Fund repatriation from Vietnam & tax implications

There are various methods in which a foreign investor may repatriate/extract funds from a business in Vietnam through intercompany transactions.  The choice depends on the investor’s commercial objectives, their legal feasibility and the tax cost-and-benefits of those transactions. The following are possible methods: 

1.         Reduction of charter capital

In theory, it is possible to repatriate fund by way of a reduction of charter capital of an existing company in Vietnam.  However, the reduction of charter capital requires pre-approval by the licensing authority in Vietnam, which is currently very difficult to obtain.  Therefore, this method is not popular and practical, although this method has no Vietnamese tax implication.

2.         Disposal of shares

Generally, a foreign shareholder may dispose its shares in a Vietnamese company and repatriate the proceeds of disposal abroad.  If there is a gain derived from such disposal, the gain will be subject to a corporate income tax (“CIT”) at 20%.  Where the shares are in a public or listed company or a non-listed joint-stock company, the disposal of shares will be subject to CIT at the deemed flat rate of 0.1% of the proceeds of disposal.  However, where a tax treaty applies, an exemption of capital gain tax may be sought in accordance with the provisions of such a tax treaty. 

3.         Dividend repatriation

A foreign shareholder of a Vietnamese company may repatriate its dividends distributed by the Vietnamese company after it has fulfilled all tax obligations of the relevant financial year(s) and obtained a tax clearance by the tax authority.  However, it should be noted that the current tax regulation prohibits a company in Vietnam to remit dividends abroad if it still carries accumulated losses.  Further, interim dividends are no longer allowed to be remitted abroad, although this was permissible in the past[1].

Vietnam has abolished dividend withholding tax since 2004. Therefore, the repatriation of (after-tax) dividends to a foreign corporate shareholder will not trigger any further tax.  However, dividends distributed to an individual shareholder (other than the sole shareholder of a one-member limited liability company) will be subject to withholding personal income tax (“PIT”) at 5%[2].

4.         Shareholder’s loan interest

A foreign shareholder may provide a loan to its Vietnamese investee company and charge interest on such a loan.  The interest payments by the Vietnamese company will be subject to interest withholding tax at 5%[3] (which solely comprises of CIT, as interest is exempt from VAT[4]).

Generally, the interest expenses are deductible to the Vietnamese company, provided that it has complied with the relevant foreign loan registration requirements (applicable to loans which have a maturity term more than one year).  However, there are restrictions on the tax deductibility of interest expenses, as discussed in the relevant section of this report.

In addition, another way to repatriate fund under this method is to amend the loan agreement which allows the acceleration of repayment of exiting loans to the lending shareholders.

5.         Royalty payments

A foreign shareholder or its affiliates may enter into a royalty arrangement with the Vietnamese company.  A royalty payment may be a payment made to the foreign party for the right to use or for the licensing of patents, inventions, industrial property, designs, trademarks, copyrights, technical know-how etc., which are broadly referred to as royalty for “transfer of technology” under Vietnamese laws.

 Royalty payments to a foreign shareholder/affiliate will be subject to a royalty withholding tax at 10% (which solely comprises of CIT, as royalty is exempt from VAT)[5].  Where a tax treaty provides for a lower rate, the treaty’s rate shall apply.

Royalty payments are generally deductible to the Vietnamese company, provided that they are substantiated by a proper royalty agreement, invoices and relevant supporting documents, as they may be required by tax auditors.

6.         Inter-company service charges

 A foreign shareholder or its affiliates may charge a company in Vietnam for services (e.g. management/consulting/technical services etc.) rendered by the foreign party.  The service payments generally attract withholding taxes which comprises of 5% VAT and 5% CIT, for general services[6].  Once paid, the 5% VAT is fully creditable to the Vietnamese company.

Where a tax treaty applies, the CIT component may be exempt under such a tax treaty, subject to a successful tax treaty exemption application.  The CIT component is also deductible to the Vietnamese company for CIT purposes.  However, the 5% VAT is not entitled to exemption or relief under tax treaties, since tax treaties do not cover indirect taxes.

In theory, service payments are deductible to the Vietnamese company for CIT purposes, provided that they are substantiated by proper service contracts, invoices, and proof of payment.  However, in practice, claims of CIT deduction of inter-company service charges are becoming increasingly problematic where there is lack of adequate proof of services provided by the foreign entity.  Therefore, caution should be taken when considering inter-company service charges as a method of fund repatriation, because it may not provide overall tax efficiency and may result in adverse tax consequences, if CIT deductions of the service payments are not allowable.

7.         Tax implications

The tax implications of these methods of fund repatriation are summarised in the table below:

Methods of fund repatriation Withholding taxes
Deemed VAT rate Deemed CIT rate
Reduction of charter capital n/a n/a
Disposal of shares in a Vietnamese company by a foreign shareholder n/a (*)
Dividends n/a n/a (**)
Interest (e.g. shareholder’s loans) n/a 5%
Royalty (e.g. software license, transfer of technology/intellectual property rights) n/a 10%
Other inter-company service charges 5% 5%

(*)   0.1% of proceeds of disposal shares in a public/listed or non-listed joint-stock company or 20% of net gain from disposal of shares in other companies.

(**) Where the foreign shareholder is an individual, there is a 5% withholding PIT.

[1] Circular 186, Art 3 and Art 4

[2] Circular 111, Art 10 and Art 2.3(c); Circular 92, Art 11.6 (amending Circular 111)

[3] Circular 103, Art 7.3 and Art 13.2.7

[4] Circular 219, Art 4.8(a)

[5] Circular 103, Art 7.3 and Art13.2.8; Circular 219, Art 4.21

[6] Circular 103, Art 12.2.1 and Art 13.2.2

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