In mergers and acquisitions (M&A), tax issues play a crucial role and can significantly impact the cost and structure of the transaction. Below are some key tax issues to consider when conducting M&A transactions in Vietnam:
Corporate Income Tax (CIT):
Gains from Capital Transfers: According to the Corporate Income Tax Law, profits from capital transfers (including share transfers) are subject to CIT. The current tax rate is 20%. However, if the target company issues new shares to the buyer, the entire amount received from the private placement of shares will not be subject to CIT.
Value Added Tax (VAT):
Asset Transfers: If an M&A transaction involves the transfer of assets, VAT may apply. However, capital transfers (share transfers) are exempt from VAT.
The transferor must pay VAT and corporate income tax. Current VAT regulations stipulate that businesses transferring part or all of their assets, such as factories, machinery, equipment, and production lines, must pay VAT at the general rate of 10%.
Personal Income Tax (PIT):
Income from Capital Transfers: Income from transferring equity shares in a limited liability company (LLC) and securities transfers, including shares, stock options, bonds, treasury bills, mutual fund certificates, and other securities as per the Securities Law and the Enterprise Law, is subject to PIT. The tax rate for foreigners depends on taxable income and residency status (Article 2, Clause 4, Circular 111/2013/TT-BTC as amended by Circular 25/2018/TT-BTC).
Import Duty:
Import Asset Transfers: If an M&A transaction involves transferring imported assets, import duty may apply. However, in many cases, businesses may be exempt from import duty if the assets were legally imported previously.
Double Taxation Agreements (DTA):
DTA Agreements: Vietnam has signed DTAs with many countries such as Thailand, Singapore, Malaysia, the Philippines, Laos, Australia, China, Cambodia, etc. DTA regulations can affect the tax obligations of parties in M&A transactions, helping to avoid double taxation and reducing tax burdens.
To facilitate taxpayers in understanding and applying the DTA provisions between Vietnam and other countries/territories, the Ministry of Finance issued Circular No. 205/2013/TT-BTC on December 24, 2013, guiding the implementation of DTAs.
Most DTAs specify that the agreement applies to individuals or businesses that are residents of Vietnam, the contracting countries, or both. The residency criteria must meet the conditions outlined in the laws of the contracting country.
In Vietnamese law, an individual must meet one of the following conditions:
Be present in Vietnam for 183 days or more, or 12 continuous months from the first day of presence in Vietnam.
Have a permanent residence in Vietnam either by registering for permanent residency or by having a rental agreement in Vietnam with a lease term of 183 days or more in a tax year.
Organizations are considered residents of Vietnam if they meet one of the following criteria:
- Being established or registered to operate in the country,
- Having a principal place of business there, or
- Maintaining an actual place of management within Vietnam.
Additionally, they may be:
- Established or registered in both countries, or
- Have a principal place of business or an actual place of management in both.
Taxes Applicable to Double Taxation Agreements: Depending on the DTA between Vietnam and other countries, the types of taxes covered by the agreement may vary. According to the Ministry of Finance’s statistics from Vietnam’s DTAs, the current DTA provisions cover 18 types of income including real estate, business activities, international freight income, dividends, interest on loans, royalties, technical services, etc.
Companies undergoing mergers or acquisitions should ensure compliance with tax obligations and contractual agreements before proceeding with merger or acquisition procedures.
Conclusion
When engaging in M&A transactions in Vietnam, understanding the tax issues is crucial for ensuring legal compliance and optimizing transaction costs. Companies should pay attention to relevant taxes such as corporate income tax, VAT, personal income tax, and import duty, and be aware of DTA regulations to avoid unwanted legal issues. Thorough preparation and professional advice will help companies conduct M&A transactions effectively and in compliance with current legal regulations.
Harley Miller Law Firm “HMLF”
Head office: 14th floor, HM Town Building, 412 Nguyen Thi Minh Khai, Ward 05, District 3, Ho Chi Minh City.
Phone number: +84 937215585
Website: hmlf.vn Email: miller@hmlf.vn