- What is retained earnings?
Retained earnings or retained earnings after tax is a term reflecting the results of production and business activities of a company. Owners/contributors/shareholders or a third party can assess the profit or loss of a business enterprise during the respective financial year.
Terms of profit distribution: the profits are used to distribute to the owners/contributors/shareholders of the company after fulfilling the tax and other financial obligations prescribed by law and to ensure full payment of debts and other property obligations due after the distribution benefits.
Incentive period: according to the provisions of the Company’s Charter.
- Legal regulations on the form of capital increase contributed on the basis of retained earnings
- For companies with 100% Vietnamese capital
A company can increase its share capital in the following cases:
- Increase in the capital contribution of the partners: clause 1, article 68 of the law on companies
- The owners of the business contribute additional capital. The owner of the company decides on the form of the increase and the increase in the share capital: clauses 1 and 2, article 87 of the Company Law
- Offer of shares to existing shareholders – Clause 1, Article 124 of the Companies Act
Regarding the form of capital increase, the law does not specify or limit the specific forms of capital contribution. Therefore, owners/capital contributors/shareholders can contribute capital through the conversion of retained earnings is not against the law.
In addition, for the conversion of retained earnings into capital, the tax law provides the following:
- Taxable income Personal income: Income from capital gains or stock dividends is income from invested capital and is subject to personal income tax (article 2.3.g Circular 111/2013/TT – BTC)
- Time of determination of taxable income: The time of determination of income from capital investment is when an individual transfers capital, withdraws capital or from when an individual transfers shares. (Article 10.3.a,b Circular 111/2013/TT – BTC)
- Taxpayers who report and pay tax: Individuals who receive stock dividends or recognized capital gains are not required to report and pay capital investment tax upon receipt. When transferring capital, withdrawing capital and dissolving businesses, natural persons must declare and pay personal income tax on capital transfer income and capital investment income. (Article 26.9 Circular 111/2013/TT-CTB). Organizations where natural persons have contributed capital/where natural persons are shareholders who receive stock bonuses are responsible for reporting and paying tax on behalf of capital investment income when natural persons transfer capital/transfer securities, capital withdrawals (article 7.5.d Decree 126/2020/ND-CP)
Thus, it can be seen that the company law does not specifically stipulate the form of capital contribution with profit, but the tax law provides for this form through the regulation of tax obligations and the time of declaration of tax on Income.
- For enterprises with foreign participation
For owners/capital contributors/shareholders who are foreign investors, the capital contribution to the company must be in accordance with Article 24 of the Investment Law. Forms of capital contribution and purchase of shares include:
- Purchase of shares issued for the first time or issued additionally by a joint-stock company;
- Contribute capital to a limited liability company or a partnership;
- Contribute capital to other economic organizations other than those specified in points a and b of this clause.
For the provision of capital to foreign investors, the capital provision must be made through the direct investment capital account or the indirect investment capital account (“Capital account”). Therefore, in case a foreign investor contributes capital, it is necessary to transfer the profits to the corresponding capital account.
However, the revenue and expenditure transactions related to the capital account on the receipt of profits and the recognition of the capital contribution by investors are not specified. Therefore, in order to transfer profits from the current account to the capital account and record the capital contribution of the investor, the company should contact the bank where the capital account is opened to seek advice and comply with the provisions of this law. banks before initiating capital increase procedures with the Planning and Investment Department.
- Capital increase registration deadline
According to Clauses 1, 2, Section 30 and Clause 4, Section 28 of the Companies Act, a company must register with the Companies Registration Agency when changing its registered capital with the company in the 10 days from the date of the change. Specifically:
“Article 30. Registration of changes to the company’s registration certificate
- A company must register with the business registration authority when change content of its business registration certificate as prescribed in Article 28 of this Law.
- Businesses are responsible for recording changes to the contents of the business registration certificate within 10 days of the date of the change.”
As such, owners/contributors/shareholders must register with the business registration authority to amend the business registration certificate within 10 days from the date of completion of use retained earnings to raise capital.