Tran Viet Quan (Mr.)
Lawyer, LL.M., MCIArb
Email: quan.tran@vlmlawfirm.com
Under Article 4.18 of the Law on Enterprise 2020 (LOE), capital contribution means the contribution of assets to the charter capital of the company, comprising an initial contribution for a company establishment or an additional contribution for an increase of the company’s charter capital. One of the assets allowed to make a capital contribution is the land use rights (LUR), which may be attached to house/building ownership.[1] This is also defined similarly in Article 3.22 of the Law on Land (LOL) 2024.[2] This article comments on certain circumstances where investors need to well understand the Vietnamese regulations to mitigate risks of transactions related to capital contribution by the LUR and house/building ownership.
In Vietnam, the lawful LUR and ownership of houses and land-attached assets will be certified by the certificate of LUR and ownership of houses and other land-attached assets (LURC). According to Article 35.1(a) of the LOE, the member/shareholder must transfer the LUR and/or the ownership of the house/building contributed as capital to the company. Additionally, Article 35.3 of the LOE also clarifies that a capital contribution is deemed to have been fully made/paid only when the legal ownership of the assets contributed as capital has been transferred to the company.
1. Risk of administrative sanction
Now, let’s see the first case in which a company raises its charter capital by receiving the LUR from a new or current member. The following steps will help the parties to do so:
- Firstly, the company and the member must sign a capital contribution agreement (CCA) and make this CCA notarized at a competent notary office.
- Secondly, an application which is detailed in Article 9.2 of Circular No. 24/2014/TT-BTNMT (amended by Article 2.1 Circular No. 14/2024/TT-BTNMT) must be prepared and submitted to the Land Registration Office for registering the capital contribution of LUR. Then, the land registration office will certify the change in the granted LURC as regulated by Article 79.2(b) of Decree No. 43/2014/ND-CP.
- Finally, the company must submit another application to the Department of Planning and Investment (DPI) to register the increase of charter capital based on the updated LURC.
As provided by Article 30.2 of the LOE, this company is responsible for registering the capital increase within ten (10) days from the date of the change which means ten (10) days from the date that the Land Registration Office certifies on the updated LURC that the LUR is transferred from the member to the company by capital contribution. Although Article 188.3 of the LOL 2013 states that the capital contribution of LUR will take effect from the time of registration in the cadastral book, this cadastral book is not a public document and is not given to the capital contributor.
Therefore, in order to determine the date of capital change, the company must rely on the certification date on the registration of capital contribution on the updated LURC. In fact, the certification date does not mean the date that the company receives the updated LURC. Not at all but the Land Registration Office mostly releases the updated LURC to the capital contributor 10 days or more after the certification date because of their workload or practical process. This results in the fact that the company will be subject to a fine of up to 20 million Vietnamese dong due to failure to promptly submit. In 2023, the clients of VLM Law Firm have faced up to this circumstance and could not convince DPI of such an objective situation to avoid administrative sanction.
2. Risk on the completion date of capital contribution
The second circumstance is that the member contributes capital to the company for charter capital increase by using not only its LUR but also its land-attached house. The same order and procedures as described above are applied for transferring the LUR and the ownership of the house to the company and registering the capital increase. However, with respect to the ownership transfer of the house, Article 12.2 of the Law on Housing (LOH) 2014 (as well as Article 12.3 of the LOH 2023)[3] provides that the house ownership shall be transferred from the date on which the house is handed over to the company unless otherwise agreed. Thus, the completion of capital contribution can be determined at two different times in this case. Particularly, it will be (i) the certification date of change on the updated LURC for the capital contribution of LUR and (ii) the handover date of the house as agreed by the member and the company for the capital contribution of the house, without depending on the certification date on the updated LURC. If the handover date is agreed upon prior to the certification date of the updated LURC, it can be invalid if the land registration office rejects the application for change registration of the LUR and the house ownership due to a rising dispute (which will be more detailed below). Moreover, while the LUR and land-attached house are mostly transacted to contribute capital at the same time, the LOL and the LOH regulate two different times for the completion of the transfer of LUR and of house ownership. This inconsistent nexus should be harmonized.
3. Risk of prohibition of the property rights transfer
The third scenario is also worth discussing that a third party can easily request the Land Registration Office to stop the registration of change to the granted LURC. Indeed, land users who contribute capital to the company by using its land use rights must satisfy all conditions in Article 188 of the LOL 2013, including “dispute-free”. Besides, according to Article 11a of Circular No. 24/2014/TT-BTNMT supplemented in Article 7.11 of Circular No. 33/2017/TT-BTNMT, one of the reasons that the Land Registration Office rejects the application for registration of change to the LURC is upon the receipt of a request to resolve disputes over land and land-attached assets from the agency competent. The practice in Vietnam shows that a third party can easily submit a petition relating to the land used for capital contribution and get a receipt of that submission from a competent agency. Then, such a party can attach such a receipt to its written request to stop the registration of change to the LURC of the land used for capital contribution. Meanwhile, the receipt of such submission does not mean the competent state will accept that dispute to begin the legal proceedings. This means the member and the company will bear losses and damages while waiting for the spurious or irrelevant dispute to be resolved (maybe 2 years or more). Our clients are stuck in such a situation. Also, this can be exemplified by Judgement No. 981/2022/HC-PT dated 22 December 2022 in which the Court of Appeal concluded that the behavior of the Land Registration Office Branch of District X, Ho Chi Minh City, in refusing to register the transfer of LUR based on Article 7.11 of Circular No. 33/2017/TT-BTNMT is illegal because the dispute is only a “loan contract dispute” and not a “dispute over land or land-attached assets.” What’s next? It is clearly another dispute to claim for losses and damages; however, it is surely time-consuming and does not easily prove the actual losses and damages in Vietnam.
4. Conclusion
This article is not aimed at proposing initiatives on harmonizing or altering real estate relevant regulations but at raising legal risks which investors must be aware of and need to have a lawyer engaged for mitigating such risks. Nevertheless, we also think about a scenario where (i) the completion date of capital contribution by using the LUR and the house ownership should be the handover date of the LUR and the house and such handover date must occur after the certification date of change to the LURC; and (ii) the refusing to register the transfer of LUR and/or house can be stopped after the Land Registration Office is provided by the petitioner with a court’s decision on applying an interim urgent measure of prohibition of the property rights transfer within 30 days upon the request of the Land Registration Office.
[1] Article 34 of the LOL
[2] The LOL 2024 will take effect from 01 January 2025.
[3] It will take effect from 01 January 2025
