CONTRIBUTING LAND USE RIGHTS AS CAPITAL, REGULATIONS, AND LEGAL RISKS

Contributing land use rights as capital is a form of capital contribution permitted by the current law of Vietnam. However, to ensure the legality of the transaction and protect the rights and interests of the involved parties, contributing land use rights as capital must comply with strict requirements related to land ownership and usage rights. Potential risks should be carefully considered and adequately mitigated to avoid disputes and complex legal issues from arising.

Land use rights is a permissible capital contribution asset

Contributing land use rights as capital essentially refers to an agreement between the parties to transfer land use rights by contributing them as part of the capital of an economic organization. “Capital contribution” in this case includes both the contribution to the establishment of a new organization or the increase of the charter capital of an already established economic organization.

Land use rights are one of the types of assets allowed to be used for capital contribution under the provisions of the 2020 Enterprise Law, provided that they meet the requirements for valuation feasibility and the legal ownership rights of the contributing party.

As stated in Article 34 of Law on Enterprise 2020:

“Article 34. Contributed assets

1. Contributed assets include VND, convertible foreign currencies, gold, land use right (LUR), intellectual property rights, technologies, technical secrets, other assets that can be converted into VND.

2. Only the individual or organization that has the lawful right to ownership or right to use the asset mentioned in Clause 1 of this Article may contribute it as capital as prescribed by law.

One important point to be noted, in order to ensure the intended use of land and effective land management, only certain restricted entities have the right to contribute land use rights as capital, including:

– Domestic economic organizations that are allocated land by the State with land use fees, or leased land with a one-time rental payment for the entire lease period;

– Individuals using agricultural land allocated by the State within the land allocation limit; land allocated by the State with land use fees, or leased land with a one-time rental payment for the entire lease period, with legal recognition of land use rights by the State; land received through land conversion, transfer, donation, or inheritance;

– Overseas Vietnamese individuals, and foreign-invested economic organizations using land to carry out investment projects in Vietnam;

– Overseas Vietnamese individuals who are allowed to own houses in Vietnam; foreigners or overseas Vietnamese who are not permitted to own houses attached to land use rights in Vietnam.

Legal requirements must be met upon contributing land use rights as capital

Contributing land use rights as capital must fully satisfy the conditions prescribed by law to ensure the legal rights and interests of the parties involved in the transaction. Specifically, land users may contribute land use rights as capital if they meet the following conditions:

– Proof of land use rights: The land user must have land use right certificate, certificate of ownership of housing and land use rights, certificate of land use rights, ownership of housing and other assets attached to the land, or a certificate of land use rights and ownership of assets attached to the land, except in cases of inheritance of land use rights, conversion of agricultural land during land consolidation, donation of land use rights to the State or local communities, and other specified cases.

– Land dispute status: The land must be free of disputes or any disputes must have been resolved by the competent state authority, with a legally effective court ruling, decision, or arbitral award.

– Coercive measures: The land use rights must not be subject to distraint or other coercive measures in order to ensure the judgment enforcement complies with civil judgement enforcement laws;

– Land use term: To be within the prescribed land use term.

– Temporary emergency measures: The land use rights must not be subject to any temporary emergency measures according to the law.

Additionally, land users should ensure that they meet specific conditions in particular cases, as required by law.

Legal procedures to be followed

Valuation when contributing land use rights as capital

Land use rights, as a capital contribution asset, must be valued in Vietnamese Dong. This valuation must be carried out through a valuation organization, members, shareholders of the company, or other relevant entities in accordance with specific legal requirements depending on the case.

Legal responsibility is imposed on the owner, member, shareholder, or contributor in the event of any discrepancy between the appraised value and the actual value at the time of the capital contribution.

Transfer of land use rights ownership

The contributor must complete the procedure for transferring the land use rights to the company according to the prescribed procedures. The capital contribution is only considered settled and completed when the legal ownership of the contributed asset has been transferred to the company.

For notarization, certification, and the capital contribution agreement involving land use rights, the land use rights and assets attached to the land must be notarized or certificated. This requirement does not apply when one of the parties in the transaction is a real estate business entity, in which case notarization or certification may be implemented depending on the parties’ specific requirements.

Additionally, any related financial obligations must be fully completed and on time, in accordance with the relevant regulations.

Potential risks in contributing land use rights as capital

In practice, contributing land use rights as capital can face certain inherent risks. The valuation of land use rights may be influenced by subjective or objective factors, leading to a recorded value that does not accurately reflect the actual land value. In cases where there are omissions in the examination of records, or if the ownership rights, or the timing of the establishment of ownership, are not clearly and comprehensively defined, or if the rights and obligations of each party in the capital contribution agreement are not specified in detail, it could result in complex legal disputes.

Hence, evaluating and mitigating risks is crucial before and throughout the transaction process. Thorough evaluation, a solid understanding of and compliance with all relevant laws and administrative procedures concerning land, preparation of a detailed and clear capital contribution agreement, or consultation with legal experts should all be carefully considered.

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