Date: 14 September 2021
Writer: Huy Nguyen & Thao Nguyen
The term “capital surplus” is common in business activities. However, not everyone can understand its term under the laws of Vietnam. Through this article, BLawyers Vietnam will introduce some pieces of knowledge and notable issues on capital surplus under Vietnamese laws.
1. Definition of capital surplus
The prevailing law does not specifically define capital surplus. However, the capital surplus can be understood as the difference between share par values and actual issuance prices.
Capital surplus = (Issuance price – Share par value) x number of issued shares
2. Tax regulations on capital surplus
a. Value added tax (“VAT”) and Corporate income tax (“CIT”)
According to the Official Letter No. 3910/TCT-CS issued by the General Department of Taxation regarding tax regulations on capital surplus, when enterprises issue additional shares to raise capital from new shareholders, the surplus between issuance prices and share par values will be classified in a capital surplus account. CIT and VAT shall not be imposed on capital surplus.
b. CIT regarding the transfer of stock arose from capital surplus
According to the Official Letter No. 53581/CT-TTHT issued by Ha Noi City Tax Department regarding the cost price of bonus stocks arose from capital surplus when investors implement the transfer, in case of enterprises receive stocks arose from a capital surplus with a total par value equivalent to the received capital surplus when transferring such stocks, enterprises must calculate, declare and pay CIT for securities transfer activities in accordance with the law. Accordingly, taxable income from the transfer of these stocks is calculated by the selling price of stocks minus (-) expenses related to the transfer (as cost price is equal to 0).
3. Regulations on securities related to capital surplus
When implementing the procedures on an offering of shares, bonds, public companies shall meet the conditions related to capital surplus as follows:
(i) A public company that conducts a follow-on public offer of shares at lower prices than par value shall have adequate capital surplus according to the latest audited annual financial statement, which is enough to cover the deficit caused by the offering at a lower price than par value;
(ii) A public company registers the public offering of convertible bonds, warrant-linked bonds, if the conversion price or issue price for exercising warrants is lower than the par value, the conversion or exercising may only be carried out when the issuer has adequate capital surplus to cover the deficit caused by the issuance of shares below par value; and
(iii) Other regulations under Vietnamese law.
4. Regulations on the forward of capital surplus to supplement the charter capital of joint-stock companies
The carrying forward of the capital surplus to supplement the charter capital of joint-stock companies must meet the following conditions:
(i) The companies can use the whole increase differences between selling prices and purchasing prices of treasury stocks to increase their charter capital. In cases where the companies have not yet sold out their treasury stocks, they can only use the increasing difference between the capital surplus and the total cost price of unsold treasury stocks to supplement their charter capital. If the total cost price of unsold treasury stocks is equal to or larger than the capital surplus, the companies can not increase their charter capital with such a capital source.
(ii) For the difference between selling prices and par values of stocks issued for executing investment projects, joint-stock companies can only use them to supplement their charter capital three years after such investment projects are completed and put into exploitation and operation.
For the difference between selling prices and par values of stocks issued for restructuring debts or supplementing business capital, the joint-stock companies can only use them to increase their charter capital one year after the end of the issuance.
(iii) The capital surplus mentioned in Item 4.(i) and 4.(ii) above shall be divided to shareholders in form of stocks according to their stock ownership proportions.
The quantity of stocks planned to be additionally issued is determined according to the following formula:
Quantity of stocks planned to be issued = Capital source planned to be used to increase charter capital/ Par value of one stock.
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