The First Double Taxation Avoidance Agreement between Vietnam and USA

On 7 July 2015, The Socialist Republic of Vietnam (Vietnam) and The United States of America (US) signed the first income tax treaty – Double Taxation Avoidance Agreement (DTAA or the Treaty) – and adopted a Protocol between the two countries for the avoidance of double taxation and prevention of fiscal evasion of taxes on income. This Treaty will take effect after being ratified by each country and exchanged the instrument of ratification by the two jurisdictions. According to Deputy Minister Do Hoang Anh Tuan, Ministry of Finance, the ratification period will take approximately one year.

DTAA aims to eliminate the double taxation of income or gains arising in one contracting state and paid to the other contracting state and prevent the fiscal evasion regarding income taxes of any persons or companies from the contracting states.

For Vietnam, the applicable taxes shall include personal income tax and business income tax, likewise, the applicable taxes in the US are the Federal income taxes imposed by the Internal Revenue Code and the Federal taxes imposed on the investment income of foreign private foundations.

The DTAA also provides a number of key provisions on how to avoid the double tax.

  1. The broader definition of “resident status of a contracting state” and “permanent establishment”

The Treaty provides similar manners to determine a resident of a country to Vietnam’s provisions. Notably, the term of “residence of an individual” is also defined as the established and maintained place of the pension fund or organization that his incomes or gains are derived from.

Under the Treaty, permanent establishment consists of building sites, construction, exploration, assembly or installation of project, supervisory activities which last more than 06 months in a contracting state. The definition is expanded to encompass the place of providing consultancy services for the same and connected project within a contracting state for a period or periods computing more than 06 months within any by an enterprise of the other contracting state.

2. The maximum allowable tax rates of dividends, interests and royalties

The Treaty regulates the maximum allowable tax rates of dividends, interests and royalties as follow:

  • The maximum tax rate on dividends is 5% if the beneficiary is a Vietnamese company owning directly at least 25% of the voting stock of an American distributing company or an American company owning directly at least 25% of the capital of a Vietnamese distributing company. Such dividends are taxed in the country of which the distributing company is considered as resident. All other cases are taxed 15% of the gross amount of dividends.
  • The Treaty also provides that dividends paid by an American Regulated Investment Company (RIC) have maximum tax rate at of 15%. However, the dividends paid by an American Real Estate Investment Trust (REIT) or Vietnamese Real Estate Investment Fund (VREIF) are subject to a maximum tax rate of 15% if only the specific thresholds are met.
  • Article 11 of the Treaty provides that the maximum allowable tax rate of interest is at 10% of the gross amount. However, if interest payments are determined with references to receipts, sales, income, profits or other cash flow of the debtor, to any change in the value of any property of the debtor or to any dividends, partnership distribution or similar payment made by the debtor, the maximum rate can increase up to 15%.
  • Under the Treaty, royalties are sourced to the residence of the payer. The payments specified in the Article 12.3(a) of the Treaty are taxable at a maximum rate of 5%. Royalties paid for the use of or the right to use any copyright of literary, artistic, scientific or other work or any patent, trademark, design or model, plan, secret formula or process will be subject to a maximum allowable 10% tax rate.

 

Effect of eliminating double taxation in Vietnam

Individuals or companies who are considered as Vietnamese residents are granted the benefits of a credit for income taxes paid on income, profits and gains in the US. Moreover, Vietnamese companies owning at least 10% of the voting rights of a company which is a resident of the US can obtain an indirect tax credit in the US.

By Vietnam Law Insight (LNT & Partners)

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com

New Proposals for Commercial Mediation (ADR)

As a matter of implementing Resolution No. 49-NQ/TQ of the Politburo dated 2 June 2005, as well as implementing Vietnam’s commitments on acceding to the WTO, the State has been developing the new Decree to govern the alternative dispute resolution (ADR) for commercial disputes, called commercial mediation.

According to the draft composer, the Decree shall adopt relevant principals of UNCITRAL’s Model Law, these principals are:

  • The mediation process must always have the presence of a neutral third party to assist the parties in the dispute to settle.
  • Mediation is a voluntary solution, except unless otherwise required by laws or the type of dispute.
  • The parties in dispute participate in the process of mediation to build and to reach a mutual agreement themselves.
  • Mediation creates a safe, friendly communication environment for the parties in the dispute.
  • Mediation could be an independent procedure or part of court or arbitral procedure.
  • Mediation is confidential.
  • Mediation does not affect or prevent the parties from using other dispute resolution methods.

For a summary of the above principals, it is concluded that if mediation is successful, the parties would have another agreement to settle the dispute, called the settlement agreement. In case either party does not honor the settlement agreement, the remaining party could request that the court or arbitration make a request for honoring the settlement agreement.

Within the content of this article, we will discuss the binding effect of a settlement agreement under the draft Decree on Commercial Mediation dated 17 June 2015.

According to Articles 25 and 26 the draft Decree, it is written that a settlement agreement would have the effect of binding the obligations of the involved parties. Also, either party has the right to request the Court to recognize the settlement agreement. The procedure and process make the request to the Court must follow the regulations of Civil Procedure Code.

Speaking of this, we are of the opinion that when drafting the Decree with the above contents, there are two issues to be discussed:

  • First, it is contrary to the principals of the UNCITRAL’s Model Laws that mediation result is some form of a new agreement, or a new contract between the parties in dispute. The point is that, in other countries, in the event that one party breaches the settlement agreement, the remaining party can bring the settlement agreement to court or arbitration. At this stage, the court or arbitration shall not re-adjudicate the whole relationship or issues before the time the parties enter into the settlement agreement, but only review the settlement agreement as a new contract between the parties that replaces any other previous issues.
  • Secondly, there is currently no specific provision in both the Law on Commercial Arbitration or the Civil Procedure Code. Therefore, the Law on Commercial Arbitration and the Civil Procedure Code must be amended to be suitable for this Decree, however this solution is not possible. Moreover, there are some opinions that currently, the procedure for recognizing a foreign award or judgment is very complicated and risky, therefore, to add this issue may result in more complexity to the system.

We are of the opinions that Articles 25 and 26 of the draft Decree should be amended in the approach that the settlement agreement is a new contract that replaces all other previous issues relating to the parties, in case where one party dishonors the settlement agreement, the other party can request the court or arbitration to instigate a new case for its enforcement.

By Vietnam Law Insight (LNT & Partners)

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com

Satisfy Demand for Securities Investment by Foreign Investors

Content of the new Law

On 26 June 2015 the Government issued Decree No. 60/2015/ND-CP (“Decree 60”) amending and supplementing certain provisions of Decree No. 58/2012/ND-CP, on the detailing and guiding the implementation of selected provisions of this, and the Law on Securities, which is considered as good news to foreign investors, since the long-awaited provisions will allow for majority ownership and control of public companies by foreign investors.

In this Decree, the foreign ownership ratio is extended to the Vietnamese securities market. Currently, a foreign investor may purchase up to 49% of total shares of a public joint stock company (JSC) or a listed company.  Beginning on the 1st of September 2015, this general restriction will be removed and instead, the new restriction will be subject to the WTO commitments or other specific domestic laws (e.g., the 30% cap in the banking sector). If there is a specific restriction under domestic law that has yet to be specified, then the rule of thumb is 49%.

When there is no restriction under domestic law (e.g., for production companies, or distribution companies), then there is no limit for the foreign shareholding ratio. This rule also applies to equitized SOEs, with the aim of attracting more foreign investment in the privatization program.

As for securities companies (or investment banks), those who are eligible to establish 100% foreign owned securities companies are allowed to buy up to 100% equity of local securities companies. Those who are not eligible can acquire up to 51% total shares.

Decree 60 also lifts all restrictions to foreign investors to purchase bonds. With respect to share certificates or derivative products of stocks of JSCs, the restriction will be relaxed as mentioned above. For this purpose, open funds or securities funds that have foreign shareholding more than 51% equity will be deemed as foreign investors. Decree 60 also addresses many other functions of foreign investment in public companies, along with other key aspects related to securities investment for foreigners.

Implications for Foreign Investors

The Decree is expected to act as a catalyst for more foreign investment in the private and State-owned sectors in Vietnam. It is intended to add vitality to the Vietnam securities markets and an extra boost to the equitization of State enterprises, as part of a plan to upgrade Vietnam from “frontier” market classification to “emerging” market classification at MSCI. It is reported that the shares with strongest liquidity on the Vietnamese stock exchanges are shares of issuers for which the 49% foreign equity quota has been used up. As such, the Decree is expected to act as an impetus to further foreign investment in Vietnam’s capital markets, both in equity and in debt markets

The Decree takes effect on September 1, 2015, and replaces Prime Minister Decision No. 55/2009/QD-TTg (15 April 2009) on the ratio of foreign investor’s participating on the Viet Nam securities market.

By Vietnam Law Insight (LNT & Partners)

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com

Vietnam Opening the Doors for Portfolio Foreign Investment

Following the relaxation of the foreign investment procedure under the new Law on Investment (LOI) and the Law on Enterprise (LOE), the Government has now also relaxed the room for portfolio foreign investment as well as the equitization of state owned enterprise (SOEs).

Furthermore, the Decree provides for the equitization of state owned enterprises (SOEs), and this action is expected to attract more share acquisition in stock markets as well as private equity soon. Currently, a foreign investor may purchase up to 49% of total shares of public joint stock company (JSC) or a listed company.  From 1 September 2015, this general restriction will be removed under Decree 60/2015/NĐ-CP dated 26 June 2015 (Decree 60).

Click here to downloa Decree 60 – Open Doors for Portfolio Foreign Investment

Instead, the new restriction will be subject to the WTO commitments or other specific domestic law (e.g., the 30% cap in the banking sector). If there is a specific restriction under domestic law that has yet to be specified, then the rule of thumb is 49%.

When there is no restriction under domestic law (e.g., for production companies, or distribution companies), then there is no limit for the foreign shareholding ratio. This rule also applies to equitized SOEs, with the aim of attracting more foreign investment in the privatization program.

As for securities companies (or investment banking), those who are eligible to establish 100% foreign owned securities companies are allowed to buy up to 100% equity of local securities companies. Those who are not eligible can acquire up to 51% total shares.

Decree 60 also lifts all restrictions to foreign investors to invest in bonds. With respect to share certificates or derivative products of stocks of JSCs, the restriction will be relaxed as mentioned above. For this purpose, open funds or securities funds that have foreign shareholding more than 51% equity will be deemed as foreign investors.

In addition, Decree 60 addresses the following changes:

  1. Private placement of public companies
  2. Share swap of public companies
  3. Public offering of shares in public companies for swapping shares in non-public companies, or equity in limited liability companies
  4. Private placement filing at the State Securities Commission (SSC) for public companies
  5. Public offering process, use of escrow account for public offering proceeds
  6. Public offering of investment certificates or shares abroad
  7. Redeem shares
  8. Tender offers
  9. Sale of treasury shares
  10. Listing of merged or amalgamated companies
  11. Upcom transaction registration and listing
  12. Real estate capital valuation and contribution to real estate investment fund

While opening the door to, and creating more options for foreign portfolio investment, as along with the deregulation of various procedures at SSC are certainly attractive to foreign investors, it is unclear how other restrictions under different ministries, such as Ministry of Health, Ministry of Education, Ministry of Industry and Trade may impact on the intention of the Government to open up the market.

Note that Art 74.3 LOI allows for the “non-compliant” restriction of business to be valid until 1 July 2016, suggesting there could be some more grounds of clarification and explanation to come.

By Vietnam Law Insight (LNT & Partners)

For more information about this article, please contact the author: Dr. Le Net, LNT & Partners, at the email: Net.le@LNTpartners.com

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com