Vietnam - Tax impact on warranty clauses | KPMG | GLOBAL

Vietnam - Tax impact of warranty clauses

Vietnam - Tax impact of warranty clauses

Tax impacts of warranty clauses in Vietnam.

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Does the seller grant warranties or indemnities to the purchaser when acquiring a company?

Yes, the seller grants warranties or indemnities to the purchaser when acquiring a company.

Does the tax treatment of the warranty depend on its legal classification (e.g. indemnity vs. reduction in the purchase price vs. others)?

No, the tax treatment of the warranty doesn’t depend on its legal classification.

Is classification of the contractual warranties as a price reduction clause or an indemnity clause relevant in your jurisdiction?

Both types of contractual provisions (i.e. warranties and indemnities) are relevant in Vietnam. However, as mentioned above, the classification of the tax treatment would depend on various factors and the substance.

Are mixed clauses included in the SPA (for instance, a warranty drafted partially as a price-reduction clause for the portion corresponding to the purchase price and as an indemnity clause for the amount exceeding the purchase price)?

No, this is not standard practice and such a hybrid warranty may not be effective at law.

Is the classification usually mentioned in the SPA?

No, the classification is not usually mentioned in the SPA.

Are there criteria to distinguish between a price reduction clause and an indemnity clause? Could you briefly describe these criteria?

No, there are no criteria applied – either type of clause is effective, but the intended consequence of breach (damages on an indemnity basis or via a price reduction capped at the purchase price) must be clearly stated in the SPA.

What is the most common type of warranty in your jurisdiction?

Both are commonly used.

Is a tax warranty usually provided by way of a separate warranty agreement (different from the SPA)?

No it is normally part of the SPA.

Is it usual / a market practice to negotiate after-tax settlements, i.e. to reduce the price adjustment to a net payment (i.e. indemnity minus the tax effect of the deduction for the acquirer or target) or to guarantee full indemnification (i.e. gross-up payment to guarantee a net indemnity)?

Both are available, and ultimately it depends on the commercial agreement between parties.

Acquirer

  Corporate Income Tax Personal Income Tax
Price reduction clause The price adjustment has no direct impact on the taxable income of the purchaser. It is treated as a decrease in the investment value of the shares. Consequently, future capital gains will be increased
The price adjustment has no direct impact on the taxable income of the purchaser. It is treated as a decrease in the investment value of the shares. Consequently, future capital gains will be increased
Indemnification clause The payment received may be treated as taxable “other income”
The payment received may be treated as an additional taxable item for the individual.

Vendor

  Corporate Income Tax Personal Income Tax
Price reduction clause Amended capital gains tax return would be required. Lower taxable gains leading to refund of capital gains tax already paid. May be practically problematic to achieve this.
Amended capital gains tax return would be required. Lower taxable gains leading to refund of capital gains tax already paid. May be practically problematic to achieve this.
Indemnification clauseThe payment may be treated as a deductible item The payment may be treated as a deductible item The payment may be treated as a deductible item

Target

Price reduction clause No tax consequences
Indemnification clause No tax consequences

Contact

Ninh Van Hien – KPMG in Vietnam
Partner, M&A Tax
(+)84 (8) 3821 9266
ninhvanhien@kpmg.com.vn

Richard Stapley-Oh - KPMG in Vietnam
Partner, Head of Legal
(+)84 (8) 3821 9266
rstapleyoh@kpmg.com.vn
 

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