The attraction and expansion of foreign direct investment (FDI) capital play a significant role in promoting sustainable development and enhancing the competitiveness of enterprises. One of the solutions commonly adopted by enterprises is the use of retained earnings to increase the charter capital of an FDI enterprise for reinvestment purposes.
Instead of distributing all profits to shareholders or investors, an FDI enterprise may retain part or all of its undistributed profits to support its business and production activities. Reinvestment through retained earnings not only enables the enterprise to expand its operational scale and upgrade technology, but also reduces borrowing pressure, minimizes financing costs, and enhances proactiveness in management and operations.
Through the article below, Siglaw provides a general overview of the procedures for using retained earnings to increase the charter capital of an FDI enterprise.
What is retained earnings?
Retained earnings are the portion of a company’s profits remaining after it has fulfilled its obligations relating to expenses, taxes, and other payables, but which has not yet been distributed to shareholders or capital contributors. This is a source of funds retained by the enterprise for its future business plans and development.
Reasons for retaining earnings
Reinvestment in Business Operations
Retained earnings are often used to serve the development objectives of an FDI enterprise, such as:
- Expanding production and business operations;
- Investing in technology innovation;
- Researching and developing new products;
- Purchasing machinery and equipment;
- Implementing new investment projects.
Financial Risk Provision
An FDI enterprise may retain earnings to establish a reserve fund for dealing with risks such as economic downturns, market fluctuations, or increasing competitive pressure.
Increase in Equity Capital
Retained earnings may also be used to supplement equity capital, thereby improving financial capacity and the ability to raise capital from investors or credit institutions.
Significance of Retained Earnings
Retained earnings are an indicator reflecting the financial capacity and growth potential of an enterprise. Enterprises with a high retained earnings ratio are generally assessed as having strong growth potential, a stable financial foundation, and a high level of adaptability to market fluctuations.
Can Retained Earnings Be Used to Increase the Capital of an FDI Enterprise?
Pursuant to Clause 1, Article 28 of Decree No. 31/2021/NĐ-CP guiding the Law on Investment, the registered investment capital for an investment project is determined based on the following sources:
- Capital contributed by the investor in the form of cash, assets, machinery, equipment, technology, intellectual property rights, and other lawful assets;
- Capital mobilized for the implementation of the investment project;
- Profits retained by the investor for reinvestment purposes.
Accordingly, under the above regulation, an FDI enterprise may fully use retained earnings to supplement investment capital for the project.
Dossier for Amending the IRC upon Increasing Investment Capital by Retained Earnings
The dossier for amending the Investment Registration Certificate (IRC) includes:
- An application for amendment of the Investment Registration Certificate;
- A report on the implementation status of the investment project up to the time of amendment;
- An investment project monitoring and evaluation report;
- A decision of the investor on amendment of the investment project (for organizations) or an equivalent document for individuals;
- A copy of the current Investment Registration Certificate;
- Supporting explanatory documents related to the amended contents;
- Other documents required by law (if any).
- Documents evidencing the investor’s financial capacity include one of the following:
- The latest annual financial statements;
- A financial support commitment from the parent company;
- A financial support commitment from a credit institution;
- A financial capacity guarantee;
- Or other documents proving financial capacity.
Processing time: approximately 10-15 working days. After approval, the investor shall contribute the capital to the investment capital account in accordance with the prescribed timeline.
Dossier for Amending the ERC upon Increasing Charter Capital of an FDI Company by Retained Earnings
The dossier for changing the Enterprise Registration Certificate (ERC) includes:
- A resolution/decision of the company owner for a single-member limited liability company; or a resolution/decision and meeting minutes of the Members’ Council/General Meeting of Shareholders for the relevant enterprise type regarding the increase in charter capital;
- A notice of enterprise registration content change bearing the signature of the legal representative;
- The list of members for a multi-member limited liability company or the list of partners (if there is any change in capital contribution ratio);
- The amended Investment Registration Certificate reflecting the new investment capital amount.
Processing time: 03–05 working days.
In case of refusal, the competent authority must provide a written response stating the reasons. For any further information, please contact Siglaw Firm for comprehensive free consultation at:
Headquarters in Hanoi: No. 44/A32 – NV13, Geleximco Area A, Le Trong Tan Street, Tay Mo Ward, Hanoi, Vietnam.
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