In the face of globalisation, groups of companies operating internationally often find themselves with complex corporate structures. Therefore, intra-group restructuring may need to take place to improve administrative, operational, and economic efficiency.
What is an intra-group restructuring transaction?
|Lac Boi Tho - Director, Tax services, Grant Thornton Vietnam|
An intra-group restructuring transaction involves the transfer of capital, shares, or assets between group entities, which can comprise either a single transaction or a series of them.
Under a shares transfer, the acquirer will take over ownership of the target company, along with all of its assets, obligations, and liabilities.
A share transfer is undertaken for management purpose, and should not generate any profit. Thus, most of these intra-restructuring transactions are conducted with the transfer price being equivalent to the historical cost to avoid any tax liabilities.
However, the Vietnamese tax authority has recently been paying more attention to such transactions, regardless of whether they are implemented within Vietnam’s territory, especially on submission of the licensing procedures to amend any changes to the name of the parent company or the Vietnamese entity itself.
The tax authority has tended to levy taxes on anything it considers an unreasonable transfer price for both direct and indirect capital transfers (i.e. the transfer of group entities which leads to the indirect transfer of a Vietnamese subsidiary) based on the government’s internal database.
In the worst-case scenario, where the tax authority stipulates duty to be paid on the intra-group transfer, income derived from the capital transfer by a Vietnamese corporate seller is subject to 20 per cent corporate income tax (CIT) on the gain.
In the case of a foreign corporate seller, the capital transfer in a limited liability company is taxed in the same way, with the transfers of securities in a joint-stock company also being subject to CIT at 0.1 per cent of the sale proceeds.
Despite the stipulated tax implications, there is still a lack of detailed guidance on calculating the gain of a Vietnamese subsidiary for an indirect capital or shares transfer at group level.
|Dinh Thi Phuong Hien - Assistant Manager Tax services, Grant Thornton Vietnam|
The local tax authority may apply different allocation approaches for tax purposes, so a good planning strategy and analysis of the most effective approach is necessary to limit the tax liability.
As per our experience, an intra-group restructuring via assets deal is not common practice because, besides the tax implications on the sales of assets, transfer pricing issues may arise when filing the documentation.
Thus, we only highlight the Vietnamese taxes imposed on the transfer of assets carried out in Vietnam (i.e. sale of assets from a Vietnamese subsidiary or the sale of assets from a group entity to a Vietnamese subsidiary) as follows for your information:
Under the current regulations, a VAT invoice must be issued for an asset acquisition at the applicable rate, including goods not subject to VAT, as well as those at 5 and 10 per cent, depending on the type of asset.
The input VAT will be creditable in the Vietnamese buyer’s VAT declaration returns.
The standard CIT rate of 20 per cent is applicable to the seller on the gains from transferring assets.
If the corporate seller does not have a legal entity in Vietnam, foreign contractor tax (FCT) should be applied instead, which consists of VAT and CIT.
The FCT rate is dependent on the nature of the income, normally set at 1 per cent CIT and the VAT rate at the import stage for any assets.
From the buyer's perspective, the cost of assets is allowed to be offset against taxable income by stating tax depreciation where certain conditions are met.
Depreciation of both new and used fixed assets is calculated based on the historical cost and useful life of the fixed assets, within the regulated timeframe for deductible expenses for CIT purposes.
Certain assets, including houses, land, cars, and motorcycles, are subject to stamp duty on ownership registration. The stamp duty rates vary depending on the asset transferred.
Similar to the transfer of shares, the Vietnamese tax authority pays close attention to the transfer price of assets upon any tax audit.
In particular, the valuation of assets for transaction purposes is a matter that both the seller and the buyer should consider, as the tax authorities may base their assessment on the market value in their internal database to deem the commercially justifiable valuation for collecting additional tax liabilities if they are not satisfied the transaction reflects commercial reality or the arm’s length principle.
The preparation of sufficient documents for both direct and indirect intra-group restructuring transactions is highly recommended to minimise potential tax risks, especially in cases where the transaction in carried out without stating any gain.
The proper documents for consideration include the incorporation certification of the involved entities to prove the group's relationship, evidence of its organisational structure, its policy on the intra-group restructuring plan, and the share or asset transfer agreement – clearly stating the purpose of the intra-group restructuring.
In addition, since intra-group restructuring usually involves a number of entities in different countries, a detailed analysis of the tax implications for all involved entities and nations is highly recommended prior to the implementation of any transfer.
The authors Dinh Thi Phuong Hien and Lac Boi Tho can be contacted at:
PhuongHien.Dinh@vn.gt.com ; Tho.Lac@vn.gt.com
Source: Vietnam Investment Review