Thom Nguyen (Iris), Associate, Asia Legal
In this article, lawyers from Asia Legal, a business law firm operating in Vietnam, point out frequent legal issues of enterprises in the country, which mostly stem from their administrative violations and consequently will result in fines and sanctions under the relevant regulations.
Inadequacies in capital contribution
Under the 2020 Law on Enterprises, the owner/shareholders/members of a company (below referred collectively to as shareholders) is/are required to make capital contribution in full as registered within 90 days from the date the company’s enterprise registration certificate is issued. Otherwise, the company will have to register the actually contributed capital with the licensing authority within 30 days after the capital contribution deadline. If failing to register the change of capital, the company will be subject to an administrative fine of up to VND 30 million.
In fact, the failure to make capital contribution is more popular in local companies than foreign-invested ones. Given the fact that local busineses tend to register a large-size capital in order to better impress their partners, vendors, suppliers, customers, etc., the registered capital does not reflect exactly financial capacity of companies. However, shareholders, directors, and even CEOs of not a few companies are seemingly unaware of the seriousness of such violation. Particulary, when a company participates in an M&A deal, the investor usually requests the company to correct the charter capital to be equal to the actually contributed amount before concluding and making payment for the deal. In this case, the company will be subject to an inspection and administrative sanctioning process by the licensing authority before the former accepts the decrease of the company’s charter capital.
Failure to issue and register internal working rules
Under Vietnam’s laws, it is mandatory for an employer having 10 employees or more to issue internal working rules in writing and register them with the provincial labor authority, i.e., the Department of Labor, Invalids and Social Affairs of the province/city where the business is headquartered or the Industrial Park/Economic Zone Management Board, if it is based in an industrial park, economic zone, or hi-tech zone.
For an employer having less than 10 employees, issuance of internal working rules in writing is not mandatory, however, contents of labor discipline and material responsibilities must be included in the labor contracts.
It is worthy to note that internal working rules of a company with 10 or more employees only come into force after being registered with the provincial labor authority. Hence, if the company refers to not-yet-registered internal rules for dismissal of employees, the dismissal may be considered illegal. In addition, if the company fails to issue internal working rules and/or register them with the provincial labor authority, it may be administratively fined up to VND 10 million.
Internal working rules constitute an important document of every company which not only is required by the laws but also serves as a basis for management of employees and working order. Besides, issuance and registeration of internal working rules are also a frequent request by investors in M&A transactions. On our point of view, drafting internal working rules is not too complicated but companies should pay attention to some points below:
(i) Internal working rules must include provisions required by 2019 Labor Code, with some important regulations such as those on confidentiality, labor discipline, and indemnification taken into carefull consideration;
(ii) Internal working rules should be customized to match the characteristics of labor management of each company, rather than being limited to basic contents required by law;
(iii) Before issuing or revising internal working rules, employers should consult employees’ representative organizations, if any.
Improper use of foreign currencies
Under the Ordinance on Management of Foreign Exchange, in the territory of Vietnam, foreign currencies may not be used in all transactions, payments, listings, advertisements, quotations, pricing, writing price on contracts, agreements and other similar forms of residents and non-residents, except for certain cases permitted by the State Bank of Vietnam. These exceptions generally are transactions/actions involving foreign elements/features. It should be noted that foreign-invested enterprises in Vietnam are not an exception to this provision of foreign currency restriction.
Notwithstanding such provision, it is not hard to find Vietnam-based companies using US dollar or other foreign currencies in their quotations or contracts or agreements with Vietnam-based vendors/suppliers/clients. This construes a violation of regulations with an administrative fine of between VND 60,000,000 and VND 100,000,000. Therefore, if the company signs any agreements with Vietnam-based parties and/or has any foreign-currency quotations/transactions, the company should amend such agreement to comply with regulations.
Failure to comply with the compulsory reporting regime
Last but not least, one of the most common breaches committed by the companies is failure to submit periodic reports as required by relevant laws. Subject to specific businesses, a company is required to submit several regular reports. Among other things, labor and employment, investments, and foreign loans are the most regular reports. Those reports serve authorities’ supervision, statistics, and analysis for the purpose of state management. If enterprises disregard the requirements for submitting those reports, they could face a fine of up to VND 50 million. In addition, performance of administrative procedures for the businesses would be delay until all reports are submitted as required. It is not to mention the fact that such breach may be a reason for inspection against violating enterprises. To minimize these potential risks, companies should compile, keep in mind and comply with the reporting schedule, reporting requirements.
The requirements above appear regularly but are frequently ignored by many companies. The incompliance not only puts them at legal risks but also makes a negative impression on authorities/investors and sometimes obstructs the companies from participating in worth-expectable transactions in the future. Since the regulations have been provided specifically in the applicable law, it is not difficult to fulfill or remedy the omissions/violations, but it requires the companies’ effort, timing, and personnel to complete and make the companies well-placed for prospective opportunities ahead.-