by Nguyen Hai Yen Associate, IPCT Pratice
(VNS) The forms in which an investor can contribute capital to an enterprise have evolved to include intangible assets such as intellectual property rights that are often of greater value than the tangible assets of an enterprise.
As Quaker chairman John Stuart once said, "If this business were to be split up, I would be glad to take the brands, trademarks and goodwill and you could have all the bricks and mortar – and I would fare better than you."
Yet, while Viet Nam's laws on enterprises and investment allow investors to contribute capital to an enterprise in the form of intellectual property (IP) rights, no regulations have been issued under these laws establishing procedures for such contributions.
The lack of guidelines has become an ongoing difficulty for provincial planning and investment departments, causing authorities to become more cautious in such cases and limiting the legitimate right of investors to capitalise IP rights.
This runs in the face of a global trend in which IP rights are highly valued and viewed as an important constituent of an enterprise's potential for success.
In the Law on Enterprises, a capital contribution is defined as a transfer of assets into a company giving the transferor an ownership stake in that company. Assets used for making capital contribution can be domestic or freely convertible foreign currency, gold, land use rights, or intellectual property rights or know-how, as well as other types of assets as specified in the company charter.
Decree No 102/2010/ND-CP further clarifies that these intellectual property rights may include copyright, industrial property rights, rights to plant varieties and other intellectual property rights under the Law on Intellectual Property.
The Ministry of Finance is designated to guide the appraisal and valuation of any intellectual property rights contributed as capital.
What contributes to charter capital can therefore be tangible (equipment, tools, production facilities) or intangible (know-how, clients lists, trademark, patents), but it must have a value agreed upon by the founders of the enterprise.
Not every such agreement, however, has been treated similarly by either the authorities or the companies themselves. Well-known enterprises in Viet Nam such as Vinashin, PetroVietnam, Song Da and Vinaconex have used their trademarks as capital contributions to a number of small companies.
The lack of guidance in appraising the commercial value of trademarks has caused confusion even for tax authorities, who consider such valuations to often be unreasonable or unreliable.
The value of property rights contributed to charter capital are not necessarily reflected as an increase in the assets of the company.
Like other founders, investors contributing IP rights can sign contracts on capital contribution and receive capital contribution certificates and bear legal liability for the enterprise corresponding to the value of the assets contributed.
When such investors want to withdraw their capital contribution, they must offer their stake for sale under the same conditions as other stakeholders in the company.
Enterprises are thus forced to bear an unreasonable burden if they accept IP rights as a form of capital contribution since they must credit the contributor with considerable equity but cannot claim the cost of the IP rights as a tax deductible cost.
According to Standard 12 on Asset Classification issued under Ministry of Finance Decision No 219/2008/QD-BTC of December 2008, IP rights are considered intangible assets of an enterprise. That means that the enterprise can determine the value of IP rights, control or limit the access of others to them, and anticipate future economic benefits from them.
Enterprises may also lease, sell, exchange, or obtain other economic benefit from these assets. Future economic benefits may include royalties, cost savings, or other benefits derived from the assets.
Around the world, there are currently three accepted methods for appraising the value of IP rights: (i) the income approach, which measures the value of past, current and future net economic benefit with the assumption that the IP rights can generate income; (ii) the cost approach, which determines the value of the asset by the cost of replacing it; and (iii) the market approach, which looks at what a third party would be willing to pay to acquire or lease the asset.
Circular No 17, issued by the Ministry of Finance in 2006, provides regulations on general asset valuation methods and practices pertaining to IP rights in Viet Nam. These methods have proved inappropriate to such aspects of IP rights as how to appraise the value of future benefits.
In order to repair this, the ministry has drafted a circular on appraisal standards for trademarks contributed to charter capital as a pilot for further classes of IP rights. It is hoped, when this circular is formally issued, the process of appraising intangible assets like IP rights will be facilitated. – VNS