Vietnam’s Regulatory Framework for Corporate Restructuring

We examine Vietnam’s regulatory framework governing corporate restructuring, mergers, and acquisitions, highlighting key legal stipulations, tax considerations, financial implications, and compliance obligations.

Regulations governing business restructuring in Vietnam

Business restructuring, particularly through mergers and acquisitions (M&A), is an integral part of corporate strategy for both domestic and international companies in Vietnam. The Enterprise Law (2020) and Investment Law (2020) lay the regulatory groundwork for these activities, supplemented by various government decrees and circulars that outline detailed procedures.

Vietnam’s 2020 Enterprise Law

The Enterprise Law (2020) is the principal piece of legislation governing the establishment, operation, and restructuring of businesses in Vietnam. It provides a legal framework for various types of restructuring activities, including M&A and consolidation. Here are key provisions relevant to business restructuring:

• M&A: Under the Enterprise Law, an M&A involves one company acquiring part or all of the assets or equity of another company. In a merger, one company absorbs another, while an acquisition involves the purchase of shares or assets. The process typically begins with negotiation between the companies and concludes with a legal agreement that must be approved by shareholders and filed with competent authorities. The merger or acquisition must also comply with antitrust and competition laws, ensuring that the transaction does not create market dominance that could harm consumer welfare.
• Consolidation: A consolidation occurs when two or more companies combine to create a new entity, with the original companies ceasing to exist. All assets, rights, and obligations of the original companies are transferred to the newly created entity. The Enterprise Law requires that the new company’s capital contributions and registration be filed and approved by the relevant business authorities.
• Divestiture: Companies may also opt to restructure by selling off or separating parts of their business operations. In Vietnam, divestitures, whether partial or full, must follow the procedures outlined in the Enterprise Law, particularly in regard to shareholder approval and fair valuation.

• Conversion: The Enterprise Law allows businesses to restructure with three conversions: limited liability company to joint stock company, joint stock company to limited liability company, and sole proprietorship to limited liability company, joint stock company, or partnership. The converted company inherits all legal rights and obligations, including debts and labor contracts.

Vietnam’s 2020 Investment Law and amendments

The Law on Investment No. 61/2020/QH14 (hereinafter, “2020 Investment Law”), is crucial in regulating restructuring activities involving foreign investors. In 2022, several provisions under this law were amended and supplemented by Law No. 03/2022/QH15. The changes related to the legislation for public-private partnership (PPP) and regulations on investment projects and categories. Subsequently released decrees, circulars, and official dispatches also further support the implementation of this law.

Foreign direct investment (FDI) has been a driving force in Vietnam’s economic growth, and restructuring activities often involve foreign parties acquiring existing Vietnamese companies or forming new joint ventures. Therefore, foreign firms participating in these activities must thoroughly study the regulations above for the most effective compliance. Below we discuss some of the concerns that business should pay attention to:

• Overall compliance: Foreign investors contributing capital, purchasing shares, or acquiring investments from economic organizations must adhere to specific regulations. They need to fulfill market access requirements for foreign investors set forth in Article 9 of the 2020 Investment Law, comply with national defense and security regulations specified in the law, and follow Vietnam’s land laws regarding the requirements for obtaining land use rights, especially in designated locations like islands, border communes, wards, towns, and coastal areas.
• Regulated sectors: Restructuring in sensitive sectors like telecommunications, banking, and defense needs approval from the Ministry of Planning and Investment (MPI). The government monitors foreign investments to safeguard national security and economic sovereignty. Foreign investors interested in these sectors must comply with several requirements, such as permissible foreign ownership ratios, allowed investment forms, investment activity scope, and investor qualifications. They might also need to meet additional stipulations from laws, National Assembly resolutions, ordinances, government decrees, and international treaties ratified by Vietnam.

• Investment conditions: Foreign investors must meet specific requirements when restructuring or acquiring companies in Vietnam. These requirements vary by industry and may include ownership limits, legal capital obligations, and adherence to specialized regulations. Decree No. 31/2021/ND-CP outlines the conditions under which foreign investors are allowed to partake in restructuring efforts, particularly within sectors that have ownership limitations.

Vietnam’s 2018 Competition Law

The Law on Competition No. 23/2018/QH14 (referred to as the “2018 Competitive Law”) is enforced by the Vietnam Competition Authority (VCA) and introduces extra requirements for restructuring activities. This legislation governs practices restricting competition, economic concentration that may impact competition in the Vietnamese market, unfair competition actions, competition litigation, addressing competition violations related to competition, and the state’s oversight of competition management.

Large mergers or acquisitions that could lead to market dominance must undergo review by the VCA to ensure compliance with antitrust regulations. This is particularly relevant for industries with limited competition or high market concentration. Failure to comply with competition laws could lead to the reversal of a transaction, fines, or other sanctions.

Tax and financial implications of restructuring

Restructuring often comes with significant tax and financial implications, particularly in M&A and other transactions involving asset transfers or changes in ownership structure. Vietnam’s tax laws provide a framework that impacts how restructuring is taxed and reported, affecting corporate income tax (CIT), value-added tax (VAT), capital gains, and financial reporting obligations.

Corporate income tax (CIT)

Vietnam’s CIT rate is 20 percent, and it applies to both domestic and foreign enterprises. In the context of corporate restructuring, CIT may be triggered in various ways:

• Capital gains tax: Any gains realized from restructuring activities, such as the sale of assets or share transfer, can be subject to CIT. These gains are often subject to 20 percent CIT, known as capital gains tax (CGT). However, there are provisions for tax deferral or exemptions under certain conditions, such as when restructuring is part of an internal reorganization or when the new entity continues to engage in activities eligible for tax incentives.
• Transfer of tax incentives: Restructured entities that change their business type or ownership are entitled to inherit CIT incentives from the previous companies if they continue to meet the conditions for CIT incentives and loss transfer conditions as prescribed, except in cases where they enjoy corporate income tax incentives under the new investment category. However, this requires approval from tax authorities and compliance with specific conditions laid out in Vietnam’s tax regulations.

Value-added tax (VAT)

VAT in Vietnam is levied at 10 percent on most goods and services, including transactions involving asset transfers. However, certain restructuring transactions may qualify for VAT exemptions:

• VAT refund: According to Circular 219/2013/TT-BTC (amended by Cirular 130/2016/TT-BTC), business establishments undertaking the restructuring processes prescribed by law and paying VAT using the tax deduction method are entitled to receive a refund of the paid VAT or any remaining input VAT after deduction. Notably, after a merger, the company still has the right to a refund of VAT that has not been fully deducted in accordance with legal provisions.

• Asset transfers: In cases where assets are transferred as part of an M&A transaction, the transfer may be exempt from VAT, depending on the type of assets and the nature of the restructuring. For example, according to Decree No. 209/2013/ND-CP, transfers of fixed assets between entities involved in restructuring may qualify for exemptions if the companies meet the necessary conditions.
• Documentation for VAT exemptions: To benefit from VAT exemptions during restructuring, companies must ensure that they comply with the documentation requirements set by tax authorities. Failure to provide the necessary paperwork can result in the loss of VAT exemptions or the imposition of fines.

Financial reporting obligations

During and after restructuring, companies must meet Vietnam’s financial reporting standards, which are based on International Accounting Standards (IAS) and adapted to the Vietnamese context through the Vietnam Accounting System (VAS). Companies must provide accurate and transparent financial reports that reflect the impact of restructuring on their assets, liabilities, and equity.

• Consolidation of financial statements: For companies involved in M&A, consolidated financial statements must be prepared, showing the combined financial results of the parent company and its subsidiaries. This ensures transparency and compliance with Vietnamese accounting standards.
• Auditing requirements: After restructuring, companies must undergo audits by independent auditors to verify the accuracy of their financial statements. These audits are critical for maintaining investor confidence and ensuring compliance with Vietnamese laws.

General regulations on conducting financial statement in Vietnam are promulgated under Accounting Law No. 88/2015/QH13. Businesses must also refer to the following circular for detailed instructions on conducting financial statement principles:

• Circular No. 133/2016/TT-BTC: This circular outlines an accounting compliance framework for small and medium enterprises (SMEs). It details the principles for preparing and presenting financial statements for SMEs that have undergone ownership or business structure conversions.
• Circular No. 200/2014/TT-BTC: The circular implements guidelines for enterprises’ accounting policies, including principles of preparing and presenting financial statements for M&A, divestitures, consolidations, and financial restructuring.

Key compliance requirements for restructuring

Compliance with Vietnamese regulations during restructuring is critical to avoid legal complications, fines, or other penalties. Key compliance areas include documentation, protection of employee rights, and obtaining necessary approvals from government authorities.

Documentation and regulatory filings

Proper documentation is a cornerstone of compliance in corporate restructuring. The following documents are typically required:

• Shareholder resolutions: A formal resolution from the company’s shareholders is necessary to approve any major restructuring activity. This resolution must specify the terms of the transaction, including details on valuation, share distribution, and the legal framework under which the restructuring will take place.
• Business registration amendments: Post-restructuring, companies must file amendments to their business registration with the relevant authorities. This includes changes in the company’s name, capital structure, ownership, and business scope. These changes must be reflected in the National Business Registration Database.
• Contracts and agreements: Legally binding contracts outlining the terms of the restructuring, including asset transfers, employment arrangements, and other key details, must be drawn up and filed with the relevant authorities.

Protection of employee rights

Vietnamese labor law places significant emphasis on the protection of employee rights during restructuring. According to the 2019 Labor Code, companies undergoing restructuring activities are obliged to protect the rights of employees as follows:

• In restructuring activities impacting worker employment, the employer must create a labor utilization plan stipulated under the 2019 Labor Code.
• Both the current and successor employers are accountable for enforcing the sanctioned labor utilization plan.
• Terminated employees will receive unemployment benefits according to the guidelines outlined in Article 47 of the 2019 Labor Code.

Approval processes and regulatory notifications

Certain restructuring activities require approval from government agencies or regulatory bodies. Key approval processes include:

• Antitrust review: For large mergers or acquisitions, approval from the VCA is necessary to ensure that the transaction does not lead to market dominance or consumer harm.
• Investment approval for foreign investors: Foreign investors involved in restructuring must seek approval from the MPI, particularly if the restructuring involves conditional sectors or exceeds certain thresholds of foreign ownership.
• Regulatory notifications: After completing a restructuring transaction, companies must notify the relevant authorities, such as the Department of Planning and Investment (DPI), the Ministry of Finance (MOF), and the General Department of Taxation (GDT), to update their business registration, tax obligations, and other legal requirements.

Conclusion

Vietnam’s legal and regulatory framework for corporate restructuring is comprehensive, balancing the need for corporate flexibility with the protection of stakeholders, employees of the target firms, and the economy. Through careful adherence to the Enterprise Law, Investment Law, and related decrees, companies can successfully navigate the restructuring process in compliance with Vietnam’s legal standards. Understanding the tax and financial implications, as well as the key compliance requirements, is essential for companies looking to restructure efficiently and sustainably. With the right legal guidance and thorough preparation, restructuring can serve as a powerful tool for growth and long-term success in Vietnam’s fast-growing market.

For business inquiries or more information on corporate strategies in Vietnam or market entry considerations, please contact our experts on the ground at Vietnam@dezshira.com.

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