While Covid is still lingering in Vietnam and many other countries, proper cashflow management is important to affected businesses. International investors may be looking at different scenarios. Some may consider funding its Vietnam subsidiary to help it cope with cashflow difficulties. Others may consider scenarios such as mobilising idle working capital or retained earning from their Vietnam subsidiary to help their business elsewhere, suspension of the Vietnam subsidiary’s business, or even an exit option etc. While it is hoped that investors do not have to consider the last two scenarios, this article helps readers to familiarise themselves with the regulatory requirements and tax implications all mentioned scenarios.
Funding a Vietnam subsidiary
A foreign investor may fund its Vietnam subsidiary by increasing the charter capital (i.e. equity), providing a loan capital (i.e. debt), or simply providing a grant, or allowing a debt waiver. Increasing the charter capital requires pre-approval by the licensing authority and it is appropriate if the increased capital will stay in Vietnam indefinitely. There will be no tax implication or benefit.
Providing loan capital to a Vietnam subsidiary by way of a shareholder’s loan offers flexibility and tax efficiency. A shareholder’s loan may be capitalised to become an addition to the charter capital at any time. A foreign loan does not require the licensing authority’s pre-approval unless the loan will cause the Vietnam subsidiary’s total investment capital (i.e. equity plus debts) to exceed the licensed total investment capital. A foreign loan requires pre-approval by the State Bank of Vietnam (SBV) if the loan period exceeds 12 months. However, a short-term loan (i.e. up to 12 months) does not require SBV’s pre-approval unless the loan period is extended beyond 12 months. A foreign shareholder’s loan may be repaid at any time, and hence, it may be used as a tool for future fund repatriation.
A lending foreign shareholder may charge an interest expense on the loan. The interest rate may be up to 150% of the local prime interest rate (subject to the usual rules on thin capitalisation, related party transactions, and transfer pricing). The interest payable to the lending shareholder by the Vietnam subsidiary will be subject to a 5% interest withholding tax but the interest expense will be tax deductible to the Vietnam subsidiary. For example, assuming that the Vietnam subsidiary is making taxable profits and is paying corporate income tax at the standard tax rate of 20%, then for every dollar of interest that the Vietnam subsidiary pays its oversea lending shareholder, it will pay 5 cents of interest withholding tax and get 15 cents of tax deduction benefit (i.e. 20% – 5%). In fact, this is one of the attractive features of Vietnam’s tax system that international investors may not be aware of.
What if the Vietnam subsidiary is not making any taxable profits to utilise the interest expense tax deduction? Such interest expense may be accounted for as part of the accumulated tax losses, which may be carried forward up to 5 years from the loss-making year.
A grant or debt waiver will trigger corporate income tax liability to the Vietnam subsidiary as they will be considered as the subsidiary’s taxable income. There will be no VAT implication unless the grant or the debt waiver is exchanged for goods or services to be supplied by the Vietnam subsidiary.
Other scenarios include (i) the sale of the Vietnam business, (ii) the reduction of its charter capital, or (ii) business suspension. Both scenarios (i) and (ii) requires pre-approval by the licensing authority. Scenario (i) may trigger tax on capital gain. Scenarios (ii) and (iii) have no tax implication. The regulatory compliance paperwork process for scenario (i) is simpler and less time-consuming than scenario (ii). Scenario (iii) is simplest and requires only a written notice to the licensing and tax authorities. A company may apply for suspension or early resumption of business at any time. Previously, a company was allowed to apply for business suspension only twice. However, the current regulation does not longer limit the number of time that a company may apply for business suspension. If a company has tax incentives (e.g. tax holiday or a 50% tax reduction period), then the unutilised tax incentives may be preserved only if the business is suspended during its pre-operating period.
Employees’ statutory redundancy payment may be another important consideration for companies with a large workforce. The labour law requires that if an employee is made redundant, the employer must pay a redundancy payment at the minimum of 2-month salary or one-month salary for every year of service to employees who have been employed for at least one year.
For a related guide on methods of repatriation of fund from Vietnam, please click here to view.