In Vietnam, determining whether merger and acquisition (M&A) costs are tax deductible depends on the nature of the costs and how they fit within Vietnam’s corporate income tax (CIT) regulations. Below is a general overview of how Vietnamese tax authorities tend to treat various M&A-related expenditures, the relevant legal considerations, and practical guidance for taxpayers.
General Principles of Tax Deductibility in Vietnam
Under Vietnamese tax law, businesses are allowed to deduct expenses that are necessary for their operations and directly related to their income-generating activities. The Corporate Income Tax Law (CIT Law) and Circular No. 78/2014/TT-BTC (and subsequent amending Circulars, such as Circular No. 96/2015/TT-BTC and Circular No. 25/2018/TT-BTC) provide guidance on what expenses can be deducted.
For an expense to be deductible for CIT purposes, it must meet the following conditions:
- It is reasonable and necessary for the business operations.
- It is clearly documented with invoices or receipts.
- It complies with Vietnamese tax laws and is not prohibited for deduction.
What Are “Merger and Acquisition Costs”?
Before examining tax rules, it helps to understand the categories of costs that typically arise in a merger or acquisition. M&A transaction costs typically include:
- Financial advisory or investment banking fees (e.g., success fees),
- Legal advisory fees (e.g., drafting contracts, conducting legal due diligence),
- Accounting and tax advisory fees (e.g., for due diligence),
- Valuation and appraisal fees,
- Financing-related costs (e.g., bank fees, structuring costs),
- Other direct costs incurred specifically for the acquisition.
Under Vietnamese tax regulations, the big question is whether these costs are considered capital expenses or operational (revenue) expenses. Typically, expenses that are “capital in nature” or that relate to the investment (i.e., acquiring ownership rights in another company) are not deductible in the same way as ordinary business operational expenses.
Capital vs. Operating Expenses
An important distinction in Vietnam (as in many other tax jurisdictions) is whether a cost is deemed:
- Capital in nature, meaning it forms part of the cost of acquiring or enhancing a capital asset; or
- Operating (revenue) in nature, meaning it pertains to the company’s regular business activities and directly supports the earning of revenue.
Typically, capital expenditures are not immediately deductible. Instead, they may need to be capitalized (recorded on the balance sheet) and, depending on the nature of the asset, amortized or depreciated over its useful life. On the other hand, operating expenses may be deducted in full in the period in which they are incurred, provided they meet all regulatory requirements.
In the context of M&A:
- Costs incurred to acquire shares or equity in another company are generally treated as capital expenditures. The share purchase price itself is not deductible as it is treated as an investment.
- Professional fees and advisory costs directly attributable to buying the shares (e.g., due diligence or transaction fees specifically incurred to facilitate the acquisition) can be viewed as capital in nature as well.
- Integration or restructuring costs that support the combined entity’s operations going forward may, in some cases, be classified as operating expenses if they are directly linked to generating future taxable income.
Specific Guidance Under Vietnamese Regulations
Although Vietnamese tax regulations do not explicitly address “M&A costs” as a single category, the general principles apply:
Directly Related to Revenue Generation
To be tax deductible, an expense must relate to the generation of revenue or the carrying on of normal business activities. If a consulting fee relates to exploring new markets or integrating newly acquired operations into ongoing activities, there may be a case for deductibility. However, if the expense is purely for acquiring the target’s shares, tax authorities are more likely to classify it as a capital cost.
Incurred and Supported by Valid Documents
M&A costs must be supported by legally compliant invoices, contracts, and other documents (e.g., engagement letters, statements of work). Without proper documentation, even legitimate business expenses can be disallowed.
Non-Deductible Categories
Circulars issued by the Ministry of Finance contain lists of expenses deemed non-deductible. Although these lists do not specifically mention “M&A costs,” they do include items such as:
- Expenditures not directly serving business activities,
- Unsubstantiated expenses,
- Share issuance costs or other expenses related to raising capital,
- Other expenses of a capital nature.
Given these general provisions, many costs directly tied to “acquiring” another entity’s shares are typically not deductible. They are seen as part of the transaction’s investment nature (i.e., capital expenditures).
Accounting Treatment vs. Tax Treatment
Under Vietnamese Accounting Standards (VAS), the purchase price of a target company’s shares, plus directly attributable acquisition costs, might be recorded as an investment or could lead to the recognition of goodwill in a business combination. For financial accounting purposes, goodwill is generally amortized over a 10-year period or a period less than 10 years if justified.
However, for CIT purposes, there may be limitations on the amortization of goodwill or intangible assets arising from business combinations. In many cases, goodwill is not deductible for CIT purposes or its amortization for accounting purposes might not be recognized as a tax-deductible expense. Therefore, it is important to carefully differentiate between accounting requirements under VAS and the specific rules for CIT deductibility.
Special Tax Considerations for M&A in Vietnam
Vietnamese tax law provides several specific provisions that may apply to M&A transactions, particularly in the case of mergers, reorganizations, and cross-border acquisitions:
- Tax-free reorganizations: Certain types of corporate restructuring, including mergers, may be eligible for tax-free treatment under specific conditions. This includes the transfer of assets and liabilities without triggering capital gains tax. However, the deductibility of associated costs in such cases can vary depending on the transaction structure.
- Tax treatment of goodwill: In some jurisdictions, goodwill arising from M&A transactions is subject to amortization for tax purposes. In Vietnam, there is no clear guidance on whether goodwill from M&A transactions can be amortized or deducted. Therefore, this remains a grey area and could be subject to the tax authority’s discretion.
Conclusion and Key Takeaways
In Vietnam, most costs directly related to acquiring a target’s shares are typically non-deductible, as they are considered capital expenditures rather than operating expenses. In contrast, certain expenses incurred in the course of an asset purchase may be partially capitalized and depreciated or amortized over time, thus eventually affecting tax liabilities more favorably. Operational expenses, including some elements of professional services or post-merger integration costs, can be argued as deductible if they meet the requisite criteria of being related to generating or maintaining taxable income.
Because the distinction between capital and operating expenses is not always black and white, companies are encouraged to consult with Vietnamese tax specialists such as Russin & Vecchi, maintain thorough documentation, and carefully plan the deal structure.
