Background
On June 28, 2024, the State Bank of Vietnam ("SBVN") issued Circular 23/2024/TT-NHNN, with new rules governing employee stock ownership plans ("ESOPs"). The most significant change is that SBVN's approval to operate an ESOP is no longer required. This reform will go far to reduce the administrative burdens that have long governed ESOPs. Circular 23 took effect on August 12, 2024.
While SBVN registration has been eliminated, an offshore parent's award of shares to an employee of its Vietnam subsidiary is still subject to rules.
Significant changes
Type of share awards: Some rules are unchanged. An offshore parent may award its shares to the Vietnamese employees of its local entity only in the form of (i) free shares, or (ii) a grant of share awards with preferential conditions whereby Vietnamese employees may receive shares but are not required to remit funds abroad. Circular 23 does not enumerate the specific form of an award, but in our experience, a share award can still include stock appreciation rights, restricted shares, restricted share units, stock options, and a share purchase plan. Even if Vietnamese employees are entitled to purchase offshore shares at a discount, no funds may be remitted abroad to pay the parent nor to pay the local entity to acquire the shares.
Abolition of registration procedures of ESOPs with SBVN: The local entity will no longer need to register an ESOP in the form of either (i) or (ii) above, with SBVN. Neither will any share awards granted by the parent to Vietnamese employees of the local entity be subject to SBVN registration. Removal of the need for SBVN's consent will shorten the time and reduce the costs for both the local entity and the parent. It will loosen the conditions for Vietnamese employee participation.
The Vietnamese entity that implements the ESOP: The Vietnamese entity can be owned directly or indirectly by the parent (being the foreign grantor of the share awards). This is consistent with international practice because ESOPs are developed by the parent to benefit employees working for its affiliates and subsidiaries worldwide.
Foreign currency account: As before, the local entity must open and maintain a domestic foreign exchange bank account designated for payments to local employees participating in the ESOP. The local entity will liaise with its local bank, and provide documents that show the relationship between the local entity and the parent. It will also inform the local bank of the ESOP terms and conditions or plan rules (which specify the form of share awards, grant date, vesting date, etc.), list of Vietnamese employee-participants, and other information. Note, this is mostly information required by the local bank not the SBVN.
ESOP payments made by the offshore parent to its Vietnamese subsidiaries' employees must still pass through the special foreign currency account before deposit to an individual participant's bank account. All accrued dividends on the shares and proceeds from sale of the shares of Vietnamese employees will be remitted through this account, and then transferred to Vietnamese employees' bank accounts in Vietnam. The local entity will withhold personal income tax.
Monthly reports: Reporting requirements are slightly changed. Reporting will be made monthly instead of quarterly. The local entity will report to SBVN on the ongoing operation of both existing and new ESOPs. Reports must be made in writing and by email, and are due no later than the 12th day of the following month. The report (which is made on a standard form) will declare the amount of ESOP-related inbound funds, together with the local bank's confirmation of receipt.
Previously-registered plans: Any plans that currently permit the remittance of funds out of Vietnam will have to be changed --- going forward no funds may be transferred abroad to acquire new shares. Even though the parent wishes to award new shares or make new forms of share awards (as described above) and even if permitted under previously registered plans. Remittance of funds offshore is not permitted either by Vietnamese employees or by the local entity.
May Vietnamese employees transfer their monies abroad to purchase new shares under a previously-registered plan? SBVN has provided one year from August 12, 2024 for the local entity and the parent to adjust their plans which gave local employees the right to purchase shares with incentives1 (which rights had been registered with SBVN before August 12, 2024) to comply with the new amendment. Even during that one year Vietnamese employees may only acquire new shares if the plan is structured so as no ESOP-related outbound funds are permitted.
Changes in current plans made after August 12, 2024: If the parent wants to change its existing plan after August 12, 2024, it may do so and the local entity need not register the change with SBVN. But, it will continue to work with its local bank where the special account for the plan has been set up, to provide plan documentation to the bank, including amendments to the plan rules.
Russin & Vecchi's view
Equity incentive plans, like ESOPs, are a solid and recognized tool to retain talent. Vietnam obviously wants to be part of this global trend. But also, Vietnam recognizes the mechanism as a way to attract foreign income into Vietnam.
Multinational corporations that have often struggled with SBVN's restrictive ESOP registrations will welcome this change.
Footnote
1. The term "incentives" is from the previous Circular 10/2016/TT-NHNN of the SBVN and is not defined.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.