Frequent legal compliance issues of enterprises in Vietnam

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In the course of advising enterprises in Vietnam for their business and conducting legal due diligence on target companies in M&A transactions, we found some legal issues below that many enterprises in Vietnam are frequently involved in. These legal issues construe administrative violations by the Company which are subject to certain fines and sanctions under the relevant regulations.

Not making capital contribution in full

Under Law on Enterprise 2020, the owner/shareholders/members of a company (hereinafter collectively referred to as “shareholders”) are required to make a capital contribution in full as registered within 90 days from the date of issuance of the enterprise registration certificate. If the shareholders do not contribute capital on time, then the company shall register the actually contributed capital with the licensing authority within 30 days after the deadline of capital contribution. If the Company fails to register the change of capital, the Company shall be subject to an administrative fine of up to VND 30 million.

From our experience, the failure of capital contribution is more popular in Vietnam-local companies than the foreign-invested ones. Given the fact that many Vietnam-local companies register a large-size capital in order to have a better impression in their transaction with partners, vendors, suppliers, customers, etc., the registered capital does not reflect exactly the actual capital contributed and financial capacity of the company. Our several interviews show that shareholders, directors, and CEOs of many companies are not aware of such a serious violation of laws. In addition, if the company participates in an M&A deal, the investor usually requests the company to correct the charter capital as actual capital contributed before closing and payment. However, the company shall be subject to an inspection and administrative violation sanctioning process by the licensing authority before they accept the decrease of the charter capital. Therefore, the company and shareholders should strictly comply with the provision of capital contribution right from the establishment.

Not issuing and registering internal working rules

Under Vietnamese laws, it is mandatory for an employer having 10 employees or more to issue internal working rules in writing and register the same with the provincial labor authority. 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[1].

We experienced many companies hiring 10 employees or more but not promulgating their internal working rules in accordance with Labor Code 2019, instead, they issue their own internal regulations or rules and do not register the same to the provincial labor authority. However, the internal working rules of the company having at least 10 employees only come into force after being registered with the provincial labor authority[2]. If the employer/company refers to their not-yet-registered internal rules for dismissal, then the dismissal may be considered illegal. In addition, if the company fails to issue the internal working rules and/or register the same to the provincial labor authority, then the company may be administratively fined up to VND 10 million[3].

The internal working rule is an important document of every company which not only is required by the laws but also sets forth a foundation to manage employees and working orders in practice. Besides, issuing and registering the internal working rule is also a frequent request by investors in M&A transactions. On our point of view, drafting the internal working rule is not too complicated but the company should pay attention to some points below:

  • The internal working rule must include provisions required by Labor Code 2019, in which some important provisions such as confidentiality, labor discipline, and indemnification should be considered carefully;
  • The internal working rule should be customized to match the characteristics of labor management of the company, rather than only including basic content by the laws;
  • Before issuing or revising the internal working rules, the comply shall consult the employee representative organization (if any)[4].

After being officially issued, the internal working rule shall be registered at the Department of Labor of the province/city where the company headquarters or Industrial Zone Authority (if the company locates in an industrial zone, economic zone, high-tech zone,…) under procedures of registering the internal working rule set forth by Labor Code 2019.

Using foreign currency not complying with the regulations

Under the Ordinance on Foreign Exchange Control, within the territory of Vietnam, all transactions, payments, listings, advertisements, quotations, pricing, writing price on contracts, agreements and other similar forms of residents and non-residents must not be affected by foreign exchange except for certain cases permitted under the regulation of the State bank of Vietnam which generally are transactions/actions involving foreign elements/features. It should be noted that the foreign-invested enterprises in Vietnam are not an exception to this provision of foreign currency restriction.

Notwithstanding such provision, we found many Vietnam-based companies using USD or other foreign currency in their quotations, agreements with other Vietnam-based vendors/suppliers/clients. This construes a violation of the regulations with an administrative fine from VND 60,000,000 to VND 100,000,000[5]. Therefore, if the company signs any agreements with Vietnam-based parties and/or has any quotation/transactions, using foreign currency before, the company should amend such agreement to comply with the regulations.

Not submitting required periodic reports

Last but not least, one of the most common breaches committed by the companies we found is not submitting periodic reports required by the relevant laws. Subject to specific businesses, the 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 the authority’s supervision, statistics, and analysis for their state management. If the company disregards the requirements for submitting those reports, it could face a fine of up to VND 50 million[6], administrative delays until the requirements are met, and such violation may be a reason for taking inspection against the company. To minimize these potential risks, the company is advised to compile and keep in mind the reporting schedule, reporting requirements and follow the same.

Conclusion

The requirements above appear regularly for each company’s business but are frequently ignored by many companies. The incompliance not only puts the company at legal risks but also makes a negative impression on authority/investors and sometimes obstructs the company 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 company’s effort, timing, and personnel to complete and make the company well-placed for prospective opportunities ahead.

By: Thom Nguyen | LinkedIn

[1] Decree No. 145/2020/ND-CP dated 14 December 2020 on elaboration of some Articles of the Labor Code on working conditions and labor relations, Article 69

[2] Labor Code 2019, Article 121

[3] Decree No. 12/2022/ND-CP dated 17 January 2022 on penalties for administrative violations against regulations on labour, social insurance, and Vietnamese employees working abroad, Art 19.2

[4] Labor Code 2019, Article 118.3

[5] Decree No. 88/2019/ND-CP dated 14 November 2019 providing for penalties for administrative violations in monetary and banking sector, Article 23.4

[6] Decree No. 122/2021/ND-CP dated 28 November 2021 on penalties for administrative violations against regulations on planning and investment, Article 15.2

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