Distinguish between subsidiaries and affiliates of a company in Vietnam

Currently, “subsidiary company” and “affiliated company” are quite popular, as well as confusing to many people. How does the current law regulate “subsidiaries” and “affiliated companies” and how to distinguish “subsidiaries” and “affiliated companies”? The following article of Viet An Law will help you better understand and distinguish these two types of companies.

Legal basis

• Enterprise Law 2020.

Regarding subsidiaries of a company in Vietnam

Subsidiary concept

• Subsidiary company is a company in which 100% of charter capital is invested by another company or holds dominant shares or contributed capital. Subsidiaries are organized in the form of a joint stock company, a single-member limited liability company, a multiple-member limited liability company, a joint venture or an offshore company in accordance with the provisions of this Law.
• “Subsidiary” means an enterprise established and operated by investing 100% of charter capital or owning shares or controlling capital contribution of another company, also known as “parent company”. This company is provided with business benefits from the association contract performed with the parent company and at the same time performs the business tasks assigned by the parent company and performs its rights and obligations.

To illustrated, we can imagine as follows: company A is a subsidiary of company B when company A is established with 100% of company B’s investment capital or is held by company B, dominant capital. Company A will hold business benefits from company B and company A must perform the rights and obligations assigned by company B (company B is also known as company A’s parent company). .

To identify and understand more about the parent company and its subsidiaries, refer to the article Identify parent company and subsidiary company in Vietnam of Viet An Law.

Subsidiary characteristics

Pursuant to Article 195 of the Enterprise Law 2020, a subsidiary has the following characteristics:

• Form: subsidiary company is organized in one of the following forms: limited liability company, joint venture company or overseas company but must comply with the law.
• Subsidiaries are not allowed to invest in buying shares or contribute capital to the parent company;
• Subsidiaries of the same parent company may not concurrently contribute capital or purchase shares for cross-ownership.
• Subsidiaries having the same parent company (this parent company owns at least 65% of state capital) are not allowed to jointly contribute capital, buy shares of other enterprises or establish new companies.

Rights and responsibilities of subsidiary companies

• Subsidiaries with 100% charter capital owned by the parent company are responsible for fully implementing the parent company’s instructions on business strategy and financial management. Subsidiaries must fully comply with the agreements in the charter, internal rules and regulations of the group of companies. Subsidiaries are responsible for implementing economic contracts entrusted by the parent company, and coordinating in organizing commercial activities with the parent company and other companies in the group.
• Subsidiaries in which shares are held by the parent company, with dominant contributed capital, operate more independently than subsidiaries in which 100% share capital is held by the parent company and are responsible for performing obligations arising from business agreement with the parent company.

Regarding affiliated company in Vietnam

Affiliate company concept

• Associate company is a company in which the Company holds shares, the contributed capital is not controlling according to the provisions of law.
• A company voluntarily participating in association is a company that does not hold shares or contributed capital of the Company but voluntarily becomes an associate member on the basis of close relationship in terms of economic, technological, market interests, social services and other business services. Companies are bound by rights and obligations with other member companies under association contracts or agreements between those companies.
• Shares, non-dominant capital contributions in an associate are those in which the company holds shares or capital contribution of 50% or less of the total share capital or the total number of shares of the company.

Thus, an associate can be understood as a type of company established by at least two economic entities (two companies) and both of which account for less than 50% of the company’s share capital.

Most affiliated companies exist in the following form: at least two different companies are subsidiaries of a parent company. And there is one entity that owns shares less than the majority of the shares of another. In general, the associate company model is established for the purpose of bringing profits and capital of the affiliated parties to carry out mutually beneficial business activities.

Affiliated company characteristics

From the above concepts, it can be seen that an associate company has the following characteristics:

• An affiliated company is established by two or more entities with the status of an enterprise. The association is made through an association contract, business cooperation contract, company charter, minutes of share contribution, capital contribution or other forms agreed and signed by the parties in the partnership relationship.
• The parties participating in the association relationship contribute assets to form the company’s capital contribution, which can be in kind or in use value, but must ensure that no company holds more than 50% of the share capital to have dominion and control.
• Associate companies are established for the purpose of jointly conducting business activities for certain purposes as agreed upon by the members.

An associate can be said to be an agreement between companies to jointly conduct business activities, generate profits and distribute profits according to the ownership ratio of each company after fulfilling its obligations. When companies are linked together, they do not have the right to govern capital or governance like other models where the parties are equal and independent of each other in terms of organization and operation in carrying out commercial activities.

Distinguish between subsidiaries and affiliates

Based on the analysis of the above concepts and characteristics, we can distinguish “subsidiaries” and “affiliated companies” as follows:

Above is the analysis of subsidiaries, associates and criteria to distinguish these two types of companies. It can be seen that the affiliated company is a popular business model but has not been specifically recognized by legal documents on related legal issues.

If you have a need for more advice on issues related to the model of subsidiaries and affiliates, please contact Viet An Law Firm for more specific and detailed advice on this issue.