Reinvestment of investors’ profits and compliance obligations under Vietnamese Law

For the purpose of expanding capital, promoting business operations, and increasing ownership interests in the enterprise, many investors choose to use undistributed after-tax profits for reinvestment, capital contribution increases, or charter capital increases. This method of increasing capital from undistributed after-tax profits enables investors to enhance their ownership interests without the need to inject additional cash capital, while at the same time giving rise to legal issues under enterprise law, investment law, tax law, and foreign exchange management regulations. Lexsol provides comprehensive advisory services to investors and enterprises regarding the conditions and procedures for increasing capital from undistributed profits, as well as the legal and tax obligations that must be complied with throughout the implementation process.

1. Undistributed profits

1.1. Definition

Undistributed profits (also referred to as undistributed after-tax profits) are the profits remaining after an enterprise has fully fulfilled its corporate income tax obligations and other financial obligations in accordance with law, but which have not yet been distributed to the owner, capital-contributing members, or shareholders. Such profits are reflected in the enterprise’s financial statements and constitute an important indicator of the enterprise’s accumulated business performance at a given accounting point in time.

Based on the figures relating to undistributed profits, the owner, capital-contributing members, shareholders, as well as other relevant stakeholders may assess the enterprise’s business performance, including whether the enterprise has generated profits or incurred losses during the relevant financial period, and the level of internal capital accumulation of the enterprise.

1.2. Conditions for profit distribution

Pursuant to enterprise law, profits may only be distributed to the owner, capital-contributing members, or shareholders of a company if the enterprise has:
(i) fully satisfied its tax obligations and other financial obligations in accordance with law; and

(ii) ensured its ability to fully pay all due debts and other property-related obligations after the profit distribution.

Where these conditions are not met, the enterprise is not permitted to distribute profits.

1.3. Timing of profit distribution

The timing of profit distribution shall be determined in accordance with the company’s Charter or pursuant to:

– the decision of the owner of a single-member limited liability company (Point (l), Clause 1, Article 76 of the Law on Enterprises);

– the decision of the Members’ Council of a multi-member limited liability company (Point (g), Clause 2, Article 55 of the Law on Enterprises); or

– the decision of the Board of Directors of a joint stock company (Point (o), Clause 2, Article 153 of the Law on Enterprises).

2. Legal framework governing capital increases based on undistributed profits

2.1. Vietnamese enterprises

Under the Law on Enterprises:

Pursuant to the Law on Enterprises, an enterprise’s charter capital may be increased through various methods, including:

(i) an increase in capital contributions by members of a limited liability company;

(ii) additional capital contribution by the owner of a single-member limited liability company; or

(iii) the offering of additional shares to existing shareholders in the case of a joint stock company

(Clause 1, Article 68; Clauses 1 and 2, Article 87; and Clause 1, Article 124 of the Law on Enterprises).

Notably, the current enterprise law does not specifically prescribe or restrict the form of assets or the source of funds used for the additional capital contribution, provided that the capital increase is carried out in accordance with the statutory authority, procedures, and formalities. On this basis, the use of undistributed profits to increase charter capital, through the conversion of undistributed profits into additional capital contributions or shares allocated to the owner, members, or shareholders, is consistent with and permissible under the enterprise law framework.

In other words, although the Law on Enterprises does not expressly regulate “capital increase from undistributed profits” as a standalone method, such a mechanism may be lawfully implemented through the recognized capital increase methods under the Law on Enterprises and should not be deemed unlawful.

Under tax regulations:

Tax legislation has, in practice, acknowledged the existence of the mechanism whereby enterprises convert undistributed profits into capital. Specifically, income derived from profits capitalized as additional capital or dividends received in the form of shares is classified as income from capital investment and is subject to personal income tax (Point (g), Clause 3, Article 2 of Circular No. 111/2013/TT-BTC).

However, the time at which income from capital investment is determined does not coincide with the time when the enterprise records the capital increase through profit capitalization or distributes stock dividends. Instead, such income is deemed to arise at the time the individual transfers the capital, withdraws capital, or transfers shares (Point (b), Clause 3, Articles 10 and Point (c), Clause 3 Articles 10 of Circular No. 111/2013/TT-BTC).

Accordingly, individuals receiving stock dividends or capitalized profits are not required to declare or pay personal income tax on income from capital investment at the time of receipt. Personal income tax obligations only arise upon the transfer of capital, withdrawal of capital, or dissolution of the enterprise, at which point the individual must declare and pay personal income tax on income from capital transfer and income from capital investment (Clause 9, Article 26 of Circular No. 111/2013/TT-BTC).

At the same time, the organization in which the individual holds a capital contribution or in which the individual is a shareholder receiving share-based bonuses bears the responsibility to declare and pay tax on behalf of the individual with respect to income from capital investment when the individual transfers capital, transfers securities, or withdraws capital (Point (d), Clause 5 Article 7 of Decree No. 126/2020/NĐ-CP).

Compliance risks in practice:

The conversion of undistributed after-tax profits into capital contributions or shares entails significant tax compliance risks if taxpayers or enterprises misinterpret the nature of the income and the timing of the tax liability. In practice, there are cases where profit capitalization or the issuance of bonus shares is mistakenly regarded merely as an increase in capital, with no taxable income arising, leading to failures in tracking, declaring, or retaining records of the corresponding tax obligations, and ultimately resulting in violations of tax law.

Hence, athough the Law on Enterprises does not expressly regulate capital increases through the conversion of undistributed profits into capital contributions or shares, tax legislation has indirectly recognized and regulated this mechanism by defining the nature of the income, the timing of the tax liability, and the applicable tax declaration and payment framework. Taxpayers should exercise due caution to avoid potential tax compliance violations.

2.2. Enterprises with foreign investment capital

For enterprises with foreign investment capital, the mechanism for increasing capital from undistributed profits remains unchanged in substance; however, the method of implementation is subject to stricter regulation under investment law and foreign exchange control regulations. Accordingly, where a foreign investor uses distributed profits or profits to which it is entitled to make additional capital contributions, such contributions must be effected through an Investment Capital Account in Vietnam (“Investment Capital Account”), in accordance with the Law on Investment and foreign exchange management regulations.

Pursuant to Article 24 of the Law on Investment, foreign investors may contribute capital to Vietnamese enterprises. The forms of capital contribution and share acquisition under Clause 1, Article 25 of the Law on Investment include:
(i) purchase of shares upon initial issuance or additional issuance of a joint stock company;
(ii) capital contribution to a limited liability company or a partnership; and
(iii) capital contribution to other economic organizations not falling within the foregoing cases.

With respect to capital contributions by foreign investors, such contributions must be made through an Investment Capital Account (Clause 2, Article 65 of the Law on Investment). Accordingly, in order for a foreign investor to make additional capital contributions, the relevant profits or investment returns must be transferred into the corresponding Investment Capital Account.

Practical legal compliance risks:

While enterprise law does not prohibit capital increases from undistributed after-tax profits; tax law recognizes profits capitalized as additional capital as income from capital investment with deferred taxation; and investment law does not prohibit foreign investors from contributing capital or acquiring shares in Vietnam using profits or investment returns, foreign exchange management regulations, particularly the provisions on Investment Capital Accounts under Circular No. 03/2025/TT-NHNN, primarily regulate transactions involving actual cash flows, i.e., inflows and outflows through the Investment Capital Account.

As a result, the transfer of profits from a payment account to an Investment Capital Account and the recording of the corresponding capital contribution currently lack a unified and explicit procedural framework, thereby giving rise to potential legal and compliance risks in practice. Accordingly, enterprises are advised to consult with the bank managing the Investment Capital Account and to comply with the bank’s internal procedures prior to carrying out capital increase registration procedures with the Department of Finance.

In summary, foreign investors may contribute capital using profits or investment returns but must consult and comply with the internal procedures of the bank managing the Investment Capital Account in order to avoid violations of foreign exchange management regulations. 

3. Timing for capital increase registration

Pursuant to Clauses 1 and 2, Article 30, and Clause 4, Article 28 of the Law on Enterprises, an enterprise is required to register any change to its charter capital with the business registration authority within 10 days from the date on which the change occurs. Specifically:

“Article 30. Registration of changes to the Enterprise Registration Certificate

1. An enterprise shall register with the Business Registration Authority upon any change to the contents of the Enterprise Registration Certificate as stipulated in Article 28 of this Law.

2. The enterprise shall be responsible for registering such changes within 10 days from the date on which the change occurs.

Accordingly, the owner, capital-contributing members, or shareholders must register the amendment to the Enterprise Registration Certificate with the business registration authority within 10 days from the date of completion of the capital increase using undistributed profits.

The foregoing sets out the relevant Vietnamese legal framework governing the conversion of undistributed profits into capital contributions, as well as the compliance obligations that investors and enterprises must observe when implementing such arrangements.

For further detailed advice, please contact Lexsol.

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Email: info@lexsolasia.com

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