has become an increasingly popular choice for foreign investors. It was recently reported that mergers and acquisitions involving targets based in Vietnam over the first seven months of this year has doubled from the same period the year before.1
Our legal team regularly acts for foreign investors intending to operate or invest in operating businesses in Vietnam. One of the most common questions we are asked to advise on is how to repatriate profits out of Vietnam, having regard to local regulatory restrictions. This article seeks to summarise the key takeaways on this pertinent subject matter.
2. Investing in a Vietnamese company
Foreign investors will usually consider either of the following ways of investing into Vietnamese businesses:
- by way of acquiring the ownership interest of a Vietnamese operating company which runs the target business; or
- by way of joint venture with a Vietnamese partner who will provide on-the-ground expertise and guidance (whether by way of liaising with local regulatory authorities for the purposes of obtaining business licences or regulatory clearance for the foreign investment, or day-to-day operations of the local business). In this situation, the joint venture company may be incorporated offshore or in Vietnam.
For the purposes of this article, we assume that the foreign investor is intending to acquire more than 50% of the onshore Vietnamese operating company.
3. Profit repatriation
(a) Dividends
Declaration of dividends to foreign shareholders is the most commonly utilised way of profit repatriation. Under Vietnam law, companies are allowed to declare and pay dividends out of their profits, after the financial year end of the company and after payment of all applicable corporate income taxes.2 Dividends are not allowed to be paid if there are accumulated losses, and interim dividends are not allowed to be paid.3
Dividends paid to all corporate investors (whether local or foreign) are subject to no withholding tax, while those paid to individual investors are subject to a 5% withholding tax. In order for funds to be repatriated offshore to its foreign investor, the Vietnam-based company must open a direct investment capital account (DICA) or an indirect investment capital account (IICA) with an eligible commercial bank or foreign bank branch in Vietnam (DICA Bank).4
In general, every FDI enterprise will need to have a DICA. A FDI enterprise is defined as (i) an enterprise established by a foreign investor and granted the Investment Registration Certificate (IRC); (ii) an enterprise with a foreign investor owning 51% or more of charter capital upon an M&A transaction; or (iii) an enterprise newly established by specialised laws.5
(b) Capital reduction
If a company has no net profit to distribute dividends, it can consider carrying out a capital reduction to repatriate excess cash.
Capital reduction by way of reduction of charter capital by returning a part of the contributed capital to its owner in proportion to their contribution may be done if the following conditions are satisfied: 6
- the company has been in continuous operation for at least two (2) years from its establishment date; and
- the company must be able to fully pay its debts and other financial obligations after returning the contributed capital.
The board of directors of a company may redeem its shares by deciding to buy back its shares, subject to a limit of 10% of the total number of shares of each class within 12 months, and a general limit of 30% of the total number of common shares sold.7 All other instances of capital reduction must be approved by the shareholders at a general meeting of shareholders (GMS).8 The price of the share buyback is determined by the Board of Directors, which shall not exceed the market price at the relevant time, unless otherwise agreed between the Company and the relevant shareholders or provided in the charter of the Company. All shareholders must be notified of the decision on share redemption within 30 days from the approval date, and they must send their written consent to the share redemption within 30 days from the notification date. Within the same period, the Company must make payment for the redeemed shares.9
As the capital reduction contemplates a change in capital contribution of the company, such change must be registered with the Business Registration Office, including the submission of a dossier which includes approval from the Investment Registration Authority approving the capital contribution.10 In practice, such approval is provided at the discretion of the authorities.
(c) Shareholder loan
Pursuant to or concurrently with the acquisition of interest in the Vietnamese operating company, shareholder loans may be provided directly from the foreign investor to the Vietnamese operating company for funding purposes. However, such shareholder loan may be considered a foreign loan that is subject to the regulations of the State Bank of Vietnam (SBV) on foreign borrowing and repayment, and is also generally subject to approval by the Department of Planning and Investment (DPI).
Some of the SBV regulations include the requirement for foreign loans that have a term of more than 12 months to be registered with the SBV before it can be disbursed or repaid.11 Such medium or long term foreign loans can also only be used for limited purposes, one of which is to finance the borrower's licensed investment project.12 Moreover, for such purpose, there is a further restriction on the maximum loan amount, in that the sum of all outstanding principal amounts of all medium/long-term domestic and foreign loans (including short-term loans that are extended and overdue short-term loans that are treated as medium/long-term loans) cannot exceed the limit on borrowed capital of that investment project (which is the difference between total investment capital of investment project and investors' paid-in capital as specified in the investment registration certificate (IRC) of the company).13 To increase the maximum loan amount, the total investment capital of the investment project will need to be increased, which necessitates an amendment to the IRC, which is subject to approval by the DPI. It should also be noted that drawdown and repayment of such foreign loans must be made through a DICA.
A shareholder loan provided by the foreign investor may be structured to be convertible into contributed capital depending on the foreign investor's intention. This will require an adjustment of investment capital structure, which requires an application to be made to the DPI in order to amend the IRC,14 and the Business Registration Department of the DPI in order to amend the ERC.15 The change of the foreign loan will also have to be re-registered with the SBV.16
(d) Service agreement or royalty arrangement
If there are technical, management or consulting services to be provided by the foreign shareholder to the Vietnamese operating company, such foreign shareholder or its affiliates may enter into a service agreement with the Vietnamese company. Similarly, if the foreign shareholder or its affiliates holds any intellectual property (IP) that is used in the business of the Vietnamese company, the Vietnamese company may also enter into a royalty arrangement with such foreign shareholder, where a royalty fee is payable to such foreign shareholder or affiliate for the right to use or licence the IP.
It should be noted that the service payment or royalty payment will be subject to withholding taxes. In order for royalty payments and service payments to be tax deductible, they must be substantiated by proper documentation in relation to the underlying agreement, invoices and proof of payment. Failure to do so may result in adverse tax consequences.
4. Conclusion
Core to investment is the ability to repatriate earnings from the business back to the foreign investors and shareholders. Vietnam laws present distinctive issues for a foreign investor in this regard. Choosing which method or combination of methods will largely depend on the foreign investor's investment structure, but with proper commercial and tax planning, its objectives can be realised. We at Dentons have advised foreign investors on this key concern in a variety of sectors.
The remarks in this article are drawn from experiences of the legal team and from advice given by lawyers, auditors, financial advisers, and other practitioners in Vietnam. No legal advice is given or intended to be given in this article on Vietnam law, or otherwise, and the reader is advised to obtain specific deal advice from advisers.
Footnotes
1. https://www.businesstimes.com.sg/international/asean/vietnams-m-rebound-amid-valuation-challenges-sluggish-deal-closures↩
2. Article 4.1 of Circular 186/2010/TT-BTC of Vietnam, accessed at: https://en.expertis.vn/kb/kien-thuc-ve-dau-tu/thong-tu-186-2010-tt-btc/↩
3. Article 3.3 of Circular 186/2010/TT-BTC of Vietnam, accessed at: https://en.expertis.vn/kb/kien-thuc-ve-dau-tu/thong-tu-186-2010-tt-btc/↩
4. Article 3.3 of Circular 06/2019/TT-NHNN of Vietnam, accessed at: https://lawnet.vn/en/vb/Circular-06-2019-TT-NHNN-guiding-the-foreign-exchange-management-for-the-foreign-investment-66D96.html↩
5. Article 3.2 of Circular 06/2019/ TT-NHNN of Vietnam, accessed at: https://lawnet.vn/en/vb/Circular-06-2019-TT-NHNN-guiding-the-foreign-exchange-management-for-the-foreign-investment-66D96.html↩
6. Article 112 of Law of Enterprise 2020, accessed at: https://lawnet.vn/vb/Luat-Doanh-nghiep-so-59-2020-QH14-68525.html ↩
7. Article 133 of Law of Enterprise 2020, accessed at: https://lawnet.vn/vb/Luat-Doanh-nghiep-so-59-2020-QH14-68525.html ↩
8. Ibid.↩
9. Ibid.↩
10. Article 51 of Decree No. 01/2021/ND-CP, accessed at: https://lawnet.vn/vb/Nghi-dinh-01-2021-ND-CP-dang-ky-doanh-nghiep-4526F.html ↩
11. Article 11 of Circular 12/2022/TT-NHNN, accessed at: https://thuvienphapluat.vn/van-ban/EN/Doanh-nghiep/Circular-12-2022-TT-NHNN-foreign-exchange-administration-in-the-enterprise-s-foreign-borrowing/533769/tieng-anh.aspx↩
12. Article 17 of Circular 08/2023/TT-NHNN, accessed at: https://thuvienphapluat.vn/van-ban/EN/Doanh-nghiep/Circular-08-2023-TT-NHNN-eligibility-requirements-for-foreign-loans-without-Government-s-guarantee/573169/tieng-anh.aspx ↩
13. Article 18 of Circular 08/2023/TT-NHNN, accessed at: https://thuvienphapluat.vn/van-ban/EN/Doanh-nghiep/Circular-08-2023-TT-NHNN-eligibility-requirements-for-foreign-loans-without-Government-s-guarantee/573169/tieng-anh.aspx↩
14. Article 63 of Law on Investment, accessed at: https://vbpl.vn/TW/Pages/vbpqen-toanvan.aspx?ItemID=11133 and Article 35 and Article 36 of Decree 31/2021/ND-CP, accessed at: https://lawnet.vn/en/vb/Decree-31-2021-ND-CP-elaboration-of-some-articles-of-the-Law-on-Investment-73B47.html ↩
15. Article 28 and Article 30 of Law on Enterprise, accessed at: https://vbma.org.vn/storage/legal-documents/July2021/59_2020_QH14_451799.doc↩
16. Article 17 of Circular 12/2022/TT-NHNN, accessed at: https://thuvienphapluat.vn/van-ban/EN/Doanh-nghiep/Circular-12-2022-TT-NHNN-foreign-exchange-administration-in-the-enterprise-s-foreign-borrowing/533769/tieng-anh.aspx ↩
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.
