The liquidation process for a Vietnamese Company is time-consuming, costly, and has significant tax exposures. Care needs to be taken to understand and prepare before investors seek to wind up their company in Vietnam.
When seeking to wind up, or liquidate, a company in Vietnam, care needs to be taken to appreciate the tax process and exposures that arise. The winding-up stage represents the last opportunity for authorities to obtain taxes, penalties or outstanding payments from investors in Vietnam, and the authorities take this very seriously. Further, as the process depends on tax authority clearance, the timing for finalisation is often hard to predict and can stretch out for over 12 months in cases.
The wind-up process
Once an internal decision has been made to liquidate or wind up a Vietnamese company, the investors first need to ensure that the entity is “clean”; that is, that all debts have been settled and documents are in order so that the entity is in the physical shape required to proceed. Decision documents must be prepared and issued to the relevant licensing authority (usually the Department of Planning and Investment) to commence the liquidation formalities.
The tax finalisation and clearance process, upon which the final wind-up approval rests, presents the last opportunity for tax authorities to extract revenue for the State Treasury. Essentially, all matters are subject to review for up to 10 years. As a result, the process can be time-consuming and costly, particularly where planning has not been careful or where companies have been less than compliant throughout their operating history.
Issues arising on liquidation
Regardless of any previous tax inspections or finalisations, the tax authorities generally undertake a complete and thorough tax audit of a company after the notification of liquidation, which inherently results in additional taxation liabilities (clawbacks), penalties and interest.
Some of the common issues that arise during the wind-up process for Vietnamese companies include:
Corporate Income Tax (“CIT”)
- Denial of deductions for expenses where documents do not meet the general deductibility requirements or expense specifics do not support allocation against relevant revenues in a period.
- Inappropriate periodic determination and allocation of revenues and expenses, resulting in revenues being brought forward to earlier periods or expenses deferred to later periods.
- Denial of deductions for expenses where documents are lost or damaged.
- Denial of deductions for benefits provided to individuals without formal employment relationships (including travel expenses, regardless whether business related or not).
- Assessment of cash receipts as revenue, where documents cannot be presented confirming otherwise (ie, missing loan agreements for shareholder loans received).
- Inappropriate application of tax incentives outside permitted business lines/projects.
- Transfer Pricing related matters, including documentation and requirements under Vietnamese Transfer Pricing regulations, along with validity and appropriateness of head office/regional recharges or shared service allocations (including evidence of services being performed/consumed).
- Adjustments to assessable income where submitted revenues in CIT and VAT returns differ, with the higher value often being deemed “correct” unless appropriate supporting information and calculations are retained and available.
- Incorrect exchange rates used for foreign transactions.
- Value Added Tax (“VAT”)
- Non creditable VAT inputs, due to missing documentation or expenses that are not deemed business related.
- Insufficient evidence to satisfy the non-cash payment requirements for expenses over VND 20 million.
- Incorrect application of VAT rates, including 0% VAT applied on exported goods or services but which were not exported correctly or appropriate documentation maintained.
- Under charging/declaration of VAT on promotional goods, where the promotions were not registered correctly.
- Adjustments to assessable income where submitted revenues in CIT and VAT returns differ, with the higher value often being deemed “correct” unless appropriate supporting information and calculations are retained and available.
Personal Income Tax (“PIT”)
- Incorrect residency determinations, and therefore PIT withheld, from individuals employed or engaged by the company.
- Incorrect application of treatment of benefits provided to staff (in-kind or cash), and PIT implications of these benefits (including benefits to spouses and children).
Other Taxes & Penalties
- Incorrect declarations, or late filings of, Foreign Contractor Withholding Tax (“FCWT”) lodgements and payments
- Insufficient documentation to support FCWT calculations and determinations.
- Non-declaration of payments subject to FCWT, including reimbursement of foreign service expenses to employees (for example, where a service is consumed in Vietnam but paid abroad via credit card)
- Penalties for late lodgement of filings or late payment of taxes – calculated on a daily basis. The compounding effect of these can be considerable, particularly the knock-on effect to each future period for old matters
Actions and plans to minimise issues on liquidation
Investors should undertake a thorough review of their company, ideally by an independent party, prior to commencing any wind-up process. This should be used to assess the historical documentation, compliance and general taxation history, and where issues are identified, to initiate plans to correct documentation or rectify matters to the extent possible.
If there is sufficient time, it can sometimes be preferable to initiate discussions with the tax authorities for them to conduct a specific tax audit prior to the wind-up process commencing. This will often allow a more preferable negotiation process to clear potential issues before the pressures of the winding-up process is placed on the company.
Developing an appropriate “exit plan” is important. This includes determining the individual(s) who will be responsible for dealing with the authorities for the wind-up, where physical records will be maintained an examined, and agreeing on how payment processes will be facilitated for costs incurred during the inspection and wind-up process.
Finally, it is essential that investors commence the process with a realistic expectation of the timeframes required for the wind-up process in Vietnam, and put aside a budget for penalties, interest and additional taxes that will invariably arise during the company liquidation process.