Tax and customs procedures and points to note regarding mergers and acquisitions
2023/06/19
- Mai Thi Dung
Introduction
The survival and development of a business is always an important theme for a company, and one of the business strategies for achieving this is “mergers and acquisitions,” which can be expected to create various synergistic effects in areas such as financial resources, business management, and technological capabilities. However, when carrying out a merger or acquisition in Vietnam, companies must be aware of the process required to navigate the complex tax and customs procedures.
This article explains the procedures required for mergers and acquisitions, as well as tax and customs matters to be aware of.+
1. Definition of absorption-type merger
Article 201 of the Enterprise Law of 2020 defines a merger as “the termination of the business activities of one or more businesses or the disappearance of such businesses by having another business succeed all of its assets, rights, obligations and legal interests.” In an absorption-type merger, the company that transfers all of its assets, rights, obligations, and legitimate interests (the merging company) among the multiple companies involved in the merger is dissolved upon completion of the transfer registration to the company that accepts them (the accepting company). Combining multiple companies into one increases the company’s competitiveness and scale.
2. Customs procedures for mergers and acquisitions
When a merger is carried out, the company being merged is required to make a written report to the competent customs authority. In addition, a financial statement report on the usage of imported raw materials, supplies, machinery, equipment and goods (hereinafter referred to as “raw materials, etc.”) up until the date of decision on the absorption-type merger will be submitted to the Customs Bureau. The deadline for submission is within 90 days of the decision date.
After receiving the financial statement, the Customs Bureau will inspect and audit the raw materials, etc. at the office of the absorbed company. Once confirmation is complete, the absorbed company will transfer raw materials, etc. to the accepting company. Since there are no clear regulations regarding the procedures and surcharges for using imported raw materials, etc. domestically, if such treatment applies, it is recommended that you submit an official letter to the General Administration of Customs requesting specific guidance.
After the merger, the merging company will be an expansion investment project of the host company, and if it wishes to apply the EPE (Export Processing Enterprise) regulations and tax preferential regimes, it will need to check whether it is eligible. According to the Enterprise Law, after a merger, the merging company ceases to exist, and the accepting company receives the powers and legal benefits of the merging company, and debts and payment obligations arise. Therefore, when carrying out customs procedures before obtaining a new Enterprise Registration Certificate (ERC) and Investment Registration Certificate (IRC), the receiving company must do so based on its own permits (ERC and IRC). In practice, customs procedures may vary from case to case, so we recommend checking with the relevant customs authority.
3. Tax procedures for mergers and acquisitions
When a merger is carried out, the corporate income tax (CIT) and personal income tax (PIT) return filing procedures must be carried out in order to close the tax code of the merged company. The procedure is as follows:
step 1
– For CIT tax return procedures, the “last CIT tax period” must be determined. This refers to the period from the start of the financial year to the date of the merger decision approved by the competent authority (or the date on the new company registration permit). If this period is less than three months, companies can choose one of the following two methods. We recommend option (2), which is expected to reduce creation time. (1) Prepare and submit a CIT report for the previous year and a CIT report for less than three months. (2) Prepare and submit a CIT tax return for a period not exceeding 15 months, including the previous year.
– For PIT tax return procedures, the “last PIT tax period” must be determined. This refers to the period from January 1 to the date of the merger decision approved by the competent authority (or the date on the new business registration permit). Currently, as electronic invoices are being used in accordance with Decree No. 123/2020/ND-CP, there is no need to submit invoice usage reports to the Tax Department. However, if the merging company does not use e-invoices during the merger, it is recommended that the merging company check with the competent tax authority to see whether it is necessary to notify the tax authority.
Step 2
The merging company must conduct an audit and submit the audited financial statements, CIT and PIT returns to the competent authorities within 45 days from the date of the merger decision. In addition, when undergoing a tax audit to close a tax code, companies will need to prepare documents and evidence to provide to the tax authorities.
Step 3
– If a company wishes to claim a Value Added Tax (VAT) refund, the tax office will audit and investigate the company if it has registered a VAT deduction scheme, and will also verify the VAT-related documents, data and information. According to the law, companies are not required to submit VAT refund applications. However, in practice, this depends on the opinion of the tax bureau, so it is best to check directly with the tax bureau whether they require you to submit an application.
If you do not wish to claim a VAT refund, the VAT refundable amount will be recorded as a VAT deduction item of the accepting company (if the VAT calculation method of the accepting company is also a deduction method, or if, after the merger, the merging company is an independent accounting department of the accepting company that also uses the deduction method for VAT calculation). If the receiving company is an EPE, the VAT refundable amount is deductible for CIT purposes.
Step 4
After a tax investigation or audit, the tax office will issue a tax investigation minutes and a decision on administrative fines (if any). The merging company must fulfill all outstanding tax obligations (such as filing returns and paying taxes). In case of transferring outstanding tax obligations to the acquiring company, Form 39/TB-DKT must be completed and submitted to the Tax Department. The receiving company must then fulfil the transferred tax obligations.
Step 5
The absorbed company will receive a notice of tax code closure from the tax authorities within three business days from the date of completion of all tax obligations.
*Note: Pursuant to Official Letter No. 74982/CT-TTHT dated November 12, 2018, the absorbed company can issue invoices and file tax returns using the tax code until it receives a notice of tax code closure. However, since this is not stipulated in any legal document such as a government ordinance or notice, it is necessary to check with the competent tax bureau before implementing it.
4. Tax and accounting points to note
a) Tax returns for capital transfers in mergers and acquisitions
If a capital transfer transaction occurs at the time of a merger, the investment ratio after the merger will change, and in that case, there is an obligation to declare the tax arising from the capital transfer transaction. The time when taxable profit is determined is the time when the ownership interest in the capital is transferred pursuant to the transfer agreement. Tax on capital transfer transactions is calculated as follows:
CIT = (Sales price – Purchase price of the capital transferred – Related expenses) x 20%
The selling price must not be less than the net assets of the merging company and must be appropriate to the market price. Capital transfers may be subject to review during tax investigations and audits in connection with mergers, and if the transfer cannot be proven to be at market value, there is a risk that the tax authorities will apply a compulsory selling price. Therefore, we recommend that you request an appraisal from an appraisal company or other such entity to assess the appropriateness of the selling price prior to the capital transfer.
In addition, if the absorbed company has a large amount of undistributed after-tax profits, the impact on the selling price and CIT of the capital transfer will be significant. Therefore, it is better for the merging company to complete its financial and tax obligations before the merger and then distribute its after-tax profits. However, it must ensure that it can enforce its debt and other obligations in respect of its assets after the distribution.
It should be noted that if the investor in the merged company is a Vietnamese company, when transferring capital to the investor in the host company, an invoice must be issued for the transaction, but this is not subject to VAT.
b) Accounting currency after the merger
After the merger, the accounting currency of transactions involving the merging company will be the accounting currency of the receiving company. If the accounting currency of the receiving company is a foreign currency, it is necessary to recheck whether it meets the conditions set out in Article 4 of Circular No. 200/2014/TT-BTC. If the conditions are not met, the receiving company will be required to convert the foreign currency into Vietnamese dong (VND).
c) Accounting standards of the receiving company after the merger
After the merger, the receiving company must record its accounting books and present financial statements for the first accounting period in accordance with the following principles:
– Accounting books: The balances in the accounting books relating to the assets, liabilities and capital of the absorbed company are recorded as accruals in the current period in the accounting books relating to the assets, liabilities and capital of the accepting company.
– Balance sheet: The balances of the assets, liabilities and capital of the merging company prior to the merger are recorded as accrued to the receiving company and shown in the column “Year-end data.”
– Income statement and cash flow statement: Present only data from the time of the merger through the end of the first reporting period in the “Current period” column.
d) CIT benefits after merger
An established enterprise or an enterprise with an investment project resulting from amalgamation may only inherit the “remaining period” of the pre-merger CIT preference if it continues to meet the eligibility requirements for the CIT preference after the merger. Therefore, if the pre-merger company or investment project lapses, the host company will not be able to enjoy the CIT benefits from the pre-merger company or investment project.
e) Loss on transfer after absorption-type merger
Losses incurred by the absorbing company before the merger must be managed in detail for each fiscal year in which they are incurred, and either offset against the income of the accepting company after the merger in the same year as the loss, or continue to be transferred as a continuous loss carryforward within five years from the year following the year in which the loss was incurred.
Conclusion
As noted above, mergers and acquisitions are complex processes that take time and are likely to have financial implications for the companies involved. In order to carry out procedures quickly and reduce costs as much as possible when merging, it is recommended that companies conduct advance checks and identify any issues with tax, customs, etc. before the merger.
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Reference laws and regulations:
– Enterprise Act 2020
– Tax Administration Act 2019
– Circular 78/2014/TT-BTC
– Circular 96/2015/TT-BTC
– Circular 200/2014/TT-BTC
– Circular 39/2015/TT-BTC
-Official Letter 74982/CT-TTHT dated November 12, 2018
– Official Letter 4742/BTC-TCHQ dated April 11, 2017
*This article was translated by Yarakuzen.
