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Vietnam: How to interpret the meaning of "an entity principally holding immovable property" under Vietnam's regulations


Thuan Pham, VDB Loi

The Ministry of Finance of Vietnam has recently released for public comment a new draft circular that provides general guidance on the implementation of tax treaty clauses. In particular, it clarifies how to identify whether an entity is considered to be holding mostly immovable property when determining taxing rights on a non-resident's gain from a share transfer of such entity.

In most double taxation agreements (DTAs), article 13 concerns gains derived from the alienation (transfer, disposal) of property. Under the OECD and UN Model Tax Conventions (the starting point for most countries' DTAs), the residence state will have exclusive taxing rights on gains realised on most types of property, with some exceptions for property that is considered closely linked to the source state. For example, gains on immovable property, or on movable property that is an asset of a permanent establishment (PE), and gains on the disposal of the PE itself, are taxable in the source state.

Under the OECD and the UN models, gains on shares issued by an entity in the source state may only be taxed in the source state if the company issuing the shares principally holds immovable property.

When looking at Vietnam as the source state, there are generally four types of provisions found in its DTAs with respect to the taxation of gains from the sale of shares or similar rights in a Vietnamese corporate entity:

  • Vietnam is not prevented from applying its domestic tax law. In this case, the DTA provides that Vietnam has taxing rights over gains on shares of an entity that is a resident of Vietnam, even if the seller is not a resident of Vietnam.

  • Vietnam may only tax the gains on shares issued by an entity that is a resident of Vietnam if that entity principally holds immovable property.

  • Vietnam may only tax the gain on shares issued by an entity that is a resident of Vietnam if the shareholding exceeds a certain limit.

  • Vietnam may not tax any gain on shares. In this case, the DTA provides that only the other treaty-state is allowed to tax gains on shares realised by one of its residents, not the state where the company that issued the shares that are being transferred is located.

With regard to provision two above, there has been an issue in Vietnam regarding how to determine if an entity principally holds immovable property. The General Department of Taxation has issued certain rulings referring to a threshold whereby if the value of immovable property accounts for more than 50% of the total value of assets in the balance sheet, the entity would be considered to principally hold immovable property.

If a specific ratio is stated in a tax treaty, such ratio would be used. For example, in Vietnam's DTAs with Spain, Oman and the United Arab Emirates, the prescribed ratio is more than 50%. If the DTA does not specify a ratio, then the more than 50% threshold would be used.

To clarify further the term "principally hold immovable property", the draft circular provides guidance on how to determine the ratio of the value of immovable property compared with the total assets held for an entity:

"The percentage of immovable property value over the total assets of an entity (immovable property ratio) is calculated as a simple average of the immovable property ratios at the time of the property transfer, and at the start and the end of the tax year immediately preceding the year in which the asset is transferred. The determination of property value is based on the audited statement of financial position of the entity".

For example: on March 30 2012, an investor who is a resident of Indonesia transfers their stake in business X in Vietnam. The immovable property ratios of business X as of March 30 2012, January 1 2011 and December 31 2011 are 60%, 40% and 53%, respectively. The determination of whether business X principally holds immovable property and the impact of the Vietnam – Indonesia DTA are illustrated below:

Clause 4, article 13 of the Vietnam – Indonesia DTA states:

"4. Gains derived by a resident of a contracting state from the alienation of shares or comparable interests in a company, the assets of which consist wholly or principally of immovable property situated in the other contracting state, may be taxed in that other state."

The clause does not prescribe a specific immovable property ratio; therefore, a threshold of more than 50% would be considered as "principally holding immovable property".

A simple average of business X's immovable property ratios would be determined as follows:

(60% + 40% + 53%)/3 = 51%

As the ratio is more than 50%, Vietnam would have taxing rights on the Indonesian resident's gain on the transfer of shares in business X.

The draft circular is still unclear as to whether a consolidated statement of financial position is required to be used as the basis for the calculation if a business has various subsidiaries or affiliates which in turn hold immovable property. This is expected to be clarified in the final draft.

Thuan Pham (


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