What is the basis for calculating CIT on income from capital transfer in Vietnam?

Is income from capital transfer subject to CIT in Vietnam?

Under point a, clause 2, Article 3 of Decree 218/2013/ND-CP stipulating income subject to CIT:

Taxable income

1. The taxable income includes income from the business and production activities of goods and services and oher income specified in Clause 2 of this Article. For enterprises registering business and having income specified in Clause 2 of this Article, this income is determined as the one coming from the business and production activities of the establishment;

2. Other income includes:

a) Income from capital transfers includes income from the transfer of a part or whole of the capital invested in the enterprise, including the sale of enterprise, transfer of stock or transfer of capital contribution rights and other forms of transfer of capital as prescribed by law;

b) Income from transfer of investment projects, income from the transfer of the right to participate in investment projects, income from the transfer of rights to explore, extract and process minerals prescribed by law; income from transfer the real estate as stipulated in Article 13 and 14 of this Decree;

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Thus, income from capital transfer of an enterprise will be subject to CIT.

What is the basis for calculating CIT on income from capital transfer in Vietnam? (Image from Internet)

What is the basis for calculating CIT on income from capital transfer in Vietnam?

According to the provisions of Clause 1 Article 14 of Circular 78/2014/TT-BTC, amended by Article 8 of Circular 96/2015/TT-BTC, the basis for calculating CIT on income from capital transfer in Vietnam is as follows:

Taxed income from capital transfer shall be determined as follows: Taxed income = Transfer price - Purchasing price of the transferred capital - Transfer expenses

Of which:

- The transfer price is the total actual value earned by the transferor under the transfer contract.

If installment or deferred payment is made under the capital transfer contract, the contract’s turnover excludes installment or deferred payment interests in the contractual term.

If the payment price is not stated in the transfer contract or when the tax agency has grounds to determine that the payment price does not match the market price, it may inspect and fix the transfer price. For an enterprise that transfers part of its contributed capital at a transfer price not matching the market price, the tax agency may re-valuate the whole enterprise at the time of transfer for re-determining the transfer price in proportion to the transferred contributed capital amount.

The transfer price shall be fixed on the basis of investigation documents of the tax agency or capital transfer prices in other cases at the same time, of the same economic organization or under similar transfer contracts at the time of transfer. In case the transfer price fixed by the tax agency is inappropriate, it shall be based on the valuation by a professional valuation organization competent to determine transfer prices at the time of transfer.

If an enterprise transfers capital to an organization or individual, the capital amount transferred under the transfer contract valued at VND 20 million must have non-cash payment documents. In case the capital transfer has no non-cash payment documents, the tax agency may fix the transfer price.

- The purchasing price of the transferred capital is determined on a case-by-case basis as follows:

+ In case of transfer of contributed capital for enterprise establishment, it is the accumulated value of contributed capital up to the date of capital transfer according to accounting books, invoices, and other documents and is certified by investors or participants in the business cooperation contract (or according to audit results provided by an independent audit company if the enterprise is a foreign-owned enterprise).

+ In case of capital redemption, it is the value of capital at the time of redemption. The purchasing price is based on the capital redemption contract and payment receipts.

If the enterprise is able to do accounting in foreign currencies and complies with regulations of law on accounting of capital transfer in foreign currencies, the transfer price and purchasing price of contributed capital shall be expressed in a foreign currency. In case an enterprise that does accounting in VND transfers contributed capital in a foreign currency, the transfer price must be converted into VND according to the buying rate announced by the commercial bank where the enterprise’s account it opened at the time of transfer.

- Transfer expenses are actual expenses directly related to the transfer with lawful documents and invoices. If transfer expenses are incurred overseas, their original documents shall be certified by a notary office or an independent audit organization of the country where such expenses are incurred, and translated into Vietnamese (with the certification of a competent representative).

Transfer expenses include expense for carrying out legal procedures necessary for the transfer; charges and fees paid for carrying out transfer procedures; expenses for transaction, negotiation and signing of the transfer contract; and other expenses with evidencing documents.

Example 16: Enterprise A contributes VND 400 billion, including VND 320 billion as the value of workshops and VND 80 billion in cash, for establishing a joint-venture enterprise to produce tissue papers. Then it transfers this contributed capital amount to enterprise B at the price of VND 550 billion. The book value of enterprise A’s contributed capital at the time of transfer is VND 400 billion and the capital transfer-related expense is VND 70 billion. In this case, income used for calculating CIT on this capital transfer is VND 80 billion (550 - 400 - 70).

- Incomes from capital transfer shall be regarded as other incomes and included in taxable income upon calculation of CIT.

- Foreign organizations doing business in Vietnam or having incomes in Vietnam but not operating under the Investment Law 2020 or the Enterprise Law 2020 (collectively referred to as foreign contractors) and transferring capital shall declare and pay tax as follows:

Capital transferees shall determine, declare, withhold and pay payable CIT amounts on behalf of such foreign organizations. In case capital transferees are also foreign organizations not operating under the Investment Law or the Enterprise Law, enterprises established under Vietnamese law invested by these foreign organizations shall declare and pay payable CIT amounts of such foreign organizations on their behalf.

The tax declaration and payment must comply with legal documents on tax administration.

When is the time to determine income from capital transfer in Vietnam?

Under Clause 1, Article 14 of Circular 78/2014/TT-BTC:

Incomes from capital transfer

1. Scope of application:

An enterprise’s income from capital transfer is income earned from the transfer of part or the whole of the capital amount the enterprise has invested in one or many other organizations or individuals (including the sale of the whole enterprise). The time of capital transfer is the time of transfer of capital ownership.

In case an enterprise sells the whole single-number limited liability company which it owns in the form of capital transfer together with real estate, it shall declare and pay CIT for transfer of real estate and fill in the CIT return (form No. 08) promulgated together with this Circular.

In case an enterprise transfers capital and receives in return property or other material benefits (stocks, fund certificates, etc.) instead of cash and earns income from such transfer, such income is liable to CIT. The value of property, stocks or fund certificates shall be determined based on their selling prices on the market at the time of their receipt.

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Thus, the time to determine income from capital transfer is the time of transferring the ownership of the capital.