New tax threatens Vietnam's capital markets

The new personal income tax applies a unified tax rate to Vietnamese and foreign nationals.
VietnamÆs National Assembly passed a new personal income tax law that applies unified tax rates to Vietnamese and foreign nationals, introduces personal and family allowances, and increases the diversity of the tax base.

The changes that are most important to the capital markets are those that cover an individualÆs income from capital investments, such as capital assignment (inclusive of income derived from securities transactions) and real estate transfers. They will be taxed at 5% for capital investment income, which includes dividends and interest.

There will be a 20% tax for residents who earn capital assignment income or direct interest, such as holding an interest in a limited liability company, or on securities where capital gains can be determined (non-residents will be charged 0.1% on gross sales proceeds for the same situation). If the capital gains cannot be determined, residents and non-residents will be taxed 0.1% on gross sale proceeds.

Finally there will be a 25% tax for residents who make a real estate transfer and earn income when a taxable gain can be determined, while non residents will be taxed 2% on the gross sale proceeds. Both residents and non-residents will be taxed 2% on gross sales proceeds if the capital gains cannot be determined.

A KPMG report on the new taxes notes says that they will have a substantial impact on the capital markets including shares traded on the share markets, over-the-counter trades and real estate transactions.

However, the law does not take effect until January 1, 2009, so over the next 13 months, there is time for tax planning and structuring transactions to take advantage of the changes.

Furthermore, the increase is not entirely unexpected. ôThese tax laws have been expected for some time and are the result of Vietnam's WTO commitments related to levelling the playing field for investors,ö notes Tung Kim Nguyen of Indochina Capital.

Nguyen points out that these tax laws will have no affect on Indochina Capital Vietnam Holdings and other funds that are categorised as non-resident institutional investors in Vietnam. The Indochina fund, for example, is currently already subject to a 10 basis points remittance tax on all proceeds.

ôWe do not expect any meaningful changes to Vietnam's tax laws affecting the ICV Fund or other non-resident institutions investing in the capital markets for a few years time,ö adds Nguyen.
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