Navigating Vietnam’s Draft Corporate Income Tax (CIT) Law: Key Changes for Investors

Vietnam’s draft Corporate Income Tax (CIT) Law is currently in the spotlight, proposing substantial updates that aim to reshape the taxation landscape for foreign investors and local businesses alike. Released by the Ministry of Finance (MoF), this draft addresses critical areas such as incentive eligibility, taxation on capital transfers by foreign investors, and compliance with international tax regulations. For anyone eyeing market entry or looking to expand in Vietnam, understanding these proposed changes is pivotal.

The Current Landscape

For more than 15 years, the existing CIT law has provided a stable environment for business operations and foreign investments in Vietnam, contributing significantly to the country’s budget. The initial reductions in the standard CIT rate—first to 22% and then to 20%—were designed to attract a broader range of investors. However, as the Vietnamese economy grows and evolves into a more globally integrated marketplace, the MoF identified pressing issues within the current framework, particularly concerning international tax compliance and strategies for preventing tax evasion.

Focus Areas In The Draft CIT Law

The proposed draft enumerates several key areas for amendment, aimed at clarifying and refining existing rules:

1. Taxpayer and Taxable Income Regulations: Enhancements to definitions and criteria that establish who is liable for CIT.

2. Exemptions: Clearer stipulations concerning income types that will remain exempt from CIT.

3. Deduction Regulations: Guidelines on which expenses can be deducted for tax purposes will be made more transparent.

4. Rate Adjustments: Potential changes to CIT rates aimed at specific taxpayer groups to better reflect the current economic climate.

5. CIT Incentives: An overhaul of the existing incentive structures to align with best international practices.

6. BEPS Compliance: Addressing issues related to base erosion and profit shifting will become a focal point.

7. Administrative Consistency: Integration of existing sub-laws to promote transparency and ease of compliance.

Incentives for Economic Growth

New Categories for Incentives

The draft law aims to broaden the scope of incentivized sectors, introducing areas such as:

• Automobile Production and Assembly
• Research and Development Centers
• Technical Support for SMEs
• Incubation Spaces for SMEs

However, the new regulations propose to remove large investment projects (over VND 6 trillion or approximately US$240 million) from the CIT incentives list, indicating a shift towards supporting smaller, innovative enterprises.

Re-evaluating Locations for Incentives

The draft suggests a removal of industrial zones from the list of incentivized locations, potentially reducing perks such as a two-year CIT exemption and a four-year reduction for new investment projects in these areas. This approach signifies a reevaluation of where incentives are most needed, aligning with broader economic goals.

Expanded CIT Incentives for Business Expansions

Businesses looking to expand may find favorable conditions under the draft law. Profits from qualified expansions could become eligible for the same CIT incentives as their original projects. This flexibility reflects a progressive mindset toward fostering growth and supporting existing enterprises.

Taxation on Capital Transfers

One of the most impactful changes in the draft is the approach to taxing capital transfers by foreign corporate investors. According to the proposed law, foreign entities will be recognized as taxpayers based on income generated from within Vietnam, irrespective of their local presence.

Direct and Indirect Transfers

The draft introduces novel taxation methods for both direct and indirect capital transfers. Here’s a concise look at the proposed changes:

• Direct Transfers: The seller would incur a tax of 2% on gross sales proceeds, simplifying previous calculations based on net gain. This means that even if a loss occurs on the sale, tax would still be paid.

• Indirect Transfers: The seller will similarly be taxed at 2% but now based on the attributable income from Vietnamese subsidiaries, marking a crucial shift that explicitly defines tax obligations.

Implications for M&A Transactions

These revisions to the tax rate on capital transfers can greatly affect mergers and acquisitions (M&A). The flat tax rate could introduce higher costs to transactions, especially if internal restructuring isn’t exempt. Investors should prepare for increased scrutiny from tax authorities on these deals, anticipating potential delays in transaction completion due to heightened regulatory oversight.

Future Outlook

The approval process for the draft law is set for presentation to the National Assembly in October 2024, with potential enactment by January 1, 2026. This timeline underscores the urgency for foreign investors to engage with these developments, allowing adequate preparation for strategic realignments in their operations and investments in Vietnam.

As these transformational changes take shape, the draft CIT law represents not just a shift in taxation but also an opportunity for informed investors to adjust their approaches in a dynamically changing economic environment. By staying updated on these developments, foreign investors can continue to navigate Vietnam’s burgeoning market landscape effectively.