Before an M&A deal, it is not uncommon for the target company to carry significant debt — which the buyer would rather not inherit as is. A common restructuring tool is the debt-to-equity swap: the creditor agrees to convert the debt into an equity stake in the company, which reduces debt and increases charter capital ahead of the transaction. This article explains the procedure and tax implications of this structure under Vietnamese law as in force on 14 October 2026.
1. The nature of a debt-to-equity swap
In essence, a debt-to-equity swap is an agreement between the creditor and the company: instead of the company repaying the debt in cash, the two sides agree to convert the debt (in whole or in part) into the creditor’s capital contribution to the company. The legal consequences are twofold:
- For the company: the debt is extinguished (to the extent converted), while the company’s charter capital increases correspondingly with the new capital contribution;
- For the creditor: it moves from the position of “lender” to that of a member of an LLC or shareholder of a joint-stock company, with the corresponding rights and obligations of that company form.
In an M&A context, this structure “cleans up” the target’s balance sheet before the sale: lower leverage, higher equity — improving valuation and reducing risk for the buyer. Sometimes the prospective buyer itself is the creditor performing the swap, thereby becoming a shareholder before moving to a full takeover.
2. The three-step procedure under enterprise law
A debt-to-equity swap involves an increase of charter capital, governed by the Enterprise Law 59/2020/QH14 — specifically the charter-capital-increase provisions in Articles 68, 87 and 112 (the law remains in force, as amended by Law 76/2025). The process has three steps:
Step 1 — Debt-to-equity conversion agreement. The creditor and the company sign an agreement recording: which debt is converted (principal, interest, or both), the conversion value, and the stake the creditor will hold after conversion. This is the foundational document — everything that follows builds on what is settled here.
Step 2 — Resolution to increase charter capital. The company’s competent body (Members’ Council / General Meeting of Shareholders, depending on company form) issues a resolution increasing charter capital by the amount of the creditor’s new contribution. For a joint-stock company, this step is tied to issuing new shares to the creditor — carried out as a private placement (see section 3).
Step 3 — Registration of changes to enterprise registration. Once the capital increase is complete, the company registers the change to its Enterprise Registration Certificate to record the new charter capital and the new member/shareholder structure. The statutory deadline for this step is 10 days.
3. Joint-stock companies: private placement to the creditor
For a joint-stock company, the debt-to-equity swap is implemented by issuing new shares to the creditor. Because the new shares are issued to a defined person — the creditor — rather than offered broadly to the public, the applicable form is a private placement of shares.
A practical point: the issue price of the shares for the creditor (typically at par value in a swap structure) and the number of shares issued must be clearly set in the resolution of the General Meeting of Shareholders / Board of Directors acting within its authority, matching the agreed value of the converted debt from Step 1.
4. Where a foreign investor is involved: capital-contribution registration first
If the creditor performing the swap is a foreign investor, an additional investment-law layer applies. Under Article 21 of Investment Law 143/2025/QH15 (effective 1 March 2026, replacing the entire 2020 Investment Law), a foreign investor making a capital contribution, share purchase or equity acquisition falling within the three cases listed in Clause 3, Article 21 must complete the capital-contribution registration procedure beforehand.
In other words, foreign investors do not always have to register — the obligation only arises in one of the three Article 21.3 cases. Before implementing a cross-border debt-to-equity swap, the specific case should therefore be checked against the three statutory cases to determine whether registration is required, avoiding both missing procedures and unnecessary delays to the M&A timeline.
5. Corporate income tax implications
On the tax side, the applicable framework is Corporate Income Tax Law 67/2025/QH15 (effective 1 October 2025). Two points are settled:
- A charter capital increase is not taxable CIT income. A company’s capital increase — whether funded in cash or by debt conversion — does not generate taxable income for the company;
- Conversion at par value generally produces no difference. Where debt is converted into equity at par (debt value = recorded equity value), no taxable spread arises.
One point, however, remains unconfirmed and should not be assumed: where the creditor agrees to a haircut — converting only part of the debt into equity while the rest is written off outright — whether the written-off portion counts as the company’s taxable “other income” for CIT purposes. This requires case-specific tax advice for each deal structure; no blanket conclusion should be drawn.
Frequently asked questions
Does a debt-to-equity swap need the consent of other creditors?
In principle, it is a bilateral agreement between the company and the swapping creditor. However, if other loan facilities contain covenants restricting capital-structure changes, they should be reviewed first to avoid cross-default.
Must a foreign creditor register when converting debt into equity?
It depends on whether the case falls within one of the three cases in Clause 3, Article 21 of Investment Law 143/2025. If it does, capital-contribution registration is required beforehand.
What is the deadline for registering the enterprise registration change after the capital increase?
10 days under the rules on registration of changes to enterprise registration contents.
Is the written-off portion of debt (not converted into equity) taxable?
This point is unconfirmed — take case-specific tax advice rather than assuming an answer.
Sources
- Enterprise Law 59/2020/QH14 — in force (amended by Law 76/2025): Articles 68, 87, 112 (charter capital increase);
- Investment Law 143/2025/QH15 — effective 1 March 2026 (replacing the 2020 Investment Law): Article 21 (foreign-investor capital contributions; the three Clause 3 cases requiring registration);
- Corporate Income Tax Law 67/2025/QH15 — effective 1 October 2025 (tax implications of the capital increase).
This article is for reference only and does not constitute legal advice. The content was drafted by AI and will undergo quality review by the AI Legal Council of FLAT Law Firm before any publication consideration; it is not the legal opinion of a licensed human lawyer. Laws and regulations may change; verify the current legal texts before applying them.
Need to structure a debt-to-equity swap ahead of an M&A deal? Contact FLAT Law Firm for advice.
Legal content reviewed by the FLAW AI Legal Council and submitted to the owner for approval; not a practicing lawyer’s opinion, not a substitute for legal advice on a specific matter.