Is it necessary to pay taxes on the transfer of capital shares to a foreign entity?

GENERAL TAX DEPARTMENT
Binh Duong Tax Department

SOCIALIST REPUBLIC OF VIETNAM
Independence - Freedom - Happiness

No: 1535/CTBDU-TTHT
Regarding tax policy

Binh Duong, January 22, 2024

To: TIGER DRYLAC VIETNAM CO., LTD
Address: Lot No. 30, Street No. 2, Dong An Industrial Park, Binh Hoa Ward, Thuận An City
Tax code: 3700375070

Binh Duong Tax Department has received the official letter No. 35-2023/CVHC dated December 7, 2023, from the Company regarding the issue of transferring profits abroad and the transfer of shares by investors in a 100% foreign-owned company.

After reviewing the contents of the letter, the Tax Department provides the following comments:

• Pursuant to Clause 2, Article 42 of the Law on Tax Administration No. 38/2019/QH14 (effective from July 1, 2020), which stipulates the tax declaration and tax calculation principles:

“Article 42. Principles for tax declaration and calculation

2. Taxpayers must calculate the tax amount they are required to pay, except in cases where the tax calculation is performed by the tax authorities in accordance with government regulations...”

• Pursuant to Article 5 of Circular No. 186/2010/TT-BTC dated November 18, 2010, issued by the Ministry of Finance regarding the declaration of transferring profits abroad:

“Article 5. Declaration of transferring profits abroad

Foreign investors, directly or through authorized enterprises in which the foreign investor has invested, must notify the tax authorities managing the enterprises where foreign investors participate in investment of their intention to transfer profits abroad using the prescribed form issued with this Circular at least 07 working days before transferring profits abroad...”

• Pursuant to Circular No. 78/2014/TT-BTC dated June 18, 2014, of the Ministry of Finance guiding the implementation of Decree No. 218/2013/ND-CP dated December 26, 2013, of the Government regarding the implementation of the Corporate Income Tax Law:

• Clause 2, Article 2 provides the definition of taxpayers as follows:

“Foreign organizations conducting business in Vietnam that do not follow the Investment Law, Enterprise Law, or earn income in Vietnam must pay corporate income tax as guided by the Ministry of Finance. These organizations, if they engage in capital transfer activities, must pay corporate income tax as specified in Article 14, Chapter IV of this Circular...”

• Clause 1, Article 11 specifies the corporate income tax rate as follows:

“1. From January 1, 2014, the corporate income tax rate is 22%, except in cases specified in Clause 2 and Clause 3 of this Article and cases subject to preferential tax rates.

From January 1, 2016, cases previously applying the 22% tax rate will shift to apply a 20% tax rate...”

• Article 14 regulates capital transfer as follows:

“1. Scope of application:

Income from capital transfer by an enterprise is income earned from transferring part or all of the invested capital in the enterprise to one or more organizations or individuals (including the sale of the enterprise). The time to determine the income from capital transfer is the time when the ownership of the capital is transferred.

...

2. Basis for tax calculation:

a) The taxable income from capital transfer is determined as follows:

Taxable income =

Transfer price -

Purchase price of the transferred capital -

Transfer costs

In which:

• The transfer price is determined as the total value actually received by the transferor according to the transfer contract.

c) For foreign organizations doing business in Vietnam or earning income in Vietnam but not operating under the Investment Law, Enterprise Law (referred to as foreign contractors) that engage in capital transfer, tax declaration and payment must be done as follows:

The organization or individual receiving the capital transfer is responsible for determining, declaring, withholding, and paying the corporate income tax on behalf of the foreign organization. If the recipient is also a foreign organization not operating under the Investment Law, Enterprise Law, the Vietnamese enterprise where the foreign organization has invested is responsible for declaring and paying the corporate income tax on the capital transfer income from the foreign organization’s capital transfer activities.

Tax declaration and payment must follow regulations in the tax management legal documents...”

• Pursuant to Article 11 of the Investment Law No. 67/2014/QH13 dated November 26, 2014, of the National Assembly:

“Article 11. Ensuring the transfer of assets of foreign investors abroad

After fulfilling all financial obligations to the Vietnamese State as prescribed by law, foreign investors are entitled to transfer abroad the following assets:

1. Investment capital, liquidation of investments:

2. Income from business investment activities:

3. Money and other assets legally owned by the investor...”

• Pursuant to Circular No. 96/2015/TT-BTC dated June 22, 2015, of the Ministry of Finance regarding corporate income tax as guided by Decree No. 12/2015/ND-CP dated February 12, 2015, and other related amendments:

• Article 8 amends and supplements point a, Clause 2, Article 14 of Circular No. 78/2014/TT-BTC as follows:

“- The purchase price of the transferred capital is determined for each case as follows:

• If it is a transfer of shares for the establishment of a company, the purchase price is the accumulated value of the capital share at the time of transfer based on accounting books, records, documents, and audited results by an independent audit firm for 100% foreign-owned enterprises.

• If the capital share was purchased, the purchase price is the value of the capital at the time of purchase. The purchase price is determined based on the capital share purchase agreement and payment documents.”

• Pursuant to Clause 1, Article 10 of Circular No. 06/2019/NHNN dated June 26, 2019, of the State Bank of Vietnam regarding capital transfer and investment projects:

“Article 10. Capital transfer and investment projects

1. Payment for the transfer of shares or capital contributions in foreign-invested enterprises regulated in Clause 2, Article 3 of this Circular must be done as follows:

a) Between non-resident investors or between resident investors, it must not be done through a direct investment capital account;

b) Between a non-resident investor and a resident investor, it must be done through a direct investment capital account.”

Based on the above regulations, Binh Duong Tax Department provides the following guidance:

1/ In case the Company has profit, after fulfilling all financial obligations to the Vietnamese State and submitting financial reports to the tax authorities, the Company may transfer profits abroad as prescribed in Circular No. 186/2010/TT-BTC. The Company must notify the tax authorities of the transfer of profits abroad using the form prescribed in Circular No. 186/2010/TT-BTC at least 07 working days before transferring profits.

2/ In case the Company has a capital transfer activity to a foreign organization not present in Vietnam (Tiger Overseas Holding Gesellschaft M.B.H based in Austria, LK & ACS LTD based in the Virgin Islands), this activity must be declared and corporate income tax paid from the capital transfer activity in Vietnam.

Tiger Drylac Vietnam Co., Ltd is responsible for declaring and paying the corporate income tax on income arising from the capital transfer transaction between the two investors as per the guidance in Article 14 of Circular No. 78/2014/TT-BTC dated June 18, 2014, Article 8 of Circular No. 96/2015/TT-BTC dated June 22, 2015, and Article 16 of Circular No. 151/2014/TT-BTC dated October 10, 2014.

Regarding the money transfer transaction when a capital transfer occurs between two foreign investors, the Company must follow the guidance in Clause 1, Article 10 of Circular No. 06/2019/NHNN dated June 26, 2019, of the State Bank of Vietnam. If there are any issues, the Company should contact the State Bank of Vietnam for proper guidance.

The Company should follow the guidance above and compare with its actual business operations to comply with the regulations.

If there are any issues, the Company may contact the Tax Inspection Department No. 4 of Binh Duong Tax Department (phone number: 0274.3899678) to provide relevant documents and data for specific guidance.

This is the opinion of Binh Duong Tax Department to inform the Company for implementation./.