Vietnam’s Draft CIT Law: Changes to Incentives and Tax Liability

October 21, 2024 Posted by Vietnam Briefing Written by Vu Nguyen Hanh Reading Time: 5 minutes

Vietnam’s draft Corporate Income Tax (CIT) Law proposes changes to incentive eligibility, taxation on capital transfers by foreign investors, and aims to address limitations hindering integration with international best tax practices. Investors and businesses planning market entry or expansion should closely monitor the draft CIT law’s development and prepare for potential impacts on their strategies in the country, including M&A activities.

In June, Vietnam’s Ministry of Finance (MoF) unveiled a draft for the new Corporate Income Tax (CIT) Law, which is now available for public comments on the government’s official website. This draft introduces significant changes to CIT incentives and CIT liability on capital transfers by foreign corporate investors, potentially impacting mergers and acquisitions (M&A) transactions.

For over 15 years, the current CIT law has fostered a conducive environment for businesses and investments in Vietnam. Initially, the law reduced the standard CIT rate from 25 percent to 22 percent generally and to 20 percent for small businesses. Then, on January 1, 2016, the standard CIT rate for all enterprises decreased to 20 percent.

Manage Company Tax and Compliance across Multiple Jurisdictions

According to the MoF, CIT is the second-largest contributor to Vietnam’s budget. It is an effective tool for the Vietnamese government to support the economy, with authorities flexibly adjusting the tax during challenging periods.

However, the MoF identified several shortcomings and limitations in the current CIT law. For instance, the law struggles to address new tax issues arising from increasing international cooperation, such as anti-base erosion and profit shifting (BEPS) and the global minimum tax.

Thus, the MoF emphasized the urgency of amending the CIT law to effectively tackle transfer pricing problems and prevent tax evasion, tax loss, and profit-shifting behaviors that erode the tax base.

Focus areas in the draft CIT law

The draft identifies seven target areas in the outline proposal approved by the government:

Refining regulations related to taxpayers and taxable income under CIT;
Clarifying the definitions of taxable individuals and income;
Specifying the types of income exempt from CIT;
Improving regulations on deductions, including which expenses are deductible and non-deductible for CIT purposes;
Adjusting CIT rates for certain groups of taxpayers to align with the new economic context;
Enhancing regulations on CIT incentives; and
Applying CIT in accordance with BEPS practices.

The draft law also integrates provisions from existing sub-law documents related to CIT policies to ensure transparency, consistency, and ease of compliance for both taxpayers and tax authorities. This is expected to promote administrative procedure reform and improve the investment environment.

Exclusion of Resolution No. 107/2023/QH15

Resolution No.107/2023/QH15 on imposition of additional CIT in accordance with the global anti-base erosion rules (hereinafter, “Resolution 107”) came into effect from January 1, 2024, and is applicable for the 2024 fiscal year. The resolution acknowledges two principles under the Global Anti-Base Erosion Rules (“GloBE”) that Vietnam will apply for the additional corporate income tax, including:

Qualified Domestic Minimum Top-up Tax (QDMTT Rule); and
Income Inclusion Rule (IIR Rule).

The draft CIT law currently does not include the provisions from Resolution 107. Although the resolution became effective from earlier this year, the deadlines for tax declarations and payments of additional CIT are extended for 12-18 months after the end of the 2024 fiscal year. Therefore, the actual deadline for businesses to apply Resolution 107 is until 2026, making it impossible to assess the effectiveness and potential issues arising in practical implementation. This is the reason why the draft law has not yet added these provisions in Resolution 107.

Proposed changes in the draft CIT Law

CIT incentives

Changes in the incentivized sectors

The draft law adds new categories to the list of incentivized sectors: automobile production and assembly, research and development centers, technical support to small and medium-sized enterprises (SMEs), incubation of SMEs, and development of co-working 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 incentivized sectors.

Changes in incentivized locations

Build Your Asia Business with Turnkey Market Entry and Cross-Regional Support

The MoF suggests removing industrial zones from the list of incentivized locations, implying that new investment projects or business expansions in these zones will no longer enjoy a two-year CIT exemption and a four-year CIT reduction.

Simultaneously, incentives for economic zones not located in difficult or especially difficult socioeconomic areas will be reduced.

Streamlining regulations for business expansions

Profit from qualified business expansions is proposed to receive the same CIT incentives as an existing investment project. If CIT incentives for existing projects have expired, the business expansion’s profit shall be entitled to the same tax exemption and reduction period as those for new investment projects.

Transition clause

Investment projects previously not eligible for CIT incentives may now enjoy them if they are qualified under the draft law. This is a prominent shift from the current law, which stipulates that only projects entitled to existing CIT incentives can access incentives under new regulations.

CIT liability on capital transfer by foreign corporate investors

Taxpayers

According to Points 2c and 2d, Article 2, foreign entities with income in Vietnam are considered taxpayers for Vietnam tax assessment purposes, regardless of their permanent establishment status in Vietnam.

Taxable income

Under Point 3, Article 3, foreign entities’ taxable income arising in Vietnam is defined as the income sourced from Vietnam from business activities, including capital transfer.

Taxing methods

The draft CIT law proposes different taxing methods for direct and indirect capital transfers in Vietnam of foreign investors:

Direct capital transfers include sales of shares via capital injection or acquisition from a third party.
Indirect capital transfers are the sales of shares of a foreign company that owns capital in one or more subsidiaries in Vietnam.

	Current application	Proposed change
Direct transfer of shares	The seller is taxed at 20% of the gain. The gain is equal to sales proceeds minus the cost of acquired shares. For example: If shares were acquired for US$70 and sold for US$100, the tax would be: (US$100 – US$70) x 20% = US$6 When the new buyer sells the shares in the future, the new buyer should be able to use US$100 as its cost base for purpose of calculating its future gain.	The seller will be taxed at 2% of gross sales proceeds. For example: If shares were acquired for US$70 and sold for US$100, the tax would be: US$100 x 2% = US$2 When the new buyer sells in the future, it would simply be taxed at 2% of gross sales proceeds and its past acquisition cost would be irrelevant. *In other word*s, even in the case where there is a loss, the seller would still be subject to tax.
Indirect transfer of shares	There is currently no regulatory guidance on the method of revenue attribution or cost calculation. It is generally interpreted that the same calculation method as is used for a direct transfer of shares should be followed. From the buyer’s perspective, it is not clear whether the acquisition amount on a reported indirect transfer may be used as the cost base for its future sale if such a sale occurs at a different layer in the corporate holding structure.	The seller will be taxed at 2% of the amount of gross sales proceeds that are attributable to the underlying Vietnam subsidiary or subsidiaries.

Current application

Proposed change

Direct transfer of shares

The seller is taxed at 20% of the gain. The gain is equal to sales proceeds minus the cost of acquired shares.

For example:

If shares were acquired for US$70 and sold for US$100, the tax would be:
(US$100 – US$70) x 20% = US$6
When the new buyer sells the shares in the future, the new buyer should be able to use US$100 as its cost base for purpose of calculating its future gain.

The seller will be taxed at 2% of gross sales proceeds.

For example:

If shares were acquired for US$70 and sold for US$100, the tax would be:
US$100 x 2% = US$2
When the new buyer sells in the future, it would simply be taxed at 2% of gross sales proceeds and its past acquisition cost would be irrelevant. In other words, even in the case where there is a loss, the seller would still be subject to tax.

Indirect transfer of shares

There is currently no regulatory guidance on the method of revenue attribution or cost calculation. It is generally interpreted that the same calculation method as is used for a direct transfer of shares should be followed.
From the buyer’s perspective, it is not clear whether the acquisition amount on a reported indirect transfer may be used as the cost base for its future sale if such a sale occurs at a different layer in the corporate holding structure.

The seller will be taxed at 2% of the amount of gross sales proceeds that are attributable to the underlying Vietnam subsidiary or subsidiaries.

Source: KPMG

Implication for M&A transactions

The adjustment to the tax rate for capital transfer means that Vietnamese CIT will be applicable regardless of whether gains are generated from such transactions.

De-Risk Your Business with Multi-disciplinary Review and Legal Advisory

If there is no exception for share transfer transactions resulting from internal restructuring, those transactions would also be subject to a flat rate of 2 percent on the gross sale proceeds.

The draft law specifies the taxation of foreign entities on Vietnam-sourced income, strengthening the Vietnamese tax authority’s position regarding indirect share transfer transactions.

Additionally, processes and procedures related to potentially affected transactions are likely to face delays or increased scrutiny once the draft law is implemented.

What comes next

If the draft law is submitted to the National Assembly meeting in October 2024 and approved in the May 2025 session, the new law could be in force from January 1, 2026.

It is emphasized that the CIT Law will take precedence in the event of any inconsistencies with other laws.

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

Regarding M&A, the draft law establishes clearer and more straightforward tax implications for foreign investors, particularly simplifying the calculation of gains on share transfers involving multiple corporate layers. However, this new framework may result in increased tax liabilities for restructuring transactions or transactions resulting in financial losses.

(This article was originally published July 11, 2024. It was last updated October 21, 2024.)

DOING BUSINESS IN VIETNAM EXPLORE IN-DEPTH INVESTMENT AND BUSINESS GUIDES.

Explore vital economic, geographic, and regulatory insights for business investors, managers, or expats to navigate Vietnam’s business landscape. Our Online Business Guides offer explainer articles, news, useful tools, and videos from on-the-ground advisors who contribute to the Doing Business in Vietnam knowledge. Start exploring

About Us

Vietnam Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Asia, including ASEAN, China, and India. For editorial matters, contact us here and for a complimentary subscription to our products, please click here. For assistance with investments into Vietnam, please contact us at vietnam@dezshira.com or visit us at www.dezshira.com.

Dezan Shira & Associates assists foreign investors throughout Asia from offices across the world, including in Hanoi, Ho Chi Minh City, and Da Nang. We also maintain offices or have alliance partners assisting foreign investors in China, Hong Kong SAR, Dubai (UAE), Indonesia, Singapore, Philippines, Malaysia, Thailand, Bangladesh, Italy, Germany, the United States, and Australia.