Converting household businesses into enterprises

According to the statistical information page of the Ministry of Industry and Trade, Vietnam currently has nearly 5 million business households (“HKD”), 10 times more than the number of enterprises (“DN”) is active. Also according to a survey by the Central Institute for Economic Management Research, 11% of business households are subject to conversion into businesses, meaning they regularly employ 10 people or more.

However, the number converting business households into enterprises is only about 6.5%. So what is the reason why business households are not “interested” in converting into a company? ANT Legal will analyze legal issues to find the above causes.

Incentives when converting a business household into an enterprise

According to Article 16 of the Law on Support for Small and Medium Enterprises, when a business household converts into an enterprise, it will receive the following incentives:

• Receive free advice and guidance on the order, procedures, and documents to register a business;
• Receive free advice and guidance on the order, procedures, and documents to register for business eligibility certification for conditional business lines (if any);
• Exemption from business registration fees and fees for providing business information for the first time first;
• Free appraisal, fees, and first-time business license fees for conditional business lines;
• Exemption from license fees for a period of 03 years from the date of issuance of the first Business Registration Certificate;
• Free consultation and guidance on tax administrative procedures and accounting regimes within the term 03 years from the date of issuance
• First-time business registration certificate;
• Exemption and reduction of corporate income tax for a limited period of time according to the provisions of law on corporate income tax;
• Exemption and reduction of land use fees for a limited period according to the provisions of law on land.

In addition, a business household converted to a company will also enjoy the privileges of a legal entity such as:

• Having a bank account, getting loans with more preferential interest rates than individuals;
• Has a legal seal;
• Is able to operate many branches, representative offices, and business locations nationwide. Can set up branches and representative offices abroad;
• Employ unlimited numbers of workers, including foreigners;
• Brand reputation is enhanced compared to business households;
• Can mobilize capital in many forms: Increasing capital, admitting more members, shareholders, borrowing from banks and organizations other organizations;
• More convenient in goods trading activities with foreign countries;
• Tax deductible;
• Issued value-added invoices to customers who need VAT invoices.
• The procedure for converting a business household into an enterprise is difficult or difficult easy
• In fact, the procedure for converting a business household is two double steps including: establishing a company and closing a business household. But instead of having to do these 2 steps with a total time of about 8 working days, businesses only need 3 working days to have their business converted from a household business.

Registration documents for converting from a household business to an enterprise

According to Clause 2, Article 27, Decree 01/2021/ND-CP stipulates that conversion documents include:

– Original copy of Business Registration Certificate.

– Copy of tax registration certificate.

– Other documents when a business household wants to convert into an enterprise are as follows:

Converting to a private enterprise, documents include:

• Application for private enterprise registration
• Authenticated copy of Vietnamese ID card/CCCD/passport for private enterprise owners.

Converting to a partnership, documents including:

• Application for business registration;
• Company charter;
• List of members;
• (Authenticated copy of ID card/CCCD/Vietnamese passport for individual company members;
• Certificate of establishment for members of the company is an organization with a certified copy of ID card/CCCD/Passport for the authorized representative
• The document appointing the authorized representative does not include the investment registration certificate).

To convert into a joint stock company, the documents include:

• (1) Application for business registration. business;
• (2) Company charter;
• (3) List of founding shareholders and list of shareholders who are foreign investors;
• (4) Certified copy of Vietnamese ID card/CCCD/Passport for the legal representative of the enterprise;
• (5) Certified copy of Vietnamese ID card/CCCD/Passport for individual shareholders;
• Establishment certificate for organizational shareholders with a certified copy ID card/CCCD/Passport for authorized representatives and document appointing authorized representatives. (Documents do not include investment registration certificate).

Conversion into a one-member limited liability company, documents include:

• Business registration application;
• Company charter;
• Authenticated copy of ID card/CCCD/Vietnamese passport for the owner Owners are individuals;
• Certificate of establishment for owners who are organizations with a certified copy of ID card/CCCD/Passport for the authorized representative and document appointing the authorized representative;
• Authenticated copy of ID card/CCCD/Passport for the legal representative of the enterprise (the file does not include the initial registration certificate private).

Conversion to a limited liability company with two or more members, documents include:

• Business registration application;
• Company charter;
• List of members;
• Authenticated copy of ID card/CCCD/Passport for the legal representative of the enterprise;
• Authenticated copy of Vietnamese ID card/CCCD/Passport for individual members;
• Certificate of establishment for organizational members with a certified copy of ID card/CCCD/Passport for authorized representatives and document appointing an authorized representative; (file does not include registration certificate investment).

In case a business household has a foreign investor or an economic organization with foreign investment capital participating in capital contribution, stock purchase, or capital contribution purchase in cases where the procedures for registering capital contribution, stock purchase, or capital contribution purchase must be carried out according to the provisions of the Investment Law, the dossier must contain:

• Document of the Investment Registration Authority approving the capital contribution, share purchase, purchase of capital contribution of foreign investors, economic organizations with foreign investment capital.

Where to submit documents to convert business households into enterprises

According to the provisions of Decree 01/2021/ND-CP The application for conversion from business household to enterprise will be handled by the Department of Planning and Investment. There are 2 ways to apply:

Live

The applicant submits 1 set of documents directly to the one-stop shop of the Department of Planning and Investment.
Submit online application: The applicant submits the application online through the national electronic information portal on business registration.
Implementation process
After submitting the application, the business will receive an appointment receipt result return time: within 3 working days. After the above deadline, if the application is valid, the result will be a Certificate of Business Registration. If after the above deadline, the dossier is invalid, the business will receive a notice of correction and supplementation.

For documents submitted online: After the online application is approved, the enterprise brings the original business household registration certificate, receipt and notice of approval of the online application to the Department of Planning and Investment to receive the results.

After receiving the original business household registration certificate and tax certificate of the business household, the Department of Planning and Investment will send it back to the district business registration authority. Thus, the procedure for terminating business operations will also be completed.

State fees and charges: is free

Notes after converting a business household into an enterprise

Making a business seal

Although the 2020 Enterprise Law does not require businesses to use seals, the habit and culture of Vietnamese businesses is to still use seals to sign contracts, go to banks… so after converting from a household business to an enterprise, you should also pay attention to engraving the seal. Note: Must request a seal sample certificate from the issuing seal engraving facility.

Paying tax debts of business households before establishing a business

After converting from a household business to an enterprise, the old tax authority will contact you to request payment of all tax debts. The business household’s tax registration certificate will then be revoked.

At the same time, business households converting into enterprises must also fully comply with company procedures such as:

• Hang company signs;
• Submit notice of tax calculation method and asset depreciation method to the tax authority;
• Open a bank account, register for electronic tax payment

Obstacles when converting a business household into an enterprise

Converting a business household into an enterprise enjoys so many incentives, but what is the reason why 50% of qualified business households refuse to convert? After research and actual contact with business households and enterprises, Pham Do Law discovered 3 main groups of reasons why business households are not interested in converting.

1. Insufficient business management capacity

In reality today, many business households have high revenue, sometimes regularly employing over 10 workers. Typically textile establishments; agricultural, aquatic and food production and processing facilities; handicraft making facility. Most workers are family members and clan members. Every day they just repeat the same job and feel that life and revenue are enough. They do not want, have no need or conditions to expand or develop further.

In another reality, according to tax and finance laws, business households only have four types of books, while businesses have more than 30 types. Having to comply with these regulations alone makes many people prefer to operate under the HKD model. Not to mention, when becoming an enterprise, it has to bear huge costs and also involves many cumbersome procedures, personnel, apparatus… that are cumbersome and not resolved quickly.

Tax evasion

It cannot be denied that many people choose to hide in the shadow of businesses to avoid taxes. Household businesses are not required to issue invoices when selling goods, so they cannot fully control the business’s revenue. Meanwhile, the flat tax rate for business households is very low, only about 5-10%/year. However, many business households still negotiate flat tax rates with tax officials, leading to tax revenue loss.

But is this a solution to tax evasion? We assume that business households can declare low tax rates. But in reality, how much did you spend on purchases? employee costs? Costs for tax officials? Presumptive tax paid monthly? And many other non-invoiced expenses… Have you really calculated whether you make a profit or just break the salary?

Then, with risks such as epidemics, natural disasters, changes in legal policies, you have a decrease in revenue but still have to pay flat tax evenly every month. So which is more worth thinking about the amount of loss with 20% corporate income tax and can you successfully evade tax?

Currently, the Law on Tax Administration has stipulated that business households with large revenues must declare taxes and issue electronic invoices like businesses. Specifically:

The Government issued Decree No. 123/2020/ND-CP dated October 19, 2020 regulating invoices and documents, accordingly, Decree No. 119/2018/ND-CP dated September 12, 2018 regulating electronic invoices when selling goods and providing services continues to be effective until June 30, 2022, from July 1, 2022 implemented according to the provisions of Decree No. 123/2020/ND-CP. Based on the above regulations, business households and individuals apply electronic invoices with tax authority codes instead of paper invoices. To deploy electronic invoices, the Ministry of Finance will have instructions for pilot implementation in some areas with favorable conditions. Based on the results of the pilot implementation, it will be deployed nationwide.

At the same time, the National Assembly has issued Tax Management Law No. 38/2019/QH14 effective from July 1, 2020, according to which individuals paying taxes according to the stable declaration method (Stable Tax Declaration) are determined to:

– Individuals doing large-scale business according to the provisions of Clause 5, Article 51 of the Law on Tax Administration “5. Household businesses and individual businesses with a scale of revenue and labor that meet the highest level of criteria for micro enterprises according to the law on supporting small and medium-sized enterprises must comply with the accounting regime and pay taxes according to the declaration method”.– Individuals whose businesses are not on a large scale but fully comply with accounting, invoices, and documents according to regulations and are required to apply a stable tax declaration method.

– Business individuals who are non-residents but have a fixed business location in the territory of Vietnam and meet the above conditions shall declare tax as for business individuals who are residents.

To implement the conversion of contracted households to paying taxes according to declaration, the Ministry of Finance will have specific instructions on the implementation roadmap. Although there is no Decree or circular with clear instructions, this is a move to change legal policies to avoid tax evasion by business households. In addition, the Law also allows inspection of individual bank accounts to collect taxes from individuals who do not have a business registration or have a business registration but do not declare personal income tax. With a series of changes in tax administration laws, can you still avoid taxes under the shadow of being a business household or will you bear the risk in the future?

 Sanctions are not strong enough

Currently, the legal regulations only stop at encouraging the conversion from business households to enterprises, but there are no specific regulations that require any business household to convert. The only general regulation is that a business household established for more than 1 year and regularly employing more than 10 employees must be converted into an enterprise. So how do we know if that business household regularly employs more than 10 workers when they do not declare their labor? Therefore, business households can completely avoid converting into companies.

Although converting a business household into an enterprise enjoys more incentives and incentives than establishing a new enterprise. But with a big fear of wanting to avoid taxes and state sanctions are not strong enough to impact, many business households have not yet converted into enterprises. However, in the future, ANT Legal believes that legal policies will change, there will be sanctions and tax enforcement mechanisms, tax collection for business households, forcing business households to convert into enterprises. If it is an overnight problem, then I think that qualified business households should soon convert into enterprises.