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

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.

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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.

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

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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 method

Under the current law, foreign entities are taxed at a rate of 20 percent on actual gains from capital transfers.

However, the draft law proposes that foreign entities, regardless of whether they have a permanent establishment in Vietnam, will be subject to a tax rate of 2 percent on gross sale proceeds from capital transfers. This provision means that foreign corporate investors transferring capital in Vietnam will be liable for this tax based on their gross sale proceeds, irrespective of their actual gains.  

According to Point 2, Article 11, the calculation formula for the CIT liability of the taxpayers is:

CIT liability = Tax Rate (%) x Sale Proceeds, with the applicable tax rate for capital transfer being 2 percent.

Meanwhile, the draft law retains the 0.1 percent tax rate on the gross sale proceeds of securities transferred by foreign investors. The tax rate applicable to capital transfers by Vietnamese entities will also remain at 20 percent on the actual gains.

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.

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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.

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