VNStockNews.com - Therefore, if foreign organisations have capital assignment activities in Vietnam, any gains from such activities shall be subject to CIT
Foreign organisations doing business in Vietnam not under the Law on Investment and the Law on Enterprise or earning income in Vietnam (hereinafter referred to as “foreign organisations”) shall pay Corporate Income Tax (CIT) in accordance with the specific foreign contractor tax regulations of the Ministry of Finance (MoF).
However, if such organisations have capital assignment activities, then they must pay CIT in accordance with the CIT regulations.
Therefore, if foreign organisations have capital assignment activities in Vietnam, any gains from such activities shall be subject to CIT and for an assignment of securities the transaction is subject to Foreign Contractor Tax.
However, a distinction between assigning “capital” and assigning “securities” is not entirely clear from the text of the current regulations, especially how to distinguish between the two categories in case of a shareholding company, commonly referred to as a joint stock company. The difference is crucial for foreign organisations due to the following reasons:
lIf the foreign organisations have capital assignment activities, they will be subject to CIT at 25 per cent on any gain derived from the capital assignment in accordance with Circular 130. The taxable gain is the difference between the assignment proceeds and the original value of the assigned capital, less the assignment costs.
lIf the foreign organisations transfer securities, they shall be subject to CIT as an element of Foreign Contractor Tax governed under Circular 134. Most foreign organisations shall be subject to a deemed CIT rate of 0.1 per cent on the value of the sales transaction when conducting securities transfer activities.
No relief is allowed for transaction costs, and no allowance is taken for the cost of investments (i.e. the existence of actual profits is irrelevant).
Potential risks
Winand points out that the difference in tax payable is likely to be material and could be a substantial cost of investing in Vietnam and that tax planning in structuring inbound investments in Vietnam becomes very important.
It is clear that transferring share of an interest in a limited liability company by the foreign organisations is considered as capital assignment activity which is subject to CIT at 25 per cent as regulated under Circular 130.
However, it is not clear under the current regulations whether the ordinary shares of founding shareholders in a shareholding company are considered as capital or securities. Therefore, the transfer of such ordinary shares by the foreign organisation shall be treated as capital assignment activities subject to CIT at 25 per cent on gain or securities activities subject to the deemed CIT rate of 0.1 per cent on the transaction value.
The key thing is we have to make a clear distinction between a founding shareholder (which it can be argued has made a capital contribution) and a normal shareholder who has merely purchased shares from an existing shareholder. Under the Law on Enterprise, a founding shareholder is defined as a shareholder who participates in the preparation, approval and signing the first charter of the joint stock company. Generally a founding shareholder is listed as an investor in the company’s investment certificate (either the initial or amended).
Responding to questions raised by a number of investors and entities on this issue, the tax authorities have different views in their official letters providing further guidance to the requestors. Of note, in the absence of formal and written regulations by the highest authorities governing the tax regulations in Vietnam (i.e. the MoF), the guidance provided under official letters may only reflect the tax departments’ interpretation of the current unclear tax regulations and may not reflect the intention of the regulations as a whole. The guidance may therefore be subsequently changed by the tax departments depending on nature of each specific case.
Given the unclear tax regulations at the moment, we now look at the securities regulations for further guidance.
Public companies
The securities regulations (i.e. Law 70) define securities as evidence from an issuing organisation certifying the lawful rights and interests of an owner with respect to an asset or capital portion in the issuing organisation. Securities may take the form of certificates, book entries or electronic data, and shall comprise shares, bonds and investment fund certificates, share purchase rights, securities rights, purchase options, sale options, future contracts, groups of securities and securities indices.
In terms of shares, Law 70 further defines share as a type of securities certifying the lawful rights and interests of an owner of a part of the shareholding in the issuing organisation; issuing organisation as an organisation making a public issue of securities; and a public company as a shareholding company that has made a public offer of shares, or whose shares are listed on the stock exchange or a securities trading centre, or a company which has shares that are owned by at least 100 investors (and a paid-up charter capital exceeding VND10 billion).
Based on the definition of shares provided under Law 70 as mentioned above, it may be interpreted that only share certificates of public companies would be included under the definition of securities.
Consequently, the transfer of ordinary shares in public companies by foreign organisations would be considered as transfer of securities which is subject to the deemed CIT rate of 0.1 per cent. While, the transfer of ordinary shares in non-public companies by foreign organisations would be considered as capital assignment activities which is subject to CIT at 25 per cent on the gain.
The above interpretation only provides a possible way to define securities for further consideration of the tax treatment in a context of the current unclear tax regulations. We expect the MoF and/or the General Department of Taxation shall provide further guidance on this area soon.
Planning opportunities
Nga indicates that the current uncertainty distorts the capital and securities markets and creates a clear incentive for investors to structure their investments (with large capital gains) in the form of securities rather than capital.
In the interests of creating a level playing field, KPMG Vietnam is in consultation with the Tax Policy Department and other government authorities to ensure investors are treated equitably.
In this investment and regulatory environment, utilising measures to reduce tax risks become very important.
_______________
The views expressed by the authors here do not necessary represent the views and opinions of KPMG.
Rolf Winand (HCMC) and Le Thi Kieu Nga (Hanoi) can be contacted on wrolf@kpmg.com.vn and nkle@kpmg.com.vn respectively
(Dau Tu)
