The Vietnam-Singapore DTT has generally been considered to provide advantageous benefits compared with other treaties. This favorable treatment has made Singapore a preferred location for investment vehicles for investment into Vietnam.
The changes under the second Protocol reduce the existing advantages available under the Vietnam-Singapore DTT. These changes include the restriction on the availability of the capital gains tax exemption, the criteria for the length of period for the determination of a permanent establishment for the provision of services, and certain other confirmations and clarifications.
Capital gains tax protection is now subject to a “land rich” restriction
Under the new Protocol, Vietnam shall have the right to tax gains generated from a capital transfer (other than shares of a company quoted on a recognized stock exchange of Vietnam) by a tax resident of Singapore if the immovable property of the Vietnamese company is valued at more than 50% of its total value. The relevant paragraph of Article 13 as revised by the new Protocol now reads:
“Gains derived by a resident of a Contracting State from the alienation of shares, other than shares of a company quoted on a recognized stock exchange of one or both Contracting States, deriving more than 50% of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State”.
The change will have a material impact to Singaporean investors for their tax efficient exit options for investments in Vietnam where they have substantial land or property holdings.
Permanent establishment (“PE”) clarification for service providers
The second Protocol now provides clarity for determining when service providers are considered to have a PE in Vietnam. The text reads as follows:
“The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 183 days within any twelve month period.”
– In line with changes in Vietnam’s taxation system/regulations, the taxes covered in Vietnam are revised to include (i) personal income tax and (ii) business income tax (corporate income tax).
– There are other amendments in respect of dividends, interest or royalties which would not impact from a Vietnam tax perspective, given that the domestic tax rates of Vietnam are less than that under the treaty.
The Protocol is not ratified for enforcement as yet. We will closely monitor this issue and provide updates.
Singaporean structured investors into the Vietnamese property market and service providers of contracts greater than 183 days in a twelve month period should consider how to restructure their arrangements to minimize the negative impacts of the DTT changes.
DFDL Tax & Customs Practice Group
Tax & Customs Practice Group
Senior Tax Manager