Project transfers may incur tax obligations

09/02/2011
Mergers and acquisitions (M&A) transactions can be put roughly into two categories: share transfer or asset transfer. When the transaction is a share transfer, the acquirer becomes the target company's owner and assumes the target company's rights and obligations with respect to the shares acquired, including obligations incurred prior to the transfer.

When the transaction is an asset transfer, however, the acquirer's rights and obligations are limited to those of a property owner, beginning from the time of the acquisition.

Under Vietnamese law, there's a third category: project transfer. This can be seen as a hybrid of share and asset transfer because it involves transfer of the ownership of assets comprising the project as well as requiring acquirer to assume both existing and subsequently arising rights and obligations. In other words, a project transfer has the characteristics of an asset transfer when it involves transfers of ownership of the assets of the project, e.g., construction buildings or equipment. However, a transferee under a project transfer is required to assume obligations the same way as a transferee in a share transfer.

In both share transfer and project transfer, the transferee assumes all obligations which are (i) outstanding up to the time of transfer, and (ii) to be arising after the transfer. Article 66 of Decree No 108/2006/ND-CP, issued in September 2006, provides that the conditions for project transfer are the same as those applied to share transfer.

However, the tax obligations applied to share transfers and asset transfers differ, and a business acquiring a project instead of assets may risk assuming unexpected tax obligations.

For instance, under Article 5.8 of the 2008 Law on Value-Added Tax, a share transfers is not subject to VAT. However, the law is silent as to whether a project transfer is entitled to the same treatment.

In practice, tax officers may choose to treat a project transfer as an asset transfer and impose VAT on the transaction. Therefore, a project transferor will likely play it safe and charge the project transferee VAT on the transaction value. Transferring the ownership of a project may also risk the loss of corporate income tax (CIT) incentives granted to the project.

Article 2.7, Section I, part H, of Circular No 130/20008/TT-BTC of December 2008 provides that "an enterprise established as a result of ownership transfer may continue enjoying CIT incentives for the remaining duration if still meeting the existing conditions for enjoyment of those incentives."

In practice, CIT incentives are transferred only when a project transferee sets up an enterprise to receive the transfer of the project. The transfer is then made by the new enterprise acquiring the target enterprise owning the transferred project. That is a very safe, rigid interpretation of the requirements of Circular No 130.

Tax officers also play it safe by narrowly interpreting the phrase "ownership transfer" to mean only "share transfer." As a consequence, project transfers may lose their attractiveness when existing CIT incentives are part of the equation./.-VNS