Global Tax Alert | 14 January 2014

Vietnam releases circular on treaty benefit application

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Executive summary

Vietnam issued Circular 205 (Circular 205),1 providing rules on the applicability of tax treaty benefits and general anti-abusive provisions (GAAR). Circular 205 will become effective 6 February 2014.

The most salient changes in Circular 205 from the previous circular are the introduction of GAAR and the assertion and expansion of the beneficial ownership provisions. Generally, a tax treaty benefit will be denied if the main purpose of a transaction or arrangement is tax abusive and/or if a treaty benefit claimant is not a true beneficial owner.

Circular 205 also provides various examples to clarify applicability of the tax treaty benefit, such as the determination of the permanent establishment (PE); the determination of profits attributable to the PE; and capital gains tax arising from a share transfer of a Vietnamese entity whose assets are primarily consisting of immovable property.

Detailed discussions

Applicability of Circular 205

  • Circular 205 is applicable to tax residents of Vietnam and/or residents of contracting countries.
  • Circular 205 reaffirms that, where there are discrepancies in treatments between a tax treaty and domestic tax laws, the tax treaty will prevail.
  • It provides for a three-year statute of limitations for a refund claim, substantiation of a tax treaty benefit application for prior years' payments or tax treaty benefit appeal.

GAAR and beneficial ownership provisions

The GAAR rules in Circular 205 set forth principles and the basis for a determination of whether a main purpose of entering into a transaction or arrangement is to obtain treaty benefits. However, since Circular 205 does not provide further guidance of how to make such determination, additional guidelines and/or case law may be issued to clarify if a transaction or arrangement has as its main purpose or one of the main purposes to claim treaty benefits.

When determining a true beneficial owner, the general substance over form principle is employed. Circular 205 provides the following seven scenarios in which a claimed beneficial owner status may be denied:

  • The applicant is due to distribute its profit to a third country resident within 12 months of receipt of that profit.
  • The applicant has no or little substantive business operations except for right to income from assets.
  • Income received by the applicant is disproportionately large for the applicant's assets, size of business and/or headcount.
  • The applicant has no or low control, power or risk over the assets, income and/or rights to future income.
  • The applicant has a back-to-back loan, licensing or technical service arrangement.
  • The applicant is a resident of a low i.e., below 10% or no tax jurisdiction.
  • The applicant is formed as an intermediary, such as a special purpose vehicle, or agent, solely for treaty shopping purposes.

PE and profits attributable to a PE

Circular 205 further provides that a foreign invested enterprise (FIE)2 would be considered to create a PE of the foreign corporate shareholder if:

  • The FIE enters into a contract that binds the foreign corporate shareholder;
  • The foreign corporate shareholder's use of the FIE's facilities and resources are not priced at arms' length.

When determining the profits attributable to a PE, no deduction is allowed for allocations of interest (except for banks), royalties and commission fees or management service fees from the headquarters and/or other group members.

Capital gains tax

Most of the tax treaties will allow Vietnam to tax capital gains from alienation of shares in a Vietnamese company whose assets are primarily consisting of immovable property. Circular 205 specifies a method of determining whether shares represent primarily immovable property.


Taxpayers are recommended to review their current transactions and structures and evaluate Circular 205 effects and ramifications.


1. For more details, See EY Global Tax Alert, Vietnam releases draft anti-treaty shopping provisions, dated 9 October 2013.

2. The term refers to a Vietnamese entity with a foreign shareholder.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Vietnam Limited
  • Nhung Tran
    +84 4 3824 5252
Ernst & Young LLP, Vietnam Tax Desk, New York
  • Anh Phung
    +1 212 773 1897
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
  • Jeff Hongo
    +1 212 773 6143
  • Kaz Parsch
    +1 212 773 7201
  • Bee-Khun Yap
    +1 212 773 1816

EYG no. CM4100