Taxation system and points to note regarding stock transfer/business transfer M&A in Vietnam
2023/04/20
- Le Thuy Vinh
Introduction
After peaking in 2021, Vietnam’s mergers and acquisitions (M&A) market tends to slow down and become cautious in 2022.
This is due to global geopolitical concerns and high inflation impacting cross-border transactions.
However, it is predicted that M&A activity in the Vietnamese market will have many development opportunities in 2023.
When implementing M&A, one of the things that needs to be considered is taxation.
This paper explains points to keep in mind regarding the tax system for major M&A schemes in Vietnam.
1. M&A overview
There are two general M&A schemes in Vietnam:
(1) Transfer of equity in a limited liability company or stock in a stock company (hereinafter referred to as “stock transfer, etc.”)
Stock transfer, etc. means becoming an owner, shareholder, or shareholder member of an existing company (hereinafter referred to as the “target company”) by buying or selling equity or shares in the target company. The buyer acquires management rights to the target company and indirectly owns the assets of the target company. Tradeable shares include existing shares sold by one shareholder to another, and new shares issued by the target company.
(2) Business transfer
A business transfer is when the target company acquires ownership of the property it offers for sale. M&A transactions often involve the transfer of specific businesses. After acquiring a business, the buyer becomes the direct owner of the business and continues to operate it at its own will. Businesses bought and sold in M&A transactions include tangible assets (facilities, equipment, machinery, etc.) and intangible assets (including brands, reputations, human resources, etc.).
Furthermore, unlike Japanese Accounting Standards and International Financial Reporting Standards (IFRS), Vietnam’s accounting and tax regulations do not have clear provisions regarding the treatment of business transfers, so in practice they are treated as transfers of individual assets and liabilities. It is thought that accounting and tax treatment will be carried out. When actually conducting M&A transactions, we recommend consulting with accounting and tax experts.
2. Taxes and points to note for each major M&A scheme
The table below shows the taxes that occur for each major M&A scheme and points to keep in mind.
| Seller attributes | M&A scheme | ||||
| Stock transfer | Business transfer | ||||
| Equity in a limited company or Transfer of unlisted stocks | Listed company stocks (Securities) |
General fixed assets | Real estate (buildings, land use rights, etc.) | ||
| Corporate | Vietnamese companies | Corporate tax Taxable income = Transfer amount – Acquisition price of shares subject to transfer – Transfer fee Tax rate: 20% (Note 2) Value added tax (VAT) Not subject to tax |
Corporate tax Taxable income = Transfer amount of securities – Acquisition price of securities subject to transfer – Transfer-related expenses Tax rate: 20% (Note 2) VAT Not subject to tax |
Corporate tax History of transfers and disposals of fixed assets other than real estate is recorded as registered taxable income for corporate tax purposes. Tax rate: 20% If all conditions are met, the same preferential VAT rate as the business activities operated by the company will be applied. It is applied as a provision for VAT associated with the purchase and sale of goods. According to the regulations, ordinary tax rate 10% (0%, 5% in special cases) |
Corporate tax Income from the transfer of real estate must be declared and recorded separately. Taxable income = real estate transfer Amount – Acquisition price – Transfer-related costs Tax rate: 20% Preferential treatment for business activities operated by the company cannot be applied. Losses on real estate transfers are offset against profits from other business activities. VAT Land use rights are exempt from VAT. Taxable income = real estate transfer Amount transferred – Land use right price for which deductions are allowed, including buildings and land use rights (“The calculation of the land use right price for which deductions are allowed varies depending on the case”) Tax rate: 10% |
| Foreign company | Corporate tax Taxable income = Transfer amount – Acquisition price of shares subject to transfer – Transfer costs Tax rate: 20% (Note 1) (Note 7) VAT Not subject to tax |
Corporate tax portion of corporate tax (foreign contractor tax: FCT)
Taxable income: Transfer amount Tax rate: 0.1% VAT |
There are two main types of business transfers where the seller is a foreign company.
① When foreign company A transfers its own business held abroad The tax treatment in ① is basically handled according to the regulations of the foreign country where the foreign company is located. If the transferee is a Vietnamese company, FCT will be levied depending on the nature of the transferred assets. |
||
| Individual | Vietnam resident | Personal income tax Taxable income = Transfer amount – Acquisition price of shares subject to transfer – Transfer costs Tax rate: 20% (Note 4) |
Personal income tax Taxable income = stock transfer amount Tax rate: 0.1% (Note 5) (Note 7) |
Not applicable | |
| Vietnam non-resident | Personal income tax Taxable income = Stock transfer amount Tax rate: 0.1% (Note 6) (Note 7) |
Personal income tax Taxable income = stock transfer amount Tax rate: 0.1% (Note 5) (Note 7) |
Not applicable | ||
(Note 1) Article 14 of Circular 78/2014/TT-BTC
(Note 2) Articles 14 and 15 of Circular 78/2014/TT-BTC
(Note 3) Article 13 of Circular 103/2014/TT-BTC
(Note 4) Article 11 of Circular 111/2013/TT-BTC
(Note 5) Article 11 of Circular 111/2013/TT-BTC, Article 16 of Circular 92/2015/TT-BTC
(Note 6) Article 20 of Circular 111/2013/TT-BTC
(Note 7) In practice, if the target company is an unlisted stock company, the transaction is considered to be similar to the sale of equity in a limited liability company, and there are cases where the tax authorities apply a 20% penalty on the capital gain. In practice, please check with your local tax bureau.
Source: Created by the author based on various materials
| Seller attributes | M&A scheme | |
| Stock transfer | ||
| Transfer of shares in a limited liability company or unlisted shares | Transfer of listed company shares (securities) | |
| Corporate | – If the seller is not a resident of Vietnam, he/she must declare and pay tax on behalf of the buyer’s company or individual seller. | Since the transaction is conducted through the Japan Securities Depository Center, the seller pays the tax through the Japan Securities Depository Center at the time of purchase. Therefore, there is no tax liability for the buyer. |
| Individual | – If both the buyer and the seller are non-Vietnamese residents, the target company, which is the company to which the shares have been transferred, is required to file tax returns and pay taxes on behalf of the seller. | |
| Seller attributes | M&A scheme | |
| Business transfer | ||
| General fixed assets | Real estate (buildings, land use rights, etc.) | |
| Corporate | Corporate tax Fixed assets are depreciated for the assets to be transferred and can be deducted as deductible for corporate tax purposes. The tax liability of the target company (seller) will not be inherited. VAT Provided that the required invoices and documents are sufficient, the input value added tax (input VAT) paid at the time of purchase can be deducted from the input value added tax (output VAT). Other taxes (e.g. fixed asset registration tax) Taxes shall be paid within 30 days from the date on which the competent authority approves the registration. |
|
Source: Created by the author based on various materials
[Table 3. Tax advantages and disadvantages by scheme]
Stock transfer
| Advantages | – The buyer will take over all tax obligations of the target company, including tax benefits and tax loss carryforwards. – As stock transfer transactions do not incur VAT, cash flow can be optimized for other business activities. |
| Disadvantages | – Since all tax obligations and tax risks of the target company are inherited, if there is a failure to file a tax return, risks may materialize in the future. – Buyer must bear DD costs etc. to confirm tax risks. |
Business transfer
| Advantages | – Buyers can decide to acquire only assets in business lines that align with their strategy. – Since you are only responsible for the assets you sell, you do not need to worry about the tax authority debt of the target company. This reduces tax risks for buyers and reduces tax due diligence (DD) costs. – Depreciation of fixed assets is deductible, and input VAT paid at the time of purchase can be deducted from output VAT if the required invoices and documents are sufficient. |
| Disadvantages | – It will have to pay input VAT when purchasing assets, which will affect the buyer’s cash flow. – It is necessary to pay fixed asset registration tax. |
Source: Created by the author based on various materials
In conclusion
The Vietnamese market, including M&A, has been evaluated by foreign investors as a relatively safe and attractive market. Domestic and foreign investors continue to have confidence in the Vietnamese government’s efforts to improve the investment and business environment and solutions such as epidemic prevention and macroeconomic management. Each M&A scheme has its own advantages and disadvantages regarding related tax obligations, so we recommend that investors consider them in accordance with their investment goals and strategies.
*This article was translated by Yarakuzen.
