Income tax implications on the assignment of capital in cross-border transactions

ARTICLES

Income tax implications on the assignment of capital in cross-border transactions

A. Direct Capital Transfer in Viet Nam

Where the assignor is an entity, gains derived from the assignment of capital in a Vietnamese company are subject to corporate income tax (CIT) rate of 20%. This is generally referred to as capital assignment profits tax (CAPT). The taxable gains are determined as the excess of the sale proceeds less cost (or the initial value of contributed charter capital for the first transfer) less expenses relating to the transfer. 

Where the assignor is a foreign entity, a Vietnamese assignee is required to withhold the tax due from the payment to the assignor and account for this to the tax authorities. Where the assignee is also a foreign entity, the Vietnamese company in which the capital is transferred is responsible for conducting the CAPT obligations on behalf of such foreign assignor. The CAPT declaration and payment are required within 10 days from the date of official approval of the assignment of capital by a competent body or, where approval is not required, 10 days from the date the involved parties reach the agreement on the assignment of capital.

For individual assignees, tax implications on the assignment of capital will be different subject to the tax resident rule

Tax-residents are those individuals meeting one of the following criteria: 

  • Residing in Vietnam for 183 days or more in either the calendar year or the period of 12 consecutive months from the date of arrival.
  • Having a permanent residence in Vietnam (including a registered residence that is recorded on the permanent/temporary residence card or a rented house in Vietnam with a lease term of 183 days or more in a tax year in case of foreigners) and unable to prove tax residence in another country.

Individuals not meeting the conditions for being tax residents are considered tax non-residents in Vietnam.

Base on the above, residents transferring capital shall declare tax upon each transfer. Gains from capital assignment are determined as the excess of the sale proceeds less the initial value of contributed charter capital for the first transfer and expenses relating to the transfer. Personal income tax (PIT) will be calculated at the rate of 20%. On the other hand, non-residents, when transferring capital, will pay PIT at the rate of 0.1% of the transfer price of each transaction.

Vietnamese tax authorities have the right to adjust the transfer price for CAPT/PIT purposes where the price is not proper with arm’s length principle or where the price is not stipulated in the capital transfer agreement.

Recently, Vietnamese tax authorities challenge not only the capital transfer in a Vietnamese entity, but also the capital transfer transactions of an overseas parent entity who hold the (direct or indirect) capital in Vietnamese entities.

Below is the summary of tax implications on the assignment of capital in Vietnam:

Transferors Tax rate
Individual shareholder (PIT) Resident 20% on gains
Non-resident 0.1% on gross sale proceeds
Corporate shareholder (CIT) Foreign entities 20% on gains
Local entities  20% on gains

B. Indirect Offshore Capital Transfer

Currently, there have not been any specific regulations on the taxing mechanism regarding the offshore capital transfer leading to the indirect transfer of the ownership of a Vietnamese company. Consequently, many foreign investors with offshore capital acquisitions leading to the indirect transfer of the Vietnamese enterprise do not declare any tax in Vietnam.

So far, the taxing mechanism on the case of indirect transfer of capital is non-officially guided by official letters of tax authorities. Basically, the main rules are similar to that applied in case of direct capital transfer, as follows:

  • the income derived from the assignment of capital of a transferor will be subject to corporate income tax and personal income tax respectively;
  • if both transferor and transferee are non-tax resident, the indirect transferred Vietnamese companies are responsible for declaring and paying tax imposed on such offshore transfer of capital on their behalf;

Regarding the determination of the transfer price and the profit of the transaction, despite of the unclear regulations, there are some solutions which have been applied on this matter in practice:

  • The transfer price 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.
  • The gain may 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.It is worth noting that the tax authority can reassess the transfer price as being made at market value for tax purposes even if the indirect transfer is made without creating gain for any relevant parties.

If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.

This article is for general information only and is not a substitute for legal advice.