Tax and accounting considerations when implementing a company split for M&A purposes


  • Mai Thi Dung

In recent years, investment in Vietnam through M&A (mergers and acquisitions) has become more active, and transaction amounts are increasing. When many people hear the word M&A, they probably think of one company acquiring another and becoming one. However, there are five methods of M&A, one of which is a method in which one company sells some of the business or assets of another company. In order to apply this, the method of company split is often taken. This article provides an overview of company splits in Vietnam and explains the tax and accounting points that companies should keep in mind when conducting a company split.

1. Concept and purpose of company split from the perspective of M&A
Companies that have developed and expanded over many years often have complex and inefficient structures. In particular, when operating multiple businesses with different content, many companies wish to sell only one business segment and maintain other business segments. Also, even if a company wants to sell, different buyers may be interested in different business segments, making the sale difficult in many cases.

In such cases, taking the method of company split is effective because it allows you to isolate only the business segment you wish to sell. Furthermore, the separated business segment can also operate independently from the company from which it was separated. M&A generally involves two companies, the merging company (the acquiring company) and the company being merged (the acquired company), creating a synergistic effect that exceeds the value of each company. In most cases, it is carried out with the expectation that this will happen. However, company splits differ in that the purpose is to increase the value of both companies by conducting their businesses separately.

In Vietnam, Articles 198 and 199 of Enterprise Law 59/2020/QH14 dated June 17, 2020 stipulate the content regarding company splits, and the following two methods are permitted.

<New establishment split>
– An incorporation-type company split is a method in which a limited liability company or stock company (the company that is the source of the split) splits its assets, rights, obligations, members, and shareholders and establishes two or more new companies.
– The original company will cease to exist after the new company is issued with an Enterprise Registration Certificate (ERC). The splitting company will naturally inherit all legal rights, obligations, and interests that were split pursuant to the company splitting resolution or decision.

<Absorption split>
– A limited liability company or stock company (the company that is the source of the split) transfers some of the assets, rights, obligations, members, and shareholders of the split company to one or more companies, while the source company remains the same. This is a method of partial division by transferring to a new limited liability company or joint stock company.
– The company that is the source of the split must register changes in the articles of incorporation, the number of employees, and the number of shareholders in accordance with the decrease in the investment ratio, number of shares, number of employees, and number of shareholders, and apply for registration of a new company. In addition, the company into which the company is split will automatically inherit all legal rights, obligations and interests of the split company in accordance with the resolution or decision on the company split.

2. Regulations regarding taxation, invoices, and other required documents
(1) Tax Administration Law No. 38/2019/QH14 dated June 13, 2019
Article 68 of the Tax Administration Law 38/2019/QH14 stipulates the following regarding the fulfillment of tax obligations in connection with company restructuring:
As a general rule, the splitting company is responsible for unpaid taxes related to the period before the split. However, depending on negotiations between the parties, it is possible to impose tax obligations on the splitting company (in the case of an absorption-type split) or on the new company established as a result of the split (in the case of an incorporation-type split).

(2) Circular No. 219/2013/TT-BTC and Decree No. 209/2013/ND-CP on VAT
Article 5 of the Ministry of Finance’s Circular No. 219/2013/TT-BTC dated 31 December 2013 and the Government’s Decree No. 209/2013/ND-CP detailing and guiding the implementation of provisions of the Value Added Tax (VAT) Law (effective from 1 January 2014) dated 18 December 2013, states that assets transferred in connection with a division, demerger, consolidation, merger or conversion of business type are not required to declare or pay VAT.

(3) Circular 68/2019/TT-BTC regarding electronic invoice guidance
Article 6, Paragraph 5, g) of Circular 68/2019/TT-BTC dated September 30, 2019 by the Ministry of Finance stipulates as follows regarding electronic invoices when selling goods and providing services.
In the case of transferring assets between subordinate accounting member units within an organization, and in the event of a division, separation, consolidation, merger, or conversion of company type, the company owning the transferred assets must issue an Asset Transfer Order accompanied by documentation regarding the origin of the assets, but need not prepare an invoice.

The “Asset Transfer Order” is a document created by the company that is the source of the split, and it contains the details of the assets to be transferred, the date of transfer, the names of the companies that are the source and destination of the split, and the decision to transfer those assets. This is a statement stating that the There are no default templates, so you can create your own company-specific forms.

(4) Circular 78/2014/TT-BTC regarding corporate tax
If the splitting company transfers land use rights, it must declare and pay corporate tax on real estate transfer income in accordance with the provisions of Chapter V “Real Estate Transfer Income” of Circular 78/2014/TT-BTC. In addition, if, at the time of a company split, the original company revalues the price of the land use rights it is transferring, in accordance with Article 7, Paragraph 14 of the Circular, the difference resulting from the revaluation of the value of the land use rights will be recorded as “other income” and will be subject to corporate tax calculation.

(5) Tax Administration Law 38/2019/QH14 and Circular 96/2015/TT-BTC dated June 13, 2019
The splitting company must submit a corporate tax return to the tax authorities within 45 days from the split decision date.

(6) Personal income tax return
Article 21, Paragraph 3 of Circular 92/2015/TT-BTC stipulates as follows:
If there are employees transferred from the splitting company to the splitting company due to consolidation, merger, complete split, partial split, or conversion of company form, the splitting company (in the case of an absorption-type split) or the new splitting company (In the case of an incorporation-type company split), it is necessary to file a personal income tax return based on the income paid by the old company, which is the source of the split, and personal income tax deduction documents issued by the old company to employees (originally, (Although individual employees are responsible for reporting, it is common for the company to file the declaration on behalf of the individual by creating a power of attorney.)

3. Accounting and Financial Reporting Regulations
(1) Regarding the preparation of accounting books for the split
Currently, there are no general regulations regarding the standards for dividing assets and capital when conducting a company split. Companies therefore need to create their own segmentation roadmaps for key departments such as finance, human resources, accounting, and information technology, taking into account legal requirements and tax planning. Based on the division plan, the accounting department must divide the revenues, expenses, profits, assets, rights, and obligations corresponding to each business segment, and prepare the basic data for the financial statements before and after the division.
Some examples of division criteria are introduced below.

<About asset division>
Example 1: Split based on the value of assets that directly generate income in each business segment
Example 2: Split based on the value of assets expected to be transferred to business segments

<Regarding division of accounts receivable>
Example ① Split based on customers belonging to each business segment
Example ② Split based on the invoice amount of goods/products/services belonging to each business segment (if it is difficult to adopt the above example ①, such as when there are common customers in many business segments)

<About personnel expenses and division of payment obligations to employees>
Example 1: Split based on the number of employees in each business segment where transfers are expected.
Example 2: Split based on the number of employees expected to directly generate revenue in each business segment

<When dividing general expenses>
Divided based on the ratio of sales of each business segment to total sales

(2) Preparation of financial reports
According to Article 105 of Circular 200/2014/TT-BTC on Corporate Accounting System, the principles for preparing and presenting financial statements at the time of company splits and mergers are stipulated as follows:
When a company is partially split into a number of new companies with legal personality, or when a number of companies are acquired by other companies, the split or acquired company must be Financial statements must be prepared. In the first fiscal year after the company split, the new company must keep records and submit financial statements in accordance with the following principles:

<Balance Sheet>
All balances of assets, liabilities, and capital inherited from the original company are shown in the “closing balance” of the receiving company, and there are no figures for the “beginning balance.”

<Profit and loss statement and cash flow statement>
Figures from the time of the split to the end of the fiscal year are recorded in the “current period,” and there are no figures for the “previous period.”

Through a company split, it is possible to separate only the business that you want to sell and increase the value of that business, leading to M&A. Therefore, company splitting can be an effective means, especially for companies that have multiple businesses with different content. When implementing a company split, careful planning is required and bookkeeping, accounting and tax issues should be carefully considered in advance in order to maximize the business value at the time of sale.

・Corporate Law 2020
・Tax Administration Law 38/2019/QH14 dated June 13, 2019
– Notification 219/2013/TT-BTC and Decree 209/2013/ND-CP on VAT
・Circular 68/2019/TT-BTC regarding e-invoice information
・Corporate Tax Circular 78/2014/TT-BTC
Tax Administration Law 38/2019/QH14, Notice 96/2015/TT-BTC
・Circular 92/2015/TT-BTC on VAT and personal income tax
・Circular on Corporate Accounting System 200/2014/TT-BTC
・Official letter 2373/TCT-CS dated June 30, 2021
・Official letter 5625/TCT-CS dated December 31, 2020

(Created on March 28, 2024)

*This article was translated by Yarakuzen.

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