Legal consequences of non-existent capital in Viet Nam
Original article written in Vietnamese Hậu quả pháp lý của việc tăng vốn ảo
Review of Finance of Viet Nam commented: “Increasing non-existent capital is a successful increase in capital on the books, but the actual cash flow sees no changes”. Businesses raise non-existent capital for different reasons; however, the legal consequences of this action cause many inadequacies for businesses in the future and if found by state agencies, business will subject to sanctions.
Let’s join Nghiep Thanh Law in analyzing some inadequacies in raising non-existent capital!
1. General overview of non-existent capital increase
Investment capital[1] is money, things that can be converted into money, valuable papers (stocks, bonds, bills of exchange, etc.) and property rights (ownership of real property, motorbike ownership right, etc.) to make investment.
Charter capital[2] is the amount of money that has been, is and will be contributed by members of the company when the company is newly established.
Investment capital for sole proprietorship and charter capital for enterprises, demonstrating their vitality and development potential in the economic market. Investors, when looking at the financial statements, the amount of capital of the business to decide to make investment in the company’s items.
As a result, businesses massively increase investment capital, increase non-existent charter capital to attract investors to pour money into their projects.
In fact, there was a case of Binh Thuan Mineral Industry Joint Stock Company (KSA): The capital increase was 100 times from 2008 to 2016, the capital amount was up to VND 800 billion. This attracted the attention of state management agencies, and it was recognized that there was a transfer of non-existent capital between the companies of the administrator and collected money from investors without implementation of project. Consequently, the company was forced to delist on the stock exchange and almost disappeared from the stock exchange, the company’s revenue rate in the next 6 months also decreased by up to 70%.
2. Legal consequences for the increase of non-existent capital at the beginning of the business establishment
Consequence 1: Administrative fines
Fines range from VND 10 million to VND 30 million.[3]
In addition, you also have to overcome the consequences by reducing charter capital to the actual amount.
Consequence 2: When borrowing from a bank, the interest on the loan amount will not be included in deductible expenses to reduce taxes for businesses.
Legal basis: Article 4.2.18 Circular 96/2015/TT-BTC
Situation:
Enterprise A has non-existent charter capital: VND 8 billion
Actual charter capital: VND 3 billion
Bank rate: 2%
Case 1: 5-billion project implementation
You will have to borrow VND 2 billion from a credit institution or bank and pay VND 40 million in interest.
However, according to the law, your charter capital is VND 8 billion, the project is only VND 5 billion, why would you borrow another VND 2 billion to implement? And in this case, you cannot have your deductible expenses deducted from interest when determining the business’s taxes.
Case 2: 9-billion project implementation
You will have to borrow VND 6 billion from a credit institution or bank, the interest in this case is VND 120 million.
However, you will have only VND 20 million deducted (corresponding to VND 1 billion – the extra amount borrowed other than the charter capital of VND 8 billion). Thus, instead of having VND 120 million deducted, you will have only VND 20 million deducted in reality.
3. Consequences of non-existent investment capital increase during the operation
First, if the company joins the stock exchange, the company’s stock price will plummet.[4]
Second[5], you must pay additional deposit or additional deposit guarantee corresponding to the increased capital.
Third, you will have to perform the act of overstating the data. Accordingly, large investment capital, revenue must not be too low because it may lead to suspicion of state agencies. And in fact, you do not make an investment, do not have actual revenue and expenditure data, which leads to having to declare data to cover up your non-existent investment capital.
The maximum fine for falsely making and reporting invoices for organizations is VND 100 million, and VND 50 million for individuals.[6]
Fourth, you will be fined for an administrative violation if the competent authority detects the act of increasing non-existent investment capital with a fine ranging from VND 10 million to VND 20 million.[7]
The content above is the advice on “Legal consequences of non-existent capital in Viet Nam”
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Translator: Le Khanh Linh
Updated and supplemented on: July 11, 2022
Content writer: Le Kim Bao Ngoc
Instructor: Nguyen Minh Co
Admin: Lawyer Thuan
[1] Article 3.23 Law on Investment 2020.
[2] Article 4.34 Law on Enterprise 2020.
[3] Article 46.3 and Article 46.4 Decree 122/2021/ND-CP.
[4] [https://tapchitaichinh.vn/kinh-te-vi-mo/nhan-dien-tang-von-ao-307264.html].
[5] Article 26.9(d) Decree 31/2021/ND-CP.
[6] Article 7.1(b) Decree 125/2020/ND-CP.
[7] Article 17.2(a) Decree 122/2021/ND-CP.
