Vietnam's Proposed Corporate Income Tax Law: Revisions to Incentives and Tax Obligations

Vietnam's draft Corporate Income Tax (CIT) Law proposes revisions to incentive eligibility, and taxation on capital transfers by foreign investors, and aims to address limitations hindering integration with international best tax practices. Investors and businesses planning market entry or expansion should closely monitor the development of the draft CIT law and prepare for potential impacts on their strategies in the country, including M&A activities.

The Ministry of Finance in Vietnam has recently released a draft of the new Corporate Income Tax (CIT) Law, which is now open for public feedback. This draft proposes significant changes to CIT incentives and CIT liability on capital transfers by foreign corporate investors, potentially impacting mergers and acquisitions (M&A) transactions. The current CIT law, in place for over 15 years, has fostered a favorable environment for businesses and investments in Vietnam, initially reducing the standard CIT rate from 25 percent to 22 percent, and then further decreasing it to 20 percent for all enterprises on January 1, 2016.

According to the Ministry of Finance, corporate income tax is the second-largest contributor to Vietnam's budget. It is a flexible tool for the Vietnamese government to support the economy, with authorities adjusting the tax during challenging periods.

However, the Ministry of Finance identified several shortcomings and limitations in the current corporate income tax law. For instance, the law struggles to address new tax issues arising from increasing international cooperation, such as anti-base erosion and profit shifting and the global minimum tax.

Therefore, the Ministry of Finance emphasized the urgency of amending the corporate income tax law to effectively tackle transfer pricing problems and prevent tax evasion, tax loss, and profit-shifting behaviors that erode the tax base.

Key focus areas in the proposed CIT legislation

The draft proposal aims to refine corporate income tax (CIT) regulations in seven key areas: clarifying definitions of taxable individuals and income, specifying tax-exempt income, improving deduction rules, adjusting CIT rates for certain taxpayers, enhancing CIT incentives, and aligning CIT with BEPS practices.

• Refining regulations related to taxpayers and taxable income under CIT;

• Clarifying the definitions of taxable individuals and income;

• Specifying the types of income exempt from CIT;

• Improving regulations on deductions, including which expenses are deductible and non-deductible for CIT purposes;

• Adjusting CIT rates for certain groups of taxpayers to align with the new economic context;

• Enhancing regulations on CIT incentives; and

• Applying CIT in accordance with BEPS practices.

The proposed legislation consolidates provisions from existing subordinate legal instruments pertaining to corporate income tax policies, aiming to enhance transparency, consistency, and ease of compliance for both taxpayers and tax authorities. This is anticipated to facilitate administrative procedure reform and improve the investment climate.

Proposed amendments in the draft Corporate Income Tax Law

Incentives for CIT

Modifications in the incentivized industries

The draft law introduces new incentivized sectors, including automobile production and assembly, research and development centers, technical support for small and medium-sized enterprises (SMEs), incubation of SMEs, and development of co-working spaces to support SMEs. However, new investment projects with a capital of VND6 trillion (US$240 million) or more will no longer be considered incentivized sectors.

Shifts in incentivized areas

The Ministry of Finance proposes to remove industrial zones from the list of incentivized locations, suggesting that new investment projects or business expansions in these zones will no longer benefit from a two-year corporate income tax exemption and a four-year corporate income tax reduction. Additionally, incentives for economic zones not situated in challenging or particularly challenging socioeconomic areas will be diminished.

Simplifying regulatory processes for business growth.

Proposed tax incentives for qualified business expansions, including extending the same CIT exemption and reduction period as new investment projects.

Condition clause

The draft law allows investment projects that were previously ineligible for corporate income tax (CIT) incentives to now qualify for them, which represents a significant change from the current law that only permits projects entitled to existing CIT incentives to access incentives under new regulations.

Corporate income tax liability on capital transfer by foreign corporate investors

Foreign entities with income in Vietnam are considered taxpayers for Vietnam tax assessment purposes, regardless of their permanent establishment status in Vietnam. The taxable income of foreign entities arising in Vietnam is defined as the income sourced from Vietnam from business activities, including capital transfer.

Under the current law, foreign entities are taxed at 20% on actual gains from capital transfers. However, the draft law proposes that foreign entities, regardless of permanent establishment in Vietnam, will be subject to a 2% tax on gross sale proceeds from capital transfers. The calculation formula for the CIT liability is CIT liability = 2% x Sale Proceeds. The draft law retains the 0.1% tax rate on the gross sale proceeds of securities transferred by foreign investors, while the tax rate for Vietnamese entities remains at 20% on actual gains.

Implications for Mergers and Acquisitions

The adjustment to the tax rate for capital transfer implies that Vietnamese corporate income tax will apply regardless of whether gains are generated from such transactions.

If there is no exception for share transfer transactions resulting from internal restructuring, those transactions would also be subject to a flat rate of 2 percent on the gross sale proceeds. The draft law specifies the taxation of foreign entities on Vietnam-sourced income, strengthening the Vietnamese tax authority's position regarding indirect share transfer transactions. Additionally, processes and procedures related to potentially affected transactions are likely to face delays or increased scrutiny once the draft law is implemented.

What follows

If submitted to the National Assembly in October 2024 and approved in May 2025, the draft law could come into force on January 1, 2026. The CIT Law will take precedence in case of any inconsistencies with other laws. Foreign investors should closely monitor the progress of the draft law to plan their future investments, M&A activities, or restructuring transactions effectively. The draft law establishes clearer and more straightforward tax implications for foreign investors, particularly simplifying the calculation of gains on share transfers involving multiple corporate layers, but may result in increased tax liabilities for restructuring transactions or transactions resulting in financial losses.