An FDI enterprise refers to a business established by foreign investors, either solely or in collaboration with domestic investors. It is common for foreign investors to contribute capital to an FDI enterprise in a foreign currency, such as USD, with the specific amount denominated in that particular foreign currency recorded in the Enterprise Registration Certificate (ERC) or Investment Registration Certificate (IRC) of the FDI enterprise. However, fluctuations in the exchange rate between the date of the IRC and the actual contribution can result in a discrepancy between the VND amount converted from the contributed capital in foreign currency and the VND amount stated in the IRC. The differing opinions of authorities on which amount should used to determine if the foreign investors have fulfilled their capital contribution in its entirety raise uncertainty about whether the FDI enterprise has fully contributed its charter capital.
Legal regulations on contributed capital
Clause 1, Article 4 of Circular No. 06/2019/TT-NHNN dated September 26, 2019 of the State Bank of Vietnam guiding foreign exchange management for foreign direct investment activities in Vietnam stipulates:
Foreign investors and Vietnamese investors have permission to contribute investment capital in foreign currencies or Vietnam dong, based on the amount of capital they contribute as stated in the Certificate of Investment Registration, License for Establishment and Operation. This applies to enterprises with foreign direct investment capital that establish and operate under specialized laws. The foreign investor demonstrates compliance with the law through the Notification of satisfaction of conditions for capital contribution, share purchase, and redemption of capital, the PPP contract signed with a competent state agency, and other supporting documents.
Clause 2, Article 5 of Circular No. 06/2019/TT-NHNN stipulates as follows:
“… b) Corresponding to the foreign currency in which investment capital is contributed, only one direct investment capital account in that foreign currency is allowed at an authorized bank.
c) In case the investment is made in Vietnam dong, it is allowed to open a direct investment capital account in Vietnam dong at an authorized bank…”.
Pursuant to the above provisions, foreign investors may contribute investment capital in foreign direct investment enterprises in foreign currency or VND corresponding to the actual contributed currency of the foreign investor, in accordance with the provisions of this Law. with the amount of contributed capital stated in the Investment Registration Certificate. Credit institutions are responsible for checking, reviewing documents and recording capital contributions to foreign investors in accordance with the Investment Registration Certificate/other equivalent documents and regulations relevant laws at the time of capital contribution by foreign investors.
Practical situations and solutions
The actual situation occurs, in some cases, although the amount transferred when the foreign investor contributes capital is exactly the same as the capital amount, the exchange rate converted to Vietnam dong is lower at the time of capital registration with the Registrar of Companies. business, leading to a lack of capital in VND, what is the solution?
Option 1: Additional payment for the lack of capital
Refer to Official Letter 1185/CT-TTHT dated May 23, 2019 of the Tax Department of Long An province, enterprises must pay additional capital due to exchange rate difference when making capital contribution and the exchange rate on the Investment Registration Certificate (IRC).
Option 2: No additional submission and explanation
In essence, the capital contribution company has contributed enough capital, so it is necessary to explain to the authorities based on all documents and legal grounds such as: Account statement; Table of actual exchange rates at the date of receipt of capital contribution; Other documents such as: Minutes of capital contribution, Bank documents of the transferor.
Two streams of opinion
a. On the one hand, we could argue that the foreign currency amount should take precedence because:
The Enterprise Law 2020 mandates that owners or members of a limited liability company must contribute capital “in full and in the type of assets as undertaken when registering incorporation of the company.” This requirement also extends to subsequent contributions on a similar basis. If the owner registers to contribute in another currency, such as USD, they do not have to fully contribute the capital in VND.
Article 36 of the Enterprise Law 2020 states that if a capital contribution using assets other than VND, freely convertible foreign currencies, or gold, the specific portion of the contribution must undergo evaluation and denominated in VND. In practical terms, when a foreign currency, such as USD used for capital contribution, it is necessary to prioritize the actual amount contributed in USD.
In a recent case, a foreign investor was denied by the DICA bank when attempting to inject additional capital in USD to address the exchange rate discrepancy between the VND amount converted from the contributed USD and the VND charter capital amount stated in the IRC. The bank’s stance was that the foreign investor had already fully contributed capital in USD. In response to this situation, the State Bank of Vietnam (SBV) clarified that foreign investors have the option to contribute capital in either VND or a foreign currency that corresponds to the actual currency used for capital contribution, as long as the amount matches what is specified in the IRC. This indicates that foreign investors only need to fully contribute capital in the currency of their choice, as long as both the currency and the corresponding amount accurately recorded in the IRC.
b. On the other hand
Looking at the other side, one could argue that calculating the charter capital based on the VND amount which more appropriate since the charter capital recorded in the Enterprise Registration Certificate (ERC) or Investment Registration Certificate (IRC) denominated in VND, and the foreign currency amount is just an equivalent. The Ministry of Planning and Investment (MPI) previously adopted this approach and demanded that an investor fully contribute the capital in VND, backing this argument. Additionally, there have been practical instances where foreign direct investments (FDIs) faced administrative fines for failing to contribute the full VND amount.
Conclusion
In conclusion, the issue of foreign exchange rates when foreign investors contribute capital to FDI enterprises is a complex and nuanced matter. While the Enterprise Law 2020 provides some guidance on the matter, there are different perspectives and interpretations. Ultimately, it is crucial for all parties involved, including foreign investors, banks, and regulatory authorities, to carefully consider the legal provisions, precedents, and practical implications to ensure a fair and transparent process. Clear and consistent communication, along with regular updates and clarifications from relevant authorities, can help mitigate any potential confusion and uncertainties surrounding foreign exchange rate issues in capital contributions by foreign investors to FDI enterprises.
HMLF is always available to offer assistance in understanding the procedures with authorities.
Harley Miller Law Firm “HMLF”
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