What taxes apply for mergers and acquisitions (M&A) transactions?
Vietnam’s current regulatory system consists of several regulations governing M&A activities which are embedded in various legal documents, such as the Law on Enterprises, the Investment Law or the Competition Law.
M&A transactions generally involve the seller, the buyer, and intermediary parties. The objects of the transaction can be assets and investment projects of businesses, whole production and business establishments, contract-based capital or stake transfer of businesses or gradual stock transactions in the stock market until reaching the controlling level.
As of now, the amended Law on Tax Administration is being considered, collecting opinions before a final draft is submitted to the government. There are no plans for new enactments of or amendments to tax regulations on the agenda of policy makers for the last year and this year. The current tax law, however, consists of fairly concrete regulations on M&A transactions, particularly tax policies applicable to the sellers and the buyers of partial or whole stakes (or capital contribution) in other businesses.
What are the taxes applicable to corporate sellers?
The sellers are obliged to pay value-added tax (VAT) and corporate income tax (CIT). Under current regulations, businesses selling part of or all of their assets, such as factories, machinery and equipment, and production lines are subject to a 10 per cent VAT rate. In case businesses transfer capital contribution, stakes or shares in the stock market, such transactions are not subject to VAT.
When businesses operating in the trading, financial, and banking fields engage in transferring a particular business segment, for example banks selling their retail segments or trading firms selling their store chains, defining their VAT obligations is more complex.
Under current regulations, businesses need to clearly define the value of products, services, and real estate attached to the business segment to be transferred to fully calculate their VAT obligation. The capital value, their liabilities, and assets defined as their intellectual property are not subject to VAT.
In light of the CIT Law and related regulations, business transactions on assets, capital or stock transfers are subject to a common CIT rate of 20 per cent. In respect to buyout cases, firms are not allowed to take the profit from their real estate business to make up for losses they incur in production and business activities in tax calculation.
What are the taxes levied on individuals engaging in capital or stake transfers?
Individuals are liable to make contributions in the form of capital, assets, real estate, and even land use rights to form businesses.
Under the Personal Income Tax (PIT) Law, the transfer of real estate products is subject to a PIT rate of 2 per cent of the real estate value.
The actual income individuals receive from their capital contribution or stake purchases in businesses is subject to 5 per cent PIT. This latter charge is not applied in case businesses used their after-tax profits to raise capital and had not paid dividends to individuals.
If individuals sell their capital contributions or stakes in businesses, these businesses need to carefully review the tax obligations of the capital sum originated from distributed dividends or after-tax profits in previous years.
Individuals holding capital or stakes in businesses must determine their own PIT obligations. The PIT payment equals 0.1 per cent of the total transaction value for stock transfers, whereas a PIT rate of 20 per cent of the actual income is applied to capital transfers.
Vietnam Investment Review