1. Legal Basis

The Enterprise Law 2020: This is the core legislation defining subsidiaries, affiliates, and parent companies in the Vietnamese context. The "Legal Basis" would specify which articles or clauses from this law directly address these business entities. Key points may include:

Definition of a Subsidiary Company: The law stipulates the ownership threshold (100% charter capital or a controlling stake) that establishes a subsidiary relationship.
Definition of an Affiliate Company: This likely focuses on the concept of "non-controlling shares", clarifying that an affiliate company involves a parent company holding less than 50% ownership.
Restrictions: The Law may include restrictions on investment activities between subsidiaries and their parent companies, or among subsidiaries of the same parent company.
Rights and Obligations: Outlining the legal rights and responsibilities of parent companies, subsidiaries, and affiliates, such as reporting or disclosure obligations.

2. Subsidiary Company

A subsidiary company, as defined by the Enterprise Law 2020 of Vietnam, is a distinct legal entity established and controlled by another company, known as the parent company. Here's a deeper dive into its characteristics:

Ownership and Control:

Ownership: The parent company holds the majority stake in the subsidiary, either by:
- Owning 100% of the charter capital: This grants complete ownership and control to the parent company.
- Owning dominant shares or contributing capital: This allows the parent company to exert significant influence over the subsidiary's operations and decision-making, even without owning the entirety of the capital.

Structure and Formation:

Structure: Subsidiaries can be established in various legal forms, including:
- Limited Liability Company (LLC): Offers limited liability protection to its shareholders (including the parent company).
- Joint Stock Company (JSC): Allows the public to invest in the subsidiary by issuing shares on a stock exchange.
- Joint Venture: Enables the subsidiary to be co-owned by the parent company and other Vietnamese or foreign investors.
- Offshore Company: A less common option, mainly used for specific purposes under Vietnamese law.
Formation: The parent company initiates the establishment process for the subsidiary, complying with Vietnamese regulations and licensing requirements.

Key Characteristics:

Limited Liability: The parent company's liability is generally limited to its investment in the subsidiary. This means the parent company's assets are typically shielded from debts or obligations incurred by the subsidiary.
Control: The parent company has significant control over the subsidiary's operations, often through:
- Appointment of management: Selecting and appointing key personnel like directors and board members.
- Strategic decisions: Influencing major business decisions and strategies of the subsidiary.
- Financial management: Overseeing the subsidiary's financial operations and performance.
Restrictions: Subsidiaries in Vietnam are subject to certain limitations:
- Investment restrictions: They are generally not allowed to invest in or hold shares of the parent company.
- Cross-ownership restrictions: Subsidiaries under the same parent company with substantial state ownership (65% or more) may be restricted from jointly investing or acquiring shares in other businesses.

Example:

Company A is a 100% subsidiary of Company B if:

Company B owns all the shares or capital contributions in Company A.
Company B holds dominant voting rights and control over critical decisions of Company A.

Overall, a subsidiary company in Vietnam offers a legal structure for parent companies to expand their operations, manage risk, and diversify their business interests while maintaining control over the subsidiary's activities.

3. Affiliate Company

An affiliate company in Vietnam, as defined by the Enterprise Law 2020, is a separate legal entity established through an agreement between two or more entities, where no single entity holds a controlling ownership stake. This implies a partnership approach with shared interests and objectives but independent operations.

Key Characteristics:

Ownership Structure:
- Distinguished by non-controlling shares or capital contribution from the parent company. This typically means the parent company owns less than 50% of the affiliate's shares or capital.
- Can involve multiple entities as co-founders, each holding a non-dominant share.
Formation:
- Established through contractual agreements like:
  - Association contracts
  - Business cooperation contracts
  - Company charters, outlining the purpose, rights, and responsibilities of each affiliate.
Independent Operation:
- Each affiliate maintains its own independent management and governance structure, unlike subsidiaries controlled by a parent company.
- Makes its own operational decisions without requiring approval from other affiliates or external entities.
Collaboration:
- Affiliates collaborate to achieve mutually beneficial goals defined in the initial agreements.
- This collaboration can involve areas like:
  - Sharing resources and expertise
  - Jointly marketing products or services
  - Expanding market reach

Benefits of Affiliation:

Risk Sharing and Resource Pooling: Sharing resources and expertise allows affiliates to reduce individual risks and leverage combined strengths.
Market Expansion: Affiliates can access new markets and customer segments by collaborating with each other's established networks.
Innovation and Learning: Collaborative ventures can foster knowledge sharing and promote innovation within each affiliated company.

Example:

Company A and Company B co-own Company C with a 40% and 30% ownership stake, respectively. The remaining 30% is owned by individual investors. In this scenario:

Company A and B are affiliates of Company C.
Neither A nor B holds a controlling stake, ensuring independent decision-making for Company C within the agreed-upon partnership framework.

In conclusion, an affiliate company in Vietnam provides a collaborative structure for businesses to achieve shared goals while maintaining individual operational autonomy.

4. Key Differences

Understanding the fundamental distinctions between subsidiaries and affiliates is crucial for navigating the Vietnamese business landscape. Although both involve relationships between separate legal entities, their ownership structures, control mechanisms, and operational dynamics differ significantly. This section delves into the key differences to guide informed decision-making involving subsidiaries and affiliates.

1. Ownership and Control:

Subsidiaries: The defining characteristic of a subsidiary is the parent company's dominant ownership and control. This can be achieved through two primary means:
- 100% ownership: The parent company holds the entirety of the subsidiary's charter capital or shares, granting complete control over its operations, management, and strategic direction.
- Dominant ownership: The parent company holds a majority stake (more than 50%) of the subsidiary's shares or capital, giving them significant influence over major decisions and strategic direction. This control often extends to appointing key personnel like board members and managers, influencing financial management practices, and setting overall business strategies.
Affiliates: By contrast, affiliates are characterized by the absence of a single controlling entity. Ownership is distributed among multiple entities, with each affiliate holding non-controlling shares, typically less than 50%. This implies a more collaborative and partnership-driven relationship, where each affiliate retains its independent decision-making authority.

2. Formation and Establishment:

Subsidiaries: The parent company initiates the establishment process for a subsidiary. This involves complying with Vietnamese regulations, obtaining necessary licenses, and defining the subsidiary's legal structure (LLC, JSC, etc.). The parent company has complete control over the formation process and sets the initial direction for the subsidiary.
Affiliates: The establishment of an affiliate involves a collaborative effort between multiple entities. This typically involves entering into formal agreements such as association contracts, joint venture agreements, or company charters. These agreements clearly define the purpose of the collaboration, the rights and responsibilities of each affiliate, and the governance structure for decision-making.

3. Independence and Operational Control:

Subsidiaries: Due to the parent company's dominant ownership and control, subsidiaries typically operate with less autonomy. The parent company often exerts significant influence over various aspects, including:
- Strategic direction: Setting overall business goals, product development strategies, and market expansion plans.
- Financial management: Overseeing budgeting, financial reporting, and investment decisions.
- Operational decisions: Influencing hiring practices, marketing strategies, and day-to-day operations.
Affiliates: As independent legal entities with no controlling shareholder, affiliates generally enjoy greater operational autonomy. They have the freedom to make independent decisions regarding their:
- Strategic direction: Each affiliate can determine its own business goals and strategies within the framework of the collaborative agreements.
- Management and governance: Each affiliate has its own management structure and decision-making processes, independent of other affiliates.
- Day-to-day operations: Affiliates independently manage their daily operations, personnel, and resource allocation.

4. Legal and Regulatory Considerations:

Subsidiaries: As subsidiaries fall under the control of the parent company, they are subject to relevant regulations and reporting requirements applicable to the parent company. This may include consolidated financial reporting requirements, depending on the specific ownership structure and Vietnamese regulations.
Affiliates: Each affiliate operates as a separate legal entity and is subject to individual regulatory compliance. While there might be specific reporting requirements within the collaboration agreements, they are generally not subject to consolidated reporting requirements or direct legal control from other affiliates.

5. Risk and Liability:

Subsidiaries: The parent company's liability for the subsidiary's actions is limited to their investment in the subsidiary. This means the parent company's assets are generally protected from debts or obligations incurred by the subsidiary. However, the parent company can still be held accountable for certain legal or financial misconduct if proven to be directly involved.
Affiliates: Each affiliate generally bears the individual liability for its actions and obligations. This means the actions or debts of one affiliate do not automatically extend to other affiliates unless specifically stipulated in the collaboration agreements.

In summary:

Choosing between a subsidiary and affiliate structure depends on the specific needs and goals of the involved entities. Subsidiaries offer the parent company greater control and direct management influence, while affiliates provide a framework for collaboration and shared risk with greater individual operating autonomy. Understanding these key differences allows businesses to make informed decisions based on their desired level of control, operational independence, and risk management strategies.

5. Conclusion

Navigating the Vietnamese business landscape requires a clear understanding of different business structures. In this article, we explored the key distinctions between subsidiaries and affiliates, highlighting their fundamental differences in ownership, control, operation, and legal implications. For businesses seeking complete control and centralized management, establishing a subsidiary provides a clear path. However, if the focus is on collaboration, risk-sharing, and shared benefits, an affiliate structure might be a better fit.

Ultimately, the choice between a subsidiary and affiliate model hinges on the specific goals and objectives of the involved entities. Recognizing and considering these key differences allows businesses to make informed decisions and leverage the appropriate structure to achieve their desired outcomes within the Vietnamese legal framework. If you need further explanation on this subject, please don't hesitate to contact us through email at lienhe@luatminhkhue.vn or phone at: +84986 386 648. Lawyer To Thi Phuong Dzung