Entering contracts before establishing a business in Vietnam

A contract signed before registering the establishment of a business is a specific business agreement, establishing basic rights and obligations for the co-owners of the business, concluded at a time before the business is established industry was established. However, in reality, many clients have difficulty understanding the concept, characteristics, and nature of this type of contract. To advise clients, Viet An Law Firm will present regulations on entering contracts before establishing a business in Vietnam in the article below.

Legal basis

• Law on Enterprise 2020;
• Civil Code 2015;
• Circular 96/2015/TT-BTC guiding corporate income tax;
• Circular 219/2013/TT-BTC guiding the Law on Value Added Tax, as amended and supplemented from time to time;
• Circular 45/2013/TT-BTC guiding the management, use, and depreciation of fixed assets, as amended and supplemented by Circular 147/2016/TT-BTC, Circular 28/2017/TT-BTC.

Features of contracts established by the enterprise before its establishment

According to Article 18 of the Enterprise Law 2020, contracts established before establishing an enterprise have the following characteristics:

• Entities participating in signing contracts: At the time of signing, the intended enterprise has not been established and does not have legal status. Therefore, contracts serving the establishment and for the benefit of the enterprise are engaged by the founders. According to Article 18 of the Enterprise Law, one of the parties involved in signing a contract before establishing an enterprise must be the person who founded the enterprise and can be between the founder of the enterprise and a third party or among the founders.
• Content of the contract: an agreement between the parties to establish a new company and through this organization to carry out production and business activities, usually including groups of relationships: pre-company, corporate internal affairs, and external relationships.
• Purpose of the contract: because the business has not been established but because of the requirements of the parties, these contracts are often signed to serve the business, not an individual or group of individuals.
• Establishment time: The contract must be established before the enterprise is established according to legal procedures.

Some cases entering contracts before establishing a business in Vietnam

Based on the practice of establishing contracts, some common types of contracts concluded before establishing a business in Vietnam can include:

• Lease contract for office, business location, headquarters: Most companies use rented houses as offices, business locations, or headquarters. The lease contract is an expression of the will of the lessee and the lessor, so the parties ensure that the terms are legal, not illegal, and the terms are strict and objective;
• Legal service contract with a law firm to carry out legal procedures before establishing a business;
• Legal service contract on intellectual property registration, investment license/investment policy approval, establishment, and operation license under specialized laws;
• Notarized translation service contract related to business establishment.

Contract legal consequences after business registration

In addition to allowing contracts to be established before registering to establish a business, Article 18 of the Enterprise Law 2020 also has separate regulations on the rights and obligations of the parties to the contract after being granted an Enterprise Registration Certificate, accordingly:

In case of being granted an Enterprise Registration Certificate

The enterprise must continue to exercise the rights and obligations arising from the signed contract and the parties must carry out the transfer of contractual rights and obligations according to the provisions of the Civil Code, except in the case of another agreement.

In cases where the enterprise is not granted an Enterprise Registration Certificate

• Because there is no enterprise standing up to implement the content of the previously signed contract, to ensure the legitimate interests of the parties, the person signing the contract must be responsible for implementing the terms of the contract;
• When there is the participation of others to establish a business, they are jointly responsible for implementing the previously established contract;
• This regulation is intended to ensure the rights of the other party when entering into a contract, accordingly, their rights and obligations are still guaranteed whether the business is established or not.

Can business contract costs established before establishment be deducted from business expenses?

Deduction of corporate income tax

According to Article 4 of Circular 96/2015/TT-BTC, enterprises can deduct all expenses when determining income subject to corporate income tax if they meet the following conditions:

• Actual expenses incurred related to production and business activities of that enterprise.
• Expenses must have enough legal invoices and documents according to the provisions of the law.
• Expenditures have non-cash payment documents if there are invoices for each purchase of goods and services with a value of 20 million VND or more (including VAT).

At the same time, according to Circular 45/2013/TT-BTC, enterprise establishment costs are not intangible fixed assets but are gradually allocated to the enterprise’s business expenses over a maximum period not exceeding 3 years according to the provisions of the Law on Corporate Income Tax.

Therefore, for expenses incurred before being granted the Enterprise Registration Certificate, if there are full invoices and documents according to regulations, serving the production and business activities of the enterprise, they can be accounted for deductible expenses when calculating corporate income tax, expenses are gradually allocated to business expenses, no more than 3 years from the time the business begins operations.

Value-added tax deduction

According to Circular No. 219/2013/TT-BTC, as amended and supplemented by Circular 65/2015/TT-BTC, before establishing a business, founders can have written authorization for organizations and individuals to pay for several expenses related to establishing a business, the business can declare and deduct input VAT according to these invoices and make payments to authorized entities via banks for invoices valued at 20 million VND or more.

Thus, before establishing a business, the founders of the business have written authorization for a third party with purchase invoices bearing their name, the enterprise does not have to adjust the invoice and is considered a reasonable and valid document to account for deductible expenses when determining VAT if these invoices meet the above conditions.

Notes for businesses

When entering into and implementing contracts established before establishing a business, the parties should pay attention to the following issues to limit risks and ensure their legitimate rights and interests:

• The content of the contract must be agreed upon by the parties voluntarily, honestly, and in good faith, and must not be contrary to morality or prohibited by law;
• Note the valid conditions of the contract to avoid the contract falling into invalidity;
• The form of the contract must be established according to the provisions of law. Some contracts, if required, must be notarized.
• The time to establish the contract must take place before the Enterprise Registration Certificate is issued by a competent state agency;
• The parties also need to pay attention to the entities that are entitled to establish contracts, rights, and obligations in the case of being granted an Enterprise Registration Certificate and vice versa to ensure the best legitimate rights.

Contract consulting services of Viet An Law Firm

• Consulting with clients on the subject when entering contracts before establishing a business in Vietnam;
• Drafting the content of contracts established before business registration for clients;
• Consulting on the responsibility to fulfill obligations to perform contracts established before registering to establish a business;
• Answer the notes that need to be paid attention to when making a contract to limit risks and ensure the rights and interests of the parties;
• Business registration services, and investment registration for businesses.

Clients who need advice on legal issues regarding contracts, please contact Viet An Law Firm for the best support.