In April 2015, the General Department of Tax (GDT) instructs a provincial tax department to consider imposing corporate income tax (CIT) on an offshore capital transfer transaction (Offshore Transfer) between a French seller and a Vietnamese buyer (2015 Instruction). The 2015 Instruction has raised a Vietnamese tax concern over offshore capital transfer activities. In February 2016, the GDT issues additional guidelines (2016 Instruction) for the Offshore Transfer to clarify some unclear issues under the 2015 Instruction. In particular,
Under 2016 Instruction, the GDT clarifies some facts of the Offshore Transfer including: (1) the foreign seller holds 100% shares in the Offshore Target Co.; and (2) the Offshore Target Co has equity interests in five Vietnamese subsidiaries mainly operating in real estate business and has no other holding; and
The GDT further invokes (1) the Agreement on double tax avoidance and prevention of tax evasion regarding tax on income and properties between Vietnam and France (Vietnam-France DTA) and (2) the principle of “substance over form” in interpreting the Vietnam-France DTA to consider the purchase price as taxable income arising in Vietnam.
The 2016 Instruction seems to rely on the following grounds:
- The foreign seller and the Offshore Target Co has an parent-subsidiary relation whereby the foreign seller can indirectly take part in the corporate governance, control and contribute capital to the Vietnamese subsidiaries of the Offshore Target Co; and
- Under the Vietnam-France DTA, the purchase price of the Offshore Transfer should be considered as taxable income in Vietnam because (1) the purchase price arises from capital transfer in the Offshore Target Co who indirectly owns real estates in Vietnam or benefits from the real estates through its Vietnamese subsidiaries; and (2) Income from capital transfer and income from real estate transfer are regulated by the same tax regulation system of Vietnam (i.e. CIT law).
It is not clear if the GDT’s 2016 Instruction will still be applicable if the Offshore Transfer does not relate to real estate in Vietnam or if the Offshore Target Co has other business or investment in other countries in addition to Vietnam. Therefore, generally, in an offshore capital transfer transaction in which the buyer is a resident in Vietnam or has a subsidiary in Vietnam, the buyer may need to check if (1) there is any tax treaty between Vietnam and the seller’s country, and (2) if any, the tax implication relating to the capital transfer under the relevant tax treaty and Vietnamese law, to determine any potential tax risk on the transaction.
This post is contributed by Nguyen Bich Ngoc, a VILAF associate.