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Transfer of business - an asset or share deal?
With the increasing mergers & acquisitions (M&A) trend, the term “transfer of business” may commonly and widely been used in daily business lives around the world. Vietnam is no exception – we can easily find this term everyday in business, in legal and commercial documents and the public media.
Scores of firms have profited handsomely from effective M&As
So, let’s examine closely what a transfer of business is. KPMG tax partner Ninh Van Hien and KPMG tax director Tran Thi Tuyet Nhung explain.
Decree 108 implementing the Law on Investment provides that, amongst other forms of green-field investment, investors are allowed to make investment in other forms such as capital contributions, purchasing stocks, consolidating and acquiring businesses.
The same decree also allows for a transfer of project which can take the form of either “capital assignment” in case the project company is not to be liquidated or “business acquisition” in case the company holding the project is to be liquidated.
Capital assignment – a share or an asset deal?
Capital assignment is a transaction allowing the new investor to acquire shares or shareholding in the target company from the existing shareholders/investor(s). Accounting and tax treatments apply as for transactions in a share deal nature. From an accounting perspective, the business’s assets and liabilities in the target company are not adjusted, they continue to be carried and/or depreciated in the same manner as before the transaction. From a tax perspective, the seller recognises a gain or loss based on the difference between the sales price and the historical investment cost. This form has proven to be very common in practice due to clear implementing regulations, least administrative and licencing requirements involved, minimal lead time and disruption to the business.
Circular 130/2008/TT-BTC confirms that the tax treatment on capital assignment which requires 25 per cent tax on net capital gains or 0.1 per cent on gross sale proceeds depending on whether the company for which capital/share is transferred is a public company or not. Note, capital assignment transaction is not subject to VAT.
Interestingly, the Circular 130 the definition on income from capital assignments subject to the above taxation goes on to include income from the sale of the entire business. No further guidance is provided on this.
Because of this sale of entire business complication, companies in share sale transactions may in some cases face a risk of being assessed on the individual asset attached to the entity to be transferred.
In a number of cases of capital assignment acquiring companies’ full share ownership that we have experienced, some local tax authorities deem the transaction as sale of business along with sale of individual assets rather than a pure capital transaction. This means where there is no or little tax that can be collected through the capital assignment tax computation method above, the tax authorities may go on to assess tax on sale of assets on the basis of a sale of entire business.
Land use right/land lease rights, one of the possible most significant items on the balance sheet, in this case becomes an attractive taxable asset to the revenue authority. We have seen some local tax authorities insisting that land use rights be re-valued at the fair market value at the transaction date of transfer and hence seek tax on the gain over the book value. In addition, local land department is also called in to handle the registration of the new name, in case the new investor wishes to change the name of the target project company following the share acquisition, which is only processed after the clearance of tax on transfer of land use right/land lease rights and land registration fee. This creates even more pressure on the incoming investor and the Vietnam target company that they acquire share/shareholding from and it can be a real challenge with additional costs incurred in getting the land use rights certificate under the company’s new name.
We noted that in Official Letter No. 3306 dated September 3, 2008 the General Department of Taxation (“GDT”) has confirmed that tax on transfer of land use rights/land lease rights should not be assessed in a company capital assignment transaction. However, it has been observed that this still is the practice in some local tax authorities.
Business acquisition – an asset or a share deal?
Unlike capital assignment cases discussed above, there is no clear definition or guidance on how tax should be collected with regards to real business acquisition, apart from the required documentation and procedures for licencing purposes.
In practice, if a transfer of business does not take the form of capital acquisition (i.e. a share deal), it should likely be regarded as an asset deal. Accounting and tax treatments will apply accordingly on the basis of an asset transfer. From an accounting perspective, the buyer records the assets and liabilities at the fair market value assigned to them as part of the transaction.
This may increase or decrease the carrying value and/or amount of annual depreciation with respect to individual assets and liabilities. From a tax perspective, the existing business recognises a gain or loss based on the difference between the sales price and the carrying value of the assets and liabilities. Goodwill may be generated in case there is on-going business operation to be attached to the business acquisition.
Typically, the sale of assets will require invoice for the buyer to record the value of the assets in the new entity as well as to register some certain asset ownership where required. VAT should apply accordingly on the VATable assets. However, Circular 129/2008/TT-BTC, when providing the list of VAT exempt goods and services, does include sale of entire business operation along side with capital assignment not subject to VAT. A number of Official Tax Letters have also confirmed this treatment.
Investors in M&A cases need to bear in mind a clear distinction between a share and an asset deal and the respective implications. They are also advised to define their transaction in the relevant sale and purchase agreement taking into account of the ambiguities and inconsistent practices which may be imposed by the tax authorities as discussed above. At the minimum, avoid classifying and naming the transaction a transfer or sale of business if it is clearly a transfer of capital. They will also need to learn to be patient in getting this entire business transfer process completed - from the licencing approval through invoice issuance to asset ownership registration for some certain assets like land use/land lease right and motor vehicles, ect.
And finally, investors in M&A cases need to watch this space and monitor the development of the issue – there have been significant increase in the number of M&A transactions which will familiarise the local authorities with structure flow and promote the creation of a clearer legal and tax framework as well as tax practices.
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