Typical due diligence issues

A potential investor may find it challenging to conduct a comprehensive due diligence exercise due to a lack of transparency among domestic enterprises. A target company may invoke state secrecy laws to prevent the disclosure of information if the state has equity in the enterprise. In addition, potential investors may find domestic enterprises' record-keeping and accounting practices lacking compared with international standards, making the task of verifying a target company's compliance status even more challenging. Patience, diplomacy and good communication skills are necessary to obtain the relevant information pertaining to a target company.

Domestic enterprises in Vietnam are also typically unfamiliar with the documents that must be provided or disclosed in a due diligence exercise, or how to properly organize them for the other side. This may occasionally affect the results of a due diligence review, which may cause significant delays in obtaining information from the target.

Pricing and payment

The purchase price needs to be decided based on a fair valuation of the transferred assets/equity interests in order to avoid possible questions from the relevant tax authorities.

Signing/closing

Is a deposit required?

The sell side would typically request a deposit in a share sale or asset sale transaction. However, this remains subject to the negotiation between the parties.

Is simultaneous signing/closing common?

Simultaneous signing and closing is not common in Vietnam due to the following reasons:

• Share/equity interest sale: Certain governmental approvals are required in order to effect the transfer, and approval may be required before being entitled to contribute capital or acquire capital/shares (M&A Approval). The target company may also be required to update its Enterprise Registration Certificate (ERC) or make certain notifications to/receive confirmations from the authorities in order to reflect the buyer's name as one of its owners/shareholders. Merger filing requirements may also be triggered in some cases.
• Asset sale: Certain common assets (e.g., real properties and vehicles) require registration, and the transfer of these assets would not be effective and completed without satisfaction of these conditions. Merger filing requirements may also be triggered in some cases.

It is possible for the transacting parties to agree on the simultaneous signing and closing, especially in transactions that are undertaken at the offshore level and subject to the laws of that jurisdiction.

Foreign investment restrictions

Vietnam has a mandatory and suspensory foreign investment screening procedure, which means that transactions that meet the relevant criteria need to be notified to the relevant authority and cleared before they can be completed. For further information, see the more detailed section on "Foreign investment restrictions".

Foreign exchange control

All transactions and payments within Vietnam must be effected in Vietnamese dong, except in certain cases prescribed by the State Bank of Vietnam.

In the case below, the purchase price for equity transfer must be paid through the direct investment capital account, which is opened in the name of the target company at a licensed bank in Vietnam, before onward payment to the seller's account:

(i) A foreign investor wishes to acquire shares or equity interest from a shareholder or member who resides in Vietnam, or contribute capital into a target company operating in Vietnam that has any of the following:

• An existing foreign member or shareholder and has already been required to obtain an IRC
• 51% of its charter capital is held by foreign investors (FDI Company)
• The acquisition of shares or equity interest (from the shareholder or member being a resident in Vietnam), or contribution of capital by the foreign investor results in the target company becoming an FDI Company

In the case below, the foreign buyer/investor itself will have to open an indirect investment capital account for the payment of the acquisition of shares or contributed capital to the seller:

(ii) A foreign investor acquires from a shareholder or member being a resident in Vietnam shares or equity interest in, or contributes capital into, a target company operating in Vietnam, and such target company satisfies either of these conditions:

• Is not an FDI Company and will not become an FDI Company after such acquisition or contribution
• Has shares listed or registered for trading on the securities trading system

Antitrust/merger control

Vietnam's merger control regime requires notification when certain thresholds are met. The pre-acceptance review takes seven working days and a preliminary assessment takes 30 days from confirmation of a complete submission. An official assessment takes up to 90 days with an extension for complicated concentrations. Transactions cannot be implemented without approval from the Vietnam Competition Commission (VCC). For further, see the more detailed section on "Antitrust/merger control".

Other regulatory or government approvals

A target company operating in special sectors may trigger special approvals from the industry management authorities. In addition, any entity engaging in a regulated industry must satisfy any relevant business conditions. Business conditions typically include permits, eligibility certificates, practicing licenses and confirmation letters. The Investment Law lists 227 conditional business sectors, which are applicable to all enterprises in Vietnam as business conditions.

Share/equity interest sale

Where an investor sells its equity in an enterprise and there is no change in the identity of the employer, it could be said that no legal transfer takes place merely by virtue of a change in the ownership of the employer and no consents are required.

Asset sale

The acquisition of assets does not automatically transfer the employees. The method for employee transfer in Vietnam is "termination and re-hire."

The law does not require the transferor to obtain the consent of a local labor authority, the employees or any employee representative organization before the sale of an enterprise, nor does it require the transferor to give prior notice to the labor authority. However, if a lay-off is to be conducted before or after the transaction, the employer must comply with any applicable requirements to consult with the employee representatives and notify the authority.

Share/equity interest sale

The transfer of capital interest and securities is not subject to value added tax (VAT). In addition, no other transfer tax is imposed on an acquisition of capital or securities.

However, sellers will be subject to income tax, at rates that differ depending on whether the sellers are individuals or corporate entities and whether it is an acquisition of securities or capital.

In particular, with respect to a transfer of capital in a limited liability company, individual sellers who are Vietnam tax residents pay personal income tax (PIT) at a rate of 20% on gains while nonresident individual sellers pay PIT at 0.1% on transfer proceeds. For a sale of shares in a joint stock company (JSC), whether public or non-public, individual sellers will be subject to 0.1% PIT on sale proceeds.

Vietnamese corporate sellers are subject to 20% corporate income tax (CIT) on any gains derived from a transfer of capital or securities. Foreign/offshore corporate sellers will pay CIT at a rate of 20% on any gains generated from a transfer of capital of a limited liability company or from a transfer of shares in a non-public JSC, and they will pay CIT at the rate of 0.1% on transfer proceeds for a transfer of shares in a public JSC.

Vietnamese tax authorities have challenged the imposition of income tax on "indirect share transfers" by referring to Decree No. 12/2015/ND-CP (Decree 12) that has been applicable from 2015 onwards. Accordingly, taxable incomes (or gains) derived in Vietnam by a foreign/offshore company (regardless of whether it has a permanent establishment in Vietnam and the location of the business) are any incomes (or gains) derived from certain M&A activities, including a transfer of contributed capital, investment projects, rights to contribute capital or rights to participate in investment projects, etc.

However, Decree 12 and other relevant tax regulations do not specifically address how taxable gains would be calculated and which entity would be liable for tax declaration and payment. This gives rise to uncertainty in implementation.

Asset sale

Registration fee

It is mandatory to register the ownership or use right of certain types of properties in Vietnam, such as houses and land, ships, boats, automobiles, motorcycles, hunting rifles and sports guns. Registration fees, known in Vietnamese as "lệ phí trước bạ", are imposed on buyers of certain property when they register the ownership of properties.

Registration fees imposed on a change of ownership or right to use land and houses are 0.5% of the property value. Different registration fee rates apply for other items. However, except for motor vehicles with fewer than 10 seats, aircrafts and yachts, registration fees for one asset do not exceed VND 500 million. 

VAT

A transfer of tangible assets is subject to VAT. The VAT rate may vary depending on the assets, but the standard VAT rate is generally 10%.

CIT

Any income derived from an asset sale is regarded as other income and subject to 20% CIT. Net book value of assets transferred (substantiated with supporting documents required under regulations) is the deductible cost base. CIT payables (if any) will be provisionally paid by the company on a quarterly basis. At a financial year-end, a seller will prepare the annual CIT finalization return, which includes income/loss from this asset sale.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.