Risks when establishing a company on behalf of a foreigner.

Risks when establishing a company on behalf of a foreigner

1. Risks of foreigners when establishing a company under Vietnamese’s name

When a Vietnamese represents the company's legal documents, state agencies only recognize Vietnamese owner/contributor/shareholder. Therefore, when there is a dispute about the interests of the owner/contributor/shareholder of the company with a foreigner, that foreigner will not be recognized as the owner/contributor/shareholder of the company:

• Foreigners will be at risk of loss/impairment of assets/ loss of the company because they are unable to manage the company and the law only recognizes the signature and authority of the owner of the company "on paper".

• Foreigners will face many challenges to manage the company or conduct commercial transactions if the legal representative/owner  "on paper" of the company does not authorize that person to perform the above transactions. 

• Due to differences in language and culture, if foreign investors are not knowledgeable about the Vietnam legal system and only operate according to their subjective sense, it is easy to lead to deviation of company’s operation and be taken advantage of by others to conduct illegal activities for their own benefit.

2. Risks of Vietnamese people when acting on behalf of foreigners:

When a Vietnamese represents the company on legal documents, state agencies only recognize Vietnamese owners/contributors/shareholders. Therefore, when there is a dispute or a violation of the company's law, the Vietnamese will take full legal responsibility for it: 

• In fact, there are many cases where companies go bankrupt and foreign investors flee to their home country, then it is difficult for Vietnam to find the investors and make them be responsible.

• If the Vietnamese do not have a profound understanding of the company's business line or Vietnamese law, it may result in the situation that investors take over and dominate business activities. The representative only follows the direction of the investor and signs all the relevant documents, then this Vietnamese person will take full legal responsibility. 

3. Legal consequences of establishing a company on behalf of a foreigner

• Regarding property responsibility, the company must return assets to the foreign investor, or perform joint liability towards any third party in case the investor requests to return assets.

• Regarding enterprises that have to be closed or forced to remedy in accordance with the capital contribution, if not, they will be closed when the competent authority discovers. Regarding the debts of the enterprise, the enterprise takes responsibility on the basis of its contributed capital and assets and the legal representative takes the responsibility related to his/her competence.

• Regarding the profit earned according to the principle of agreement, not the principle of contributed capital, in the case of the principle of contributed capital, the person who acts on behalf will only receive the salary as a normal employee. Regarding foreign investors, they manage the enterprise via authorization or management titles such as director or legal representative. Because they do not have the ownership, they can be replaced if there is a dispute.

• Thus, the situations where Vietnamese are asked to act on the foreigner’s behalf are legally risky for both parties, either party may suffer undesirable consequences if one party fails to fulfill its commitments or the State agencies discover the above behavior. Therefore, depending on the nature of the business and the relationship of the two parties, investors and Vietnamese individuals should consider carefully before deciding to establish a company on behalf of a foreigner.