Mergers and acquisitions (M&A) are a useful tool in facilitating corporations to do business in Vietnam. This can be structured according to two common methods: buying shares or buying assets. Factors that are specific to the different commercial, tax, and financial sectors will determine the M&A form of each deal.
The difference between buying shares and buying assets
M&A deals in the form of share repurchases can preserve the tax benefits and benefits of the licensing of the target company. This is the more common option in Vietnam.
A share buyback gives the buyer the benefit of being able to take advantage of the tax losses and tax incentives that apply to the target company. However, the buyer is responsible for the business liabilities when acquiring the target company. This may also give rise to contingent liabilities, including taxes and indebtedness arising as a result of past business activities of the target company. The acquirer should limit its liabilities with warranties and guarantees from the seller.
Conversely, buying an asset can be of greater benefit to the acquirer since the buyer will not be exposed to the risk of the seller’s potential taxes. However, all tax benefits, including tax relief, tax incentives, and tax refund, still belong to the seller.
In the event that an M&A deal is conducted in the form of a share buyback, a basic agreement will be made between the acquiring company and the shareholder(s) of the target company, resulting in a transfer of ownership of the business entity along with current assets and liabilities of the company. This usually includes tax liability.
In the event that an M&A deal is conducted in the form of an asset acquisition, the target company is still the legal owner of the business entity, the acquiring company can flexibly choose the assets they want and determine the amount of debt they can afford. This usually does not include buying the target company’s cash; at the same time, the target company often has to withhold its long-term liabilities. The acquiring company will only inherit liabilities that it determines suitable in accordance with the terms of the asset purchase agreement.
In general, share transfers in Vietnam include the sale of stakes in limited liability companies and joint-stock securities companies. In certain cases, the tax on each transaction is different. Depending on whether the seller is a business or an individual, local or foreign sellers will also lead to how taxed the seller will be in Vietnam. This transaction may be subject to withholding tax at the standard corporate income tax rate (CIT) of 20% or 0.1% of the sales price.
In an asset transaction, the gain from the transfer is treated as other income and is subject to corporate income tax at the standard rate of 20%. Transfer of most properties is also subject to value-added tax, usually at the standard 10% rate. Furthermore, certain types of assets will be subject to stamp duty and/or import duties in some cases.
In an asset transaction, buyers typically want to allocate a higher amount of money to assets with a high depreciation rate. This will allow the buyer to claim larger tax deductions on any income earned in the business. On the other hand, the seller will generally want to allocate a lower amount to assets with a high rate of tax depreciation to avoid “reclaiming” the previously requested depreciation. To justify the transfer price, it is necessary to involve an independent evaluator. This assessment may be presented to the tax authority if the tax authority believes the transfer price is inconsistent with the market price based on their data source.
However, this will not be an issue for share purchases. The tax cost of each asset remains the same before and after the share buyback because ownership of the property remains with the target company.
Identify opportunities and risks
A sound acquisition plan will involve finding a way to achieve your goal to produce beneficial results. Deciding on how to structure an acquisition is not always straightforward. Each deal should have its strategic approach that takes into account the pros and cons of the acquisition methods.
In an acquisition, buyers and sellers are bound to have a difference of interest. Besides finding the highest price, the seller will also try to minimize the risk after completing the transaction. Conversely, the buyer will seek to buy at the lowest possible price and that is also in order to avoid any potential risks and liabilities that the target company may be incurring. Both sellers and buyers need to reach a mutually beneficial agreement to balance these benefits.
To make the right decision, it is essential in every M&A deal that the buyer needs to invest time and effort to thoroughly research the target company with the help of the appraisal party, often including an appraisal of the legal, finance, and tax.
Due diligence is an important stage used to identify opportunities and risks as the type of transaction can have significant tax and other business-related consequences for the buyer. and sellers.
Seeking professional support throughout the entire merger and acquisition process will be an effective approach to determine which structure best suits your company’s requirements.
ASL LAW advises on Mergers and Acquisitions between domestic companies, domestic companies and foreign companies, 100% foreign-invested companies and foreign companies. The M&A team of ASL LAW is capable of consulting complex transactions. In addition, with many lawyers trained from countries with civil and common law systems, ASL LAW has a comprehensive understanding of multinational organizations.
The future of M&A in Vietnam
The fact that there are many M&A deals not only helps to reshape the financial capacity of the seller but also helps open up new opportunities for participation for other organizations and groups. Although there are deals that bring instantaneous profits, the market today also has many big non-profitable deals right now, but these deals will help set the stage for the future. Not only in the manufacturing sector, but M&A is also a powerful tool in many other fields, especially in areas requiring large capital flows such as real estate.
According to Mr. Phan Duc Hieu – Deputy Director of Central Institute for Economic Research (CIEM) acknowledged: M&A activities in the coming time are also expected by businesses to promote. However, a new trend in today’s M&A market is strategic cooperation rather than acquisitions. Along with more synchronous policies, the M&A phases will create a push for private enterprises to soon increase capacity and scale in the developing economy and international integration.
Mergers and acquisitions are also expected to recover soon in mid-2021. According to a market assessment report by Euromonitor International, Vietnam is one of the most dynamic and potential M&A markets in the world. Vietnam’s M&A investment score is 102 points by 2020, ranking second in the world, behind only the US with 108.9 points.