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Taxation of Cross-Border Mergers and Acquisitions Vietnam kpmg.com

2 | Vietnam: Taxation of Cross-Border Mergers and Acquisitions

Vietnam Introduction This chapter provides basic information to potential buyers and sellers of Vietnamese businesses and deals with both asset and share purchases. The laws and regulations in Vietnam are at an early stage of development and are not very well established; investors into Vietnam need to be aware that they cannot expect the same degree of legal certainty that is available in more developed jurisdictions. Furthermore, as the legal system in Vietnam is itself developing, it is difficult to say how any inconsistencies or gaps in laws and regulations will be dealt with. The Vietnamese tax rules are characterized by uncertainties and by a lack of interpretative guidance. Both the substantive provisions of Vietnamese tax laws and the interpretation and application of such provisions by the Vietnamese tax authorities may be subject to more rapid and unpredictable change than in a jurisdiction with more developed capital markets. A number of key tax and other reform measures affecting the tax status of taxpayers have been implemented in whole or in part. For instance, the corporate and investment laws have been revised with effect from 1 July 2006 and continue to be supplemented and clarified as issues of interpretation and/ or implementation arise. In addition, most major tax laws and regulations have been either revised or enacted effective from 1 January 2009, amended during 2010 and 2011, which are applicable from 2012.

Recent developments Current Vietnamese environment It is more than five years from the date that Vietnam has been admitted as an official member of the World Trade Organisation (WTO) since 11 January 2007. As a member of WTO, Vietnam has to adhere to WTO commitments and adopt international rules. It is no doubt that further reforms will continue to take place, especially in the legal framework, to make the country more integrated into the world economy. It is therefore anticipated that merger and acquisition (M&A) activities will grow rapidly in coming years. M&A can be a good option for many foreign investors as Vietnam has started to open various sectors for foreign ownership. One of the most significant regulatory developments in 2008 arising from WTO membership obligations was the granting of licenses to wholly foreign-owned banks. The first recipients of such licenses were HSBC, Standard Chartered and ANZ Bank.

Significant developments also occurred in the area of corporate governance legislation with the enactment in 2007 of new regulations and a model charter for Public Listed Companies. However, although the legislation imposes an obligation on companies to report regarding their corporate governance status, there is little guidance in the law to assist companies in the implementation of the necessary processes and procedures. In addition, the lack of publicly available information makes it difficult to assess the extent of compliance with such regulations. Although many positive changes to the Vietnamese legal environment were committed to under the WTO membership, there remains a considerable lack of guidance available regarding the execution of certain commitments, in particular with respect to the granting of distribution rights to foreign enterprises. Overall, Vietnam continues to try and live up to the high expectations international investors have of it as the “next Asian tiger” by continually pushing through reforms aimed at facilitating the ongoing development of the economy. The government’s ongoing participation and encouragement of forums facilitating consultation between investors and regulators in order to address ways in which to improve the business climate indicates that such a stance will continue in 2012. During the past two years, M&A activities in Vietnam have been growing rapidly, as a result of Vietnam being perceived now as one of the most promising growth markets and currently having plenty of inexpensive assets, as well as the government’s determination in strengthening the banking and financial services sectors. Looking forward, it is anticipated that M&A activities in Vietnam will continue to surge as foreign investors continue to view Vietnam as a promising market. Newly-issued legislation in 2010 and 2011 A wide chain of new regulations have been issued to amend/ supplement the existing legislation which are likely to have a considerable impact on Vietnam acquisition structuring. In particular, the newly-issued legislation comprises: • Decree No. 122/2011/ND-CP passed by the government dated 27 December 2011 providing a number of amendments to the prevailing Decree No. 124/2008/NDCP dated 11 December 2008 on corporate income tax. • Decree 121/2011/ND-CP passed by the government dated 27 December 2011 providing amendment of and supplement to Decree No. 123/ND-CP dated 8 December 2008 on Value Added Tax (VAT).

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• Decree 51/2010/ND-CP passed by government dated 14 May 2010 on invoices. • Circular 28/2011/TT-BTC passed by the Ministry of Financial dated 28 February 2011 on tax administration. • Circular No. 186/2010/TT-BTC passed by the Ministry of Finance dated 18 November 2010 providing guidance for profit repatriation by foreign investors. Laws are passed by the National Assembly and implemented by decrees issued by the government and by circulars, decisions, or rulings of relevant ministerial authorities.

Asset purchase or share purchase Foreigners cannot directly hold assets in Vietnam. Foreign investors must establish a Vietnamese entity to hold the Vietnamese asset (if not already legally present in Vietnam). If a foreign investor already has a Vietnamese entity, it is likely that the business license of the Vietnamese entity would need to be amended to accommodate the expanded activities following the purchase of assets. The establishment of a Vietnamese entity or amendment to the business license can be a lengthy process and may entail multiple approvals. Therefore, in most cases the purchaser is likely to purchase the share/interest in the target Vietnamese entity. Purchase of assets Purchase price Basically, the valuation of assets for transaction purposes is a matter of mutual agreement between the seller and the buyer. Note that for transactions between related parties, this should be subject to local regulations of transfer pricing to ensure fair market value. The sale of asset shall be subject to VAT on a itemized basis for each asset. The seller of asset shall be subject to corporate income tax at 25 percent on income from asset transfer (i.e. after deducting related expenses of the transfer). Goodwill For tax purpose, goodwill shall be allowed to amortize over a maximum period of three years.

Depreciation In order to recognize the assets transferred from the seller to the buyer as fixed assets and depreciation of such assets is deductible for corporate income tax purposes, the following issues must be taken into account: The acquisition of assets must be substantiated by legitimate tax invoices and other supporting documents, e.g. sale invoices, sale contract. An asset which satisfies all of the following criteria shall be considered as fixed asset: • It is certain that future economic profit is obtained from the utilization of such assets. • The useful life of such asset is at least one year. • The value of such asset is at least VND10,000,000 (approximately USD500). The original cost of the fixed assets purchased from the seller shall be the actually paid price plus directly relevant expenses paid as at the time of putting such fixed assets into the state ready for use (such as interest on loan invested in the fixed assets, transport expense, loading and unloading expense; expenses for upgrading, installation, commissioning; and registration fee etc.). For depreciation purposes, enterprises must register with the local tax department its chosen method of depreciation of fixed assets (e.g. straight-line method, adjusted reducing balance method or product quantity and volume method). The registered methods must be performed consistently during the course of utilizing its fixed assets. In practice, however, the tax authorities accept that an enterprise simply sends a notice letter to the local tax office indicating its chosen depreciation method. The depreciation method can be changed during the course of operation, provided that the company has valid reasons to do so and sends a written notice of such change to the local tax office. Note that only changes in the depreciation method require notification to the tax office. No notification is required in case of subsequent changes in the depreciation rates within the regulated time frame. Depreciation of fixed asset of either new and used assets is based on the same principle, which is calculated based on historical cost and useful life of the fixed assets within the regulated time frame. Note that an enterprise shall itself determine the useful life of intangible fixed assets which shall not exceed 20 years. The useful life of land use right shall be the term of the land use right in accordance with regulations.

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Tax attributes Not applicable. Value Added Tax The sale of asset shall be subject to VAT in Vietnam. Under current VAT law, there are three applicable VAT rates imposed on goods and services: 0 percent, 5 percent, and 10 percent with the default VAT rate being 10 percent. The seller shall issue VAT invoices for the sale of asset where the VAT portion shall be added to the sale price and indicated on the invoice issued. This VAT will become output VAT of the seller and they will have to declare and pay this output VAT on a monthly basis. For the buyer, the VAT charged by the seller in relation to the sale of assets will become creditable input VAT and offset against its output VAT on a monthly basis. The buyer has six months to claim its creditable input VAT. Of note, input VAT on fixed assets which are used for production or trading of both VAT and non-VAT goods and services shall be creditable in full. Where the buyer of asset is a new business establishment and has not commenced operations, if the capital investment period lasts more than one year, the buyer of asset will be entitled to a refund of VAT on goods or services used for investment on an annual basis. When the accumulated amount of input VAT on goods or services purchased for investment is more than VND200 million (approximately USD9,500), the buyer will be entitled to a VAT refund. Notwithstanding the above, a business establishment shall not be required to declare and pay VAT in the following cases: • Capital contribution by assets for establishment of an enterprise. • Transfer of assets between dependent cost accounting entities within an enterprise. • Transfer of assets upon demerger, division, consolidation or conversion of form of enterprise. Stamp duty and stamp duty land tax Stamp duty applies to certain kinds of assets, in general such as: houses and land, ships, cruisers and boats, automobiles, motorcycles, hunting rifles and sports guns, aircrafts. Accordingly, upon transfer of these assets, the new registered asset owner shall pay stamp duty.

Bases for stamp duty calculation include price for stamp duty calculation and stamp duty rates. Price for stamp duty calculation is stipulated by local People Committee. Specific stamp duty rates shall apply to specific kind of assets, for example: • houses and land: 0.5 percent • shot guns and sports guns: 2 percent • ships, cruisers and boats, aircrafts: 1 percent • automobiles: 2–20 percent • motorcycles: 1–5 percent. However, the amount of stamp duty payable on any one transaction on any one asset shall not exceed VND500 million (approximately USD24,000), except for cars of less than 10 seats, aircrafts, cruisers where these is no such cap on stamp duty. Stamp duty must be declared and paid no later than 30 days from the transaction date. Purchase of shares The issuance of Decision No.55/2009/QD-TTg of the Prime Minister dated 15 April 2009 (Decision No.55) in which foreign investors are permitted to hold a maximum of 49 percent of stake in a public joint-stock company since 1 June 2009 has made a more significantly open investment environment. This recently issued decision along with the gradual removal of restriction on the capital holding ratio of foreigners in specific sectors in line with the WTO commitment has created more investment opportunities for purchasers. However, certain limitations in specific services sectors such as banking still remain at current cap of 30 percent of foreign ownership. Capital gains tax Capital gains derived by corporate investors from the sale of interest in a Vietnamese Limited Liability Company or sale of shares in a joint-stock company will be subject to capital gains tax at 25 percent. The taxable gain is determined as the difference between the sale proceeds less investment cost and transfer expenses. For tax-resident individual sellers, the capital gains tax rate is 20 percent on the gain. For non-taxresident individual sellers, the tax is 0.1 percent on the gross sale proceeds. Gains from the sale of shares in a Public Company or a Listed Company, which are technically recognized as securities, shall be subject to tax at 0.1 percent of the gross sale proceeds applicable to both corporate and individual sellers.

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Double taxation treaties (DTAs) may provide certain protection from the above taxes. Use of offshore holding company may also provide certain opportunities for tax mitigation upon exit. Tax indemnities and warranties In accordance with prevailing Vietnamese regulation, the tax exposure of the target company will be transferred to the purchaser after the deal. It is therefore advisable for the purchaser to pay careful consideration on the target company’s tax compliance status, as this should help effectively reduce risk of being suffered from contingent tax payables post-deal. For this reason, customary tax due diligence exercise typically plays an important role in defining and locating significant tax issues in M&A transactions. As the target company’s legal rights and related liabilities will also be transferred to the purchaser, it is recommended that tax indemnities and warranties for contingent tax liabilities should be well addressed in the M&A contract. Tax losses Tax losses of the target company would remain after the transaction. Accordingly, losses incurred by the target company prior to the transaction could be offset against the taxable income of the company after the transaction. The principle is that tax losses will be carried forward for a period of not exceeding five years from the loss year. In principle, losses to be carried forward for deduction from taxable income shall be self-assessed by the target company under the Vietnam self-declaration tax regime. However, in case of tax audit by the tax authority, only the losses concluded by local tax authorities can be utilized. Crystallization of tax charges

Tax clearances The target company is required to conduct tax finalization with the local tax authorities up to the time of the decision on the merger. Repatriation of profits After fulfilling all tax and financial obligations towards the Vietnamese government, the foreign investors can repatriate their after-tax profit out of Vietnam without any further withholding tax in the case of corporate investors, and at 5 percent in the case of individual investors. Under Circular 186/2010/TT-BTC, annual remittance of dividends abroad may be made only when the company has completed the declaration of corporate income tax of the relevant financial year and issued audited financial statements, and has received clearance from the tax office. Of note, profit/dividend remittance is not allowed if the financial statements of the target/investee company show an accumulated losses.

Choice of acquisition vehicle There are several potential acquisition vehicles available to a foreign purchaser into a company in Vietnam. Vietnam holding company Given the laws and regulations in Vietnam are at an early stage of development, this vehicle is rarely seen for foreign investors as it may require obtaining license from Vietnam authority which are onerous and time consuming on a pilot basis only. In addition, as currently there is no tax group consolidation in Vietnam, there is no tax group benefit from this vehicle.

Not applicable. Foreign parent company Pre-sale dividend In certain circumstances, the seller may prefer to realize part of the value of his or her investment as income by means of a pre-sale dividend. The rationale here is that the dividend may be subject to no (in case of corporate) or only a lower tax rate (in case of individual which is taxed at 5 percent). Stamp duty

This structure is normally chosen by foreign purchasers. There are certain tax benefits from this structure. Dividends paid to foreign parent company are neither subject to Vietnam corporate income tax nor withholding tax as long as they are paid from after tax profits of the subsidiary. However, interest payment to foreign parent company was subject to withholding tax at 10 percent. From 1 March 2012, the withholding tax on offshore interest payment is reduced to 5 percent.

Currently there is no stamp duty on the transfer of shares in Vietnam.

6 | Vietnam: Taxation of Cross-Border Mergers and Acquisitions

In addition, foreign parent company shall be subject to corporate income tax of 25 percent on the gains (when selling its capital contribution in the subsidiary) or withholding tax of 0.1 percent on the gross sale proceeds (when selling shares of the subsidiary provided that such shares are considered as securities under Vietnam laws, i.e. the target company is either a Public Company or a Listed Company). The foreign investors may seek tax-exemption from income from transfer of capital or securities in Vietnam under the DTA between Vietnam and the respective country if and when relevant. Currently, Vietnam does not have any legislation on anti-treatyshopping. Non-resident intermediate holding company Not applicable. Vietnam branch A Vietnam branch is subject to Vietnam corporate income tax at 25 percent. At current, branch is not a popular form of business presence given the ambiguity and disadvantages in many tax and regulatory respects. As a result, this form of business presence has typically been used for law firms and foreign banks due to their professional regulatory requirements. Joint ventures The tax treatments of this structure are similar to the aforementioned foreign parent company structure.

Choice of acquisition funding With potential acquisition transactions, a purchaser needs to decide how to fund the acquisition, by means of debt or equity or even a hybrid method which includes positive sides of two methods. Debt Vietnamese legal entities and individuals, foreign legal entities and individuals can choose to fund their acquisition by debts arranged locally or from offshore. For legal entities established under Vietnamese law using the acquisition funding of debt, one of the most considerable advantages is that interest expenses would be allowed as deductible expenses for corporate income tax calculation purposes (please refer to this chapter’s section on deductibility of interest). Other expenses relating to cost of debt, i.e. guarantee fee, bank commission are also considered as deductible expenses. There is a wide range of debt funding sources available to these purchasers, i.e. from banks, third parties or even related parties. Given debts used to fund acquisition, a further decision should be made to define the structure of debt in total given fund. Under the domestic tax regulations, debt financing arranged locally would not attract any withholding tax. However, on cross-border financing, the interest withholding tax rate of 10 percent would apply. From 1 March 2012, interest withholding tax rate is reduced to 5 percent, applied to loan agreements signed with foreign lenders from that date. Of approximately 60 tax treaties currently in force, the tax treaty with France provides straightforward tax exemption on interest for commercial loans. The other treaties generally specify a maximum interest withholding tax rate that is equal to or higher than the Vietnamese 10 percent domestic rate.

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Deductibility of interest

Checklist for debt funding

Interest expenditure is deductible against taxable income in the Vietnamese company. There are no thin capitalization rules as such; however, the equity-to-debt ratio is specified in the business registration certificate by virtue of specifying the charter capital (equity) and investment capital (total project size – total of equity and debt). In the past, this was restricted to 30:70. There is now no such specific restriction.

All foreign debts are required to register to the State Bank of Vietnam.

The tax-deductibility of interest rate is limited to 150 percent of the basic interest rate announced by the State Bank of Vietnam as at the date of the loan. Foreign loans need to be registered with the State Bank of Vietnam before the interest and related expenses are allowed as deductible for corporate income tax purposes on the part of the borrower. Interest payment on loans for contribution to legal capital or to registered legal capital which is not yet fully paid-up, as per the schedule for capital contribution set out in the enterprise charter, including the case the enterprise has already commenced production and business, are not deductible expense for corporate income tax calculation purpose. Withholding tax on debt and methods to reduce or eliminate The interest payment on debt from non-resident party in Vietnam shall be subject to withholding tax at 10 percent, reduced to 5 percent from 1 March 2012, unless reduced under a DTA between Vietnam and approximately 60 countries. Please note that DTA is not automatically granted to beneficiaries unless the conditions for tax-exemption or reduction are met. The prior approval from Vietnamese tax authorities must be obtained before the exemption goes into effect. Professional advice should be sought to comply with requirements on DTA claims under both domestic laws and DTA provisions.

Equity Beyond the above method, a purchaser may use equity to fund an acquisition. Under the Vietnamese regulations, only joint-stock companies can issue shares either to current shareholders or to outsiders with the satisfaction of certain conditions. There is no capital duty, and neither stamp duty nor stamp duty reserve tax applied to new share issues. As a matter of domestic law, there is no withholding tax on dividends paid from after tax profits by a Vietnamese company. From the other side, a purchaser may prefer equity for nontax purposes. For instance, in some circumstances, it shall be required to have a good debt-equity-ratio for financial purposes. If such cases happen, one may prefer to use the hybrid method as mentioned in the following section. Hybrids A purchaser may use hybrid method, including both debt and equity, to fund its acquisition to take advantage of interest deduction for corporate income tax calculation purpose from debt instrument. A tax-efficient structure normally requires an appropriate mix of debt and equity, but the position is ever changing and professional advice should be obtained. Discounted securities When securities are sold at discounted prices, the actual discounted purchased price shall be the basis for assessing tax obligations of the seller. The discounted price shall also serve as the cost-base for the buyer for tax purposes at the time of further transfer in future. The taxation in this case is similar to that in the case of normally-priced securities.

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Deferred settlement

Concerns of the seller

An acquisition often involves an element of deferred consideration, the amount of which can only be determined at a later date on the basis of the business’s post-acquisition performance. However, the seller only exposes to Vietnamese taxation once realizing income/gain from selling the unknown future amount.

Other considerations There are other considerations which are constantly changing. Investors should seek advice before proceeding with acquisition transactions, such as foreign exchange control, repatriation of funds, limitations on foreign ownership, etc. Professional advice should be sought for proper planning purposes.

Corporate seller of shares/interest Under the law on corporate income tax, Vietnamese corporate sellers would ordinarily be subject to 25 percent tax on the gain. Foreign organizations shall be subject to 25 percent tax on the gain (when selling its capital contribution in the subsidiary) or withholding tax of 0.1 percent on the gross sale proceeds (when selling shares of the subsidiary provided that such shares are considered as securities under Vietnam laws, i.e. the target company is either a Public Company or a Listed Company). Individual seller of shares/interest Pursuant to the Law on Personal Income Tax (PIT), an individual seller should be subject to tax on capital investment, capital assignment and real estate transfers as per the following table.

Tax rate

Taxable income

Resident

Capital investment income (including dividends and interest)3

Non-resident2

Capital assignment income (direct interest, i.e. holding an interest in a limited liability company)

20% on gains

0.1% on gross sale proceeds

Capital assignment income (securities where taxable gain can be determined)

20% on gains

0.1% on gross sale proceeds

Capital assignment income (securities where taxable gain cannot be determined)

0.1% on gross sale proceeds

25% on gains

2% on gross sale proceeds

Real estate transfer income (where taxable gain can be determined)4 Real estate transfer income (where taxable income cannot be determined)

Notes 1. Appears to include also all offshore sourced income/gains/transactions. 2. Only on Vietnam-sourced income/gains/transactions. 3. Note interest on deposit with credit institutions is classified as a tax-exempt income item.

4. Exemption applies on certain transaction such as sole dwelling property, family members’ transaction, among others.

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Of note, income from dividend (except for dividend received from joint-stock banks, financial investment funds, credit institutions) is exempt from PIT for the dividend received during the period from 1 August 2011 to 31 December 2012. In addition, income from transfer of securities by individuals is entitled to 50 percent PIT reduction for the securities transferred during the period from 1 August 2011 to 31 December 2012.

• public companies, including listed companies (49 percent cap remains in place)

The aforementioned may have a substantial impact on M&A activity, including acquisitions of shares traded on stock exchanges, over-the-counter trades and real estate transactions.

Accounting standards

Company law and accounting Company law Vietnamese legal entities incorporated and operating in Vietnam is mainly controlled by two legislations, i.e. Law on Investment 59-2005-QH11 (LOI) and Law on Enterprise 60-2005-QH11 (LOE). Vietnamese legal entities take one of the following forms: (i) Multi-member Limited Liability Company, (ii) One member Limited Liability Company, (iii) Shareholding company, (iv) Partnership, (v) Proprietary business and (vi) Corporate Group. Enterprises may be divided, separated, consolidated, merged, converted, or dissolved. Each entity is generally subject to corporate income tax of 25 percent on the profits of the business (subject to a range of incentives). In general, foreign business set ups in Vietnam are not required to set up and contribute after tax profits to any compulsory reserves except for banks and insurance businesses. Therefore, profits remittance overseas can be made fully of all the after tax profits. A foreign investor is entitled to contributing capital to and/ or purchasing shares of a company in Vietnam, and the proportion of capital contribution/share purchase with respect to certain sectors and industries is prescribed by the government. The prevailing regulation affirms a general principle that business entities and individuals, irrespective of nationality, are entitled to make capital contributions and purchase shares without any limitation of ownership in all enterprises in Vietnam, except for:

• businesses operating under certain specialized industries • equitized state-owned enterprises (SOEs) • many service companies as set out in Vietnam’s commitments to the WTO.

In Vietnam, the Vietnamese accounting standard No. 11 predominantly determines the accounting treatment of a business combination. This standard should be applied to business combination using the purchase method. A business combination may be structured in a variety of ways. It may involve the purchase by an entity of the equity of another entity, the purchase of all the net assets of another entity, the assumption of the liabilities of another entity, or the purchase of some of the net assets of another entity that together form one or more businesses. It may be affected by the issue of equity instruments, the transfer of cash, cash equivalents or other assets, or a combination thereof. An acquirer shall be identified for all business combinations. The acquirer is the combining entity that obtains control of the other combining entities or businesses. A business combination may result in a parent-subsidiary relationship in which the acquirer is the parent and the acquiree is a subsidiary of the acquirer. In such circumstances, the acquirer applies this standard in its consolidated financial statements. The parent includes its interest in the acquiree in any separate financial statements it issues as an investment in a subsidiary. Group relief/consolidation There is no tax group relief/consolidation in Vietnam at present.

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Transfer pricing After M&A activities are completed, the purchaser and the target shall be considered as related parties if the purchaser holds more than 20 percent share capital of the target. Therefore, transactions between related entities must be on arm’s-length basis, i.e. based on market price. Transfer pricing documentation should also need to be maintained properly. Otherwise, the local tax authorities may challenge the position of the two parties in this case. Dual residency Not applicable. Foreign investments of a Vietnam target company The Vietnam target company (VTC) shall be permitted to remit invested capital abroad to carry out investment activities if it satisfies the following conditions: • Having been issued with an outbound investment certificate by the Vietnamese Ministry of Planning and Investment. • The investment project has been approved by the competent state body of the investment recipient country in accordance with the law of that country. • Having fulfilled all financial obligations towards the State of Vietnam. The VTC is required to repatriate back into Vietnam all profit and/or income earned from investment projects within a time limit of six months from the date of completion of the tax finalization report in accordance with the law of the investment recipient country.

If income from an investment overseas has been subject to corporate income tax (or any other type of tax similar to corporate income tax) overseas, when computing corporate income tax payable in Vietnam, the VTC shall be entitled to deduct the tax amount paid overseas or paid on its behalf by the foreign party, but the tax deductible must not exceed the tax amount that is otherwise payable in Vietnam. If the VTC, pursuant to the foreign law, is entitled to a tax reduction or exemption on part of the profit earned from the offshore investment project, the amount of such exemption or reduction shall also be deductible from the corporate income tax payable in Vietnam. Loss arising from offshore investment shall not be permitted to be deducted from the amount of income arising in Vietnam when the VTC calculates its Vietnam corporate income tax liabilities. All transactions on the transfer of foreign currencies from Vietnam abroad or vice versa, which are related to investment projects, should be conducted via a foreign currency account opened at a credit institution licensed to conduct foreign exchange activities in Vietnam and be registered with the State Bank of Vietnam. In addition, remittance of invested capital overseas must adhere to laws and regulations on foreign investment, foreign exchange control and other international agreements which Vietnam have taken part in.

Comparison of asset and share purchases Share purchase will lead to ownership partly or wholly of the target company other than purchase of asset. The key difference is that the purchase of asset is subject to VAT while the purchase of shares is not. In addition, to be able to purchase Vietnamese assets, the buyer must establish a Vietnamese entity to hold the assets. Sale of assets shall be taxed at 25 percent of gain on the part of the seller, while share transfers can be taxed at either 25 percent of gain or at 0.1 percent of gross sale proceeds depending on the type of shares being transferred.

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Advantages of asset purchases

Advantages of share purchases

• The purchase price can be depreciated or amortized for tax purposes (including goodwill).

• The purchaser may gain benefit not only from tax losses but also that from corporate income tax incentives of the target company

• No previous liabilities of the company are inherited.

• Share purchases shall not be subject to VAT. Disadvantages of asset purchases • A foreign investor must establish an entity in Vietnam for asset purchasing. Purchase of asset does not lead to the ownership of the former entity owning that asset.

Disadvantages of share purchases The purchaser will fully responsible for all remaining liabilities including tax and debts as well as others arising in the future.

• The possible need arises to renegotiate supply, employment and technology agreements etc. • Accounting profits may be affected by the creation of acquisition goodwill. • The benefit of any losses incurred by the target company remains with the seller (but may be lost altogether).

Vietnam – Treaty withholding rates table This chart is based on information available up to 1 March 2011. The following chart contains the withholding tax rates that are applicable to dividend, interest and royalty payments by Vietnamese companies to non-residents under the tax treaties currently in force. Where, in a particular case, a treaty rate is higher than the domestic rate, the latter is applicable. If the treaty provides for a rate lower than the domestic rate, the reduced treaty rate may be applied at source. To minimize withholding taxes and calculate the total tax cost of your cross border transaction the IBFD recommends the decision support tool International Tax Expert. Dividends1 Individuals, Qualifying companies (%) companies (%) Domestic Rates Companies: Individuals: Treaty Rates Treaty With: Australia Austria Belarus Belgium Brunei Bulgaria Canada China (People’s Rep.) Cuba Czech Rep.

Interest2 (%)

Royalties (%)

0 0

0 n/a

10 10

10 5

10 15 15 15 10 15 15 10 15 10

10 5/103,4 15 5/106,7 10 15 5/109 10 5/10 10

10 10 10 10 10 10 10 10 10 10

10 7.5/105 15 5/10/158 10 15 7.5/10 10 10 10

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Dividends1 Individuals, Qualifying companies (%) companies (%) Denmark Finland France Germany Hong Kong Hungary Iceland India Indonesia Ireland Israel Italy Japan Korea (Rep.) Luxembourg Malaysia Myanmar Netherlands Norway Philippines Poland Romania Russia Singapore Slovak Rep. Spain Sweden Switzerland Taiwan Thailand Ukraine United Kingdom Uzbekistan Venezuela

Interest2 (%)

Royalties (%)

15 15

5/10 5/10

10 10

5/1510

15 15 10 10 15 10 15 10 10 15 10 10 15 10 10 15 15 15 15 15 15 12.5 10 15 15 15 15 15 10 15 15 10

7/10 5/10 10 10 10 10 15 5 10 5/10 10 10 5/1015 10 10 5/10 5/10 10 10 15 1017 5/7 5 7/10 5/10 7/10 15 15 10 7/10 15 519

–11 10 10 10 10 10 15 10 10 10 10 10 10 10 10 10 10 15 10 10 10 10 10 10 10 10 10 10/1518 10 10 10 10

10 7.5/10 7/1012 10 10 10 15 5/10/15 5/7.5/1513 7.5/10 10 5/1514 10 10 10 5/10/15 10 15 10/1516 15 15 5/15 5/10/15 10 5/15 10 15 15 10 10 15 10

Notes: 1. Vietnam does not levy a withholding tax on dividends in addition to the EIT charged on the profits out of which the dividends are declared. The rates provided in some treaties represent the maximum withholding tax rate should Vietnam impose a withholding tax on dividends in the future. 2. Many of the treaties provide for an exemption for certain types of interest, e.g. interest paid to public bodies and institutions or approved loans. Such exemptions are not considered in this column.

3. The rate generally applies with respect to participations of at least 70% of capital or voting power, as the case may be (or has invested at least USD 12 million in the payer’s capital, in the case of the treaty with Denmark). 4. The rate generally applies with respect to participations of at least 25% of capital. 5. The royalties article also provides a rate for fees for technical services, which are defined as payments to any person (other than an employee of the person making the payments) in consideration for technical, managerial and consultancy services. Where applicable, the lower rate applies to technical services.

Vietnam: Taxation of Cross-Border Mergers and Acquisitions | 13

6. The rate generally applies with respect to participations of at least 50% of capital. 7. The rate generally applies with respect to participations of at least 25% but less than 50% of capital or voting power, as the case may be (and has invested not more than USD 10 million or its equivalent in the payer’s capital, in the case of the treaty with Luxembourg). 8. 5% applies to royalties for the use of, or the right to use, any patent, design or model, plan, secret formula or process and industrial or scientific information (also applies to royalties for the use of, or the right to use industrial, commercial or scientific equipment under the treaty with the Slovak Republic); 10% applies to the use of, or the right to use, a trademark or commercial information; 15% in all other cases. 9. The rate generally applies with respect to participations of at least 25% but less than 70% of capital or voting power, as the case may be. 10. The lower rate applies to royalties paid in respect of any patent, design or model, plan, secret formula or process, industrial or scientific information or industrial, commercial or scientific equipment involving the transfer of know-how; 15% in all other cases. 11. The domestic rate applies; there is no reduction under the treaty. 12. The lower rate applies to royalties for the use of, or the right to use, any patent, design or model, plan, secret formula or process.

13. 5% applies to royalties for the use of, or the right to use, any patent, design or model, plan, secret formula or for the use of, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience; 15% applies to royalties in all other cases. 7.5% applies to technical fees. 14. The lower rate applies to royalties paid in respect of any patent, design or model, plan, secret formula or process, industrial, commercial or scientific equipment or information. 15. This rate generally applies with respect to participations of at least 50% of capital or voting power, as the case may be (or has invested more than USD 10 million or its equivalent in the payer’s capital in the case of the treaties with Luxembourg, the Netherlands and Singapore, or at least GBP 7 million in the case of the treaty with the United Kingdom). 16. The lower rate applies to royalties paid in respect of any patent, design or model, plan, secret formula or process, or industrial or scientific information. 17. The rate applies to dividends paid to a company that has directly invested not less than USD 10 million in the share capital of the dividend-paying company. 18. The lower rate applies to interest received by financial institutions, including insurance companies. 19. The rate applies to dividends paid to a company that owns at least 10% of the capital of the dividend-paying company.

KPMG in Vietnam Anh Tuan Hoang KPMG Limited 115 Nguyen Hue Street 10th Level, Sunwah Tower, District 1 Ho Chi Minh City 848 Vietnam T: +84 8 382 19 266 – Ext 8266 F: +84 8 382 19 267 E: thoang@kpmg.com.vn

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