Understanding the legal status and liability limits of a foreign parent company when investing in Vietnam through a subsidiary model is a key factor to ensure legal compliance and optimize investment benefits. In this article, DNP Vietnam Law Firm will provide a detailed analysis of the relevant legal aspects to assist foreign investors in risk management and achieving sustainable business efficiency.
1. Concept
1.1. Legal Basis: According to Clause 1, Article 195 of the Law on Enterprises 2020:
A parent company is a legal entity that meets at least one of the following conditions:
- Owns more than 50% of the charter capital or the total ordinary shares of the subsidiary;
- Has the right to directly or indirectly appoint the majority or all of the members of the Board of Directors, the Director, or the General Director of the subsidiary;
- Has the right to decide on amendments and supplements to the subsidiary’s charter.
Additionally:
- A subsidiary, although subject to control and influence from the parent company, remains an independent legal entity with separate legal status and conducts independent business activities under the Law on Enterprises 2020.
- The relationship between the parent company and the subsidiary allows the parent to control strategy and management without eliminating the subsidiary’s legal autonomy.
1.2. Legal Basis: According to Article 21 of the Law on Investment 2020:
A foreign parent company can invest in Vietnam through two main methods to establish or control a subsidiary:
- Establishing a new economic organization (e.g., a Japanese company establishing a limited liability company (LLC) in Vietnam to manufacture electronic components);
- Contributing capital, purchasing shares, or stakes in an existing Vietnamese company to gain business control.
Subsidiaries established or controlled under these methods:
- Have independent legal status;
- Are governed by the Law on Enterprises 2020 and the Law on Investment 2020.
Thus, the subsidiary model offers flexibility for foreign parent companies to implement their investment strategies in Vietnam while ensuring compliance with the current legal framework.
2. Liability Limits of a Foreign Parent Company
2.1. Independent Legal Status
The parent company and the subsidiary are two separate legal entities, each with its own rights and obligations (Clause 2, Article 194).
The parent company exercises its rights and obligations as:
- An owner in an LLC;
- A member in a partnership;
- A shareholder in a joint-stock company.
The parent company is not liable for the debts or obligations of the subsidiary, except where:
- Otherwise agreed;
- Or as specifically provided by law.
Transactions, contracts, and relationships between the parent company and the subsidiary must:
- Be established independently;
- Be executed equally, based on the conditions applicable to independent legal entities (Clauses 1 and 2, Article 196).
2.2. Joint Liability in Exceptional Cases
The parent company may be held liable for damages if it:
- Interferes beyond its authority,
- Forces the subsidiary to engage in unprofitable or irregular business activities,
- Causes losses without reasonable compensation within the financial year (Clause 3).
If another subsidiary benefits from such harmful actions, it must jointly compensate the affected subsidiary (Clause 6).
Creditors or members/shareholders holding at least 1% of the charter capital of the affected subsidiary have the right to demand compensation from the parent company if the parent fails to voluntarily fulfill its obligation (Clause 5).
2.3. Cross-ownership Restrictions
Subsidiaries are prohibited from investing, contributing capital, or purchasing shares in the parent company. Subsidiaries under the same parent are also prohibited from cross-owning each other. These regulations ensure independent corporate governance and prevent complex transactions that could lead to abuse of control rights or concealment of economic interests.
In addition to the joint liability outlined in Article 196 of the Law on Enterprises 2020, a foreign parent company may face legal risks arising from the subsidiary’s operations, such as transfer pricing violations or other legal breaches. To minimize risks, the parent company should establish strict internal controls and strictly comply with Vietnamese law.
Legal Basis: Clause 2, Article 195 of the Law on Enterprises 2020.
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3. Related-party Transactions between Parent Company and Subsidiar
According to the Law on Tax Administration 2019 and Decree 132/2020/ND-CP, related-party transactions include transactions between entities with a special relationship, such as between a parent company and a subsidiary. To prevent transfer pricing and tax base erosion, companies engaging in related-party transactions must strictly comply with regulations on declaring and determining prices based on market principles, ensuring that transaction prices are equivalent to those between independent entities.
Companies are also required to submit full information on their related-party relationships and transactions with their corporate income tax finalization return. In addition, they must prepare, maintain, and provide transfer pricing documentation upon request by the tax authorities, timely and accurately according to the regulations.
The case of Coca-Cola Vietnam (2007–2015) clearly illustrates the legal risks of non-compliance. During this period, the company conducted extensive transactions with its parent company and affiliated companies, purchasing raw materials accounting for 70–85% of its cost of goods sold, which led to consecutive losses despite revenue growth. The tax authority found that Coca-Cola Vietnam failed to adjust its business results to reflect market value ranges and imposed transfer pricing adjustments, reassessing taxable profits and collecting back taxes.
Therefore, under the subsidiary model, a foreign parent company must ensure full legal compliance to avoid joint liability and legal risks while securing a sustainable investment strategy in Vietnam.
DNP Vietnam Law Firm is committed to accompanying enterprises by providing comprehensive legal solutions to support effective and safe investment processes.
The above content is for reference purposes only. For further consultation, please contact us through the information below.
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