Minimising Capital Gains Tax on Disposal of Equity in Vietnamese Companies.

A disposal of equity in a Vietnamese entity – be it a Joint Stock Company or Limited Liability Company – will result in a taxable event/transaction for Vietnamese taxation purposes. In a previous article (link) we wrote about potential tax issues for disposals of offshore holding companies with underlying interests in Vietnamese entities, with this article focussing on disposals of direct ownership in Vietnamese entities.

What are the tax rates for capital transfers in Vietnam?

In Vietnam, taxation for a disposal of equity is calculated on either a profits basis (selling price, less purchase price and applicable costs) where the profits are subject to tax, or on a transaction basis where a tax rate is applied on the total transaction value. The application varies depending on the type of entity, and also on the tax residency of the disposing party.

Individual Seller

Corporate Seller

As a result, for many transactions the disposal of equity in a JSC results in a better tax outcome compared with disposing of an LLC, especially where the transaction results in a profit to the disposing party. If the equity is being disposed at a loss, taxation applicable to disposing of equity in an LLC may be a better result.

“The tax authorities, however, will not only seek to apply a market value on capital transfers, they maintain a general view that there should be an amount of tax paid on each transaction regardless” 

 

Planning Issues

1. Tax Status of JSCs.

There are different opinions that the 0.1% transaction tax rate only applies to JSCs that are listed on a stock exchange or publicly traded, and therefore the 0.1% rate does not apply to all JSCs. Relevant tax regulations (Article 16, point b in Circular No. 92/2015/TT-BTC issued 15 June 2015) states that the 0.1% tax rate applies to transfers of “securities”, and it is argued that JSC shares don’t themselves meet the standard of a “security”.

The General Department of Taxation, however, has previously confirmed (eg, official Letter 1211/TCT-DNNCN dated April 4, 2019) that all JSC shares are “securities” for the purpose of application of taxation on transfers of shares in JSCs, based upon their specific reference to definitions of “securities” contained in the Securities Law and Enterprise Law. This article follows this later approach that all JSC shares are securities, however an opinion may best be obtained from the relevant tax office to confirm this application before proceeding with any action.

2. Market Values & Restructuring

Restructuring a company ownership within a corporate group is relatively common, however, as there is no general concept of rollover relief in Vietnamese taxation laws, restructures will trigger a tax event (transfer of ownership). In these scenarios, parties generally seek to pay little to no tax, especially where there has not been any change in underlying beneficial ownership (just changing within the group).

The tax authorities, however, will not only seek to apply a market value on capital transfers, they maintain a general view that there should be an amount of tax paid on each transaction regardless (suggesting that if there is no taxable profit declared on an LLC transfer, the tax authorities tend to push back).

What is the market value of a company for taxation purposes? Without going into a detailed discussion on acceptable valuation methodologies and practices in Vietnam to support a transaction value (and the tax authorities do maintain internal guidance on these), there are three general approaches that usually taken to support submissions to tax authorities for taxation on transactions:

a) Balance Sheet Approach, where the net equity (assets minus liabilities) are used to justify the value of the company. This will essentially mean that the paid-up capital, plus retained (undistributed) profits, is equal to the value that is being transferred. The most recent balance sheet, based upon Vietnamese Accounting Standards, is usually used as the basis to justify this valuation. This method essentially assumes there is no goodwill, and although common, can be a risky method as Vietnamese Accounting Standards do not have revaluation (market value) provisions, so the balance sheet is generally historical cost.

In this scenario, where the transfer value is greater than the Balance Sheet, it is taken that a market value has been applied. However, where the transaction value is less than the paid up capital (ie, where there are retained losses), this is often challenged by tax authorities, requiring reverting to one of the other approaches.

B. Arms-length “Market” Approach, applicable where there are external buyers and sellers, and there are public announcements/disclosures that the tax officers can independently refer to support the values disclosed.

C. Third Party Valuation. An independent valuation supporting the value (or adjusting the market value) for taxation purposes.

If the tax authority disputes or does not accept the valuation or approach used, there are provisions for the tax authorities to deem a market value, so this needs to be kept in mind when working out how to proceed.

Tools for Restructuring

1. Convert to JSC

This is the most straight forward method depending on the status of the owners. If an LLC has 3 equity holders already, this becomes simply a “paper conversion” of the company type. However, if there are only 1 or 2 equity holders, there will need to be new capital issued (and paid up) as part of the conversion process so that the minimum requirement for 3 shareholders in a JSC is met.

After the restructure, a transaction can then arise and JSC tax rates (0.1%) may apply to taxpayers depending on their specific status, which can be a significant advantage where profits arise.

2. Cost-base shifting

As an LLC does not have shares, but members (owners) are entitled to ownership of the proportion of the company’s capital to which they have contributed, there is an opportunity to shift the cost base to new (lower taxed) members. Essentially, if there is paid up capital of 10,000,000VND, a member who has contributed 1,000,000VND would own 10% of the company, regardless of the market value of the company.

A new investor would contribute capital at cost to an LLC that has an underlying market value greater than its capital. This will dilute the market value attributable to existing owners and push value to the new owner, which can be very useful if the new owner is taxed at 0.1% (ie non-resident individual), lowering the gain for those subject to 20% tax on profits, which have now decreased.

But, this can be taken one step further – combining the JSC conversion after capital cost-base shifting, maximising the 0.1% transaction value tax versus profits tax for other taxpayers too.

Anti-Avoidance

It should be kept in mind that If the restructure is done to avoid or evade tax, risks can arise. The general rule is that there will need to be a commercial justification for any restructure, as a transaction immediately after restructure can be a red flag to tax authorities and penalties or other tax implications may arise.

Another issue, as an additional red flag, is if there is a conversion from an LLC to JSC prior to a company being sold to a new buyer. Promptly after completion of the transaction, the new buyer seeks to convert back to an LLC.

Any restructure needs to therefore be taken with advice and care.

Bonus Notes

1. Changes have been proposed in recent draft taxation law amendments that would tax all capital transactions on a disposal value basis, at a much higher tax rate than the current rates (for example, 2% of the transaction value). This is only a draft at this stage, however if this approach (or a similar version) arises in final legislation, care should be taken to plan accordingly, depending on how that impacts equity holders in Vietnamese entities.
2. The offshore sale of a foreign company which owns an underlying Vietnamese entity may have a tax impact, despite there being no direct Vietnamese transaction event, so planning should be undertaken to ensure any potential tax results in the best position for the seller. (read further here).

This article is general in nature, and should not be taken as specific advice or instruction to proceed in any specific manner. All parties should seek individual advice related to their personal circumstances, and not rely on general articles for decision making.

Matthew Lourey is Chairman & Advisor at Alitium, with 20 years experience in Vietnam assisting foreign investors navigate and maintain compliance in market. Contact Matthew via Alitium.com for further assistance and advice.