Vietnam clarifies application of Double Tax Treaty

• The Vietnamese tax authority has clarified that the Double Tax Treaty (DTT) claimants are not subject to the treaty benefits if they are not the true beneficial owners of the income.
  
  
• The DTT claimant must not fall into any of the anti-avoidance provisions set out in Vietnamese tax regulations, which could potentially exclude a company from being treated as a true beneficial owner.

Executive summary

The General Department of Taxation (GDT) of Vietnam issued Official Letter No. 689/TCT-HTQT on 27 February 2024 (OL No. 689) to clarify the application of the Double Tax Treaty (DTT) for income from the transfer of shares in a Vietnamese company. A DTT application will be rejected if the DTT claimant is not the true beneficial owner of the income. The Vietnamese tax authorities refer to the avoidance provisions set out in Circular 205/2013/TT-BTC dated 24 December 2013 (Circular No. 205) as guiding the implementation of the DTTs for the beneficial-owner test.

Detailed discussion

Vietnam has signed DTTs with more than 80 countries and territories to eliminate double taxation through tax exemption, reduction and credits. Tax benefits are not automatically applied; the treaty claimants are required to file a treaty application with the managing tax authorities.

The GDT issued OL No. 689 in response to questions from the provincial tax authority regarding the DTT application of tax exemption for the income from indirect transfers of shares in a Vietnamese Company. The GDT emphasizes some cases stipulated in Circular No. 205 in which the DTT application will be refused, unless otherwise provided in treaties. Salient points include:

• The DTT claimant must be the true beneficial owner of the income to be a subject of the treaty benefits.
  
  
• The beneficial owner must be entitled to own and control income, assets, or rights creating incomes. When determining a beneficial owner, the tax authorities in Vietnam shall consider all elements and circumstance based on the "substance over form" principle because the objective of the DTT Agreement is to prevent double taxation and tax evasion. The DTT claimant must not fall into any of the anti-avoidance provisions set out in Vietnamese tax regulations that could exclude a company from being treated as a true beneficial owner. For example:
  
  • The DTT claimant is a nonresident person obligated to distribute more than 50% of his income to a resident of third State within 12 months of receiving income.
    
    
  • The DTT claimant is a nonresident person with no (or almost no) business activity, except for owing assets or rights to create income.
    
    
  • The DTT claimant is a nonresident person with business activity, but the quantity of assets, business scale or number of employees are not proportionate to the earned income.
     
• OL No. 689 also provides guidance on determining the real estate ratio that will be based on the provisions of the treaty, relevant Vietnamese laws and Circular No. 205.
  
  
• Vietnam tax authorities cooperate and exchange information with other countries and jurisdictions for the administration and enforcement of tax matters.

In addition to the beneficial-owner test, circumstances in which DTT applications will be refused in Circular No. 205 include if the treaty application expires (three years after a tax liability arises) and if the main purpose of the contracts or agreements is tax avoidance.

Action plan

Multinational companies contemplating transactions that rely on the DTT with Vietnam should consider carrying out an in-depth assessment of DTT eligibility and maintain robust documentation to protect their position.

Contact Information

For additional information concerning this Alert, please contact:

EY Consulting Vietnam JSC

• Huong Vu, Hanoi
  
  
• Robert King, Ho Chi Minh City
  
  
• Trang Pham, Hanoi

Ernst & Young LLP (United States), Vietnam Tax Desk, New York

• Huong Thi-Thu Nguyen

Ernst & Young LLP (United States), ASEAN Tax Desk, New York

• Bee-Khun Yap

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

• Gagan Malik
  
  
• Dhara Sampat

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

• Pongpat Kitsanayothin

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.