In April 2015, the General Department of Tax (GDT) instructs a provincial tax department to consider imposing corporate income tax (CIT) on a capital transfer transaction whereby a Vietnamese buyer acquires the entire equity interest of a Hong Kong company (Offshore Target Co) from a foreign seller. The Offshore Target Co holds shares in a joint venture company in Vietnam. The GDT considers the purchase price that the foreign seller receives from the Vietnamese buyer for sale of shares in the Offshore Target Co as “taxable income arising in Vietnam” (thu nhập chịu thuế phát sinh tại Việt Nam) of the foreign seller under Decree 12/2015. The GDT’s view could raise a tax concern over capital transfer in an offshore company which in turn have shares in a Vietnamese company, at least in case the buyer is a Vietnamese company.
Under Circular 78/2014 on CIT, where a foreign entity not operating in accordance with the Investment Law and the Enterprise Law (i.e. a seller incorporated in a foreign country) has income in Vietnam from capital transfer activity, the local buyer will be responsible for determining, declaring, withholding and paying payable CIT. If the buyer is also a foreign entity then “the enterprise incorporated pursuant to Vietnamese law” where the foreign seller invests in will be responsible for declaring and paying payable CIT for capital transfer activity of the relevant foreign seller.
In light of Circular 78/2014, two issues arise from the GDT’s instruction:
- Why income from a transfer capital in the Offshore Target Co which is not an enterprise incorporated pursuant to Vietnamese law could be considered as “taxable income arising in Vietnam” and subject to CIT in Vietnam? In 2012, the GDT has once taken the view that CIT does not apply to a foreign buyer purchasing shares of an Offshore Target Co from a foreign seller. It is not clear in this circumstance whether the GDT has changed its view given in 2012 or the GDT has relied on the fact that the buyer in this transaction is a Vietnamese company to give a different view; and
- Even if such income is taxable income arising in Vietnam, why the joint venture in Vietnam (instead of the Vietnamese buyer a as provided by Circular 78/2014) is responsible for declaring, withholding and paying tax for and on behalf of the foreign seller?
This post is contributed by Nguyen Bich Ngoc, a trainee lawyer at VILAF.