Vietnamese Tax Losses Remain After Shareholder Changes in Acquisitions

In Vietnam, a change of shareholders in a company acquisition does not automatically eliminate its accumulated corporate income tax (CIT) losses. The treatment of these carried-forward losses depends significantly on the acquisition structure, necessitating careful valuation and planning by investors. Under Vietnamese tax law, companies are generally permitted to carry forward CIT losses for up to five consecutive years, commencing from the year following the year in which the loss occurred. These losses can be offset against taxable income in subsequent years, thereby reducing tax liabilities. Any remaining balance after the five-year period expires is no longer deductible. The treatment of carried-forward losses in an acquisition hinges on whether the deal is structured as a share acquisition or an asset acquisition. In a share acquisition, the legal entity of the target company remains the same, even with a change in shareholders. Consequently, the carried-forward losses generally remain with the target company. However, the company must continue to track these losses by their year of origin and utilize them within the original five-year carry-forward period. Conversely, in an asset acquisition, the buyer purchases specific assets or business operations rather than the shares of the existing company. The acquiring entity is typically a different taxpayer. Therefore, the seller's historical CIT losses do not automatically transfer to the buyer simply because they acquire the business assets or continue the commercial activity. The losses remain with the company that originally incurred them. Furthermore, in statutory restructurings such as mergers, consolidations, divisions, or conversions, the treatment of carried-forward losses is governed by specific tax regulations. In these scenarios, losses must remain identifiable by their year of origin and do not receive a new five-year carry-forward period. Buyers considering an acquisition should obtain a detailed schedule of historical losses, including the amount originally declared, the portion utilized, and the remaining balance. This schedule must be reconciled with tax finalization returns and audited financial statements. It is crucial to note that accounting losses do not always equate to tax losses. Special attention is required for losses arising from related-party transactions and businesses benefiting from tax incentives. The economic value of carried-forward losses should be assessed considering the remaining carry-forward period, the target company's projected taxable profits, and the likelihood of successful tax authority review.