What ways are there to identify parent companies and subsidiaries within companies belonging to an economic group?

The way to identify parent companies and subsidiaries is specified in Clause 1, Article 8 of Circular 02/2014/TT-BTC, the content is as follows:

Identify the parent company

1. A company is considered the parent company of another company if it has the right to control through controlling financial and operating policies to obtain economic benefits from this company’s activities, regardless of the legal form or name of that company. The parent company has the right to govern financial and operating policies in the following cases:

a) Holding more than 50% of direct or indirect voting rights in Subsidiaries. In case there is a difference between the voting rights ratio according to the business registration certificate and the voting rights ratio calculated on the basis of actually contributed capital, the voting rights are determined according to the enterprise charter or by agreement between the parties;

b) Have the right to directly or indirectly appoint or dismiss the majority of members of the Board of Directors, Director or General Director of the subsidiary;

c) Have the right to cast a majority of votes at meetings of the Board of Directors or equivalent management level;

d) Have the right to decide on amendments and supplements to the Charter of the subsidiary;

d) Other investors agree to give the parent company more than 50% of voting rights;

e) Has the right to govern financial and operating policies according to agreed regulations.

Thus, the parent company can be identified through its power to govern financial and operating policies over other companies (considered subsidiaries) in the same economic group.

How to determine the voting rights of the parent company and its subsidiaries in an economic group?

The way to determine the voting rights of the parent company and its subsidiaries in the group must be based on point a, clause 5, Article 9 of Circular 202/2014/TT-BTC, the content is as follows:

Principles for determining the control rights and interest rates of the parent company and non-controlling shareholders in a subsidiary

…

5. Determine the control rights and interest rates of the parent company and non-controlling shareholders in some cases:

a) Determination of voting rights: The parent company can directly hold voting rights in the subsidiary through the amount of capital the parent company invests directly in the subsidiary.

– For example: Company A owns 2,600 common shares with voting rights out of a total of 5,000 common shares with voting rights outstanding in joint stock company B. Thus, company A directly holds 52% (2,600/5,000) of voting rights in company B. Accordingly, company A is the parent company of joint stock company B, joint stock company B is a subsidiary of company A. Ratio The interests of the parent company and non-controlling shareholders will be proportional to the capital contributions of the parties, unless otherwise agreed.

– For example: The parent company can indirectly hold voting rights at a subsidiary through another subsidiary in the group.

Joint Stock Company Z’s fully paid charter.

The direct voting rights of Company X at Joint Stock Company Y are:

(8,000 Shares/10,000 Shares) x 100% = 80%.

The direct voting rights of Company Y at Company Z are:

(600/1,000) x 100% = 60%.

Thus, the voting rights of joint stock company X and limited company Z include two parts: Direct voting rights are 20% (200/1,000); Indirect voting rights through joint stock company Y are 60%. The total voting ratio held directly and indirectly by company X is 80% of the voting rights of company Z. Accordingly, company Z is a subsidiary of company X.

Thus, according to the above regulations, it is completely possible to determine the voting rights of the parent company and its subsidiaries in a group. The voting rights of the parent company can be generated in two ways:

– Directly through the amount of capital the parent company invests directly in the subsidiary or;

– Indirectly through another subsidiary in the group (like the examples in the above regulations).

What is an economic group?

The concept of economic corporations is stipulated in Clause 1, Article 194 of the Law on Enterprises 2020, the content is as follows:

Economic groups, corporations

1. Economic groups and corporations belonging to economic sectors are groups of companies that have relationships with each other through ownership of shares, capital contributions or other associations. Economic groups and corporations are not a type of enterprise, do not have legal status, and do not have to register their establishment according to the provisions of this Law.