Legal, Financial & Tax Due Diligence Services in Vietnam

Due diligence (DD) in Vietnam is a crucial step for any investor, particularly in mergers and acquisitions (M&A). It involves a thorough investigation into a target company's legal, financial, and tax standing to uncover potential risks and liabilities before a transaction closes. Here's an overview of these critical services:

1. Legal Due Diligence

Purpose: To assess the legal health of the target company, ensuring it complies with Vietnamese laws and regulations, and that all its legal claims (e.g., ownership, contracts) are valid. This is vital given Vietnam's evolving legal framework and specific regulatory nuances.

Key Areas of Focus:

• Corporate & Governance:

  • Verification of establishment licenses (Enterprise Registration Certificate - ERC, Investment Registration Certificate - IRC for foreign-invested entities).

  • Review of company charter, internal regulations, and corporate resolutions to ensure proper governance and decision-making processes.

  • Identification of legal owners, shareholder agreements, and any restrictions on share transfers.

• Contracts & Agreements:

  • Examination of significant commercial contracts (customer, supplier, distribution agreements) for unfavourable terms, unfulfilled obligations, or "change of control" clauses.

  • Review of loan agreements, guarantees, and security documents.

  • Lease agreements for premises and equipment, especially regarding land use rights.

• Asset Ownership & Intellectual Property:

  • Confirmation of legal title to major assets, particularly Land Use Rights Certificates (LURCs), which are critical in Vietnam, where all land is state-owned.

  • Verification of registration and ownership of trademarks, patents, and copyrights.

• Labour & Employment:

  • Review of employment contracts, internal labour rules, and compliance with Vietnam's Labour Code.

  • Assessment of social insurance, health insurance, and unemployment insurance contributions, a common area for non-compliance and hidden liabilities.

  • Identification of any labour disputes or significant grievances.

• Regulatory & Compliance:

  • Confirmation of necessary business licenses, sub-licenses, and permits required for the company's specific operations.

  • Assessment of environmental compliance, health, and safety regulations.

  • Review of any pending or threatened litigation, administrative proceedings, or disputes.

2. Financial Due Diligence

Purpose: To analyse the target company's historical financial performance and position, providing a clear and unbiased view of its true financial health, quality of earnings, and working capital requirements. This helps in validating the asking price and understanding future cash flow.

Key Areas of Focus:

• Quality of Earnings (QoE):

  • Deep dive into revenue streams to identify sustainable vs. non-recurring income.

  • Normalisation of expenses to remove one-off, non-operating, or discretionary items that distort true profitability (EBITDA adjustments).

  • Analysis of gross profit margins and operating expenses to understand the cost structure.

• Net Debt & Debt-like Items:

  • Identification of all forms of financial indebtedness, including bank loans, intercompany loans, and off-balance-sheet liabilities.

  • Assessment of debt covenants and potential breaches.

  • Quantification of debt-like items such as unfunded pension obligations, environmental liabilities, or unrecorded expenses.

• Working Capital Analysis:

  • Evaluation of accounts receivable ageing, inventory turns, and accounts payable cycles.

  • Determination of normalised working capital levels to ensure sufficient operating cash post-acquisition.

  • Identification of any unusual working capital movements or policies.

• Cash Flow Analysis:

  • Review of historical cash flow statements to assess the company's ability to generate cash from operations.

  • Analysis of capital expenditure trends and financing activities.

• Internal Controls & Accounting Practices:

  • Assessment of the effectiveness of financial reporting systems and internal controls.

  • Identification of potential weaknesses that could lead to fraud or misstatement.

3. Tax Due Diligence

Purpose: To identify and quantify potential tax risks and exposures that could arise from past non-compliance, ensuring the buyer is not inheriting significant tax liabilities. Vietnam's tax regulations are complex and subject to frequent changes, making this a critical review.

Key Areas of Focus:

• Corporate Income Tax (CIT):

  • Review of historical CIT returns, taxable income calculations, and supporting documentation.

  • Assessment of the validity of claimed tax incentives and preferential rates.

  • Identification of disallowed expenses, transfer pricing risks, and potential under-reporting of income.

• Value Added Tax (VAT):

  • Examination of VAT declarations, input VAT deductions, and output VAT calculations.

  • Verification of the legitimacy of invoices (e-invoices are mandatory) to avoid penalties for invalid input VAT claims.

  • Review of any VAT refunds due or outstanding VAT liabilities.

• Personal Income Tax (PIT):

  • Assessment of compliance with PIT withholding obligations for employees, including local and expatriate staff.

  • Review of employee benefits, allowances, and their tax treatment.

  • Compliance with PIT finalisation requirements.

• Foreign Contractor Tax (FCT):

  • Verification that FCT has been correctly withheld and paid on payments made to foreign organisations or individuals providing services or goods to the Vietnamese entity.

• Other Taxes & Duties:

  • Review of business license tax, environmental protection tax, import/export duties, and any other specific industry taxes.

  • Identification of any unrecorded tax provisions or penalties.

• Tax Disputes & Audits:

  • Review of any past or ongoing tax audits, assessments, or disputes with tax authorities.

By thoroughly examining these three facets, investors gain a holistic understanding of the target company, enabling them to make informed decisions, negotiate favourable terms, and mitigate post-acquisition risks in the Vietnamese market.

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