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.
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:
Similar to the direct capital transfer, capital gains taxes vary by taxpayers and types of gains.
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:
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.
Press Release
Indirect Offshore Capital Transfer and Potential Capital Gains Tax in Vietnam
31 Jul 2020
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:
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
Non-Vietnamese Individual Transferor
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:
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.
Planning Points
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.
Experts / Authors
Valerie Teo
Tax Partner
View ProfileHoang Khoi
National Head of Tax Services
View ProfileGrant Thornton uses cookies to monitor the performance of this website and improve user experience.
To find out more about cookies, what they are and how we use them, please see our privacy notice, which also provides information on how to delete cookies from your hard drive.
