At the exit, a VC (or any private equity fund) in particular or any foreign investors in general would have several liquidity considerations including IPO, share redemption and, most commonly, M&A. Generally, gains resulting from such exit could be taxed by the Government of Vietnam under the sphere of corporate income tax.[1]
- How taxable capital gains are calculated?
Taxable capital gains = (i) transfer price minus (ii) original purchase price minus (iii) transaction expenses where:
- transfer price: price paid to the seller as shown in the relevant share/capital contribution purchase agreement;
- original purchase price, which can be either of: (a) paid-up equity if the seller has participated in establishing the target company; or (b) transfer price of the previous transaction for the rest
- transaction expenses: actual payments directly relating to the capital transfer and supported by legitimate documents/invoices including statutory fees required for transfer of that type, transaction, negotiation, execution expenses and other expenses (e.g. – attorney fees) with supported documents.
- Are all capital gains taxed equally?
No.
Capital gains taxes vary by tax payers and ‘gains’ types, namely:
Because VC/private equity funds are often foreign investors, capital gains, depending on whether their target is a non-public company or, very less likely, a public one, could be 20% of the capital gains or 0.1% of the transfer price.
4 – Are offshore (but Vietnam-related) capital gains taxed?
Yes. ‘Incomes originated from Vietnam’ including capital gains from offshore transaction can be taxed ‘regardless of business location’.
For example, Alpha Capital has set up a company in Singapore as an investment holding vehicle and employed the same to invest in a Vietnamese startup. If Alpha Capital seeks an exit by selling the Singaporean vehicle, capital gains from such sale can be still be taxed under Vietnamese tax law.
- Is share premium (surplus) taxed?
When a company issues new shares to either its existing shareholders or a third-party buyer, the price of a share may be higher than its par value. That excessive amount, which is often called share premium (or surplus), will not be taxed. However, if the share surplus is allocated to shareholders, tax obligation arises.
- When to pay?
That depends on who is the tax payer.
- For local corporate tax payers: capital gains are blended with their other sources of income and generally taxed at a fiscal year end. This means that if a tax payer receives capital gains on one hand but suffers from huge loss on the other hand, no ‘capital gains’ tax would be then required.
- For others: generally capital gains tax must be declared within 10 days from the date the transfer is approved or, where such approval is not required, 10 days from the date the parties contractually agree to transfer the shares.
In the next post, I will discuss some practical aspects of capital gains tax in Vietnam as well as preferred tax arrangements.
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[1] Or personal income tax in case of individual.
[2] Explained in item 6.
