Important points to note when suspending a company's business activities
- Masaya Sakasai
Some Vietnamese companies that have faced difficulties due to the negative effects of the COVID-19 pandemic have filed and suspended their business activities as a waiting period until the economy recovers or in preparation for company liquidation procedures. There are many places where this is done. However, some businesses, even when their business situation is in dire straits, continue to operate because they are unaware of the procedures for suspending business activities, which only worsens the situation. In this article, we will explain the notifications and important points to note when suspending a company’s business activities.
1. What is suspension of business activities?
Suspension of business activities is not defined in the Vietnam Enterprise Law (hereinafter referred to as the “Enterprise Law”), but it is understood to mean the temporary suspension of business activities for a certain period permitted by law(1) to be done. Although there is no legal definition, it is sometimes called “dormancy.”
2. Points to note when suspending business activities
2.1. Obligation to notify company registration authority of suspension of activities
According to the Enterprise Law, companies are required to notify the company registration authority where the company is located in writing at least three business days before the date on which it actually ceases to operate. In addition, even if activities are to be resumed before the notified scheduled suspension period, written notice must be given at least three business days prior to the restart date. The following points should be noted when companies suspend business activities. The points to note when suspending business activities are as follows.
・Although there is no limit to the number of times a business activity can be suspended, the maximum period of suspension that can be granted with a single notification is one year(2). After one year, if the enterprise wishes to extend the suspension of its activities, it must send a written notice to the Registrar of Companies in the place where the enterprise is located within the above-mentioned deadline.
-When a company applies for temporary suspension of activities, the government changes the legal status of the company’s head office, all branches, representative offices, and business bases to dormant status in the national enterprise registration information system(3). Companies only need to apply for suspension of activities at their head office; there is no need to submit application forms for suspension at each branch office, representative office, management base, etc.
・If you wish to resume your activities before the notified scheduled suspension period, you must notify the company registration authority in the area where your company is located in writing at least 3 business days before the restart date(4). If a company wishes to resume operations on the day following the end of the notified suspension period, the company does not need to carry out any formalities with the business registration authority. After the suspension period ends, the legal status of the company will be returned to normal “active” status by the authorities.
・If the enterprise fails to properly notify the business registration authority about the date and period of suspension of activities and the date of resumption when resuming operations before one year has passed since the suspension of activities, or if the notification is delayed, the enterprise shall be fined VND 10,000,000. A fine of up to 15,000,000 yen(5) will be imposed, and the above-mentioned procedures for notifying the suspension and resumption of business activities will have to be retroactively implemented.
2.2. Obligations to workers and third parties
a. Obligations to workers
During the period of suspension of activities, companies can take measures such as temporarily suspending the performance of labor contracts, reducing salaries, or canceling labor contracts by agreement with workers.
-Suspension of performance of labor contracts: Companies can agree with workers to suspend performance of existing labor contracts or reduce salaries. In the case of a suspension of the performance of a labor contract, the enterprise is not required to pay salaries or allowances during the period of suspension of the performance of the labor contract, unless otherwise agreed.
・Salary reduction: If the worker agrees, it is possible to reduce the salary stipulated in the labor contract. In this case, the new salary must not be less than the local minimum wage.
・Cancellation of agreement: If this measure is taken, the company must fully fulfill its obligations such as paying the employee severance pay and the amount equivalent to unused annual paid leave when terminating the labor contract(6).
If a company’s business suspension is strategic for future business resumption, if it is possible to agree to a temporary suspension of labor contracts or a reduction in wages, labor relations with workers can be improved while saving personnel costs during the suspension period. It is believed that this will enable the company to resume operations more smoothly after the suspension period ends. If it is unclear how long the suspension of activities will last, or if the company is in the waiting period for dissolution but has not yet determined the time or plan for liquidation, a labor contract will be concluded before the suspension of activities unless there are special circumstances. In many cases, it is more appropriate to terminate the agreement(7).
If the labor contract is maintained without taking these measures, the enterprise must continue to fulfill its existing labor contract obligations during the period of suspension of activity(8).
b. Obligations to third parties
During the suspension period, a company will not be automatically released from its debts and obligations to third parties, unless otherwise agreed between the company and its creditors and customers(9). Therefore, we recommend that companies, especially those with long-term lease contracts for buildings and offices, reach an agreement with their landlords to reduce the rent during the suspension period.
2.3. Business registration tax payment obligation, tax declaration/payment obligation
The point of suspension of activities can be decided by the company according to the needs and actual situation of the company. Furthermore, companies whose activities are suspended are not obligated to file tax returns. However, regulations differ for each tax item, and the obligation to declare and pay taxes may arise depending on the point at which the activity ceases, so it is necessary to understand each and respond appropriately(10).
・Personal income tax (hereinafter referred to as “PIT”): If a company generates taxable income for personal income tax by paying salaries, etc. to workers during the filing period during which the company is suspended, it is necessary to withhold, declare, and pay PIT. It is necessary to determine whether or not to file and pay tax for each quarter (or month) and final tax return. If a company does not pay salaries, etc. to its workers, it does not have the above obligations regarding PIT.
・Value-added tax (hereinafter referred to as “VAT”): If a company is dormant throughout the quarterly (or monthly) filing period, it is not required to file or pay the tax, but if it is temporarily active throughout the filing period, it is not required to file a tax return. It becomes necessary. In addition, even if you pay rent etc. and incur input VAT during the suspension of activities, if sales VAT does not incur, then the next term
Since input VAT can be carried over and declared in the next quarter or month, there is no need to declare it during the suspension period.
・Corporate tax (hereinafter referred to as “CIT”): If a company suspends its activities throughout the fiscal year, it is not required to declare or pay, but if it is active even temporarily or if it pays wages, rent, etc. to workers. must be declared and paid(11). For foreign companies, an accounting audit is also required when filing corporate tax returns.
・Business registration fee: Companies engaged in business activities such as service/product sales, manufacturing, etc. are required to pay a business registration fee by January 30th every year. If a company ceases to operate during the calendar year (January 1 to December 31), it is not required to declare and pay business registration fees. On the other hand, if a company is not inactive during the entire calendar year, that is, if it was active even temporarily during the calendar year, it must declare and pay the business registration fee for that year.
Based on the above, from the perspective of minimizing tax obligations, it would be worth considering suspending business activities for one month, one quarter, or one year in a calendar year.
Suspending business activities is also considered to be a powerful option when restructuring a business in difficult business conditions. However, in order to avoid violations of laws and regulations, companies should pay attention to notification deadlines when starting, extending, or resuming suspension of activities, and should also be aware of their obligations to workers and third parties based on long-term business prospects. It is necessary to take into consideration the obligation to declare and pay taxes.
*This article is translated by Yarakuzen.
1 Article 41, Paragraph 1 of Decree 01/2021/ND-CP dated January 4, 2021 on enterprise registration
2 Article 66, Paragraph 1 of Decree 01/2021/ND-CP dated January 4, 2021 on enterprise registration
3 Article 66, Paragraph 1 of Decree 01/2021/ND-CP dated January 4, 2021 on enterprise registration
4 Article 66, Paragraph 1 of Decree 01/2021/ND-CP dated January 4, 2021 on enterprise registration
5 Decree No. 122/2021/ND-CP dated December 28, 2021 stipulating penalties for administrative violations in the planning and investment field, Article 50, Paragraph 1, Point c
6 Labor Law Article 46, Paragraph 1
7 Labor Law Article 34, Paragraph 3
8 Enterprise Law Article 206, Paragraph 3
9 Enterprise Law Article 206, Paragraph 3
10 Paragraph 2 of Article 4 of Decree No. 126/2020/ND-CP dated October 19, 2020, providing detailed guidance on the Tax Administration Law 2019.
11 Article 4, Paragraph 3 of Circular No. 302/2016/TT-BTC dated November 15, 2016 issued by the Ministry of Finance on Corporate Tax Guidance