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|A helpful starting point to identify where tax obligations fall after a transfer|
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.
Complying with the regulations and having a tax efficient approach is one of the key concerns of most shareholders who would like to invest or divest from 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.
For local corporate sellers, any gain derived from the transfer of capital/securities in another Vietnamese entity is regarded as ‘other income’ and is accordingly subject to corporate income tax (CIT) at the current standard rate of 20 per cent.
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 per cent on the gain, whereas the transfer of securities (bonds or shares of JSCs) is subject to CIT on a deemed basis at 0.1 per cent 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 or a foreign seller who is considered a tax resident in Vietnam will be liable to 20 per cent PIT on the gains from transferring contributed capital in a LLC or to a flat deemed PIT rate of 0.1 per cent 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 per cent on the sales proceeds.
The aforesaid taxable gains are determined as the excess of the transfer price minus the purchase price of transferred capital/securities, minus 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 equal the market price, they may re-evaluate the transfer price based on the arm’s length principle for tax purposes.
The value of the transferred capital includes the value of capital contributed for the enterprise establishment, the capital from additional contributions, the capital contribution sourced from an acquisition transaction, and the capital contribution sourced from retained earnings used for capital increments 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 legitimate invoices/documents, e.g. expenses to carry out the legal procedures, negotiate and sign off the CTA, etc.
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, 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 per cent CIT on net capital gain is higher than the tax payable amount calculated at the deemed rate of 0.1 per cent of the total selling price.
Foreign investors earning gains from share sales can seek tax protection under Avoidance of Double Taxation Agreements (DTA) that Vietnam signed 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 is subject to the final approval/assessment from the tax authority.
Generally, the party who takes responsibility for tax declaration and payment will depend on the nature of transactions. In particular:
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.
With this article, Grant Thornton Vietnam hopes to provide a general basis to understand the imposition of tax on the transfer of contributed capital/securities in Vietnamese entities, to help investors comply with Vietnamese tax regulations. More importantly, the investors can consider and decide on the most tax efficient option for their sale/purchase of shares.
This article is of a general nature only and readers should obtain advice specific to their circumstances from professional advisors. Should you need to use information from this article or support from Grant Thornton Vietnam, please contact our professional consultants. To view more information, please visit our website www.grantthornton.com.vn