In the parent-subsidiary relationship, clearly understanding the rights and obligations of each party is essential to avoid disputes and ensure effective business operations.
DNP Viet Nam Law Firm provides key legal considerations for parent and subsidiary companies under the provisions of the Law on Enterprises 2020.
1. Definition of Parent and Subsidiary Companies
1.1 Definition
According to Article 195 of the Law on Enterprises 2020, a company is considered the parent of another company if it satisfies one of the following criteria:
- Holds more than 50% of the charter capital or ordinary shares of that company;
- Has the right, directly or indirectly, to appoint the majority or all members of the Board of Directors, the Director, or General Director of that company;
- Has the right to decide on amendments or supplements to the charter of the subsidiary.
The subsidiary is a separate legal entity but remains under the control of the parent company. Each subsidiary can have only one parent company. However, such control does not mean that the parent company is legally liable for the obligations of the subsidiary, except in cases where the parent company breaches legal regulations in managing and operating the enterprise.
1.2 For a company as an FDI (Foreign Direct Investment) enterprise:
In cases where the parent company is a foreign-invested economic organization (FDI), the establishment of a subsidiary in Vietnam is governed by the Law on Investment. Specifically, under Article 23 of the Law on Investment 2020, an economic organization with foreign investment capital must comply with investment conditions and procedures based on the ownership ratio:
- Case 1: If the parent company holds 51% or more of the subsidiary’s charter capital, the establishment of the subsidiary is considered a foreign investor’s investment activity. Thus, the parent company must carry out investment registration procedures applicable to foreign investors.
- Case 2: If the ownership ratio is less than 51%, the parent company may proceed with investment procedures as a domestic investor.
A typical example of a parent–subsidiary structure in foreign direct investment in Vietnam is Samsung Electronics Group (South Korea). Currently, Samsung directly holds 100% ownership in four subsidiaries operating in Vietnam, including:
- Samsung Electronics Vietnam (SEV, established in 2008 in Bac Ninh);
- Samsung Electronics Vietnam Thai Nguyen (SEVT, established in 2013);
- Samsung Display Vietnam (SDV, established in 2014); and
- Samsung HCMC CE Complex (SEHC, established in 2014 in Ho Chi Minh City.
2. Purpose of Establishing a Subsidiary
- More effective management: Separating business segments allows the parent company to better monitor the finances, performance, and risks of each area.
- Increased specialization: Each subsidiary focuses on a specific industry, operating more efficiently than the “multi-sector under one roof” model.
- Promoting internal competition: Multiple subsidiaries in the same sector can engage in healthy competition, driving innovation and growth.
Compared to a branch, a subsidiary differs significantly in terms of legal status and operational scope. A branch is a dependent unit without legal person status and may only conduct business in the same field as the parent company. In contrast, a subsidiary is a separate legal entity, with the parent company holding more than 50% of its charter capital, and may operate in the same or different business sectors. However, the subsidiary model requires the parent company to possess strong management and oversight capabilities to ensure efficient operation and alignment with the group’s overall strategy.
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3. Is the Relationship Between Parent Company and Subsidiary a Related-Party Relationship?
The relationship between a parent company and its subsidiary falls within related-party transactions. This is specified under Clause 2, Article 5 of Decree No. 132/2020/ND-CP. The decree concerns tax administration for enterprises engaged in related-party transactions. When an enterprise holds at least 25% of the charter capital of another, they are related parties. This applies whether the holding is direct or indirect. It also applies if the enterprise controls or directs the other enterprise’s activities. These activities include production, business, finance, or personnel.
Pursuant to Article 195 of the Law on Enterprises 2020, a parent company is defined as an enterprise that has control over its subsidiary through one of the following means: owning more than 50% of the subsidiary’s charter capital or voting shares; directly or indirectly appointing the majority or all members of the Board of Directors, Director or General Director; or having the right to amend and supplement the subsidiary’s Charter. Accordingly, the relationship between a parent company and its subsidiary fully satisfies the legal conditions to be classified as a related-party relationship.
4. Key Restrictions on Foreign-Invested Parent-Subsidiary Structures
According to Clauses 2 and 3, Article 195 of the Law on Enterprises 2020, the law prevents conflicts of interest. It ensures transparency in corporate governance. The law imposes several important restrictions on investment relationships. These restrictions apply between parent companies and subsidiaries, including:
4.1 Prohibition on reverse investment and cross-ownership between subsidiaries
The parent company does not allow a subsidiary to invest back into it under any form, such as capital contribution or share acquisition.
The parent company does not permit subsidiaries under the same ownership to hold shares or contribute capital to each other.
4.2 Restrictions on joint investment by state-owned enterprises holding 65% or more of charter capital
If a state-owned enterprise holds at least 65% of charter capital or voting shares in the parent company, the subsidiaries cannot jointly conduct the following:
- Contributing capital to establish a new enterprise;
- Jointly acquiring shares or capital contributions of existing enterprises;
- Jointly acquiring shares or capital contributions from existing shareholders or members of other enterprises.
(Refer to Article 12 of Decree No. 47/2021/ND-CP)
4.3 Interest expense limitation at 30% of EBITDA
As analyzed above, we consider the parent-subsidiary relationship a related-party relationship. This classification entails important legal consequences. First, the authorities require enterprises to prepare Transfer Pricing Documentation—a complex compliance procedure that requires significant time and resources. Notably, the deductible interest expense is capped at 30% of EBITDA (pursuant to Point a, Clause 3, Article 16 of Decree No. 132/2020/ND-CP). This provision imposes particular pressure on enterprises in the investment phase or those yet to generate profits.
4.4 Restrictions on real estate ownership
If the parent company is a foreign-invested enterprise, the subsidiary it establishes will also be deemed a foreign-invested enterprise. Accordingly, any acquisition or ownership of real estate must comply with the regulations applicable to foreign-invested enterprises (FDIs).
Pursuant to Articles 159 and 160 of the Law on Housing 2014, foreign-invested enterprises may only acquire housing by investing in housing development projects or purchasing commercial housing. Therefore, the subsidiary is not permitted to purchase or be named as the owner of residential apartments (red books) transferred from Vietnamese individuals.
DNP Vietnam Law Firm specializes in providing legal consultancy on foreign investment matters, including the establishment of subsidiaries, corporate governance, and compliance with Vietnamese laws to ensure efficient and lawful business operations.
The information above is for reference only. If you require further details, please contact us using the information below.
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