Scenario 1: Using indemnity or escrow
For M&A transactions involving the sale of Vietnamese targets, it is a common strategy for the seller to claim CGT exemption under the tax treaty. This is done to mitigate any exit taxes on gains derived from the sale of a Vietnamese entity by foreign investors.
However, the assessment of CGT exemption claims ultimately remains at the discretion of the local tax authorities. As such, there is a significant risk that the seller may be unsuccessful in claiming CGT exemption.
Even though the CGT is imposed on gains derived by the seller from the sale, the buyer is required by law to file and pay taxes to the tax authorities on behalf of the seller. If the tax authorities assess that there is CGT to be paid, the tax authorities will impose tax liabilities (including interest and penalties) on the buyer if taxes are not filed and paid accordingly.
One way for the buyers to safeguard against these outcomes is by seeking an indemnity from sellers or insisting that a portion of sales be placed in escrow to cover potential tax liabilities. However, this will involve the locking up of capital and prevent the sellers from making a “clean exit”.