To date, Vietnam has signed approximately 80 Double Tax Treaties (DTTs) with various countries and jurisdictions worldwide. The majority of these treaties include provisions to avoid double taxation on capital gains tax (CGT) arising in either of the contracting states.
From Vietnam’s perspective, most DTTs stipulate that Vietnam would not have the right to impose CGT on capital or equity transfers if the assets of the project company in Vietnam do not principally comprise immovable property located in Vietnam. While certain DTTs expressly define the threshold ratio of immovable property, others do not. In such cases, under Circular 205 issued by the Ministry of Finance, the immovable property ratio is interpreted as 50%.
A common question arises regarding the definition of “immovable property”. Under Vietnam Civil Code and the Law on Real Estate Business, immovable property generally includes land, houses, and constructions attached to land.
Capital Gains Tax Exemption under Double Tax Treaties (DTTs)
Unfortunately, in practice, certain local tax authorities in Vietnam have adopted a broad interpretation by classifying “machinery and equipment” installed on the land of manufacturing factories or plants as immovable property. This approach appears to be aimed at inflating the immovable property ratio beyond 50%, thereby denying foreign investors or sellers the CGT exemption under the applicable DTT. Fortunately, the Ministry of Justice has issued an official ruling that overrides the interpretation previously adopted by the local tax authorities.
If you are encountering similar issues with local tax authorities or wish to discuss this matter further, please feel free to contact us at:
jamesphan@hthpartners.com.vn or legalenquiries@hthpartners.com.vn
