Vietnamese tax environment for mergers and acquisitions (M&A) is in constant movement, with its tax laws and procedures changing even more rapidly to the point that it is difficult to plan and ensure full obligation for foreign investors. Although still deviant from international norms, these rules tend to change, closing the gap between regulations in Vietnam and the international requirements it obliged itself to.
This article builds on that, providing a basic overview of the taxation on cross-border M&A of companies in Vietnam.
1. Tax Features
Tax losses and incentives cannot be transferred as part of an asset acquisition as these tax attributes remain with the purchaser company or are extinguished if the company possessing these are being purchased and merged. There are no specific rules for the acquisition of an entire business (and not in the form of a share deal or buying an entire asset) for CIT purposes in Vietnam, so it is unclear on the stance of the authorities on what tax is liable. The safest strategy is to assume that a standard 20% CIT will be applied per any other standard profits from a transaction. There is a possible exception where share acquisitions of companies are made because then the tax features can be preserved but are subject to some conditions and limitations.
To be deductible from taxable income, expenses must:
- Be incurred in relation to business activities as permitted with the company’s business license;
- Be supported by appropriate invoices or relevant documents; and
- Where expenses are VND 20 million and above, be settled by non-cash payment (i.e., through a bank transfer).
2. Value-Added Tax (VAT)
The transfer of most assets in Vietnam is subject to VAT, the standard rate of which is 10%. There are no specific provisions in Vietnam related to the transfer of a going concern and consequent favourable VAT treatment, but if goods are being exported to another country, these might be free from a VAT burden in Vietnam, although might still be subject to the TAX of another transit/destination country.
The seller is required to issue VAT invoices for the sale of the assets with VAT added to the sales price and indicated in the invoices issued. The VAT becomes the input VAT of the buyer provided the assets acquired are used in business activities that are subject to VAT if the deduction method is chosen when calculating VAT.
Business establishments are not required to declare and pay VAT on the following M&A-related transactions:
- Capital asset contribution for establishing an enterprise;
- Transfer of assets between dependent accounting units; and
- Transfer of assets on demerger, division, consolidation, or conversion of form of the enterprise.
3. Asset Registration (Stamp Duty) Fee
Properties are significant (and in the case of foreign owners very complicated) assets subject to an asset registration fee (considered a tax), payable by the newly registered asset owner when assets subject to the asset registration tax are transferred. It is beneficial for locally operating investors that Vietnam differs from many jurisdictions, as it caps asset registration fees, making it relatively less costly if the M&A is more valuable.
This capped fee has different rates related to certain kinds of assets listed in the regulations. For properties, the rate is 0.5 percent, but such asset registration fees payable on any asset cannot exceed VND 500 million (approximately US$20,500). There is no cap for cars with fewer than 10 seats, aircraft and cruisers, however since these are usually not significant in cross-border M&A transactions, this exception does not significantly impact the cost of an acquisition. Asset registration fees must be declared when incurred and paid within 30 days after the date of the registration tax notice being signed by the tax authorities.
It is additionally worth noting that asset registration fees are not applicable to share transfers.
4. Purchase of shares
Although not specifically a separate tax, Capital Assignments Profit Tax (“CAPT”) applies a 20% tax to gains from sales of interests/holdings in non-public companies in Vietnam. The gain is defined as the excess of the sales proceeds less the initial cost and any transfer expenses. Transfers of securities (including bonds and shares of joint stock companies) are also taxable at 20% on gains for resident taxpayers, however non-resident (foreign) taxpayers are subject to a deemed CAPT of 0.1% of the total sales proceeds on securities.
5. Capital gain tax
Capital gains from the sale of shares are normally subject to the standard 20% CIT rate. The taxable gain is defined as the difference between the sales proceeds after deducting investment costs and transfer expenses. The Vietnamese assignee is required to withhold the tax due from the payment to the assignor and account for this to the tax authorities unless both the assignor and assignee are offshore entities, the local target company is legally obliged to take this responsibility.
CIT is calculated with the following formula:
|CIT Payable = [Assessable Income – Legally Permitted Deduction from Income] x CIT Rate|
Gains earned by a foreign investor from selling securities (bonds and shares of public joint-stock companies, irrespective of whether they are listed or non-listed) are subject to a CIT rate of 0.1 percent of the gross sales proceeds (replacing the capital gains tax applicable on net gains).
Tax treaties may provide some protection from the above taxes, except for (usually) real estate-rich targets. The use of an offshore holding company may provide opportunities for tax mitigation on exit. However, anti-avoidance rules may also apply, with a broad interpretative scope enjoyed by the local tax authorities, which is especially difficult in Vietnam because of the complicated and unclear rules. Furthermore, tax treaty claims are not reviewed or approved by the local tax authorities until a tax audit is undertaken, which (considering the local reality) can take a long time.
An example of treaties regulating transactions between Vietnam and other countries is the Income Tax Treaty with the US in 2015, according to which the following capital gains derived by a resident of Vietnam or USA may be taxed by the countries:
- Gains from the alienation of immovable property situated in either country;
- Gains from the alienation of a U.S. real property interest;
- Gains from the alienation of the capital stock of a company, or of an interest in a partnership, trust or estate, the total asset value of which is comprised directly or indirectly principally (greater than 30%) of immovable property situated in Vietnam;
- Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other country, and
- Gains from the alienation of other property by a resident of either country may only be taxed by that State.
Currently, the Ministry of Finance is proposing to develop a draft law on corporate income tax. However, it is unclear whether the legislation will be implemented.
6. Tax indemnities and warranties
The tax exposures of a target company are transferred to the buyer after a share purchase transaction is completed. Therefore, the buyer should pay close attention to the target company’s tax compliance status. For this reason, it is important to employ professionals to conduct thorough tax due diligence exercises to identify any significant tax issues in M&A transactions. In recent transactions, high tax exposure developed by the widespread lack of transparency across Vietnamese companies was one of the main deal breakers.
As the target company’s contingent liabilities are transferred to the buyer, the tax indemnities and warranties for contingent tax liabilities should be thoroughly addressed in the transaction agreements. In order to improve this lack of transparency and reduce the uncertainties involved, buyers might decide to require the following:
- Statute of limitation;
- Ultimate parties responsible for the compensation;
- Definition of tax-related items;
- Exceptions associated with penalties/interests, and others.
7. Tax losses
Tax losses of a company can be fully and consecutively carried forward for up to 5 years starting from the year in which the losses were incurred, ergo, losses incurred by the target company prior to the transaction may continue to be offset against the taxable income of the company after the transaction. However, losses are not permitted to be carried back in time (cannot apply to any revenue before their occurrence) and there is no concept of group loss sharing or a consolidated tax relief.
8. Tax Incentives
Tax incentives in Vietnam can take several forms based around encouraged sectors, locations and project scales, and are granted to new investment projects:
- Sectors: Encouraged sectors include: high-tech enterprises, software development, education, health, environmental protection, scientific research, agricultural/aquatic product processing, renewable energy and infrastructure development.
- Locations: Encouraged locations include areas with difficult socio-economic conditions, certain Economic Zones, certain High-tech parks and approved Industrial Parks.
- Project Scale: Large manufacturing projects, meeting either of the below criteria:
- Projects with a total capital of VND 6,000 billion or greater, disbursed within 3 years of being licensed, and:
- A minimum annual revenue of VND 10,000 billion by the 4th year of revenue generation, or
- Regularly employing more than 3,000 employees by the 4th year of operations.
- Projects with a total capital of VND 12,000 billion or greater, disbursed within 5 years of being licensed and using technologies approved in accordance with applicable laws.
Incentives provided take two forms, both of which can apply concurrently:
- Tax Holidays and Exemptions. These usually apply from the first profit-making year, or the fourth revenue generating year, and result in a specified period where no tax will apply (often 2-4 years) and/or a 50% reduction of tax for a specified length of time.
- Preferential Tax Rates. These preferential rates can reduce applicable CIT rates to between 10 and 17% and apply from 10 years to indefinitely for certain projects.
Furthermore, the Government passes incentives from time-to-time for small and medium sized enterprises (SMEs), which can reduce the primary tax rate applicable during specified tax years. However, this usually does not apply to international investors conducting M&A as these are multinational companies, too large to be considered SMEs.
9. Currency Flow
Although not a tax, currency flow is also highly regulated in Vietnam, significantly influencing the financial sphere of each cross-border M&A transaction. Recent developments in Laws brought about by the 2014 Law on Investment and State Bank of Vietnam-issued Circular 06/2019/TT-NHNN have eased some regulations, especially regarding Foreign Direct investment (FDI). For instance, a good example of this is that Vietnamese Law now allows foreign purchasers to pay foreign sellers in foreign currencies outside of Vietnam.
Nevertheless, there are still numerous restrictions regarding the currency flow in Vietnam, including:
- Tranche Structure: In M&A transactions with multiple tranches, the settlement of the price may differ in each tranche. For example, if the target company is a domestically owned company without a Direct investment Capital Account (DICA) in the first tranche, the payment must be made via the Indirect investment Capital Account (IICA) of the foreign investor. If the target company becomes an FDI Company in the second tranche, there will be a need for a target company to possess a DICA, to which the payment must be made.
- Direct vs. Indirect Investment: An acquisition of a majority stake in a domestic company by a foreign investor should be considered a direct investment activity e, but Circular 06 allows for a payment to be made from the investor’s IICA if the target company does not have a DICA.
- Resident vs. Non-Resident Investors: When both the purchaser and the seller are foreign investors without resident status in Vietnam, the payment can be made in their offshore accounts. However, the Law enables the purchaser to do so if they prefer to make the payment onshore in Vietnam via the DICA of the target company to ensure compliance with capital transfer tax regulations.
- Tax Considerations: It is crucial to consider tax implications when structuring the payment flow. Compliance with tax regulations, including capital transfer tax, should be a priority to avoid potential legal issues and penalties.
In conclusion, the Vietnamese tax provisions system is still a tough nut to crack for foreign investors trying to conduct cross-border M&A, just like for any other tax-related activities. Although it is gradually improving to comply with international treaty standards Vietnam signed up to, there are still numerous restrictions present, which are difficult for investors to navigate through, thus it is crucial for them to employ competent professionals who will be able to ensure full legal compliance to enable cross-border M&A to run as smoothly for the transacting parties as possible.