Business restructuring tax in Vietnam and important notes

The Corporate Income Tax (CIT) and Personal Income Tax (PIT) regimes apply to corporate restructuring activities in Vietnam, including mergers, consolidations, splits, and transformations. Tax issues in M&A transactions are a significant challenge for businesses, whether they are in the position of seller or buyer.

Corporate restructuring activities are recognized by Vietnamese law as the basic legal forms of M&A transactions.

1. Tax obligations of enterprises in M&A transactions

Corporate restructuring activities are recognized by Vietnamese law as the basic legal forms of M&A transactions. These forms often lead to the termination or significant change of one or more legal entities.

In the context of taxation, these transactions need to be clearly categorized according to two basic structures:

Transfer of shares/contributed capital (Share Deal): The target legal entity remains the same, only the owner changes. In terms of CIT at the target enterprise level, this transaction usually does not incur a CIT obligation (except in the case of real estate transfer) and does not affect the basis of historical asset depreciation.

Transfer of assets (Asset deal) through legal merger/consolidation: This transaction results in the transfer of assets and liabilities from the reorganized entity to the successor legal entity. According to Vietnam's tax regulations, this is a mechanism that triggers major CIT obligations related to the revaluation of assets.

Enterprises must make CIT finalization up to the time of issuance of decisions on division, separation, consolidation, merger, transformation of ownership, dissolution, or termination of operation. This requirement confirms that, from a tax perspective, the cessation or substantial change of the old entity, requires the closing of the books and the determination of the final tax obligation.

CIT obligations are a key factor in the valuation and structuring of M&A transactions.

The CIT period is usually determined according to the calendar year or fiscal year of the enterprise. For foreign enterprises, the tax period can be applied for each time income is generated. The requirement to finalize CIT at the time of restructuring decision imposes a significant administrative burden and may delay transaction timelines.

2. Tax obligations in the process of enterprise transfer

A fundamental distinction between Vietnamese tax treatment and international tax neutrality principles lies in the handling of gains arising from asset revaluation during restructuring.

2.1. Tax treatment of transferred assets

Current regulations determine that the difference increased due to the revaluation of assets when dividing, separating, consolidating, merging, or transforming the type of enterprise must be included in other income when determining CIT taxable income.

This regulation shows that the tax authority treats the transfer of assets in restructuring (merger, consolidation) as an ordinary asset sale transaction rather than a continuation of business activities.

Fixed assets: The increase in difference due to revaluation must be included in other income subject to CIT of the transferring enterprise.   

Land use rights:

• For land rights with a definite term (for capital contribution or transfer), the difference must be included in other incomes subject to CIT.
• For long-term land use rights or land use rights for investment in the construction of houses/infrastructure for sale, the difference shall be calculated once into other incomes when determining CIT taxable income at enterprises with revaluation assets.

This rule creates a significant CIT liability right at the time of the transaction. For assets whose market value is significantly higher than the residual value on the books (especially real estate or fixed assets that have been used for a long time), the merged enterprise is forced to pay a large amount of CIT on the unrealized profit in cash.

Although the transferring enterprise is subject to tax on the revaluation difference, the merged or reconsolidated enterprise has an important benefit: it is allowed to depreciate fixed assets at the revaluation value.

2.2. Handling of loss carryover and post-restructuring tax incentives

Carrying forward losses: Losses arising from the business activities of the enterprise before the restructuring are allowed to be carried forward continuously to the taxable income of the following years. However, this carryover period must not exceed 5 years from the year the loss arises. The merged enterprise can inherit these losses, provided that the 5-year period is complied with. Maintaining adequate records of where and when losses were incurred is necessary to maximize this tax benefit.   

CIT incentives: After the restructuring, a complex issue is whether the new legal entity or the successor legal entity will continue to enjoy the CIT incentives granted to the old entity, or whether it will be considered as a new investment project to start the new incentive period.   

Tax incentives are often associated with preferential geographical conditions or industries. If the merger is not carefully structured or does not comply with the procedures for registering incentives from the beginning, the legacy business may be considered as a continuation of the former ineligible activity, resulting in the loss of the right to CIT incentives. The lack of clear guidance on the transferability of tax incentives in legal merger transactions is a major risk in the M&A due diligence and valuation process, requiring in-depth preparation and legal advice from experts.

If an individual receives dividends in securities, the paying organization is responsible for declaring and paying tax on its behalf.

3. Tax obligations of shareholders/owners

In business restructuring transactions by stock swaps, individual shareholders transfer the old ownership to receive new shares, this act is considered a PIT capital transfer event.

3.1. PIT on the transfer of contributed capital

This regulation applies to capital contributors in limited liability companies (limited liability companies) and partnerships.

• Tax rate and tax base: The applicable tax rate is 20% for each transfer. Taxable income is determined by the transfer price minus the purchase price and related reasonable expenses.   
• Declaration obligation: Resident individuals are responsible for self-declaration and payment of PIT. For non-resident individuals, organizations or individuals receiving the transfer are responsible for deducting and paying tax on behalf of the transferor.   

3.2. PIT on the transfer of securities/shares

This regulation applies to the transfer of securities such as stocks, bonds, stock options, etc.

• Tax rate and basis for tax calculation: Since July 2015, individuals transferring securities pay PIT at the rate  of 0.1% applied  on the transfer price (i.e. total transaction value). This is a tax on gross sales, not a tax on net profit.   
• Stock swap in merger/consolidation: When shareholders of the merged company swap shares to receive shares of the merged company, this transaction is considered a transfer of securities and incurs an immediate PIT liability of 0.1%.   

Note that income from stock dividends is income from capital investment (dividends) subject to a tax rate of 5% on par value. If an individual receives dividends in securities, the paying organization is responsible for declaring and paying tax on its behalf. The 0.1% tax rate applied to the transfer of shares in M&A is typically significantly lower than the 5% tax on stock dividends. This makes the stock swap structure in mergers and acquisitions a relatively effective PIT option compared to other forms of profit distribution before M&A.

4. Some solutions to optimize taxes in enterprise restructuring

Businesses should apply the following strategies to optimize CIT liabilities:

If the main goal of M&A is legal integration without triggering a large CIT bill, companies should prioritize a 100% share acquisition structure instead of a legal merger/consolidation to avoid the obligation to mandatory asset revaluation and charge tax on the difference.

When a legal merger is mandatory, businesses need to perform a detailed analysis comparing the current CIT costs with the long-term benefits of asset depreciation at increased value. This is especially important when fixed assets have a high market value.

In order to improve the investment environment and increase the competitiveness of M&A transactions in Vietnam, regulators should consider adjusting the current regulations on CIT and PIT to help the parties to the transaction feel safe and convenient to strengthen M&A activities in Vietnam in the coming time. Detailed tax guidelines for mergers and consolidation activities, especially CIT incentives and minimizing cumbersome and unnecessary administrative procedures are the right and appropriate approach in the current context.