TAX IMPLICATION RELATING TO M&A DEALS IN VIETNAM

Legal basis

Law on Enterprises No. 59/2020/QH14 published on 17 June 2020;

Competition Law No. 23/2018/QH14 published on 12 June 2018;

Circular No. 78/2024/TT-BTC guiding the implementation of the government’s Decree No. 218/2013/ND-CP of december 26, 2013, detailing and guiding the implementation of the Law on Corporate Income Tax (“Circular 78/2014/TT-BTC”).

General information in relation to M&A

Definition

M&A is an acronym for two words Mergers and Acquisitions, it can be considered a method of gaining control of a company or business through mergers and acquisitions. to that company or enterprise, specifically:

Acquisitions: means an act whereby an enterprise acquires the whole or part of property or shares of another enterprise sufficient to control or dominate all or one of the trades of the acquired enterprise.

Mergers: means an act whereby one or several enterprises transfer all of its/their property, rights, obligations and legitimate interests to another enterprise, and at the same time terminate the existence of the merged enterprises.

Popular forms of M&A

The classification of mergers and acquisitions is a complex process that involves various criteria. However, the most widely used and accepted method is the categorization based on the functions of the member companies. This approach is considered the most suitable for business and academic settings due to its clarity and accuracy, specifically:

Horizontal M&A

A combination of businesses that are in the same industry or market join forces shall bring various benefits. This includes expanding the market, improving the efficiency of combining brands, and reducing fixed costs. As a result, the overall distribution system can become more effective. This kind of merger is quite common as it brings about economic scale benefits.

Vertical M&A

Is a combination of companies and businesses with different production stages in the production process and market access (on the same value chain), bringing many advantages in terms of quality assurance and control of product sources or outputs, reducing intermediary costs, and not limiting competitors' sources of goods or outputs.

Conglomerate M&A

Is a formation of a corporation through an association of businesses in disparate and unrelated fields is a mechanism, which effectively reduce risks by diversifying products and services, while simultaneously exploiting different economic forms in the domains of finance and resources. Notably, such an association does not influence the level of market concentration. Additionally, it can help save market entry costs and achieve augmented profits by offering a variety of products and services.

Famous M&A deals

Central Group is a corporation from Thailand that spent about 1.11 billion USD to own Big C Vietnam with the aim of dominating the retail sector in Vietnam. Previously, this group also acquired shares of Nguyen Kim - a famous electronic distribution system in Vietnam.

In December 2019, Masan Group and VinGroup agreed in principle to merge MCH and VinCommerce, VinEco (later renamed WinCommerce and WinEco) through a share swap. This is considered Masan's most prominent M&A deal. After the deal, Masan took control of the company's operations and became a consumer goods - retail group with outstanding competitiveness and leading scale in Vietnam.

In 2017, TTC Group completed the merger of Bien Hoa Sugar Joint Stock Company and Thanh Thanh Cong Tay Ninh Sugar Joint Stock Company into Thanh Thanh Cong - Bien Hoa Joint Stock Company (TTC AgriS), completing the Corporation model, centralized management Central to all business units of the TTC sugar industry. Besides expanding markets and increasing output, TTC AgriS agricultural industry also expands the value chain horizontally and deeply.

Common types of business acquisitions and related tax obligations

There are 4 common types: (i) Indirect transfer, (ii) Transfer of shares and capital contributions (“Capital transfer”), (iii) Project transfer, (iv) Asset transfer.

In particular, types (i) and (ii) have fewer tax issues and transactions often take place when the business lines are conditional business lines, types (iii) and (iv) often have more tax issues and business lines without conditions.

In addition, it is necessary to note the tax issues arising from these types as follows:

Tax relating issues	Indirect transfer	Capital transfer	Project transfer	Asset transfer
Applicable taxes	Corporate income tax	Corporate income tax	Corporate income tax Value added tax (if any)	Corporate income tax Value added tax (except where the asset is land use rights)
Inherit tax incentives	Does apply	Does apply	Does apply	Do not apply
Transfer losses	Does apply	Does apply	Do not apply	Do not apply
Potential tax issues	Fewer problems	Fewer problems	Multiple problems	Multiple problems

Tax issues in relation to merging enterprises

Capital transfer tax:	Do not apply
Value added tax:	Not applicable but the merging party inherits the input value added tax pass-through
Corporate income tax:	Does not apply, but only inherits rights and obligations, including tax incentives and losses.
Registration fee:	Does not apply, only requires re-registration of property ownership
Tax obligations due to termination of operations:	Tax authorities perform tax checks to close tax codes

Method of calculating income subject to corporate income tax.

Regarding the tax basis for businesses, corporate income taxpayers are organizations that produce and trade goods and services with taxable income. Therefore, businesses that generate taxable income from mergers and acquisitions are obliged to pay corporate income tax (“CIT”).

Income subject to CIT is determined specifically as follows:

Taxable income

Transfer price (1)

Purchase price of transferred capital (2)

Transfer costs (3)

In which:

Transfer price: is the amount of money that the transferor receives under the transfer contract. Although the law does not require parties to set a price, the transfer price must align with the market price. If the transfer contract does not mention the payment price or the payment price in the contract does not match the market price, then the tax authority has the right to determine the transfer price according to the provisions of the law on tax administration.

Purchase price of transferred capital: is the value of the capital contribution at the time of the transfer or the repurchase price. To prove the purchase price, you can refer to documents such as audited financial statements, transfer contracts, and payment documents. The transfer costs should be determined based on the actual expenses involved in the transfer, supported by legal documents and invoices.

Transfer costs: is the expenses incurred in the course of transferring a property from one party to another. This includes a broad range of costs, such as fees and charges associated with legal procedures, transaction costs, and the negotiation and signing of transfer contracts, as well as other expenses relating to the preparation of legal documents and invoices. These costs are essential to the completion of a transfer and are typically borne by both parties in accordance with their respective legal obligations. As such, it is vital to have a clear understanding of the various transfer costs involved in any property transaction in order to make informed decisions and ensure that the process proceeds smoothly and efficiently.

Regarding the issue of corporate income tax rate, it applies according to the Full Tax Schedule with a tax rate of 20%.

Regarding the issue of declaring and paying CIT

Firstly, CIT declaration and payment should be completed within 10 days from the date of official approval by the competent authority. If approval is not required, the deadline is within 10 days from the date of official approval by the competent authority, upon completion of the transfer transaction. However, it is important to note that some tax authorities may require earlier declaration deadlines, such as at the signing of the contract or the notification of foreign investor transfer condition satisfaction. As such, it is crucial to pay attention to the specific deadline for each case in order to comply with the law.

Secondly, in regard to tax returns, the transferor of a resident organization is the person responsible for preparing and filing the return. However, if the transferor is a non-resident organization, then the Vietnamese transferee or target company is responsible for conducting tax declaration on its behalf. For shares of public companies, a bank or securities company is the tax preparer who declares on their behalf.

Thirdly, the place of declaration is the direct tax authority in case the transferor is a resident organization or the direct tax authority of the target company in case the transferor is a non-resident organization.

CONCLUSION

Mergers and acquisitions (M&A) are executed in a multitude of ways. However, typically, legal entities involved in M&A activities have tax obligations, primarily corporate income tax obligations arising from transactions. A prevalent issue in M&A deals is that businesses and individuals involved in capital transfer transactions often seek to minimize their income tax liability or evade it altogether. This problem is particularly common in foreign-invested enterprises, especially foreign enterprises that generate income in Vietnam but are not registered to operate there. Nevertheless, the tax authorities have mechanisms to collect taxes owed to the state budget. Therefore, it is imperative for businesses to conform to their tax obligations to the state and avoid any violations that may result in severe legal consequences.

ADK VIETNAM LAWYERS