Strategic Advisory on the Establishment of a Local Joint Venture in Vietnam

1. Case Overview

Domestic manufacturing company A, as part of diversifying its overseas markets, sought to establish a new corporation in Vietnam through a joint venture with a local Vietnamese company and a Chinese partner company. The joint-venture corporation was to be established in the form of a limited liability company (LLC), and it was a matter accompanied by various legal issues in practical terms, including the method of injecting additional funds beyond capital, royalty agreements related to technology transfer, and the issue of temporary-address registration. In particular, it was a matter requiring multifaceted review that took into account Vietnamese law and the special-relationship tax-law issues with China.

The key issues in this case were as follows.

First, because in the form of a limited liability company shares cannot be issued, "issuance at a premium" is not legally permitted, and accordingly a strategy was needed as to how to handle the injection of funds beyond capital.

Your Legal Team analyzed in advance the method of injecting capital surplus in the form of a grant (non-repayable contribution) and the resulting tax burden, and designed a structure that could minimize the actual investment risk.

Second, there was a complex situation in which the double-taxation avoidance agreement (DTA) and transfer-pricing issues overlapped in relation to the royalty agreement under which royalties were to be paid to the Chinese partner company as consideration for the technology transfer.

Accordingly, we provided guidance, together with the royalty tax rates based on Vietnamese and Chinese local law, by specifically organizing the related tax risks so that a safe contract conclusion would be possible.

Third, in response to the inquiry as to whether "temporary-address registration" was possible in a situation where corporate establishment was needed before securing a local factory site, we guided the practical possibility under Vietnamese practice and the subsequent address-change procedure, and on this basis responded so that a stable corporate-establishment procedure would be possible.

This entire process was carried out through close cooperation between Your Legal Team and the Vietnamese partner law firm, and we provided highly effective legal support by linking real-time advice with local attorneys.

As a result, Company A established a legal foundation on which it could set up the Vietnamese joint-venture corporation under a legally stable structure, and was able to minimize future risks through advance responses to capital and royalty agreements and tax issues. In particular, it is highly significant in that, as a Foreign-Invested Company, it received clear and specific guidance on matters frequently encountered with a Vietnamese corporation-such as the choice of corporate form, methods of fund procurement beyond capital, and royalty and tax issues-thereby eliminating uncertainty in the early stage of the business. In addition, the transfer-pricing review and tax-risk response that took into account the special relationship with the Chinese partner can be evaluated as a model case of a multinational joint-venture structure, as strategic advice that also kept in mind the possibility of a future tax audit.