Solving tax problems when separating enterprises

The separation of enterprises entails a series of tax procedures and problems, from corporate income tax (CIT), personal income tax (PIT) to the handling of loss carryover, interest expenses, etc. The case of Vinpearl separating Vinpearl Cua Hoi into an independent enterprise is a typical example of the complex tax obstacles that need to be removed when conducting this activity.

Vinpearl Hotel Hue. Source: VNEconomy

Different regulations on CIT and PIT finalization when separating enterprises

According to the Law on Tax Administration, the deadline for submitting tax declaration dossiers in case of enterprise reorganization is no later than the 45th day from the date of the event. An enterprise separation event is understood as when there is a separation decision of a competent authority, which can be a decision of the Board of Members, the owner or the General Meeting of Shareholders of the company depending on the type of enterprise.

In case of separation of Vinpearl's enterprise with two times when there is a decision to separate the company, according to the guidance of the tax administration agency, the company must make CIT finalization up to that time. This means that Vinpearl must make a separate CIT finalization report for the period from the beginning of 2023 to the date of the 1st separation resolution, then finalize it again from the effective date of the 1st decision to the date of the 2nd separation resolution. Having to make tax finalization in the middle of the year many times is an embarrassing point for businesses, because usually CIT finalization is only done at the end of the year. In addition, after the reorganization, Vinpearl and the new company will continue to operate until the end of the year, so they still have to pay CIT finalization for the whole fiscal year of each company.

Contrary to CIT, PIT is still settled according to the calendar year even though the enterprise is separated at any time. However, problems arise when separating the enterprise, employees can be transferred to the newly separated company. According to current regulations, employees who are transferred due to the separation of new companies or organizations in the same system are responsible for finalizing taxes on behalf of individuals, including the income paid by the old organization to the employees, as long as the separated company inherits all taxes of the separated company. Note that in case the company has declared PIT finalization at the time of the decision to separate the company, the company must cancel the tax finalization declaration and re-declare PIT finalization at the end of the year.

Transfer of losses between businesses after separation

A major problem with CIT is the handling of losses that have not been carried forward when the enterprise is separated. According to the provisions of Clause 3, Article 9 of Circular 78/2014/TT-BTC (amended by Circular 96/2015), "the losses incurred by the enterprise before the division or separation ... are still in the period of carrying forward losses as prescribed, these losses will be allocated to enterprises after division and separation according to the proportion of equity to be divided and separated". This regulation aims to ensure that the right to carry forward losses is not lost but is divided equally based on the size of each party's capital after restructuring. In the Vinpearl case, assuming that at the time of separation the company had accumulated losses from previous years, that loss must be allocated: Vinpearl retains the majority corresponding to nearly 95% of the equity after the separation, Vinpearl Cua Hoi receives the loss corresponding to nearly 5%. The detailed allocation will be carried out by Vinpearl and declared in the settlement dossier at the time of separation. The challenge here is that businesses must track in detail the year in which the loss is incurred and the deadline for carrying forward the remaining losses for each allocated part. Enterprises also note that the principle of carrying forward losses continuously for no more than 5 years from the year following the year in which losses arise still applies normally to enterprises after separation. This means that if Vinpearl has a loss from 2019 to 2019 and 2023 is the last year to be carried forward, both Vinpearl and Vinpearl Cua Hoi can only use that corresponding loss to offset in 2023. Obviously, the transfer of losses requires caution such as calculating the right proportion, not allocating more than the allowed period, and each company after the separation is only allowed to use its own loss.

The listing ceremony of VPL shares of VINPEARL Joint Stock Company. Source: SSC

Interest expense is not deductible

In addition to carrying forward losses, a specific issue of CIT is  the interest expense that is controlled according to Decree 132/2020/ND-CP on anti-transfer pricing. According to this Decree, the total net interest expense is deductible up to 30% of EBITDA, the [1]excess will not be deducted in the period and will be carried forward to the following periods (up to 5 years). For enterprises with related-party transactions, it is very likely that every year there will be a part of the loan interest that cannot be deducted and is suspended for carry-over. When separating a business, the question arises: how will the undeducted interest expense of the old company be handled? The current law does not clearly stipulate the carryover of losses, but usually the tax administration agency will apply the same principle of carrying forward losses, which is to allocate non-deductible interest expenses to enterprises after separation and these enterprises can continue to transfer those expenses within a limit of 5 years. Thus, assuming that Vinpearl has 50 billion VND of non-deductible interest expense accumulated until before the separation, Vinpearl Cua Hoi will be "inherited" about 5% of the 50 billion VND (i.e. 2.5 billion) included in its non-deductible interest expense, Vinpearl retains 47.5 billion. Each party then continues to monitor this amount during its tax period, and is only transferred within 5 years from the year following the year in which it originally arose (not 5 years from the time of separation). This requires the tax accountants of both companies after the separation to coordinate to identify the data and declare on the appendix of the finalization declaration according to the form. If Vinpearl Cua Hoi is not notified and forgets to declare this part of 2.5 billion, it may lead to the loss of the right to transfer the valid deductible expenses in the future.

Other tax problems

In addition to the above main points, business separation may arise a number of other tax issues to be noted.

VAT and invoicing: When moving part of your business to a new company, invoicing and VAT deductions can be interrupted. Therefore, it is necessary to adjust or re-sign the contract so that the new company receives and avoids VAT deduction errors. The VAT Law does not have separate regulations on separation of enterprises, but the practice of tax authorities allowing the transfer of assets and goods between separated and separated companies for internal restructuring will not be considered taxable activities. However, the enterprise must make a record of asset handover, clearly identify the list of assets and debts transferred together and not issue VAT invoices for these assets.

License tax and other taxes: The newly established company will have to pay license tax according to its charter capital. The company is separated due to a decrease in charter capital, but the license tax remains unchanged, and from the following year, it will be paid according to the new charter capital, if the capital decreases to another level. This is a small point, but businesses should pay attention to updating.

In summary, the tax perspective shows that business separation arises many procedures and detailed compliance requirements. When restructuring, enterprises should carefully look up the relevant tax regulations, and may even consider seeking a prior opinion from the tax administration agency to properly comply and avoid being sanctioned from somewhat tricky regulations in this particular activity.

Lawyer Nguyen Van Phuc

HM&P Law Firm