Which is more attractive for structuring investments into Vietnam: The (New) Hong Kong-Vietnam or the Singapore-Vietnam Double Taxation Agreement?

On 16 December 2008, the Government of the Hong Kong Special Administrative Region of the People’s Republic of China (“Hong Kong”), and the Government of the Socialist Republic of Vietnam (“Vietnam”) have signed their first double taxation agreement (hereafter “HK-VN DTA”)[1]. The HK-VN DTA is bound to generate much interest from practitioners and from the business community with an interest in Vietnam. Hong Kong is of course a major financial center, known among other things for attractive tax rules on international income.

Singapore, on the other hand, has had a DTA with Vietnam since 3 May 1994 (hereafter “SIN-VN DTA”)[2].

It is obvious why there is a practical interest to compare both treaties. From the perspective of a third country investor, both Hong Kong and Singapore may be considered for locating a regional holding company or a regional headquarters. Indeed, besides being major financial centers, the tax systems of both jurisdictions present some attractive features including exemption of foreign dividends, exemptions of certain foreign income, no withholding tax on dividends paid to non-residents and no capital gain tax. In this article, which is intended as practical rather than scholarly, the HK-VN DTA is examined from the perspective of international tax planning opportunities in connection with Vietnam, and compared to the SIN-VN DTA. In both instances, our attention goes out to investment structuring opportunities that originate from third countries. In other words, taken into account the new HK-VN DTA, we try to answer the question: “which of the two treaties is more interesting from a tax perspective to structure investments into Vietnam?”

All three jurisdictions have an active DTA policy, although Hong Kong clearly has fewer treaties in force than Singapore and Vietnam. Hong Kong currently has DTA’s in force with Korea,Thailand, Belgium and an arrangement with an agreement with DTA-like provisions with China.Singapore has concluded 60 DTAs, many of which are already in force. Singapore and Hong Kong do not have a DTA with each other.Vietnam has concluded 45 DTAs.

Permanent Establishment

Taxable presence under Vietnam tax law

Under Vietnam domestic tax law, a permanent establishment (“PE”) is defined in the CIT Law as follows [3]:

Permanent establishment of a foreign enterprise means a production business establishment through which a foreign enterprise conducts part or all of its production business activities in Vietnam which realizes income, which includes:

• Branches, operational offices, plants, workshops, means of transportation, mines, petroleum and gas fields, and any other location in Vietnam where natural resources are mined;
• Construction sites; and construction, installation and assembly works;
• Establishments providing services, including consultancy services provided via staff employed by such establishment or through other organizations or individuals;
• Agents of foreign enterprises;
• Representatives in Vietnam where they are representatives with authority to sign contracts in the name of the foreign enterprise, or where they are representatives without authority to sign contracts in the name of the foreign enterprise but regularly deliver goods or provide services in Vietnam.

Although the CIT Law recognizes the PE-concept and defines it along the same lines as in DTA-practice and in many other tax systems, having a PE in Vietnam does not necessarily mean that the non-resident enterprise is taxed on a net-basis [4]. Non-resident companies pay tax via the “Foreign Contractor Tax” (hereafter “FCT”), which is in practice mostly used as a comprehensive withholding tax system that can cover both income tax and VAT. Alternatively, a non-resident may be taxed on a net-basis without withholding if the following conditions are met:

1. The non-resident disposes over a permanent establishment in Vietnam;
2. The period of carrying out business in Vietnam is 183 days counting from the date the contract entered into effect; and
3. The non-resident adopts the Vietnam accounting system [5]

At least in the practice up to 2009, to a large degree a non-resident taxpayer could choose to be subject to Vietnam tax on a gross, withholding basis by means of the FCT even when the taxpayer disposes over a PE in Vietnam, by not applying the Vietnam Accounting System. In other words, by and large it is fair to say that corporate taxation on a net basis is in Vietnam“automatic” for domestically owned or foreign owned Vietnam companies and duly licensed foreign investment entities, but not for all foreign enterprises that derive income in Vietnam through a permanent establishment. Income derived from performing services, engineering and construction projects are in this manner often taxed on a withholding tax basis rather than a net-basis, even when they strictly speaking dispose over a PE in Vietnam.

PE for furnishing of services: advantage for Singapore-Vietnam DTA

Under the influence of the international model DTA’s, the differences between the PE-Articles in both DTA’s are limited, but telling. The HK-VN DTA provides in a so-called “furnishing of services-PE” as can be found in the UN Model DTA [6]. The text reads as follows:

“[Also encompasses a PE] 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 Party for a period or periods aggregating more than 180 days within any twelve-month period”.

If Circular 133-2004 (Vietnam’s key piece of regulation on the topic of DTA’s) can be taken as an indication of Vietnam’s DTA policy, including a “furnishing of services-PE” in tax treaties is a standard policy objective if the Vietnam authorities. Indeed, most of Vietnam’s DTA’s have this provision [7].

However, the SIN-VN DTA does not provide in a similar extension of the PE concept. As far as services are concerned, in the relation between Singapore and Vietnam one would therefore have to refer to the general principles of the PE, so that performing services in Vietnam per se in theory does not lead to having a PE.

How useful is this difference in practice for tax planning purposes? First of all, as will be discussed more in detail below, any tax treaty benefit must under Vietnam tax law be “confirmed” by an administrative procedure under Circular 133-2004. Taxpayers that want to apply a tax treaty exemption are required to have this exemption approved by the tax authorities beforehand. Without this procedure, the benefits are not available, at least not according to the Vietnam tax authorities. Another, more substantive point to consider is the issue of PE under the DTA with Singapore (under the general definition rather than the “furnishing of services-PE”) when services are performed in Vietnam. In other words, when a Singapore enterprise performs services in Vietnam, will the Vietnam General Department of Taxation (“GDT”) agree that no PE exists and that Vietnam does not have jurisdiction to tax? Put yet another way, there is clearly a difference in text of the treaty but to translate this in an effective tax benefit may not always be obvious.

Combination of auxiliary and preparatory activities: advantage for Singapore-Vietnam DTA

Another difference between the HK-VN DTA and the SIN-VN DTA is the provision in the SIN-VN DTA that a combination of auxiliary or preparatory activities does not lead to having a PE for a non-resident enterprise. It is doubtful that this difference springs solely from the negotiations between the parties. In the UN Model revision of 2001, a sub-paragraph f) was added to Article 5 Paragraph 4 (f). The text is identical to the same sub-paragraph in the OECD Model as updated in 1977:

“(f) The maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.”

Article 5 Paragraph 4 of the OECD Model and the UN Model lists certain activities that, even in case a fixed place of business exists, are not considered a PE (the so called “negative cases”). The OECD Model further specifies in sub-paragraph f) of Article 5 Paragraph 4 that a fixed place of business where a combination of several of those activities is carried out, is not deemed a PE either, as long as it still has a preparatory or auxiliary character. That specification did not feature in the UN Model 1980, perhaps indicating that a fixed place of business with a combination of such activities may be a PE after all [8].

However, the question may be asked if that result can really be achieved by omitting sub-paragraph f) [9]. After all, by lack of the special exclusion for a combination of “negative” activities, the normal rules apply. That includes sub-paragraph e), which affirms that a fixed place of business solely for the purpose of carrying on any other activity of a preparatory or auxiliary character, is not considered to be a PE anyway [10]. According to this interpretation, Article 5 Paragraph 4 f) is actually just a clarification, and omitting it or not does not make any difference. On the other hand, from the mere fact that the Group took the trouble of taking it out, it must perhaps be concluded that a combination of negative activities may be a PE [11]. Also, it must be considered that certain treaties, unlike the OECD or UN Model, specify in sub-paragraph 4 that those auxiliary or preparatory activities must be similar in nature to activities, supply of information and research [12].

Assembly PE: advantage Singapore-Vietnam DTA

The UN Model DTA includes “assembly” in the “construction site-PE” in Art. 5 par 3 b) but the OECD Model limits the same provision to “a building site or construction or installation project”. In this regard, the HK-VN DTA follows the UN Model, while the SIN-VN DTA follows the OECD Model DTA. In other words, a Singapore enterprise that has an assembly project in Vietnam which continues for a period of 6 months does not per se have a PE in Vietnam, whereas a Hong Kong enterprise in similar circumstances would indeed be deemed to have a PE under the DTA.

Stock delivering agent: advantage Singapore-Vietnam DTA

Another feature of the UN Model DTA that has made its way into the HK-VN DTA’s PE rules is the provision for so-called stock delivering agents. A person that is acting on behalf of the non-resident enterprise in the source country constitutes a PE of that enterprise even if the person has no authority to conclude contracts binding upon the enterprise, “but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise”. The SIN-VN DTA does not have a similar provision.

Allocation of income to a PE

Vietnam tax law

Article 3 Paragraph 2 of the CIT Law sets out the tax liability for corporate income taxpayers as follows:

1. “An enterprise established pursuant to the law of Vietnam must pay tax on taxable income arising in Vietnam and on taxable income arising outside of Vietnam.
2. A foreign enterprise with a permanent establishment in Vietnam must pay tax on taxable income arising in Vietnam and on taxable income arising outside Vietnam which relates to the operation of such resident establishment.
3. A foreign enterprise with a permanent establishment in Vietnam must pay tax on taxable income arising in Vietnam and not relating to the operation of the permanent establishment.
4. A foreign enterprise which does not have a permanent establishment in Vietnam must pay tax on taxable income arising in Vietnam.”

Article 3.3 of the CIT Decree provides some further detail, by providing that the “taxable income arising in Vietnam” referred to in sub-paragraphs c) and d) of article 2.2 means “income receivable and originating in Vietnam from activities of provision of services, providing loans, and royalties payable to Vietnamese or foreign organizations and individuals which are carrying out business in Vietnam, irrespective of the location where the business is carried out” [13].

The reference of Article 3 Paragraph 2 to income arising in Vietnam which is “not related to the operation of the permanent establishment” makes it clear that when a non-resident with a PE derives income from Vietnam without involvement of that PE, such income will nevertheless be taxable in Vietnam. However, this does not mean that the income must be included in the PE’s income. More likely, income earned outside of the context of the PE is subject to tax on a withholding basis under the FCT.

Limited force of attraction: advantage for Singapore-VN DTA

The HK-VN DTA provides in a limited force of attraction rule which is adopted from the UN Model DTA:

“The profits of an enterprise of a Contracting Party shall be taxable only in that Party unless the enterprise carries on business in the other Contracting Party through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Party, but only so much of them as is attributable to:

1. that permanent establishment;
2. sales in that other Party of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or
3. other business activities carried on in that other Party of the same or similar kind as those effected through that permanent establishment;
4. provided that (2) or (3) shall not apply where an enterprise is able to demonstrate that the sales or business activities were carried out for reasons other than obtaining treaty benefits [14].

The SIN-VN DTA does however strictly follow the OECD Model DTA in Article 7 Paragraph 1, and thus does not adopt any form of force of attraction.

International Shipping and Air Transport

Vietnam domestic tax law

Income derived by non-residents from international transport, including transport by sea and air is in Vietnam currently subject to the FCT. Previously, a separate freight tax applied. Non-resident airlines as well as enterprises providing international sea transport and freight forwarding services are now subject to the FCT. When the FCT is applied on a withholding basis, the VAT portion for international transport is 3% while the CIT portion is 2%. Lease of vessels or aircraft is subject to CIT at a rate of 2% in this case.

Leasing ships and containers: neutral

The HK-VN DTA provides simply that “profits of an enterprise of a Contracting Party from the operation of ships or aircraft in international traffic shall be taxable only in that Party”. The SIN-VN DTA adds a third paragraph to the Article, which reads:

“3. For the purposes of this Article, profits from the operation of ships or aircraft in international traffic include:

• income from the lease of ships or aircraft; and
• profits from the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers);

Where such lease or such use, maintenance or rental, as the case may be, is incidental to the operation of ships or aircraft in international traffic.”

Does this mean that income earned by Hong Kong enterprises from leasing ships and containers to Vietnam customers is taxable in Vietnam? Probably not. The OECD Commentary makes it quite clear that income from leasing ships and containers is included in Art. 8 of the DTA [15]. Also Circular 133 follows the same approach, provided the lease income is ancillary to an actual transport.

Transfer pricing

Transfer pricing in Vietnam

Under Vietnam tax law, CIT-taxpayers are subject to transfer pricing rules and compliance under Circular No.117-2005-TT-BTC (“Circular 117”) [16]. The transfer pricing Circular is applicable to organizations and individuals engaged in production and business of goods or services, conducting all or part of business activities in Vietnam and having business transactions with affiliated parties (Circular 117, Part A, I, 1). In addition, Circular 117 provides that its scope of application is as follows:

“Scope of application: transactions of sale, purchase, exchange, lease, transfer or assignment of goods and services during the course of business (hereinafter referred to as business transactions) between affiliated parties.”

By and large, the Vietnam rules are in accordance with OECD transfer pricing principles with some noted exceptions. All types of transactions are covered, including sales, services, licensing and loans. Taxpayers are expected to apply transfer price calculation methods to determine the arm’s length price of such a related transaction, and must supply this calculation together with other documentation to tax authorities together with corporate income tax returns.

Corresponding adjustments: advantage Hong Kong-Vietnam DTA

Article 9 of the OECD and UN Model allow a correction of the profit of an enterprise in case of transactions between associated enterprises which are not at arm’s length. Paragraph 2 introduces the obligation for the other state to carry out a so-called corresponding adjustment. This means, for example, that if one state were to increase the taxable income of an enterprise based on transfer pricing, the other state may have to lower the taxable income on the other side of the same transaction to avoid double taxation.

Article 9 Paragraph 2 of the HK-VN DTA is an example of such a provision:

“Where a Contracting Party includes in the profits of an enterprise of that Party – and taxes accordingly – profits on which an enterprise of the other Contracting Party has been charged to tax in that other Party and the profits so included are profits which would have accrued to the enterprise of the first-mentioned Party if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other Party shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Agreement and for this purpose the competent authorities of the Contracting Parties shall if necessary consult each other”.

Having a provision of this nature must be considered a significant advantage. In all likelihood, the Vietnam GDT will very actively challenge suspected abusive transfer prices. Although general consultations between the contracting parties to avoid double taxation are arguably also possible under the mutual agreement procedure of Art. 26 of the SIN-VN DTA, having a specific provision to this effect should be very useful [17].

Dividends

Vietnam’s source taxation of dividends

Vietnam has gone back and forth in its source taxation of dividends and branch profit remittances. Until 31 December 2003, a distinct “profit remittance tax” applied with rates of 3%, 5% or 7% depending on various criteria. Up to 31 December 2008, no actual withholding taxes applied when paying dividends to resident or non-resident shareholders. With Vietnam’s new Personal Income Tax Law (“PIT Law”) [18] that has changed at least with respect to shareholders that are individuals. Non-residents and resident individuals that receive dividends paid from a source in Vietnamwill be subject to a withholding tax of 5%. The payer of the income will apply this withholding.

Withholding rates: advantage depending on situation

For now, the question is a moot point since Vietnam does not apply a withholding tax in its domestic tax law which exceeds the DTA rates. The HK-VN DTA provides in a maximum withholding tax rate of 10% for dividends. The SIN-VN DTA sets forth several rates, some of which are lower than 10%. Article 10 Paragraph 2 SIN-VN DTA provides in the following rates:

1. 5 per cent of the gross amount of the dividends if the beneficial owner has contributed, directly of indirectly, more than 50 per cent of the capital or the company paying the dividends or more than US$10 million;
2. 7 per cent of the gross amount of the dividends if the beneficial owner has contributed, directly or indirectly, between 25 per cent and 50 per cent of the capital of the company paying the dividends;
3. 12.5 per cent of the gross amount of the dividends in all other cases; and
4. Finally, an exemption applies for dividends paid to “the Government of Singapore” [19].

The conclusion is that in case Vietnam would raise its domestic withholding tax rate on dividends one could indeed receive benefits from the DTA, but it depends on the taxpayer’s situation which of the DTA’s has the upper hand. Imagine that the Vietnam dividend withholding tax rate is raised to 15%, the SIN-VN DTA would be the most advantageous for shareholdings that exceed 25% or 10M$. For smaller shareholdings, the 10% rate of the HK-VN DTA is more attractive than the SIN-VN DTA’s 12.5%.

It is noteworthy that both Singapore [20] and Hong Kong [21] have regimes to exempt foreign dividends from taxation. Both DTA’s provide in a “tax sparing credit” [22] and in an “underlying tax credit” [23].

Royalties

Vietnam’s source taxation of royalties

Royalties derived from sources in Vietnam by a non-resident enterprise are usually taxed by means of the FCT. The rate of withholding is 10% under domestic Vietnam tax law [24]. “Royalties arising in Vietnam” mean royalties borne and paid by any resident of Vietnam, including those borne and paid by the Vietnamese Government and local authorities or Vietnam-based permanent establishments or fixed places of foreign residents [25].

Royalties were previously defined as:

“Income in any form paid for the right to use or for the transfer of intellectual property rights and technology transfer (including payments for the right to use and for transfers of rights of an author and rights of the owner of a work; transfers of industrial property rights; technology transfer); including the transfer of the right to use in the form of lease of machinery, equipment and means of transportation.” [26]

The Vietnam tax reform of 2009 has separated leasing of equipment/means of transportation from the definition of royalties [27].

Royalties with the HK–VN and SIN–VN DTAs

The HK-VN DTA provides in a reduction of the currently applicable Vietnam withholding tax for some production intangibles. Aricle 12 Paragraph 2 HK-VN DTA provides that in a maximum withholding rate of “7 per cent of the gross amount of the royalties if they are made as a consideration for the use of, or the right to use, any patent, design or model, plan, secret formula or process”. The withholding on other royalties is limited to 10%.

Structuring licenses withSingaporewill likely result in a better tax situation, though. Article 12 of the SIN-VN DTA provides in two rates:

• 5 per cent of the gross amount of the royalties in respect of payments of any kind received as a consideration for the use of, or the right to use, any patent, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience; and
• 15 per cent of the gross amount of royalties in all other cases.

The comparison is clearly in favor of the SIN-VN DTA in most circumstances. Leasing fees, subject to a Vietnam withholding of 10% currently, paid to a beneficial owner in Hong Kong would not be reduced under the DTA, while the Vietnam tax would be limited to 7% in the case with Singapore. Patents, designs and models qualify for the reduced rate under the HK-SIN DTA, but in all those cases the rate in the SIN-VN DTA is lower, i.e. 5%. Licensing know how would not qualify for the reduced rate of the HK-VN DTA, which means the general rate of 10% applies. For Singapore, on the other hand, know how gives rise to only a 5% withholding.

It is thus fair to say that the HK-VN DTA would only be more advantageous than its counterpart with Singapore when marks or copyrighted materials are involved and the Vietnam domestic withholding tax rate would be raised above 10%.

Service fees

Vietnam tax law

As was noted above, service fees paid from a source in Vietnam will in any event be taxable income under Vietnam tax law, both in terms of CIT and VAT. Earlier, some uncertainly had arisen whether services performed outside of Vietnam would be subject to any tax in Vietnam. Official Letter 1108 [28] addressed this issue by setting out that “services performed abroad but used in Vietnam” are subject to the FCT regime, obviously begging the question what “use in Vietnam” actually means. The tax reform of 2009 has cleared up the matter by providing a limitative list of services which, if performed abroad, are not subject to tax in Vietnam:

1. Repairs overseas of transport vehicles, machinery and equipment;
2. Advertising, marketing, and investment and commercial promotion overseas;
3. Brokerage for the sale of goods overseas;
4. Training conducted overseas; and
5. Share of charges for international post and telecom services distributed to the foreign party [29].

No article on “technical fees”

Certain Vietnam DTA’s do provide for a separate provision for technical service fees (e.g.Canada,Malaysia,India,Italy). Such a provision allows Vietnam to levy a withholding tax on all technical service fees, even if no PE exists or when performed abroad. All that is required for Vietnamto have taxing rights under the DTA in this case, is for the payer of the technical fee to be a resident of Vietnam.

Neither the HK-VN nor the SIN-VN DTA provides in a source taxation for “technical fees” per se.

Capital gains on shares

Vietnam tax law

The Vietnam tax regime of capital gains on shares is relatively complex. One regime exists for gains on “assignment of a capital interest”[30] (“CIT CA”), and a “presumptive tax” for gains on transferring “securities” [31]

(“Pres. CIT”). By and large, the difference between the two categories corresponds with that between direct and indirect investment, but various conditions and formalities must be respected to qualify for the more advantageous Pres. CIT. The CIT CA is calculated as 25% on the positive difference between the selling price of a capital interest and the cost price. The Pres. CIT is 0.1% on the selling price of the shares in question. With the introduction of the new PIT Law, another dimension was added to the issue as gains on shares are a taxable category of income as well as far as individuals are concerned. The PIT is either 20% on the net gain or 0.1% on the transfer value, depending on the type of shares and the registration by the taxpayer. For non-residents, the FCT regime is used to collect the CIT or PIT due.

Sale of Vietnam shares: advantage Singapore-Vietnam DTA

In general, there are three types of treaties that can be discerned with respect to taxation on gains from the sale of shares in a Vietnamese company:

1. Vietnam is not prevented from applying its domestic tax law. In this case, the treaty provides that Vietnam has taxing rights over gains on shares of a Vietnamese company, even if the seller is not a resident of Vietnam;
2. Vietnam may only tax the gain if the shares are of a company of which the property consists of “principally immovable property”; and
3. Vietnam may not tax any gain on shares. In this case, the treaty provides that only the other treaty-state is allowed to tax gains on shares realized by one of its residents, not the state where the company is located which issued the shares that are being transferred.

The HK-VN DTA provides that Vietnam would be allowed to tax a gain on shares of a Vietnam entity realized by a Hong Kong shareholder in two cases:

• The gain is realized on “shares of or comparable participation in a company the assets of which consist directly or indirectly, mainly of immovable property situated in Vietnam”. The Protocol to the DTA further points out that “For the purposes of Article 13 paragraph 4, the term “assets” shall be read as the value of the assets, and the term “mainly” shall be read as “not less than 50 per cent” [32]; or
• The gain is derived from the alienation of shares of not less than 15% of the entire shareholding of a Vietnam company.

Conversely, the SIN-VN DTA provides in much more limited rights to source taxation for Vietnamin relation to gains on shares. Article 13 of the SIN-VN DTA follows the OECD Model DTA and thus provides that in nearly all cases, “the state where the alienator is a resident” has taxing jurisdiction.

In conclusion, the DTA with Singapore offers a distinct advantage in cases where the shareholding exceeds 15% or in cases of real estate investment companies.

Limitation of relief and remittance

As has become a standard feature of Singapore DTA policy, the SIN-VN DTA includes a provision that limits the application of the benefits of the DTA. The provision reads as follows:

“Where this Agreement provides (with or without other conditions) that income from sources in Vietnam shall be exempt from tax, or taxed at a reduced rate, in Vietnam and under the laws in force in Singapore the said income is subject to tax by reference to the amount thereof which is remitted to or received in Singapore and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in Vietnam shall apply only to so much of the income as is remitted to or received in Singapore”.

Singapore uses a territorial principle of taxation. Income that is realized abroad and not received in or remitted to Singapore would in all likelihood not be taxable in Singapore [33]. The “remittance rule” in the DTA would exclude Vietnam income from treaty benefits to the extent it was not remitted to Singapore.

The HK-VN DTA does not provide in a similar rule.

Conclusion

The HK-VN DTA has a lot to offer to investors who are based in Hong Kong or who would choose Hong Kong for locating a holding entity. Gains on participations in Vietnam companies up to 15% would be tax-exempt in Vietnam (not mainly holding property in Vietnam), instead of being taxed at 25% on the net gain or on 0.1% of the sales price. Service fees paid to companies that are residents of Hong Kong may be exempt from the normally applicable FCT unless there would be a PE in Vietnam. The HK-VN DTA also reduces the withholding tax on certain royalties from 10% to 7% (patents, models and designs). Importantly, the HK-VN DTA provides a comprehensive regulation for corresponding adjustments in transfer pricing cases.

However, from the brief analysis above it appears that the SIN-VN DTA has even more advantages to offer. The PE-provision does not necessarily regard the performance of services in Vietnam for over 6 months as constituting a PE. The withholding tax rates for many types of royalties and lease are reduced to 5% while there is no source taxation on technical service fees except if realized through a PE. The treaty’s exemption for gains on shares of all companies is a significant tax advantage.

Of course, when one evaluates suitable holding jurisdictions for tax purposes, one does not only take the DTA into account. The domestic tax systems of Hong Kong and Singapore are comparable in some respects, but many important differences remain. Hong Kong’s tax system is already quite attractive for international tax planning, and it is certain that with the new HK-VN DTA, it makes for a powerful combination for structuring investment into Vietnam.

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[1] The HK-VN DTA can be found online at http://www.ird.gov.hk/eng/pdf/dt_vietnam.pdf. It will enter into force as soon as both States have notified each other that their respective domestic procedures have been completed to have the agreement enter into force (Art. 28 HK-VN DTA).

[2]The SIN-VN DTA can be found online at http://www.iras.gov.sg/irasHome/uploadedFiles/Quick_Links/singaporevietnamdta.pdf. It entered into force on 9 September 1994.

[3] Art. 2 par 3 CIT Law 14-2008-QH12, June 3, 2008

[4] Burke, F. and Nguyen Thanh Vinh, “Nexus for Taxation in Asia: Vietnam”, Asia Pacific Tax Bulletin, 2005, p. 235.

[5] 1, II, Part B Circular 134

[6] Art. 5(3)b, UN Model, Model Tax Convention, 2001

[7] Australia, Korea, Malaysia, Singapore, United Kingdom and France do not feature the “furnishing of services concept”.

[8] UN Model Commentary, art. 5 (4) at 68 only notes: “although there was a general consensus not to include the clause, some members of the Group indicated that the desirability of including it in a treaty could be left to bilateral negotiation”.

[9] Edwin Vanderbruggen, “A Preliminary Look at the 2001 UN Model”, British Tax Review, 2002, pp. 119 – 270.

[10] Vogel, K., Double Taxation Conventions, 3^rd ed., Kluwer, 1997, p. 322-324.

[11] As does Skaar, Permanent Establishment : Erosion of a tax treaty principle, Kluwer, 1991, p297 (“The most likely solution is therefore that the deletion of the cumulation clause in a tax treaty based on the UN pattern indicates that any combination of excepted activities may constitute PE”)

[12] See for example DTAs Australia-China , Australia-Austria. Thailand-Australia, Thailand-Austria, Thailand- Belgium.

[13] With respect to the exception for services performed outside of Vietnam, see below. “VII. Service fees”

[14] The last paragraph is not found in the UN Model DTA.

[15] OECD Commentary, Art. 8/8.1

[16] For an elaborate discussion, see Nguyen Tan Phat, “Arm’s Length Principle under New Transfer Pricing Guidelines and the Impact on Multinational Enterprises”, Asia Pacific Tax Bulletin, 2006, p. 215.

[17] OECD, Transfer Pricing Guidelines “Corresponding Adjustment and Mutual Agreement Procedure”, 1995 – 2000

[18] PIT Law 2007-QH12, Nov. 20, 2007

[19] It should also be noted that Art. 25 SIN-VN DTA provides in a maximum of 10% branch profit remittance tax.

[20] IRAS Circular “Tax exemption for foreign sourced dividend, sourced branch profits and foreign sourced service income”

[21] Sec.26(a) Internal Revenue Ordinance

[22] Art. 24 par. 3 b) SIN-VN DTA and Art. 22 par 1 b) HK-VN DTA (limited for a 10 year period)

[23] Art. 24 par. 3 a) SIN-VN DTA and Art. 22 par 3 HK-VN DTA

[24] Circular 134-2008-TT-BTC, Dec. 31, 2008, B, III, 3.2.

[25] Circular 133-2004-TT-BTC, Dec. 31, 2004

[26] Circular 5-2005-TT-BTC, Jan. 11, 2005

[27] Circular 134-2008-TT-BTC, Dec. 31, 2008, B, I, 1.2.

[28] OL 1108-TCT-DTNN, Mar. 26, 2006

[29] Art. 3 par. 3 CIT Decree; A, II, 4, Circular 134-2008-TT-BTC, Dec. 31, 2008

[30] Circular 130-2008-TT-BTC, Dec. 26, 2008

[31] Circular No. 72/2006/TT-BTC (dated 10 August 2006, amending and supplementing Circular No. 100/2004/TT-BTC dated 20 October 2004 on the Application of Value Added Tax and Corporate Income Tax in the Securities Sector) (“Circular 72”)

[32] Protocol HK-VN DTA, Art. 3

[33] iRAS Circular “Tax exemption for foreign sourced dividend, sourced branch profits and foreign sourced service income”