Clear understanding of each party’s rights and obligations is key to avoiding disputes and ensuring smooth 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
Article 195 of the Law on Enterprises 2020 defines a parent company as one that satisfies one of the following criteria:
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, the parent company is not legally liable for the subsidiary’s obligations unless it violates laws in management or operations.
- Holds more than 50% of the charter capital or ordinary shares of that company;
- Has the right to directly or indirectly appoint most or all members of the Board, Director, or General Director of the company;
- Has the right to decide on amendments or supplements to the charter of the subsidiary.
The Law on Investment governs the establishment of a subsidiary in Vietnam when a foreign-invested parent company initiates the process. 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: The Investment Law regulates subsidiary establishment in Vietnam by foreign-invested parent companies. Thus, the parent company must carry out investment registration procedures applicable to foreign investors.
- Case 2: If it owns under 51%, the parent company can follow 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.
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2. Purpose of Establishing a Subsidiary
- More effective management: Separating business segments helps the parent company monitor finances, performance, and risks more effectively.
- 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 non-legal entity that operates only in the same business field as its parent company. A subsidiary is a separate legal entity, over 50% owned by the parent company, and may operate in the same or different sectors. The subsidiary model requires the parent company to have strong management and oversight capabilities. This ensures efficient operations and alignment with the group’s overall strategy.
3. Is the Relationship Between Parent Company and Subsidiary a Related-Party Relationship?
The relationship between a parent company and its subsidiary falls within the scope of related-party transactions under Clause 2, Article 5 of Decree No. 132/2020/ND-CP of the Government on tax administration for enterprises engaged in related-party transactions. An enterprise becomes a related party when it directly or indirectly holds at least 25% of another enterprise’s charter capital or controls that enterprise’s production, business, finance, or personnel activities.
According to Article 195 of the Law on Enterprises 2020, a parent company controls its subsidiary by owning over 50% of charter capital or voting shares, appointing most or all key managers, or having the right to amend 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, to prevent conflicts of interest and ensure transparency in corporate governance, the law imposes several important restrictions on investment relationships between parent companies and subsidiaries, including:
4.1 Prohibition on reverse investment and cross-ownership between subsidiaries
The parent company must not receive any investment from its subsidiary, including capital contributions or share acquisitions.
Subsidiaries under the same parent company must not invest in each other through shareholding or capital contributions.
4.2 Restrictions on joint investment by state-owned enterprises holding 65% or more of charter capital
- 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, the parent-subsidiary relationship is considered a related-party relationship. This classification entails important legal consequences. First, enterprises are required to prepare Transfer Pricing Documentation—a complex compliance procedure requiring 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.
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