Introduction
A Singaporean investor looking to divest its ownership in a Vietnamese company has options to minimize taxes. We start with the fact that capital gains are tax exempt in Singapore but not in Vietnam. A Singapore investor can also, in certain circumstances, take advantage of the Double Tax Agreement (DTA) [1] between Vietnam and Singapore in order to enjoy capital gains exemption.
This Article discusses major tax policies that affect Singaporean holders of capital or shares in Vietnamese companies. We focus on the divestment of shares and capital, but not immovable property. We discuss tax policy on capital gains under both Vietnamese and Singaporean law, the possibility for a Singaporean investor to obtain a capital gain exemption under the DTA, and the requirements for a Singaporean investor to enjoy tax benefits under the DTA.
Tax Policy on Capital Gains in Vietnam
In Vietnam for capital gains from share/capital transfer transactions, individual investors and institutional investors are taxed at different rates and under different methods. An individual investor who is not a tax resident of Vietnam and who has income in the form of the sale proceeds received from the transfer of her capital or shares in a Vietnamese company is taxed at a flat rate of 0.1%. A foreign individual may become a tax resident of Vietnam (eg, she has a permanent home in Vietnam, a close personal and economic relationship with Vietnam, etc). If a foreign individual investor is a tax resident of Vietnam, s/he is taxed at the rate of 0.1% imposed on the sale proceeds [in case of transferring shares in a joint stock company (“JSC”)] or at the rate of 20% imposed on the gains [in case of transferring capital in a limited liability company (“LLC”)]. A foreign institutional investor is taxed at different rates. The rate depends on the corporate form of the target. Gains from the transfer of capital in a Vietnamese LLC or the transfer of shares in a Vietnamese non-listed JSC by a foreign institutional investor are subject to corporate income tax at the normal rate of 20%[2] imposed on the gains. On the other hands, sale proceeds received by a foreign institutional investor from the sale of its shares in a Vietnamese listed JSC will be taxed at the rate of 0.1%.
It is important to know which party has the statutory obligation to pay taxes and to file tax returns. It depends on the nature of the transaction: either the target company or the purchaser or the securities company through which the sale is carried out is responsible to file tax returns and to pay taxes in Vietnam. If both the vendor and the purchaser are offshore companies, payments must be wired to the target company’s capital account and the target company is responsible to withhold income tax and to file the tax return before remitting the sale proceeds to the vendor. If the vendor is an offshore company and if the purchaser is a domestic company, the purchaser is responsible to file tax returns on behalf of the vendors, and to withhold income tax before paying the net sale proceeds to the vendor. If the sale of shares in a listed company is carried out through a securities company, the securities company is responsible to withhold income tax of the vendor.
Tax Policy on Capital Gains in Singapore
Gains of a capital nature are not taxable in Singapore; however, gains from disposal of shares that are considered to be income or revenue in nature will be taxed in Singapore. There are various facts to consider whether gains are revenue or income in nature. The general rule depends on the circumstances of the case surrounding the disposal of shares (eg, intention to hold for the long term, actual period of holding, reasons for disposal, etc). In particular, Section 13Z of the Singapore Income Tax Act provides two conditions: (i) the dispositions occurs between 1 June 2012 to 31 May 2022; (ii) a company (the divesting company) has, at all times during a continuous period of at least 24 months ending on the date immediately prior to the date of disposal of the shares, legally and beneficially owned at least 20% of the ordinary shares in the invested company The exemption does not apply in a few limited circumstances.[4] . If the investing company fails to meet these conditions, it will be subject to income tax at a rate of 17%.
Since there is no tax exemption of capital gains under the law of Vietnam, the transfer of shares or capital held by a Singaporean company in a Vietnamese company is taxed. However, the transfer of ordinary shares held by another company in the same Singaporean company that holds an interest in such Vietnamese company, is tax free under the law of Singapore. In theory, this can be an alternative to mitigate Vietnamese taxes on capital gains. There were few precedents in which the tax authorities of Vietnam imposed a capital gains tax on the indirect transfer of a foreign company’s interest in another foreign company which held an interest in a Vietnamese company, to another Vietnam-based company. These presidents create a tax risk for an indirect transfer of an interest in a Vietnamese company that is made abroad, if the transfer involves a Vietnamese purchaser.[5]
Tax Policy on Capital Gains under the DTA
The DTA is not totally clear. The language of the DTA seems to say that a Singaporean tax resident that transfers its capital in a Vietnamese limited liability company, or that sells its shares in a Vietnamese joint stock company that is listed on a stock exchange in Vietnam or in Singapore, is exempt from Vietnamese tax[6]. The exemption does not apply to an unlisted “land rich” company.
The DTA does not define a ‘land rich” company. The matter is elaborated upon in Circular 205 of the Ministry of Finance of Vietnam[7]. It provides that a company is considered “land rich” under the DTA if the value of its immovable property[8] located within Vietnam constitutes more than 50% of its total assets as recorded in its audited financial statement of the preceding year. As there are no exemptions for a “land rich” company, Singaporean vendors of shares in Vietnamese un-listed companies that engage in real estate, development, or that otherwise rely on the ownership of land or facilities, may not take advantage of the DTA. To enjoy tax benefits under the DTA, the Singaporean vendors might want to have the target company listed on an official stock exchange in Vietnam or in Singapore. This option is untested, but it may be worth testing if the transaction involves a substantial tax benefit.
Procedure and Documents Required for a Foreign Investor to Enjoy Tax xemption/Deduction under the DTA
Individual foreign investors, who are entitled to tax benefits under the DTA, are required to provide the Vietnamese counterparty with the following documents within 15 days prior to the implementation of a capital transfer contract/share sale and purchase agreement:
- notice of tax exemption/tax reduction (statutory form);
- original copy (or certified copy) of the residency certificate[9] issued by the Inland Revenue Authority of Singapore. This document must be legalized in order to be used in Vietnam.
- copy of her passport;
- copy of relevant contracts/agreements [10] with Vietnamese counterparties;
- power of attorney (if necessary).
Institutional foreign investors, that are entitled to tax benefits under the DTA, are required to provide their Vietnamese counterparties with the following documents:
- notice of tax exemption/tax reduction (statutory form);
- original copy (or certified copy) of the residency certificate issued by the Inland Revenue Authority of Singapore. This document must be legalized in order to be used in Vietnam.
- copy of relevant contracts/agreements with Vietnamese counterparties;
- power of attorney (if necessary).
The Vietnamese counterparty is responsible to file these documents with the tax authorities.
Conclusion
To summarize, a Singaporean company is usually exempt from Singapore capital gains tax (capital gains in nature, but not revenue gains or income gains in nature) upon disposal of its ordinary shares in a company that holds an interest in a Vietnamese company if certain conditions are met. If the former company (in its capacity as a vendor) fails to meet the statutory conditions (for example, by holding less than 20% of total shares in the company or holding the shares for less than two years), it must pay corporate income tax in Singapore at the rate of 17%. But it is still preferable for the first Singaporean company to pay corporate income tax in Singapore (17%) rather than in Vietnam [20% (in the case of institutional investors that transfer their stake in a Vietnamese limited liability company or in a non-listed Vietnamese JSC)].
There are circumstances for Singaporean investors to explore tax benefits under the DTA, as long as the investment is not in an unlisted, “land rich” Vietnamese company. For example, the Singaporean vendor may structure the transaction such that the sale relates to shares or capital in a Singaporean company that owns shares in a Vietnamese company. Alternatively, an unlisted Vietnamese company may be listed in Vietnam or Singapore to take advantage of the exemption in the DTA afforded to listed companies. Although there is no firm legal basis for the tax authorities of Vietnam to exercise jurisdiction over an offshore sale transaction, an offshore indirect sale that involves a Vietnamese purchaser could be questioned by the tax authorities of Vietnam.
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[1] Agreement between the Republic of Singapore and the Socialist Republic of Vietnam for the Avoidance of Double Taxation, signed in 1994, amended in 2012.
[2] This 20%-rate is greater than the applicable rate (17%) under the law of Singapore.
[3] For this purpose, the company could not have, for example, held 15% for 2 years and then only recently added 5%, nor could it hold 30% for 2 years, sell down to 10%, and then sell the final 10% separately. See Singapore Income Tax Act, Part IV, §13Z.
[4] The capital gains exemption does not apply to insurance companies, Singaporean companies in the business of holding and trading immovable properties located in Singapore, where the shares are not listed in Singapore or elsewhere, or partnerships in which the partners themselves are companies.
[5] Particulars of this case can be found in Official Letter 1595/TCT-DNL of the General Department of Taxation dated 24 April 2015.
[6] The original language of the DTA (Amending Article 13, §4) provides that gains derived by a resident of [Singapore] from the alienation of shares, other than shares of a company quoted on a recognized stock exchange of Vietnam or of Singapore or of both Vietnam and Singapore], deriving more than 50% of the value of the shares directly or indirectly from immovable property situated in Vietnam, may be taxed in Vietnam.
[7] Circular 205/2013/TT-BTC of the Ministry of Finance dated 24 December 2013 (“Circular 205”).
[8] The concept of “immovable property”, as defined in the Civil Code of Vietnam, includes (a) land; (b) houses and constructions attached to the land; including properties annexed to such houses and constructions; (c) other properties attached to the land; (d) other properties specified by law.
[9] The foreign company must have some substance in order to obtain a tax residency certificate. A mere paper company, passive company will not qualify.
[10] With regard to a securities sale and purchase conducted through a Vietnamese stock exchange but with no agreement, the taxpayer may provide certification of its accounts as verified by the bank/securities company involved.
By Nguyen Huu Hoai and Sesto E Vecchi
