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The transfer of contributed capital and securities is becoming more widely used by both domestic and foreign investors as the tax environment for mergers and acquisitions (M&A) in Vietnam evolves. As a result, most shareholders who want to invest in or divest from a Vietnamese company consider compliance with regulations and tax efficiency to be top priorities. This is a guide from Viettonkin Audit to help interested investors become acquainted with the tax environment, particularly the capital transfer tax in Vietnam.
Capital Transfer Tax and Income Tax from Capital Transfer
In general, capital transfer tax can be described as the levy on the profit that an investor makes from the sale of an investment. The profit gained from the transfer of capital is classified as taxable income under Vietnamese law.
According to Section 1(1) of Decree No. 12/2015/ND-CP, taxable incomes earned in Vietnam by foreign enterprises, as prescribed in Article 2 of the Law on Corporate Income Tax 2007 amended in 2012, are derived in Vietnam from the provision of services, provision and distribution of goods, grant of loans, payment for copyrights for Vietnamese entities or foreign entities doing business in Vietnam, or from the transfer of capital, projects of investment, right to contribute capital, right to participate in projects of investment, and right to mineral exploration, extraction, and refinement of minerals, regardless of the location of business premises.
For further clarification, Section 14(1) of Circular No. 78/2014/TT-BTC also states that an enterprise’s income from capital transfer is income earned from the transfer of part or the whole of the capital amount the enterprise has invested in one or many other organizations or individuals (including the sale of the whole enterprise).
Although most assets in Vietnam are subject to VAT upon being transferred, according to Article 4. 8 (d) of Circular No. 219/2013/TT-BTC, business establishments are not required to declare and pay VAT in a number of capital transactions. These include “the transfer of part of or the whole capital invested in another business organization (regardless of the creation of a new legal entity); securities transfer; transfer of the right to contribute capital; and other forms of capital transfer prescribed by law, including business acquisition in which the acquirer inherits all rights and obligations of the acquired company.”
How to Calculate Capital Transfer Tax?
Taxed income from capital transfer shall be determined as follows:
Taxed income = Transfer price - Purchasing price of the transferred capital - Transfer expenses
Of which:
- Transfer price: price paid to the seller as shown in the relevant share/capital contribution purchase agreement;
- Purchasing price of the transferred capital, which can be either of: (a) paid-up equity if the seller has participated in establishing the target company; or (b) transfer price of the previous transaction for the rest
- Transfer expenses: actual payments directly relating to the capital transfer and supported by legitimate documents/invoices including statutory fees required for transfer of that type, transaction, negotiation, execution expenses and other expenses (e.g. – attorney fees) with supported documents.
Corporate Income Tax (CIT) Declarations Related to Capital Transfer
According to Article 16.7 of Circular No. 151/2014/TT-BTC, any company that receives income from capital transfers must calculate and record the corporate transfer tax (CIT) in its annual declaration forms.
CIT shall be declared whenever it is incurred by any foreign organization that does business in Vietnam or earns income in Vietnam (hereinafter referred to as a foreign contractor) from capital transfer but its operations do not comply with regulations of the Law on Investment or the Law on Businesses.
The capital transferee shall determine, declare, deduct, and pay the CIT payable on behalf of the foreign organization. If the transferee is also a foreign organization that does not comply with the Law on Investment and the Law on Enterprises, the company established under The foreign organization must declare and pay any CIT owed under Vietnamese law on its behalf when investing capital in Vietnam.
Conclusion
Capital transfer tax can be quite a tricky issue when it comes to foreign investors and how they conduct their business, especially mergers and acquisitions (M&A), in Vietnam. It would take a considerable time for the continued development of the rules to converge with international norms. Still, investment and enterprise regulations and licensing procedures play a significant role in the acquisition process in Vietnam and should be reviewed carefully.
Understanding the tax-related challenges that businesses may face, Viettonkin Audit offers a series of services that guarantee accuracy and quick results. With our team of experts in the field of taxes in Vietnam, Viettonkin Audit is confident in handling even the most sophisticated tasks, from determining capital transfer tax to completing CIT declaration dossiers. By letting us take care of these time-consuming processes, our clients have more time to concentrate on other major duties and are more confident in their ongoing and future investments in Vietnam. For more information on our services, contact us now.
