Tax obligations in M&A transactions

Tax allocation and related Vietnam tax responsibilities in M&A transactions need to be clarified by the parties immediately upon signing the Letter of Intent and specified in the Shares/Asset Purchase Agreement to serve as a basis for implementation.

The general principle when valuing an M&A transaction is that the parties must consider factors that significantly impact the deal’s success which includes:

• The target company’s compliance
• The company’s market position
• The potential for business expansion
• Tax and legal policies of the host country
• Infrastructure conditions,…

The seller’s complete tax compliance up to the Shares/Asset Purchase Agreement signing is crucial for the buyer’s decision to proceed with the Vietnam transaction. This article will examine some practical aspects related to tax obligations in M&A transactions in Vietnam.

1. The stage of signing a Letter of Intent (or Term Sheet)

The Letter of Intent or Term Sheet is a document that records important agreements between parties as a precursor to the due diligence and signing of the Shares/Asset Purchase Agreement. When signing the Letter of Intent or Term Sheet, parties typically specify tax obligations and responsibilities related to the transaction in a general manner, as outlined in the following template:

“With the aim of best compliance with tax requirements and obligations to the local Government, tax obligations related to the Potential Transaction will be carried out by the Seller. The value of the potential transaction will include any tax obligations under the Buyer’s responsibility (if any) related to the transaction and will be allocated as specified in the Asset Purchase Agreement.”

On the buyer’s side:

At this stage, the buyer has not conducted in-depth tax due diligence. However, establishing basic and general agreements on tax obligations and tax allocation will facilitate easier progress towards the signing of the Shares/Asset Purchase Agreement after the due diligence stage.

On the seller’s side:

If failing to clearly define and quantify tax liabilities within the Letter of Intent or Term Sheet could result in unforeseen financial losses. Therefore, the recommendation for the seller before signing the Letter of Intent or Term Sheet is to independently conduct tax due diligence or seek advice from tax advisors to avoid binding oneself to unfavorable agreements.

2. Tax Due Diligence Stage

By entering into a Letter of Intent or Term Sheet, the buyer typically secures exclusive access to information and documents of the target company for due diligence purposes. In addition to legal, personnel, and financial due diligence, tax due diligence is complex and requires the support of experienced professionals.

Tax due diligence is a critical aspect of mergers and acquisitions, primarily driven by the need to mitigate the risks associated with the target company’s tax non-compliance that could adversely impact the buyer post-acquisition. This concern is particularly salient in share purchase transactions. Moreover, while, the legal entity remains unchanged, ownership—and consequently, tax liability—transfers from the seller to the buyer. The target company’s non-adherence to tax obligations could expose the buyer to future risks, including fines or suspension of invoicing privileges.

In asset purchase transactions, tax obligations related to the purchased asset also pose significant challenges for the buyer post-acquisition, potentially exposing the buyer to various business risks.

3. Entering into the Shares/Asset Purchase Agreement Stage

Upon the successful completion of due diligence, if the results are positive:

The parties will proceed to negotiate and sign the Shares/Asset Purchase Agreement. Based on the tax due diligence reports, at this stage, the parties shall:

• Identify the types of taxes and tax rates related to the transaction, as well as the target company’s outstanding tax liabilities.
• Clarify provisions regarding the completion of tax filing and payment procedures related to the transaction, as well as schedules and plans for addressing outstanding tax issues, will be clarified by the parties.

Here is a sample provision regarding the allocation of tax responsibilities in the Shares/Asset Purchase Agreement:

“The Seller, as the party responsible for and obligated to bear the outstanding tax obligations listed below, shall endeavor to complete these tax obligations according to the agreed-upon plan. Any reasons for failing to fulfill these agreements will not be accepted and shall be considered a breach of fundamental obligations under this Agreement.”

To bind the party responsible for filing and paying taxes related to the transaction:

The responsibility usually belongs to the Seller. The parties will specify the implementation schedule through specific provisions such as:

“Based on reports provided by the Buyer and consent of the Seller, the Parties agree on the following taxes with all corresponding obligations to be entirely implemented by the Seller and completed with the competent tax authority no later than date A:

• Corporate income tax corresponding to the value of abc USD;
• Value-added tax corresponding to the value of xyz USD.

Any additional taxes or adjustments to tax rates or any changes related to tax allocation under this provision shall be the sole responsibility of the Seller and must be promptly notified and updated to the Buyer to ensure timely and secure transmission of information without affecting the rights and interests of the Buyer.”

The parties need to anticipate tax implications arising from the transactions that may affect the Buyer post-transaction:

These transactions are often undertaken by related parties such as shareholders, legal representatives, or the target company itself. Noticeably, lack of transparency in conducted transactions can expose the seller to potential compensation claims even after transaction completion. To mitigate this, the parties should include declarations, commitments, and responsibilities related to violations in the Shares/Asset Purchase Agreement.

4. Conclusion

Given the complex and multi-layered nature of M&A transactions, parties involved should carefully consider and define tax responsibilities and obligations to comply with Vietnam tax regulations and prevent future risks. This requires the involvement of experienced tax and legal advisors. Seeking external support, such as from auditing or law firms, is crucial to ensure a secure and enforceable transaction.

At PLF Law Firm:

Businesses can explore our services for Company Formation and Mergers & Acquisitions. With a comprehensive solutions cover legal, financial, and accounting aspects for foreign investors, PLF want to help build a solid foundation for your business and develop effective market expansion strategies in Vietnam.

Contact PLF Law Firm today via email at inquiry@plf.vn or +84913 902 906  to receive a Free 30-Initial Minute Consultation.