With the increasing number of mergers and acquisitions (“M&A”), transfer of contributed capital and securities is becoming more common and is widely used by both domestic and foreign investors.
How to comply with the regulations and have efficiency tax efficient approach is one of the key concerns of most shareholders, who would like to invest or divest their ownership in a Vietnamese company. In general, share transfer in Vietnam includes the sale of capital contributed in a limited liability company (“LLC”) and securities of a joint stock company (“JSC”), and in certain circumstances, the taxes imposed on each transaction are different.
Tax Liability of the Sellers
For local corporate sellers, any gain derived from the transfer of capital/securities in another Vietnamese entity is regarded as other income and accordingly subject to Corporate Income Tax (“CIT”) at the current standard rate of 20 percent.
For foreign corporate sellers, the tax treatment on capital gains earned by a foreign seller is different depending on the corporate form of the target. In particular, the transfer of contributed capital in a Vietnamese LLC is subject to CIT at 20 percent on the gain whereas the transfer of securities (bonds, shares of JSCs) is subject to CIT on a deemed basis at 0.1 percent of the sale price.
The current Personal Income Tax (“PIT”) regulation has different tax implications on capital gains based on the tax residency status of individual investors, as well as the corporate form of the target. Accordingly, a Vietnamese seller or a foreign seller, who is considered a tax resident in Vietnam, will be liable to 20 percent PIT on the gain from transferring contributed capital in a LLC; or to a flat deemed PIT rate of 0.1 percent on the sales proceeds from the transfer of securities.
However, an individual investor who is a non-tax resident in Vietnam and earns income from the transfer of capital/securities in a Vietnamese LLC/JSC is subject to PIT at a rate of 0.1 percent on the sales proceeds.
The aforesaid taxable gains are determined as the excess of the transfer price less the purchase price of transferred capital/securities less the deductible transfer expenses.
The transfer price of an LLC or a public non-listed company is the total actual value earned by the sellers under the Capital Transfer Agreement (“CTA”).
In the event the transfer price is not stated in the CTA or when the tax authority has grounds to determine that the transfer price does not equate to the market price, they may re-evaluate the transfer price, based on the arm’s length principle for tax purposes.
The value of transferred capital includes the value of capital contributed for the enterprise establishment, value of the capital from additional contributions, value of the capital contribution sourced from an acquisition transaction, value of the capital contribution sourced from retained earnings using for capital increment, at the time of capital transfer.
Deductible transfer costs are the reasonable expenses actually incurred and directly related to the capital transfer, and supported by the legitimate invoices/ documents, e.g. expenses to carry out the legal procedures, negotiate and sign off the CTA, etc.
Tax Liability of the Buyers
At the time of receiving transferred capital/securities, no tax is imposed on the buyer or the transferees.
However, upon making an investment decision, foreign buyers often start to think of their future exit strategy. Upon their future disposal of shares, from a tax perspective, the foreign buyers will wish to achieve tax efficiency. Thus, they may consider investing through an offshore holding company established in a jurisdiction where tax treaty protection may be applicable and where there is possible tax exemption, as then the future disposal occurs outside of Vietnam. Another viable option is investing through an Intermediary, e.g. a securities company or fund manager in case the tax payable amount calculated at 20 percent CIT on net capital gain is higher than the tax payable amount calculated at the deemed rate of 0.1 percent on total selling price.
Tax Treaty Protection
Foreign investors earning gains from share sales can seek tax protection under Avoidance of Double Taxation Agreements (“DTA”) signed between Vietnam with approximately 75 countries.
Tax treaty claims are not automatically granted to beneficiaries unless conditions for tax exemption/reduction are satisfied. An application dossier is required and subject to the final approval/assessment from the tax authority.
Obligation of Tax Declaration
Generally, the party who takes responsibility for the tax declaration and payment will depend on the nature of transactions. In particular, if:
- the vendor is a Vietnamese company, the vendor is required to declare tax in its year-end CIT finalization return;
- the vendor is an offshore company and the buyer is a local company, the buyer is responsible for withholding tax before making payment to the foreign vendor and for declaring tax on each transaction;
- both the seller and buyer are offshore entities, the responsibility of withholding and declaring tax belongs to the Vietnamese target company;
- a domestic company/individual receives contributed capital from a non-tax resident, such company/individual has an obligation to withhold tax before making payment as well as to pay tax and file tax returns on a monthly/quarterly basis; and
- Then, a tax resident vendor is required to declare tax directly to the tax authority under his/her tax code on each share transfer transaction.
Of note, individuals are not allowed to directly declare tax in case of transferring securities of listed companies, or in some specific cases of unlisted companies.
This article is of a general nature only and readers should obtain advice specific to their circumstances from the professional advisors.