Capital contribution in the form of land use rights – an apple of discord between Law on Enterprise and Land Law
Land use right (LUR) is a special type of intangible asset, which can be contributed for establishment of an enterprise pursuant to Vietnamese laws. This type of valuable asset has created a high position as well as remarkable strength for Vietnamese investors to a joint venture company although their financial resources are normally less than those of their foreign partners. However, the treatment to the LUR contributed to an enterprise is various among regulations on land and the same on enterprises, and this has caused much confusion and difficulty for enterprises.
Both the Law on Enterprises (LoE) and the Land Law allow a party to contribute capital to an enterprise in the form of a LUR. Both these Laws provide that in such case, LUR shall be transferred from the contributing party to the enterprise and the latter shall be granted with a certificate for land use right (LURC). It would be logical if a party contributes an asset to an enterprise, such asset shall be under the ownership of the enterprise, which shall in turn have the exclusive right to use and dispose of such asset. It is similar to the LUR. In other words, when an enterprise is granted with LURC, the contributing party shall no longer have any right over the contributed land, but the capital proportion hold by this party in the enterprise.
However, the above essential principle is disclaimed by Article 131 of the Land Law. According to it, capital contribution in the form of the LUR by one party may be terminated by a mutual agreement of the concerned parties, and in case of a joint venture with foreign party(ies), such termination must be approved by the provincial People’s Committee. Then, the contributing party shall be entitled to use such land during the remaining land use term granted to the enterprise.
Article 131 of the Land Law has caused much controversy and confusion to stakeholders and state authorities, such as:
If the parties agree to terminata the capital contribution by LUR prior to expiration of the land use term, whether the contributing party shall cease to be a member of the enterprise or its capital proportion shall be reduced? For example, a party contributed its LUR to an enterprise for 20 years and the enterprise has already been granted with the LURC for the same period. In the 10th year, the parties agree to terminate their agreement on capital contribution in the form of LUR and the land will be given back to the contributing party for remaining 10 years. It is not very clear how this case would be handled under the current laws. Someone may claim that as the contributed property has been returned to the contributing party, the qualification of such party as a member of the enterprise shall be ceased. Other may opine that in this case, the enterprise already used the land during the first 10 years, so the value of 10-year LUR shall become an equity proportion of the contributing party in the enterprise. This proportion shall be reduced merely on pro rata basis with the value of the LUR in the remaining land use term (i.e. 10 years). As a result, the charter capital of the enterprise will be reduced accordingly.
The above reasoning appears to be contrary to the regulations of the LoE on capital contribution. In particular, Article 29 of the LoE provides that shares or assets used for capital contribution, which are other than Vietnamese Dong or freely convertible foreign currency or gold, shall be deemed as completely contributed only after the lawful ownership of such assets has been transferred to the enterprise. In case of LUR, the capital contribution obligation of a party shall be completed when LURC is granted to the enterprise. Therefore, the way of disposal of the land (such as assignment of LUR to any other party or third party) shall not affect the equity proportion of the contributing party. It would be fine if the enterprise does not wish to use the land and further assign the LUR to the contributing party for its use based on an assignment agreement at an assignment fee, then such equity proportion of the contributing party shall remain unchanged. However, under Article 29 of the LoE, it is unreasonable for a party to revoke its LUR as stipulated in Article 131 of the Land Law.
It is clear that regulations on land and land use rights recognize any termination of capital contribution in the form of the land use right by a party. However, pursuant to Article 42 of the LoE, a party of a limited liability company shall not be entitled to reduce or get back its capital contribution committed to the charter capital. Such party just has the right to (i) transfer its equity proportion to other members of the enterprise, or any outsiders if the other members do not purchase such equity proportion; or (ii) requests the enterprise for purchasing its equity proportion just in case such party votes against amendment of the enterprise’s charter with respect to rights and obligations of the members, members’ council, re-organization of the enterprise and other particular cases stated in the enterprise’s charter. And, business registrars or licensing authorities may not accept registration for reduction of the contributing party’s equity proportion in the above case. Furthermore, as far as we know, it would also be very difficult indeed to register a reduction of an enterprise’s charter capital.
Besides, in case of termination of capital contribution in the form of LUR under Article 131 of the Land Law, the important issue needs to be resolved is a method for calculation of the remaining value of the land use rights for the remaining land lease term. As at present there has not yet been relevant regulation, we understand that this shall depend wholly on any agreement of the concerned parties. However, the calculation of LUR value in this case may affect the equity proportion of the contributing party and then, on the charter capital of the enterprise, we are of the opinion that it should be expressly specified in the laws.
The above illustrates the importance of a consistency between different laws. Otherwise, the enterprises shall face many troubles in making and performing its relevant decisions when different state authorities (such as departments of natural resources and environment and planning, and investment authorities) do not get in tune with them.
Vision & Associates