IS IT PERMISSIBLE TO CONTRIBUTE INTELLECTUAL PROPERTY RIGHTS AS CAPITAL?

Issue:

In the context of the Fourth Industrial Revolution (4IR), the need for business cooperation through the establishment of new legal entities or through Business Cooperation Contracts (BCC) has increasingly gained attention and been chosen by numerous individuals and economic organizations. One of the core elements contributing to the effectiveness and sustainability of business cooperation is the contributed capital, especially intangible assets such as intellectual property rights. The legal issue arises: Can intellectual property rights be contributed as capital? This article will assist business entities in answering this legal query.

1. Is it permissible to contribute intellectual property rights as capital?

Pursuant to Clause 18, Article 4 of the Enterprise Law 2020 (hereinafter referred to as the “Enterprise Law”), capital contribution is understood as the contribution of assets to form the charter capital of a company, including contributions to establish a new company or contribution of additional capital to an existing company.

Clause 1 Article 34 of the Enterprise Law stipulates that contributed assets include Vietnamese Dong, convertible foreign currencies, gold, land use right, intellectual property rights (hereinafter referred to as “IPR”), technologies, technical secrets, other assets that can be converted into Vietnamese Dong.

Therefore, IPR can be used as a capital contribution to an enterprise. However, to ensure the legality of such a contribution, the current law stipulates a prerequisite: the individual or organization must be the lawful owner or have the lawful right to use the IPR (Clause 2, Article 34 of the Enterprise Law).

2. How to Legally Contribute IPR as Capital?

Step 1: Valuation of IPR

Given the unique nature of IPR, the lawmaker has established a distinct legal framework to govern the procedure for contributing IPR as capital. Consequently, when contributing IPR as capital, the parties must carry out the valuation of intellectual property to convert into Vietnamese Dong, as stipulated in Clause 1, Article 36 of the Enterprise Law. Issues to be noted regarding the valuation procedures for IPR corresponding to different cases are as follows:

Firstly, receive IPR contribution as capital when establishing an enterprise:

The IPR valuation procedure shall be conducted under one of two methods: (i) The founding members or shareholders shall determine the valuation by consensus; or (ii) A valuation organization shall be hired to conduct the valuation. In the latter case, the valuation must be approved by more than 50% of the founding members or shareholders.

Secondly, receive additional capital in the form of IPR during the business operation:

The IPR valuation procedure shall be conducted under one of two methods: (i) The owner or the Board of Members (for limited liability companies and partnerships), or the Board of Directors (for joint stock companies) and the contributor shall agree on the valuation; or (ii) A valuation organization shall be hired to conduct the valuation. In the latter case, the value of the contributed assets must be approved by the contributor and the owner, the Board of Members or the Board of Directors.

Step 2: Transfer of IPR to the Enterprise

Pursuant to point a, clause 1, Article 35 of the Enterprise Law, for intellectual property rights that have been registered (hereinafter referred to as “Registered IPR”), when contributing capital to an enterprise, members of a limited liability company, a partnership, and shareholders of a joint stock company must transfer the Registered IPR to the enterprise. Accordingly, the capital contributor and the capital recipient shall enter into a capital contribution contract, which records the capital contribution to the enterprise by Registered IPR (In the case of receiving capital contributions when establishing an enterprise, this contract shall be signed after the enterprise is granted a Certificate of Enterprise Registration).

In addition, according to the provisions of IP law, for certain assets that must be registered for protection, when transferring Registered IPR to an enterprise (i.e., changing the owner on the Protection Title), it is necessary to carry out registration procedures with the competent authority. Accordingly, the capital contributor and the capital recipient must sign a contract and register this contract at the competent authority as prescribed by IP law.

Step 3: Issuing a certificate of capital contribution/shareholder register

After completing the capital contribution as described above, the company receiving the capital contribution shall issue a certificate of capital contribution/shareholder register to the members or shareholders as prescribed by the Enterprise Law.

3. Legal Issues and Solutions

• The Transfer of Ownership of Contributed Assets to the enterprise

Current Intellectual Property Law does not provide detailed regulations for transactions involving the contribution of IPR to an enterprise. Meanwhile, Enterprise Law requires that contributors transfer ownership of the contributed assets to the enterprise.

Under current Intellectual Property Law, the transfer of ownership of the contributed assets as IPR is primarily regulated through assignment. Other forms of IPR transfer under Intellectual Property Law do not meet the requirement of “transferring ownership of the contributed asset” as stipulated by Enterprise Law.

This creates the following practical dilemma: (i) When completing capital contribution procedures by signing a capital contribution contract to register the transfer of ownership of the contributed assets, relevant parties may be denied registration by the competent authority; (ii) If a transfer contract is signed to carry out a capital contribution, it does not conform to the legal nature of a capital contribution, given that a transfer entails a payment by the recipient.

Faced with this impasse, in practice, the contributing party and the receiving party may opt to execute two independent contracts:

– Capital Contribution Contract: The contributor (member or shareholder) contributes a monetary amount to the recipient (company). Under this contract, the member/shareholder pays the company an amount of X (the capital contribution).

– Intellectual Property Rights Assignment Contract: The contributor (member or shareholder) assigns the IPR to the recipient (company). Under this contract, the company pays the member/shareholder an amount of X (the consideration for the assignment). Subsequently, the two parties can offset their obligations against each other.

• Regarding the Term of Transfer of Intellectual Property Rights

Pursuant to Articles 27, 34 and 93 of the current Intellectual Property Law, each subject matter of intellectual property rights has a different protection term (5 years, 10 years, 20 years, etc.). Accordingly, the term of capital contribution will be agreed upon in accordance with the term of ownership of this asset.

From this perspective, if a member/shareholder contributes capital with intellectual property rights, while other members/shareholders contribute capital with other assets such as cash, gold, or land use rights, there will be a discrepancy when comparing the terms of ownership. Therefore, when contributing capital and signing a capital contribution contract involving IPR, the parties should pay close attention to the term of capital contribution to avoid misunderstandings and subsequent disputes.

• Regarding the accounting principles for equity

Capital contributions made in the form of IPR shall be accounted for as a lease, rather than as a contribution of ordinary assets (such as cash or real estate).

Pursuant to Clause 3 Article 66 of Circular No. 200/2014/TT-BTC dated December 22, 2014, issued by the Ministry of Finance, on guidelines for accounting policies for enterprises, receiving contributed capital by the kind of intangible assets, such as copyright, right to develop and use property, trademarks, brands … shall only be carried out under provisions of law or permission of competent bodies. When the law does not have specific regulations on this issue, the capital contribution by trademarks, brand shall be accounted as asset lease or franchising, in which:

(i) For the side contributing capital: Record sum received from using the trademark, trade name of the other side as revenue from lease of intangible asset, franchising, do not record an increase in the value of investments into other units and income of owner’s equity corresponding to the investment value.

(ii) For the side receiving capital contribution: Do not record the value of brand, trademark, trade name and record an increase of owner’s equity corresponding to the value of the brand, trademark, trade name received the contributed capital. Payments for the use of these IPRs are recorded the asset rental costs, the franchise cost.

Based on the cited regulations, the legal question arises as to whether the contribution of IPR can currently be considered to have “specific legal provisions.” There are still various viewpoints on this matter in practice. Therefore, when business entities choose the form of contributing IPR, it is advisable to consult tax experts, tax authorities at each locality, the Ministry of Finance for guidance in identifying and clearly defining the principles of recognizing equity, avoiding situations where the capital contribution procedures have been completed, but the books cannot be finalized.