Vietnam Tightens DTA Rules to Crack Down on Treaty Shopping

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Nov. 5 – Vietnam has recently released a circular on anti-treaty shopping rules. This new circular amends the existing circular 133/2004, which was on the matter of double taxation agreements (DTA) with other countries, and seeks to prevent companies from using DTAs as a way to circumvent taxation.

The latest circular goes into depth on a number of new general anti-avoidance rules (GAAR) that are directly related to the claiming of tax treaty benefits.

The GAAR follows the general trend of other countries in the Asia-Pacific that are also seeking to prevent treaty shopping and strengthen their DTAs. The new circular also follows the Organization of Economic Cooperation and Development’s (OECD) definitions for such terms as ‘beneficial ownership’ and ‘residency’.

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The circular states that the tax benefits arising from a DTA can be refused by the Vietnamese tax authorities if:

  • The main purpose of an agreement or structure is to obtain treaty benefits; or
  • It is determined that the person receiving treaty benefits is not the beneficial owner of the income. The circular uses a “substance over form” principle which allows for beneficial ownership to be challenged if:
    • The applicant will distribute the majority of its profit to a third country within 12 months of receipt of the income.
    • The applicant does not carry out any particular business operations except for the ownership of the assets or the right to generate income.
    • The applicant’s assets, size of business or number of employees does not align with the amount of income received.
    • The applicant does not have any power, control or has low risk over the assets and income.
    • The applicant has a back-to-back agreement for lending, royalty or a technical service agreement with a third party.
    • The applicant is a resident of a jurisdiction with low or no taxes.
    • The applicant is an intermediary solely formed for obtaining treaty benefits.

Additionally, the circular makes clear that there is a three-year deadline for companies to claim any benefits arising under the existing DTAs. Previously it had appeared that there was no time limit as to when companies must claim their benefits.

It is suggested that all companies that have operations within Vietnam review their current investment structures and assess what risks, if any, this new legislation exposes them to.

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