In depth
The wording suggests that this new regulation will likely target indirect offshore share transfers. In direct onshore share transfers, it is common for sellers, i.e., owners of Vietnam-incorporated enterprises, to appoint representatives within these Vietnamese enterprises. Thus, these representatives may be treated as having direct management of the subsidiary's activities. As a result, direct onshore share transfers may not fall in the scope of this new 2% rule.
Additionally, the Draft Decree contains provisions regarding capital transfers, similar to existing regulations, with language that likely refers to direct onshore transactions.
In the explanatory notes to this 2% rule, the MOF explicitly refers to successful tax collections in prominent cases like Metro and BigC. Given that the BigC transaction was an indirect transaction, the MOF appears to propose this 2% rule for an indirect share transfer rather than a direct one.
Due to the Draft Decree's ambiguity, continued monitoring is advised.
Major challenges for exit investors
According to the explanatory note, the MOF notes that when foreign organizations transfer capital to other foreign parties offshore, they frequently declare the transfer price at cost, but Vietnamese authorities currently have limited capacity to verify the accuracy of an actual transfer price and costs related to the capital contribution and transfer. This inability to verify "income" seems to be a key driver for the proposed shift to a percentage of "sale proceeds."
Generally, we think the adoption of a flat tax instead of a capital gains tax may be welcomed by foreign investors, particularly as it creates some more consistency with how foreign corporate investors are treated regarding their transactions in public companies.
However, the Draft Decree still does not address the key questions for indirect offshore transactions, i.e., what constitutes an indirect transfer and how the purchase price should be allocated to Vietnamese assets. This is particularly the case where the offshore transaction may be a sale of shares in a holding company that owns companies/assets not just in Vietnam but elsewhere. This could have the unintended consequence of making the tax calculation just as complicated as it was under the previous capital gains tax regime and therefore undermining the purpose of having a flat tax. That being said, we expect more details to be provided in a circular, which may clarify these matters.
Therefore, the proposed regulations, if implemented, may create substantial challenges, particularly for foreign investors and Multinational Corporations (MNCs) contemplating divestments or reorganizations, such as the following:
- The shift to a flat tax means a much broader and potentially more expensive tax liability for transactions in companies that have not reached their potential, and it may therefore be sold at a low/no gain, as the tax does not account for actual profit or verifiable costs.
- There is no indication in the Draft Decree of any exemptions, such as for internal group restructurings, transactions in listed offshore companies that have Vietnamese subsidiaries or transactions below certain thresholds.
- Unlike other jurisdictions that also impose similar taxes, if the intention is to capture sale proceeds, there is no clear method to calculate the tax liability where the Vietnamese company is only one part of a broader transaction (e.g., the sale of a holding company of a group of businesses in Southeast Asia) and where it may indeed form a small part of that transaction.
Next steps for investors
Foreign investors and MNCs with investments in Vietnam should closely monitor the developments of this proposed decree. Understanding its final form and implications will be critical for future investment and exit planning. We recommend seeking professional advice to assess the potential impact on your current and planned operations.
