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M&A transactions in Vietnam: Promising market with strong indicators

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published on 24 February 2021 | reading time approx. 4 minutes


The transition from a centrally planned economy to an opened market, socialist-oriented economy thanks to the Doi Moi economic and political reform in 1986, has fueled an impressive growth with rising economic indicators in Vietnam. Since its accession to the World Trade Organization in 2006 (the WTO Commitments), markets have been extensively opened to foreign investors.


In recent years, Vietnam has emerged as a promising destination for many regional and international investors thank to its strong annual economic growth (currently of around 6 to 7 per cent), and underlying factors that contribute to such progress – namely a stable political system, a young and dynamic workforce, a low wage economy and a growing middle class. In 2020, despite significant impacts of the unprecedented and ongoing Covid-19 pandemic, Vietnam is among a few countries that are likely to experience a positive GDP growth, contrary to most economies. Vietnam is also estimated to be the fourth largest economy in ASEAN this year, behind Indonesia, Thailand and the Philippines.

While concerns about the investment environment still exist, the Vietnamese mergers and acquisitions (M&A) market has seen an increasing number of financial and strategic investments, leading to a sharp rise in the total transaction value. There has been a growing trend in inbound M&A activities instead of domestic ones – pursuant to public data, inbound M&A occupied more than 75 per cent of the total deal volume in 2018. Favorable sectors for M&A are retails and consumer goods, pharmaceuticals and life sciences as well as real estates. While many investments in Vietnam continue to be strategic, and targeted for long-term growth, international private equity investors have also started to become strong players in the market.

   

What are the common deal structures in Vietnam?

The three common options for M&A structures in Vietnam include:

  • acquisition of shares or capital contribution (in a locally-targeted joint stock company (JSC) or a limited liability company (LLC) respectively);
  • acquisition of assets; and
  • merger.

 
Share or equity acquisition is the most common structure in the Vietnamese market, as certain types of assets (in particular land and fixtures) may not be sold to foreign investors, and foreign investors need to set up a new company to acquire the target company’s asset.

Besides, common features of M&A transactions comprise put option and call option, drag-along right and tag-along right, classes of preference shares, corporate re-structuring for holding companies and/or subsidiary group structures as well as convertible instruments.

  

How is a share transaction structured in Vietnam?

Investors may acquire shares or capital contribution from existing shareholders or members of the targeted JSC or LLC, purchase shares newly issued by the target JSC, or inject further capital in the LLC.

Transaction documents for share or equity acquisitions would include a conventional sale and purchase agreement or a share subscription agreement, as well as a shareholders’ agreement. Investors may need to obtain regulatory approvals prior to acquiring shares/capital. For instance, the transaction is subject to M&A approval from the provincial licensing authority if [1]

  • the purchase of share or equity leads to 51 per cent or more of foreign ownership in the target company[2] or
  • the target company operates in a sector restricted to foreign investment (such as education, distribution, etc.). Antitrust approval should be taken into consideration where M&A transaction meets a statutory threshold for pre-merger notification.

  

Besides, convertible loans are also common investment structures to acquire shares due to restrictions on investment in certain sectors and lengthy regulatory approving proceedings.

  

What are the main tax drivers to be considered?

The main tax implication relating to M&As in Vietnam is capital gains tax, which may either be corporate income tax (CIT) or personal income tax (PIT), applicable for the acquisition of shares or capital contribution in Vietnamese companies. Capital gains from the sale of shares or equity in an LLC or non-public JSC are generally subject to the standard CIT rate of 20 per cent, irrespective of onshore/offshore seller. For gains from the sale of shares in a public JSC, Vietnamese corporate sellers will be subject to CIT at the rate of 20 per cent on capital gains, while foreign corporate sellers will be subject to 0.1 per cent of CIT on gross sales proceeds. For individual sellers, special tax rates have to be observed.

In asset deals, the gain derived from the sale of assets is considered as income, hence, subject to the standard CIT rate of 20 per cent. The transfer of most assets is also subject to value-added tax (VAT) at the standard rate of 10 per cent. In addition, certain kinds of assets would be subject to stamp duty and/or import duty under specific circumstances.

  

Are there restrictions for foreign direct investment?

In general, foreign investors are permitted to own charter capital in Vietnamese enterprises without being subject to any limits. Exceptions are applicable though for companies in certain service sectors in which foreign ownership is restricted or conditional under WTO Commitments, or which is subject to sector-specific legislations, such as banking, education, distribution, etc.

Of note, for industry sectors which are not explicitly set out in the WTO Commitments or otherwise specifically legislated, Vietnamese licensing authorities in practice often exercise discretion in determining whether or not to grant necessary regulatory approvals for M&A transactions in such sectors.

  

Common risks and opportunities when entering the Vietnam market via M&A

The complicated nature of Vietnam’s law and tax regimes remains the major challenge. In relation to the seller’s and buyer’s expectations, the valuation of assets represents another issue, as sellers tend to be overoptimistic about their companies, hence overcharge without thoroughly taking into consideration all potential post-completion risks of an M&A transaction. Furthermore, investors may be confronted with issues related to management and accounting standards upon entering the M&A market in Vietnam.

On the other hand, the rapidly expanding market of Vietnam offers a number of assets, such as a progressing integration into the global economy through participation in numerous free trade agreements, or affordable labor supply, which has made foreign investment in the country worthwhile. Moreover, the government carried out divestments in a number of State-owned enterprises, providing a valuable opportunity for foreign investors looking to acquire shares in locally well-known brands, such as Petrolimex, Viglacera, Vinatex, etc.

  

Which valuation methods are commonly utilized in the market?

The most common methods to estimate a company´s value in Vietnam are Discounted Cash Flow, earnings multiples and assessment based on value of assets and liabilities in one’s balance sheet. Discounted cash flow is in practice the most reliable way to evaluate a company due to the absence of comparable data from listed or recently transacted companies in Vietnam.

  

Have any M&A related investment or tax facilitations been enacted in your jurisdiction in the light of the current pandemic?

The Vietnamese government has taken various tax relief measures to combat the impacts of the Covid-19 pandemic, such as extended deadlines for VAT and PIT payments, or a possible application for a 30 per cent CIT reduction. Other than that, no specific M&A-related investment incentives or policies have been enacted to encourage M&A activities in the country.

 


[1] Under the new Law on Investment (“LOI”), effective as of 1 January 2021, M&A approval will be required in case the target company holds land use right certificate(s) referring to land located in areas deemed vital for national security (e.g. islands and in border as well as coastal communes, wards and towns).
[2] This will be changed to more than 50 per cent under the new LOI.
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