Are Pre-incorporation Expenses Considered Deductible Expenses?
Question:
Are the expenses incurred before the incorporation of a company considered legitimate business expenses, and can they be deducted for tax purposes (if applicable)? What documents are required? How long before incorporation can such expenses be incurred to ensure compliance?
Answer:
According to Article 19 of the 2014 Enterprise Law, it regulates "Pre-incorporation Contracts":
The founders of a company may sign contracts necessary for the establishment and operation of the company before and during the registration process. If the company is successfully established, it must continue to fulfill the rights and obligations arising from the signed contracts, unless otherwise agreed by the parties involved.
Based on this provision, pre-incorporation expenses that are mutually agreed upon by the company founders will be recognized, and once the company is established, these expenses can be accounted for as business expenses and gradually allocated to deductible expenses for the company.
According to Clause b, Article 12 of Circular No. 219/2013/TT-BTC dated December 31, 2013, issued by the Ministry of Finance, which regulates the principle of deducting input VAT:
12. Business establishments may declare and deduct VAT for goods and services purchased by authorized individuals or organizations on behalf of the company, including the following cases:
"b) Before the company is established, if the founders authorize an individual or organization to pay for certain expenses related to the company's establishment or the purchase of goods and supplies, the company may declare and deduct VAT for input taxes based on invoices issued in the name of the authorized individual or organization, and the payment must be made to the authorized entity through a bank for invoices valued at 20 million VND or more."
Additionally, Clause 3 of Article 3 of Circular No. 45/2013/TT-BTC dated April 25, 2013, issued by the Ministry of Finance, which guides the management, use, and depreciation of fixed assets, states:
The expenses related to company formation, etc., are not considered intangible fixed assets but must be gradually allocated to the company's business expenses over a period of up to 3 years according to the Corporate Income Tax Law.
Article 1 of Circular 6/2014/TT-BTC amending Circular 78/2014/TT-BTC regulates:
"Except for non-deductible expenses specified in Clause 2 of this Article, a business is allowed to deduct all expenses if they meet the following conditions:"
a) The expense is directly related to the company’s production and business activities; b) The expense has valid invoices and legal documents as required by law; c) If the invoice for goods or services purchased exceeds 20 million VND (including VAT), payment must be made through non-cash methods.
According to Circular 200/2014 on enterprise accounting regimes:
Account 213 - Intangible Fixed Assets:
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Accounting principles:
e) Expenses that bring future economic benefits to the company, including company formation expenses, employee training costs, advertising costs incurred before the company’s operations, research phase costs, relocation costs, are recognized as production and business expenses in the period or are gradually allocated to production and business expenses over a period of up to 3 years.
Account 242 - Prepaid Expenses:
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Accounting principles:
b) Prepaid expenses, including:
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Company formation costs, training, and advertising costs incurred before operations, allocated over a period of up to 3 years.
In summary, based on the above provisions, for expenses incurred before the company’s establishment license is granted, if:
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They are backed by valid invoices (issued in the name of the authorized individual or organization);
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They serve the company’s production and business activities, they are eligible to be accounted for as deductible expenses when calculating Corporate Income Tax. These expenses are allocated over a period of no more than 3 years from the time the company begins operations.
If these expenses were incurred before the company’s establishment but there was no authorization for an individual or organization to pay on behalf of the company, or if they do not meet the invoicing and documentation requirements, the company will not be able to declare VAT deductions or account for the expenses as deductible when determining taxable income for Corporate Income Tax.
