1. What is Capital Surplus?

Under Vietnamese laws, there's no formal definition of "capital surplus." However, it's a financial concept commonly encountered by businesses. It refers to the additional money a company receives when it sells its shares for more than their par value.

Here's a breakdown to understand capital surplus better:

Calculating Capital Surplus: Imagine a company issues 1,000 shares with a par value of $10 each (total par value: $10,000). If they sell these shares for $15 each, they generate $15,000 in revenue. The capital surplus in this case would be $5,000, which is the difference between the selling price ($15) and the par value ($10) multiplied by the number of shares issued (1,000).

Tax Implications:

The good news is that capital surplus is generally exempt from both Value Added Tax (VAT) and Corporate Income Tax (CIT) in Vietnam. This is according to Official Letter No. 3910/TCT-CS issued by the General Department of Taxation. These issues will be more explored in section 2 of the article.

There's one exception, though. If a company issues bonus stocks derived from capital surplus and these stocks are later transferred, CIT applies. The taxable income for this transfer is calculated by subtracting any transfer-related expenses from the selling price (since the cost price, in this case, is zero).

Regulations and Capital Surplus:

There are specific regulations related to capital surplus that public companies need to be aware of when issuing shares, bonds, or convertible bonds:

Public Offerings at Lower Prices: When a public company conducts a follow-on offering where the selling price is lower than the par value, they must have sufficient capital surplus (verified by their latest audited financials) to cover the deficit arising from the lower offering price.
Convertible Bonds and Warrant-Linked Bonds: Similar to the above scenario, if a public company issues convertible bonds or warrant-linked bonds where the conversion or exercise price falls below the par value, they need to have adequate capital surplus to cover the potential deficit.

Using Capital Surplus for Increased Charter Capital:

The ability for companies to use capital surplus to increase their charter capital (registered minimum capital) differs between private and public companies:

Private Joint-Stock Companies: Currently, the 2020 Law on Enterprises doesn't explicitly allow private companies to utilize capital surplus for this purpose. However, Circular 19/2003/TT-BTC previously outlined conditions for doing so. This circular might be annulled in the future, creating uncertainty. It's best to consult with a professional for the latest regulations.
Public Companies: Public companies have a clearer legal standing. Article 62 of Decree 155/2020/ND-CP allows them to issue shares to increase their capital from their equity, which includes capital surplus.

2. Tax Implications

As explored in the first section, capital surplus can be a significant financial benefit for companies operating in Vietnam. Here's a breakdown of the tax implications associated with it:

Good News: Generally Exempt from VAT and CIT

Vietnamese tax authorities consider capital surplus a positive element for company growth. Official Letter No. 3910/TCT-CS issued by the General Department of Taxation confirms that capital surplus itself is exempt from both Value Added Tax (VAT) and Corporate Income Tax (CIT). This means the additional funds raised by selling shares above par value are not subject to these taxes, providing companies with more financial resources for operations and investment.

Exception: Capital Gains Tax on Stock Transfers from Capital Surplus

There's one key exception to the tax exemption. If a company issues bonus stocks derived from capital surplus and these stocks are later transferred by shareholders, capital gains tax applies. In this scenario, the taxable income is calculated by subtracting any transfer-related expenses from the selling price of the stock. Since the cost price of these bonus stocks (derived from capital surplus) is considered zero, the taxable income is essentially the entire selling price minus any transfer fees.

Key Takeaway:

While capital surplus itself is not taxed, companies should be aware of potential capital gains tax implications when shareholders transfer bonus stocks originating from capital surplus. It's advisable to consult with a tax professional for specific guidance on how these regulations might apply to your company's situation.

3. Regulations on Capital Surplus and Securities

When issuing shares, bonds, or convertible bonds in Vietnam, public companies need to pay close attention to how capital surplus interacts with securities regulations. Here's a breakdown of the key points to consider:

Safeguarding Financial Stability:

The Vietnamese government prioritizes financial stability in the securities market. Regulations are in place to ensure companies issuing securities have a healthy financial standing. Capital surplus serves as a buffer in specific scenarios, protecting investors and fostering market confidence.

Public Offerings at Lower Prices:

It's not uncommon for companies to conduct follow-on offerings, where they issue new shares to raise capital. However, if a public company plans to offer shares at a price lower than their par value, they must have sufficient capital surplus according to their latest audited financials. This surplus acts as a safety net, ensuring the company has the resources to cover the deficit arising from the lower offering price.

Convertible Bonds and Warrant-Linked Bonds:

Similar to public offerings, regulations apply to convertible bonds and warrant-linked bonds issued by public companies. If the conversion or exercise price for these bonds or warrants falls below the par value of the underlying shares, the company must possess adequate capital surplus. This surplus helps mitigate potential financial strain if a significant number of investors choose to convert their bonds or warrants into shares at a lower price than par value.

Transparency and Public Trust:

Maintaining transparency and building public trust are crucial aspects of the Vietnamese securities market. Regulations requiring companies to demonstrate sufficient capital surplus when issuing securities at lower prices promote investor confidence. Investors can be assured that the company has the financial strength to weather potential fluctuations in share price.

In essence, these regulations ensure that public companies issuing securities do not undermine their financial stability and are well-positioned to meet their obligations to investors.

4. Using Capital Surplus to Increase Charter Capital

In Vietnam, the ability for companies to leverage capital surplus to increase their charter capital (registered minimum capital) differs between public and private entities. Here's a breakdown of the current landscape:

Private Joint-Stock Companies:

Limited Usages under Previous Regulation: Circular 19/2003/TT-BTC previously outlined conditions for private companies to utilize capital surplus for charter capital increase. These conditions included:
- Using the difference from selling previously repurchased treasury stocks (shares bought back by the company) after all treasury stocks are sold.
- Using the difference from issuing shares for specific projects only after three years of project completion.
- Using the difference from issuing shares for debt restructuring or business capital increase only after one year from issuance.
Uncertainty Due to Potential Regulation Change: It's important to note that Circular 19/2003/TT-BTC might be annulled in the future. The Ministry of Finance is proposing this change, which would eliminate the ability for private companies to directly use capital surplus for charter capital increase.

Public Companies:

Clear Legal Basis: Public companies enjoy a more straightforward approach. Article 62 of Decree 155/2020/ND-CP explicitly permits them to issue shares to increase their capital from their equity, which includes capital surplus. This allows them to directly utilize capital surplus as a source for raising additional capital through charter capital increase.

Key Takeaway:

The current regulations in Vietnam regarding using the capital surplus for charter capital increase favor public companies. While private companies have some limited options under potentially changing regulations, public companies have a clear legal path to leverage this strategy.

Recommendation:

Given the potential changes for private companies, it's crucial to consult with a legal or financial professional to stay updated on the latest regulations and explore alternative methods for utilizing capital surplus or increasing charter capital if applicable to your situation.

5. Public vs. Private Companies

The ability to utilize capital surplus for various purposes differs significantly between public and private companies in Vietnam. Here's a closer look at the contrasting approaches:

Public Companies:

Clear Legal Framework: Public companies enjoy a clear advantage when it comes to capital surplus. Article 62 of Decree 155/2020/ND-CP grants them the legal right to issue shares and raise capital by drawing from their equity, which includes capital surplus. This allows them to directly leverage capital surplus for strategic growth initiatives like charter capital increase.
Enhanced Flexibility: Public companies have greater flexibility in using capital surplus. They can utilize it not only for charter capital increase but also for other purposes that align with their financial goals. This flexibility empowers them to make informed decisions regarding capital allocation and growth strategies.
Transparency and Public Scrutiny: As public entities, companies operating in this domain face greater public scrutiny. This translates to stricter regulations and a requirement for maintaining transparency in financial reporting. This can be viewed as both a challenge and an opportunity. Public companies must demonstrate responsible use of capital surplus, fostering investor confidence and potentially attracting more investment.

Private Joint-Stock Companies:

Limited Options and Uncertainty: Private companies face a more complex and uncertain landscape regarding capital surplus. While Circular 19/2003/TT-BTC previously outlined limited conditions for utilizing capital surplus for charter capital increase, this regulation might be annulled. This creates uncertainty for private companies seeking to leverage this strategy.
Restricted Flexibility: Compared to public companies, private companies have fewer options for utilizing capital surplus. The potential annulment of Circular 19/2003/TT-BTC further restricts their flexibility, potentially hindering their ability to unlock the full potential of this financial resource.
Less Public Scrutiny: Private companies generally operate with less public scrutiny compared to public companies. This can offer them some flexibility in decision-making. However, it also means they may have less access to capital markets and face greater challenges in attracting investors.

6. Conclusion

Capital surplus presents a valuable financial tool for companies operating in Vietnam. Understanding the regulations surrounding it allows businesses to make informed decisions regarding capital allocation and growth strategies. Public companies enjoy a clear legal framework and greater flexibility in utilizing capital surplus. However, private companies face uncertainties due to potential changes in regulations.

Regardless of company type, staying updated on the evolving legal landscape is crucial. Consulting with a legal or financial professional can help businesses navigate the specific regulations applicable to their situation and unlock the full potential of capital surplus to achieve their financial goals. By effectively leveraging this financial resource, companies in Vietnam can position themselves for sustainable growth and success.

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.