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Thuan Pham |
In an effort to avoid the double taxation of international income and thus promote foreign direct investment, Vietnam has concluded double taxation agreements (DTAs) with more than 60 countries to date – the most recent of which was with the Republic of San Marino on February 19 2013, the first of the five smallest jurisdictions in the world to do so. The Vietnam–San Marino DTA is pending ratification, but it is understood that there will not be much benefit for taxpayers, since most of the tax rates under the DTA are equal to or higher than those under Vietnam's domestic regulations.
Table 1 summarises some notable points and the tax effect under the DTA versus under domestic tax regulations for various income sources from Vietnam:
We note that with the way the taxing rights are allocated under the capital gains clause, capital gains at the holding level can be taxed in Vietnam if more than 30% (in value) of the property owned by the holding (directly or indirectly) consists of immovable property located in Vietnam.
In other words, for example, Company A is a resident of San Marino, and owns 100% of the capital of its subsidiary B in Vietnam. B owns and operates a resort and villas in Vietnam. The value of the villas/resort exceeds 30% of the aggregate value of all assets owned by Company A. When the shareholders of Company A transfer shares in Company A to another buyer offshore, Vietnam can tax this gain subject to its domestic regulations. However, Vietnamese law does not provide a clear mechanism for collecting this tax, even though certain official rulings have confirmed the subject-to-tax position of those offshore sales in Vietnam.
This rule does not exist in earlier DTAs signed with other jurisdictions; this could be an indication that Vietnam plans to officially impose capital gains taxation at the offshore holding level soon.
Table 1 |
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Types of income |
DTA between Vietnam and San Marino |
Vietnam regulations |
Permanent establishment (PE) definition |
One situation where a PE is constituted is when a person conducts activities in Vietnam (including offshore activities) that relate to the exploration for and exploitation of natural resources located in Vietnam. |
N/A |
Dividends |
Vietnam can tax, but the rate will not exceed: (a) 10% of the gross amount of the dividends if the beneficial owner is a company that has directly held at least 10% of the capital of the company paying the dividends for an uninterrupted period of at least 12 months before the decision to distribute the dividends. (b) 15% of the gross amount of the dividends in all other cases. |
Beneficiary organisation: N/A Beneficiary individual: 5% |
Interest |
Vietnam can tax, but the rate will not exceed: (a) 10% if the beneficial owner is a company that has directly held at least 10% of the capital of the company paying the interest for an uninterrupted period of at least 12 months before the decision to pay the interest. (b) 15% in all other cases. |
5% |
Royalties |
Vietnam can tax, but the rate will not exceed: (a) 10% of the gross amount of the royalties if the beneficial owner is a company that has directly held at least 10% of the capital of the company paying the royalties for an uninterrupted period of at least 12 months before the payment of the royalties. (b) 15% of the gross amount of the royalties in all other cases. |
10% |
Technical fees |
Vietnam can tax, but the rate will not exceed 10% of the gross amount of the technical fees. |
5% |
Capital gains |
Vietnam can tax: (a) Gains from the alienation of shares of the capital stock of a company, or of an interest in a partnership, trust or estate, which owns property (directly or indirectly) that consists principally of immovable property situated in Vietnam. The concept “principally” in relation to the ownership of immovable property means the value of such immovable property exceeding 30% of the aggregate value of all assets owned by the company, partnership, trust or estate. (b) Gains from the alienation of shares other than those mentioned in (a) above in a company which is a resident of Vietnam. |
Taxed on a net gain basis at the normal rate of 25% |
Thuan Pham (thuan.pham@vdb-loi.com)
VDB Loi
Tel: +84 8 3914 7272
Fax: +84 8 3915 4248
Website: www.vdb-loi.com
