Regulatory and tax concerns when dissolving a company in Vietnam

In this article, Data Entry Vietnam (DEV) would like to explore the regulatory and tax implications of a foreign investor dissolving their business in Vietnam.

Foreign investors may decide to discontinue operations and close down their invested entity in Vietnam as part of business restructuring plans prompted by negative causes such as the global economic crisis as a result of the Covid-19 pandemic. A Vietnamese company’s liquidation process can be time-consuming and costly, with major tax and regulatory concerns. When foreign investors decide to stop conducting business in Vietnam, it is critical that they understand the procedures and responsibilities imposed by Vietnamese legislation.

Dissolving a Business

For a variety of reasons, foreign investors may decide to dissolve their Vietnamese firm in which they have invested. Whatever the cause, once the management board has chosen to liquidate the firm, the investors or board must first take the appropriate steps to wind it up and ensure that it is clean from a business and regulatory standpoint.

This may involve making certain that all debts have been paid and that all relevant documents are in order; dissolution documents must be properly prepared and in place before being filed with the competent licensing authority, which is usually the Department of Planning and Investment (DPI), to begin the liquidation process. The tax finalization and tax code closure process, which is required for final wind-up permission, provides the tax authorities with one last chance to collect any unpaid taxes, fines, and interest.

As a result, the procedure can be time-consuming and costly, especially if careful planning has not been done or if organizations have been less than compliant in the past. In theory, dissolving a company should take four to six months, but in practice, the length of time it takes to complete an entire dissolution is highly dependent on the complexity of the company structure, as well as the level of legal and tax compliance and transparency during final audits by the competent authorities.

Procedure for Dissolution

The relevant parties and regulatory authorities must complete the following stages as part of the voluntary dissolution procedure.

Dissolution Resolution

The legal board of management of the company will need to make a dissolution statement that includes all of the following information:

  • company name;
  • registered operational address;
  • business registration number (it is also the Tax Code);
  • reasons for dissolution;
  • deadlines and procedures for liquidation the firm’s contracts and loans (which must be completed within six months of the company’s dissolution date);
  • solutions for any labor contract obligations.

This document must be signed and forwarded to all of the company’s business partners (i.e., business/investment registration agencies, creditors, individuals with rights, benefits, and duties, and all workers).

Debt Consolidation

The corporation must ensure that all debts and property obligations are discharged in the following order:

  • Unpaid wages, severance allowances/retrenchment allowances, and social insurance as required by law, as well as other employee benefits under the terms of a signed collective bargaining agreement and labor contracts;
  • tax liabilities;
  • and other debts

After deducting all obligations and dissolution expenses, the owner of the business will be entitled to the remaining funds (if any).

Labor Contracts Termination

Due to the dissolution, a corporation can unilaterally cancel current labor contracts with its employees. Technically, labor contract terminations can be considered legal if the company can demonstrate a force majeure impact (e.g. Covid-19) and has taken all remedial measures but is still forced to close its operations; otherwise, this may be considered illegal unilateral labor contract termination, resulting in compensation payments.

Following the termination of labor contracts, the corporation must complete the following tasks in order to satisfy any outstanding responsibilities to present employees and relevant authorities:

  • Payment of employment income;
  • severance pay;
  • compensation;
  • mandatory insurance compliance;
  • and other reporting requirements

Assets Liquidation

The shareholders or the management board will be directly responsible for the liquidation of the company’s assets, as required by law. At its discretion, the board will form an asset liquidation committee to dispose of the company’s assets.

Following the completion of the liquidation process, the committee in charge of the process must issue a report on the liquidation of assets. The decision on the formation of the liquidation committee will be included in the company’s dissolution application dossiers.

The tax implications of asset liquidation should be applied in accordance with the applicable tax legislation.

Obligations for Tax Filing in a Liquidation

A company that is being dissolved must submit final tax returns and clear all tax liabilities, including CIT, VAT, PIT, and other tax liabilities (if any), with the local tax authority no later than 45 days from the date of the resolution on dissolution.

Whether-or-not the company engages in import-export activities, the company must write a letter to the General Department of Customs certifying that it has no outstanding import-export taxes.

After 15 working days from the day it received the tax finalization dossier for dissolution purposes, the tax authorities will conduct a tax audit at the company’s office. In practice, however, the actual time for the tax audit may be extended significantly due to the tax authority’s internal processes and working schedule.

During a tax audit, the tax authority will examine and re-evaluate the company’s tax compliance status as well as the tax returns it has filed. In actuality, a tax audit will almost always result in tax recoupment and penalties owing to under-declaration of tax, as well as interest on late payments related to that under-declaration of tax.

The tax audit is regarded one of the most difficult and time-consuming stages of the dissolution process. The entire process (from the tax audit fieldwork of tax officials to the issuance of the final decision) could take months. As a result, a pre-tax audit assessment of current tax compliance status—performed by tax experts prior to dissolution—is recommended to ensure that all tax filings and payments are compliant, as well as to cut down on the time spent providing documents and explanations to tax auditors during tax audit.

In terms of the obligation to keep accounting books and tax documents after a company’s dissolution, the required time to keep accounting documents relating to the dissolution varies depending on the type of document and the type of business, but they must generally be archived for at least 10 years, at a location determined by the company’s legal representative(s).

Bank Account Termination

Any active bank accounts must be closed in accordance with local commercial bank standards, following which the investors must request that the bank issue a document certifying the accounts’ closure. A letter of commitment from the company verifying that they have no debts with any banks may be required if the company has never opened any bank accounts.

Deregistration of the Company

After all obligations and relevant dissolution expenses have been paid, the firm will submit a dissolution application to the licensing authority (normally the Department of Planning and Investment). The licensing authority will update the legal status of the firm in the National Business Registration System (NBRS) if no opinions or objections from relevant parties are received.

Plan of Action to Make the Dissolution Process Easier

First and foremost, the management board should have a well-thought-out closure strategy. This means the company should choose employees who will be responsible for the winding-up process both before and after a physical closure, such as managing documents and records, finalizing payments with vendors, staff benefits, and so on, as well as collaborating with the appropriate authorities to complete the dissolution process.

Prior to beginning any winding-up process, investors should do a detailed analysis of the company’s tax, labor, and other regulatory compliance situation, or employ an independent consulting firm to do so if the business structure is complicated or considered highly sensitive to risks. The goal is to look over the documentation, compliance, and general tax liabilities from the past. When issues are discovered, investors should look into supplementing/improving the paperwork or correcting the situation as soon as possible.

In practice, some businesses request that the tax authority conduct a specialized tax audit prior to implementing a dissolution plan. Given that shutting a firm creates special pressures and challenges for both the company’s management and tax officials over the course of executing the tax audit, this will typically allow a negotiating process to clear potential tax issues.

In practice, many foreign investors hire a professional consulting firm to help them with the process, from pre-tax audit review to supplying human resources and aid in completing all labor, tax, and related regulatory duties and procedures for dissolution purposes.

Finally, foreign investors should anticipate and budget for a realistic schedule for the winding-up and dissolution procedure in Vietnam, as well as penalties, interest, and additional taxes that are likely to develop throughout the dissolution process.