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Changes in incentives and tax liability

The draft of Vietnam’s Corporate Income Tax (CIT) Law proposes changes in the eligibility and taxation of capital transfers by foreign investors and aims to remove restrictions that hinder integration with international best tax practices. Investors and companies planning to enter or expand their market should closely monitor the development of the draft CIT Law and prepare for potential impacts on their strategies in the country, including M&A activities.


In June, Vietnam’s Ministry of Finance unveiled a draft of a new corporate income tax law, which is now available for public comment on the government’s official website. This draft introduces significant changes to corporate income tax incentives and corporate income tax liability on capital transfers by foreign corporate investors, which could potentially impact merger and acquisition (M&A) transactions.

For over 15 years, the current Corporate Tax Law has promoted a favorable environment for business and investment in Vietnam. First, the corporate tax rate was reduced from 25 percent to 22 percent generally and to 20 percent for small businesses. Then, on January 1, 2016, the corporate tax rate for all businesses was reduced to 20 percent.

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According to the Ministry of Finance, corporate tax is the second largest contributor to Vietnam’s budget. It is an effective tool used by the Vietnamese government to support the economy, with the authorities flexibly adjusting the tax in difficult times.

However, the Treasury Department identified several deficiencies and limitations in the current corporate tax law. For example, the law is unable to address new tax issues arising from increasing international cooperation, such as combating base erosion and profit shifting (BEPS) and the global minimum tax.

Therefore, the Ministry of Finance stressed that an urgent amendment to the Corporate Tax Law is needed to effectively address transfer pricing issues and prevent tax evasion, tax losses and profit shifting that undermine the tax base.

Key points in the draft Corporate Tax Act

The draft framework proposal adopted by the government identifies seven target areas:

  • Refine the rules relating to taxpayers and taxable income under CIT;
  • Clarification of the definitions of taxable persons and income;
  • Indication of the types of income exempt from corporate tax;
  • Improving deduction rules, including which expenses are deductible and non-deductible for corporate tax purposes;
  • Adaptation of corporate tax rates for certain groups of taxpayers to the new economic environment;
  • Improving corporate tax incentive rules; and
  • Application of corporate tax in accordance with BEPS practices.

The draft law also integrates provisions from existing sub-laws related to corporate tax policy to ensure transparency, consistency and easy compliance for taxpayers and tax authorities. This is intended to promote the reform of administrative procedures and improve the investment environment.

Proposed changes to the draft Corporate Tax Act

CIT incentives

Changes in the supported sectors

The draft law adds new categories to the list of supported sectors: automobile production and assembly, research and development centres, technical support for small and medium-sized enterprises (SMEs), incubation of SMEs and development of coworking spaces to support SMEs.

However, new investment projects with a capital of VND6 trillion (US$240 million) or more will be removed from the list of supported sectors.

Changes to the supported locations

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The Ministry of Finance proposes to remove industrial zones from the list of locations eligible for subsidies. This would mean that new investment projects or business expansions in these zones would no longer be eligible for a two-year corporate tax exemption or a four-year corporate tax reduction.

At the same time, incentives for economic zones that are not located in socio-economically difficult areas or particularly difficult regions are being reduced.

Simplifying rules for business expansion

The same corporate tax incentives are proposed for profits from qualified business expansions as for existing investment projects. When the corporate tax incentives for existing projects have expired, the same tax exemption and reduction periods apply to profits from business expansion as for new investment projects.

Transitional clause

Investment projects that were previously ineligible for corporate tax incentives will now be able to claim them if they qualify under the draft law. This is a significant departure from the current law, which stipulates that only projects eligible for existing corporate tax incentives will be eligible for incentives under the new provisions.

Corporate tax liability for capital transfers by foreign capital investors

taxpayer

Pursuant to items 2c and 2d of Article 2, foreign enterprises with income in Vietnam shall be deemed to be taxpayers for the purposes of Vietnamese tax assessment, regardless of their status as a permanent establishment in Vietnam.

Taxable income

Under Item 3, Article 3, the taxable income of foreign companies in Vietnam is defined as income derived from business activities in Vietnam, including capital transfers.

Taxation method

Under current law, foreign companies are taxed at a rate of 20 percent on actual profits from capital transfers.

However, the draft law stipulates that foreign companies, regardless of whether they have a permanent establishment in Vietnam, will be subject to a 2 percent tax rate on gross sales proceeds from capital transfers. This provision means that foreign corporate investors transferring capital to Vietnam will have to pay this tax based on their gross sales proceeds, regardless of their actual profits.

According to point 2, Article 11, the formula for calculating the taxpayer’s corporate tax liability is:

Corporate tax liability = tax rate (%) x sales proceedsThe applicable tax rate for capital transfers is 2 percent.

At the same time, the draft law maintains the tax rate of 0.1 percent on gross sales proceeds of securities transferred by foreign investors. The tax rate on capital transfers of Vietnamese companies also remains at 20 percent on actual profits.

Impact on M&A transactions

The adjustment of the tax rate on capital transfers means that Vietnamese corporate income tax applies regardless of whether profits are made from such transactions.

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If no exemption applies to share transfer transactions resulting from an internal restructuring, these transactions would also be subject to a flat tax rate of 2 percent on the gross sales proceeds.

The draft law specifies the taxation of income of foreign companies from Vietnam and strengthens the position of the Vietnamese tax authority regarding indirect share transfer transactions.

In addition, following the implementation of the draft law, it is expected that there will be delays or increased scrutiny of processes and procedures relating to potentially affected transactions.

What’s next

If the bill is submitted to the National Assembly in October 2024 and adopted at the May 2025 session, the new law could come into force on January 1, 2026.

It is emphasized that the Corporate Tax Act takes precedence in the event of any conflict with other laws.

Given these significant changes, foreign investors should closely monitor the progress of the draft law in order to effectively plan their future investments, M&A activities or restructuring transactions.

With regard to mergers and acquisitions, the draft law establishes clearer and simpler tax implications for foreign investors, in particular simplifying the calculation of gains from share transfers involving multiple levels of companies. However, this new framework may result in higher tax liabilities in restructuring transactions or transactions that result in financial losses.

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