You are negotiating to acquire a domestic manufacturing company. Everything is going smoothly: the financial statements for the last three years all show profits, margins are stable, and your financial DD team is nearly done. Then, during a working session with the seller's chief accountant, one of your people happens to glimpse an Excel file on the screen named "internal books" — showing revenue far higher than the figures in the financial statements provided. Asked about it, they learn that the company has always maintained two sets of books: a "tax set" for filing, and a "real set" for running the business.
This is not a rare scenario in Vietnamese M&A practice, particularly among long-established small and medium-sized enterprises. The question is: how should the buyer react? Walk away, push the price down, or proceed with conditions? This article follows exactly the sequence an M&A lawyer would use: reconstruct the facts, frame the legal questions, map the legal framework, then set out the options for the buyer to choose from.
1. Reconstructing the facts of the scenario
Before discussing the law, the known facts need to be pinned down — because each detail that changes leads to a different risk assessment:
- F1. The target is a domestic manufacturing company with many years of operating history. The buyer is a foreign investor negotiating to acquire 100% of the shares (a share deal).
- F2. During DD, the buyer's team discovered that the target maintains two sets of books: "tax books" (used for financial statements and tax filings) and "internal books" (reflecting actual revenue and costs for management purposes).
- F3. The gap between the two sets is material: revenue in the internal books is higher than reported revenue. The seller explains this as a "common practice" for "tax optimization", and insists many peers do the same.
- F4. The seller has never been inspected or audited by the tax authorities on this matter, and has never been administratively sanctioned for accounting or tax violations related to the two sets of books.
- F5. The transaction is at the DD stage: no share purchase agreement (SPA) has been signed, no deposit has been placed, and there is no binding commitment to complete the deal.
- F6. The DD team has not yet determined the precise amount of tax that could be assessed if the authorities discover the discrepancy — more time and the seller's cooperation are needed to reconcile the books.
On these facts, the buyer faces three layers of questions: (1) how serious a legal violation the seller's two-book practice is; (2) whether that risk "travels" to the buyer after the transaction closes; and (3) if the buyer still wants to proceed, what legal mechanisms can protect it.
2. Legal framework (1): the Accounting Law — two sets of books are expressly prohibited
The clearest starting point is the Law on Accounting 2015 (Luật Kế toán 2015, 88/2015/QH13). Clause 10, Article 13 of this law lists prohibited acts in accounting practice, expressly including: "preparing two or more financial accounting book systems or providing or publishing financial statements with inconsistent figures for the same accounting period".
In other words, the law does not treat two sets of books as a "business practice" or a "tax optimization technique" as the seller claims in F3 — it is an expressly prohibited act. The legal consequences run along two tracks:
The administrative track. Under Decree 41/2018/ND-CP (Nghị định 41/2018/ND-CP), as amended by Decree 102/2021/ND-CP, keeping assets or liabilities of the entity (or relating to the entity) off the accounting books — not serious enough to warrant criminal prosecution — is fined VND 20–30 million for individuals; organizations committing the same act are fined double, i.e. VND 40–60 million. Beyond the fine, a remedial measure applies: the off-book assets and liabilities must be added back into the accounting books. The administrative fine itself is modest relative to the size of an M&A deal, but it is the "entry ticket" to heavier consequences on the tax and criminal tracks.
The criminal track on accounting. Article 221 of the Penal Code (Bộ luật Hình sự) provides for the offence of violating accounting regulations causing serious consequences: a person who, abusing their position or powers, commits acts such as forging, misrepresenting, conspiring with or coercing others to forge, misrepresent or erase accounting documents; or inducing, conspiring with or coercing others to provide or certify untrue accounting information or figures — causing damage of VND 100 million to below VND 300 million (or below VND 100 million but already disciplined or administratively sanctioned for this act and reoffending) — is subject to non-custodial reform of up to 03 years or imprisonment of 01 to 05 years.
3. Legal framework (2): tax risk — 10-year back-tax assessment and late-payment interest
The gap between the two sets of books almost always means the target has under-reported revenue and therefore underpaid value-added tax and corporate income tax (and possibly other taxes). This is the largest financial risk for the buyer, governed by the Law on Tax Administration 108/2025/QH15 (Luật Quản lý thuế 108/2025/QH15) — the currently applicable tax administration law, effective from 01/7/2026.
Three key points the buyer must grasp:
First, expiry of the sanctioning limitation period does not extinguish the tax payment obligation. Under Article 44 of the Law on Tax Administration 108/2025/QH15, the limitation period for administrative sanctioning of tax administration violations is 02 years for procedural tax violations and 05 years for tax evasion not serious enough for criminal prosecution or for false declarations leading to underpaid tax. But once the limitation period has expired, the taxpayer is no longer sanctioned yet must still pay in full the underpaid tax, the evaded tax and late-payment interest for the 10 years preceding the date the violation is discovered. In other words, the tax risk of two sets of books is a "debt overhang" that can stretch a full decade — it does not simply fade with time because the company has not been inspected, as in F4.
Second, late-payment interest accrues daily. The back-assessed tax comes with late-payment interest computed on the number of days of delay. For a company that has kept two sets of books for many years, the total financial exposure (back tax + late-payment interest + fines) can be many times the original underpaid amount. This is why the DD team in F6 cannot put a precise figure on the risk without a full reconciliation — and why the buyer should never accept any verbal assurance that "the underpaid tax is only about this much".
Third, tax violation fines can be very heavy. Depending on the nature of the conduct (false declaration versus tax evasion), the taxpayer may be fined at a percentage rate or at multiples of the violated tax amount under current regulations, on top of paying the full underpaid tax and late-payment interest. Where the gap between the two sets of books is deliberate and prolonged, the risk that the conduct is characterized as tax evasion — carrying a far heavier penalty frame than ordinary false declaration — is something the buyer must price in.
4. Legal framework (3): the criminal boundary — Article 200 of the Penal Code
The most serious layer of risk is criminal liability for the individuals involved on the seller's side — which indirectly affects the buyer's deal. Article 200 of the Penal Code (the offence of tax evasion) sets quantitative thresholds and penalty frames as follows:
- Tax evasion of VND 100 million to below VND 300 million: a fine of VND 100–500 million or imprisonment of 03 months to 01 year.
- Committed in an organized manner; the amount being VND 300 million to below VND 1 billion; abusing position or powers; committed 02 or more times; or dangerous recidivism: a fine of VND 500 million to 1.5 billion or imprisonment of 01 to 03 years.
- Tax evasion of VND 1 billion or more: a fine of VND 1.5–4.5 billion or imprisonment of 02 to 07 years.
- Additional penalties may also apply: a fine of VND 20–100 million, a ban from holding positions, practising a profession or doing certain work for 01 to 05 years, or confiscation of part or all of the offender's assets.
To be clear: criminal liability is personal — the buyer cannot be criminally prosecuted for tax evasion committed by others before it acquired the company. But the practical risk to the buyer lies elsewhere: if, after closing, the authorities open a criminal case relating to the pre-closing two-book practice, the target company (now owned by the buyer) will be drawn into the investigation — documents seized, operations disrupted, reputation damaged — and key seller-side personnel the buyer intended to retain may face liability. A deal whose core management team is entangled in criminal proceedings is a failed deal in business terms, however well the contract is drafted.
5. Why the risk "travels" to the buyer: tax obligations follow the legal entity
This is the pivotal point many foreign investors unfamiliar with Vietnamese practice overlook. In a share deal as in F1, the object of the sale is the shares of the target company — the target's legal entity continues to exist without interruption; only its ownership changes. All of the company's tax obligations — including those arising from periods before the change of ownership — remain obligations of that same legal entity.
The consequence: after closing, if the tax authorities audit and assess back tax for prior years, the recipient of the assessment decision and the party that must pay is the company the buyer now owns. The buyer cannot plead "that was the old owner's business" to refuse payment to the state — obligations to the state budget cannot be contracted away by a private agreement between buyer and seller. All a contract can do is allocate the financial risk between buyer and seller (the seller indemnifies the buyer); it cannot erase the company's obligation to the tax authorities.
That is why discovering two sets of books at the DD stage (F5 — no binding commitment yet) is the golden moment: the buyer still holds full bargaining power, including the right to walk away at no significant cost.
6. Option A: walk away from the deal
This is the cleanest option legally and should be seriously considered where: the gap between the two sets of books is too large relative to deal size (estimated tax exposure swallows the transaction's profit margin); the seller refuses to cooperate in providing the full internal books or to explain in writing; there are signs the matter may already be on — or about to come onto — the authorities' radar; or the buyer lacks the operational capacity to "clean up" the accounting system post-acquisition.
The advantage of this option is complete elimination of risk. The downside is the sunk DD cost and the lost business opportunity — but compared with buying an unquantifiable "tax debt overhang", this is usually the cheaper price. A practical note: if the decision is to walk away, the buyer should do so discreetly and in writing, leaving no trail suggesting it "knew" of the seller's violation in a way that could later be misconstrued as complicity in any scenario.
7. Option B: proceed with full protective conditions
If the deal remains strategically attractive and the tax risk can be estimated, the buyer may proceed behind an "armour" of protective provisions in the purchase agreement. The key provisions are:
1. Re-price on adjusted figures. The purchase price must be recalculated on the basis of real profit after deducting the estimated contingent tax liability — not on the "pretty" profit figure of the tax books. This is the most direct negotiating leverage from the DD finding.
2. Representations and warranties. The seller must warrant in writing that the accounting books have been prepared truthfully and completely in accordance with the law; that all tax obligations have been declared and paid in full; and that no second book system is maintained. These warranties are the foundation for the buyer's post-closing indemnity claims.
3. Tax indemnity. The seller undertakes to indemnify the buyer (or the target company directly) for all back-assessed tax, fines and late-payment interest arising from pre-closing periods. The clause should clearly define scope, and the notice and cooperation procedures when the tax authorities conduct an inspection.
4. Holdback of part of the purchase price or escrow. A portion of the purchase price is held in an independent escrow account for a sufficiently long period (measured in years, with reference to the back-tax assessment limitation period) to ensure the seller still has "real money" to honour its indemnity when the risk materializes. This is the most important practical provision, because an indemnity promise without assets behind it is worth very little.
5. Conditions precedent. Require the seller to file supplementary declarations, pay all outstanding tax in full, and completely terminate the two-book practice before closing. This "clean up before the wedding" approach materially reduces legacy risk, although it may expose the seller to administrative sanctions — a cost the seller should bear and which should be reflected in the price.
6. Unilateral termination right. The buyer retains the right to withdraw from the transaction without penalty if further DD uncovers additional serious violations beyond the agreed threshold.
The practical effectiveness of this package depends heavily on the seller's financial capacity and good faith — so alongside negotiating the provisions, the buyer must assess the seller's ability to pay (assets, cash flow) to ensure the indemnity obligation is not merely paper.
8. Option C: restructure the deal — buy assets instead of shares
Another structural option is to switch from a share deal to an asset deal: the buyer uses a new (or existing) legal entity to acquire specific assets of the target — plant, machinery, inventory, contracts, brand — instead of acquiring the legal entity that carries the "two-book past".
The advantage: the buyer takes only the assets listed in the contract and, in principle, does not inherit the selling entity's historic tax liabilities. The disadvantage: materially higher transaction cost and complexity — transfer procedures for each asset, termination and re-signing of customer and supplier contracts, labour issues (termination and rehire or transfer), and some business licences attached to the old entity may not be transferable. This option fits where the estimated tax risk is too large but the target's assets and business operations retain strategic value.
The choice between Option B and Option C is a cost-benefit calculation specific to each deal, requiring both lawyers and tax advisers from the DD stage.
9. The absolute red line: never continue two sets of books after the acquisition
Whichever option is chosen, one red line must never be crossed: after taking over, the buyer must not continue maintaining two accounting book systems. Keeping two sets of books is a prohibited act under the Law on Accounting — continuing it means the new management is committing a fresh violation, with full administrative and criminal exposure of its own.
Immediately after closing, the buyer must: consolidate into a single accounting book system in full compliance with the regulations; replace the chief accountant and review the entire accounting team (personnel who operated the two-book system are a human-resource risk to be handled carefully and in accordance with labour law); reconcile and adjust misstated items; and consider proactively filing supplementary declarations and paying outstanding tax — voluntary remediation before discovery is generally treated as a mitigating circumstance when violations are sanctioned.
10. DD checklist: spotting two sets of books early
To avoid being caught off guard as in the opening scenario, the DD team should build the following procedures into the financial-tax review checklist:
1. Reconcile reported revenue against actual cash flows. Compare revenue in the financial statements with bank statements and sales figures in the internal management system (ERP, sales software). A large, persistent gap is the first warning sign.
2. Interview the chief accountant and the storekeeper separately. Hold separate sessions, asking cross-checking questions about the revenue recognition process, invoicing and inventory management. Inconsistencies in the answers often reveal the existence of another record-keeping system.
3. Inspect the accounting software and off-book Excel files. Demand full access to the accounting software; at the same time, look out for Excel spreadsheets and "internal" tracking notebooks in the accounting room, the sales office and the warehouse — like the "internal books" file in the opening scenario.
4. Reconcile payables and physical inventory. Conduct a physical stock-take against the books; confirm receivables against major customers' confirmations. Physical inventory materially different from the books signals unrecorded revenue.
5. Review the history of tax inspections and audits. A company operating for many years yet never tax-inspected (as in F4) is both a plus and a minus: it means any irregularities (if any) have never been "washed" through an inspection cycle.
6. Require the seller to warrant in writing the completeness of the documents provided. Include in the NDA or the DD minutes a clause by which the seller warrants it has provided all accounting books and documents fully and truthfully — creating a legal basis if concealed documents surface later.
11. Frequently asked questions
If DD uncovers two sets of books, should the deal be stopped immediately?
Not necessarily right away — but valuation based on the old figures must stop. The first step is to require the seller to explain in writing, quantify the gap between the two sets, and estimate the contingent tax liability. Only where the gap is too large, the seller will not cooperate, or there are clear criminal indicators should withdrawal be considered. In many cases, the finding becomes the basis for negotiating a price reduction and tighter protective provisions.
Is the buyer jointly liable for the seller's pre-acquisition two-book practice?
Liability for maintaining two sets of books rests with the target company and the individuals involved in the past — the buyer bears no criminal or administrative liability for acts it did not commit. However, tax obligations (back tax, late-payment interest, fines) are obligations of the target company's legal entity, so after the acquisition, the company the buyer owns is the one that must pay. The financial risk therefore still lands on the buyer without an indemnity from the seller.
After the acquisition, may the two-book practice be continued?
Absolutely not. Maintaining two accounting book systems is a prohibited act under the Law on Accounting, and continuing it after taking over means the new management is committing a fresh violation. Immediately after closing, the buyer must consolidate into a single book system, review and adjust misstated items, and consider proactively filing supplementary declarations and paying outstanding tax to mitigate the risk of heavier sanctions if the tax authorities discover the issue.
When two sets of books are found, should the buyer acquire shares or assets?
In principle, an asset deal helps the buyer avoid inheriting the selling entity's historic obligations, because the buyer takes only the assets listed in the contract. However, an asset deal has higher transaction costs (transferring ownership of each asset, terminating and re-signing contracts, handling labour) and may not be feasible for businesses with many licences attached to the legal entity. The decision depends on the estimated tax risk weighed against the restructuring cost — lawyers and tax advisers should assess each deal specifically.
Which provisions in the purchase agreement protect the buyer against two-book risk?
The key provisions are: representations and warranties (the seller warrants truthful books and full tax compliance); tax indemnity (the seller indemnifies all back tax, fines and late-payment interest arising from pre-closing periods); holdback of part of the purchase price or escrow for a sufficiently long period; conditions precedent (the seller must file supplementary declarations and pay outstanding tax before closing); and a unilateral termination right if further serious violations are discovered. Their effectiveness depends on the seller's financial capacity and integrity, which must be carefully assessed.
12. Conclusion and next steps
Discovering two sets of books during DD is not the end of the deal — but it is a signal forcing the buyer to switch from "price negotiation" mode to "risk management" mode. The legal framework is clear: maintaining two sets of books is prohibited under the Law on Accounting; the numerical gap brings a 10-year back-tax assessment risk, late-payment interest and fines under the Law on Tax Administration 108/2025/QH15; and where the quantitative thresholds are met, criminal liability under Articles 200 and 221 of the Penal Code. In a share deal, all of that financial risk travels with the target company's legal entity into the buyer's hands — which is why a DD-stage discovery, before any binding commitment, is the buyer's greatest bargaining advantage.
The choice between walking away, proceeding with a full protective package, or restructuring into an asset deal — there is no one-size-fits-all answer. What matters is that every decision rests on a substantiated tax-risk estimate (not the seller's verbal assurances), is confirmed by independent lawyers and tax advisers, and is "locked in" by contractual provisions backed by real assets.
This article is for general reference only and is not legal advice for any specific situation. Each M&A transaction has its own facts and must be assessed independently.
If your company is conducting DD on an M&A transaction and has spotted irregularities in the target company's books, FLAT Law Firm can assist in assessing legal risk, estimating contingent tax liabilities, designing protective provisions in the purchase agreement, and supporting you throughout the negotiation process. Contact FLAT Law Firm at hotline 0988424851 for advice tailored to your transaction.