Lac Boi Tho and Nguyen Hung Du, of Grant Thornton Vietnam, discuss the tax implications on the income derived from an indirect offshore capital transfer in Vietnam.
Many foreign investors have been investing into Vietnam through a holding company or subsidiaries of their group located overseas, not only aiming to achieve convenience in their internal business management but also tax efficiency for their future exit plan. Foreign investors have been able to take advantage of unclear regulations on the taxing mechanism of offshore acquisitions leading to the indirect transfer of the Vietnamese enterprise over the past few years.
However, the ownership transfer of the group’s top company carried out overseas without declaring tax in Vietnam has recently drawn the attention of the Vietnamese tax authorities.
Potential Tax Implications
The Vietnam government issued Decree No. 12/2015/ND-CP (Decree 12) (effective from January 1, 2015) to verify whether the offshore capital transfer is subject to Vietnamese tax; in particular, the income derived from transferring capital of foreign investors in Vietnam will be regarded as taxable income earned in Vietnam irrespective of where the transactions take place.
However, as there have not been any specific regulations on the taxing mechanism regarding the offshore capital transfer leading to the indirect transfer of the Vietnamese enterprise, i.e. computation mechanism and tax filing mechanism, the relevant parties therefore have no guidance on which party will be responsible for the tax declaration or on how to determine the profits to be taxed and applicable tax rates. Consequently, many foreign investors with offshore capital acquisitions leading to the indirect transfer of the Vietnamese enterprise do not declare any tax in Vietnam.
The Vietnamese tax authorities are therefore attempting to impose tax on the offshore capital transfer by providing official letters to reaffirm that the indirect transfer of capital in a Vietnamese enterprise is subject to capital gains tax in Vietnam, and to guide the taxing mechanism and computation mechanism as follows:
- the income derived from the capital transfer of an organization/individual transferor will be subject to capital gains tax in Vietnam based on principles of corporate income tax (CIT) and personal income tax (PIT) respectively;
- if both transferor and transferee are non tax resident in Vietnam, the indirect transferred Vietnamese enterprise is responsible for declaring and paying capital gains tax imposed on such offshore transfer of capital on their behalf;
- the indirect transferred Vietnamese entity is required to submit the documents related to the assets investment to itself to the local tax authorities for their inspection and assessment, including transfer price, purchase price of the transferred capital, its shares structure prior to the capital transfer, the relationship/allocation among the transferred and branches/subsidiaries including the Vietnamese entity (i.e. capital, manufacturing and business activities, assets, human resources, etc.);
- in the event of not being provided with the supporting documents, the tax authorities have rights to carry out a tax inspection as well as cooperating with other local competent authorities (e.g. Department of Planning and Investment, Management of industrial zones, etc.) in order to clarify the relationship and provide a proper approach for capital gains tax calculation.
Approaches to Determine Capital Gains Tax
Similar to the direct capital transfer, capital gains taxes vary by taxpayers and types of gains.
Foreign Corporate Transferor
- The gains derived from the indirect transfer of capital contributed in a limited liability company (LLC) will be taxable at 20% CIT.
- Income from the indirect transfer of securities (e.g. bonds, shares) in a joint stock company (JSC) will be taxed at 0.1% CIT.
Non-Vietnamese Individual Transferor
- A Vietnamese tax resident will be subject to 20% PIT on his/her gain generating from the indirect transfer of capital in a Vietnamese LLC, or 0.1% PIT on the proceeds upon selling securities in a Vietnamese JSC.
- A Vietnamese non tax resident is subject to PIT on the basis of 0.1% on the selling price for both transfer of capital and securities.
The key concern is how to determine the selling price and the gain of the indirect capital transfer due to the unclear regulations; as we have seen in practice there are some approaches which have been applied on this matter:
- The transfer price/gain could be allocated separately among the indirect transferred Vietnamese entity and other subsidiaries within its group based on either (i) the ratio of capital contribution of the transferred foreign company to the indirect transferred Vietnamese entity; or (ii) the ratio of total assets of the indirect transferred Vietnamese entity and other subsidiaries according to the audited report for capital gains tax computation.
- Also, the gain is able to be determined based on (i) the difference between the business valuation and the contributed capital of the transferred Vietnamese entity; or (ii) the difference between the possible transfer price and its contributed capital.
We would like to note that the tax authority can reassess the transfer as being made at market value for tax purposes even if the indirect transfer is made without creating gain for any parties within the group.
Despite the fact that the offshore capital transfer is difficult to determine, as well as current regulations being unclear on capital gains tax imposed on such transactions, it is recommended that the Vietnamese entity carefully reviews and has sufficient information/documentation about the offshore shares acquisition for tax prudence purposes.
Capital gains tax may have a significant impact on the transfer price of the acquisition (i.e. reduction on the transfer price due to the capital gains tax imposed on the seller); a ruling letter addressed to the Vietnamese tax authority is highly recommended for seeking specific guidance on the tax filing obligation and tax computation, in order to mitigate the tax risk prior to carrying out the transaction or making the payment to the seller.