Ensuring a smooth capital transfer

The transfer of 100% capital of a single-member limited liability company owned by an organization (hereinafter referred to as "capital transfer") is a significant transaction, as it results in a complete change in ownership and management structure of the enterprise. This process also entails complex tax obligations, requiring businesses to thoroughly understand the legal framework to ensure compliance and optimize costs.

Source: The Saigon Times

In practice, many enterprises remain uncertain and encounter various difficulties when handling tax issues related to capital transfers. This article will clarify the tax obligations and requirements that businesses engaging in capital transfers must take into account, including applicable taxes, declaration obligations, payable tax amounts, potential legal risks, and tax incentive policies.

Value-added tax

According to the Value-added tax (VAT) Law 2008, Decree No. 209/2013/ND-CP, and Circular No. 219/2013/TT-BTC, the transfer of part or all of an enterprise's capital does not fall within the scope of VAT[1]. Additionally, the amended VAT Law of 2024, effective from July 1, 2025, stipulates that when transferring capital to another entity or individual, no VAT obligation arises from the transaction[2]. Therefore, it can be concluded that capital transfer activities are not subject to VAT.

However, it is important to note that if, after acquiring the capital, the transferee changes the operational objectives (business sectors or activities) of the investment project but continues to implement a VAT-taxable investment project, then the previously refunded VAT for the investment project will not be reclaimed. Conversely, if the transferee discontinues the VAT-taxable investment project, the tax authorities may require repayment of the previously refunded VAT before the capital transfer[3].

Thus, in principle, the transfer of total capital does not give rise to VAT obligations. However, businesses must be proactive in understanding cases where VAT refunds may need to be returned due to adjustments in the investment project to ensure compliance and avoid tax risks during capital transfers.

Corporate income tax

In addition to VAT, Corporate income tax (CIT) is another crucial tax obligation in capital transfer transactions. Under the Corporate Income Tax Law 2008, Decree No. 218/2013/ND-CP, and Circular No. 78/2014/TT-BTC, income derived from capital transfers is considered taxable profit obtained from transferring part or all of the invested capital in an enterprise. Therefore, in cases where a single-member LLC is fully transferred, the profit earned from the transaction is subject to CIT[4].

To determine the CIT payable, the taxable income must first be calculated using the following formula[5]:

Taxable income = Transfer price - Acquisition cost of transferred capital – Transfer cost

In this formula, the transfer price is determined based on the actual value received by the transferor as per the transfer agreement. If the agreement stipulates deferred or installment payments, the transfer revenue does not include the interest arising from such payment arrangements. Notably, tax authorities have the right to review and adjust the transaction value if there are indications that the transfer price does not reflect the market value, based on data collected by the tax authorities.

The acquisition cost of transferred capital depends on how the capital was previously acquired. Specifically, if the capital contribution was made at the time of the company’s establishment, the acquisition cost is the accumulated capital contribution value up to the transfer date, confirmed by the involved parties or, in cases involving 100% foreign-owned enterprises, by an independent audit report. If the capital was acquired from a third party, the acquisition cost is determined based on the actual purchase price at the time of acquisition, as documented in the contract and payment records.

Furthermore, legitimate expenses incurred directly from the capital transfer are deductible when determining taxable income. These expenses include legal fees associated with the transfer, regulatory fees for completing the transaction, as well as transaction, negotiation, and contract signing expenses, provided that valid supporting documents are available. If such expenses are incurred abroad, the enterprise must provide duly certified and legalized supporting documents, translated into Vietnamese in accordance with regulations.

Regarding CIT declaration and payment obligations, under Vietnamese law, if the transferor is a Vietnamese enterprise, it is responsible for declaring and paying CIT on the capital transfer income. If the transferor is a foreign organization not operating under Vietnam's Enterprise Law or Investment Law, the transferee must declare, withhold, and remit the applicable CIT on behalf of the transferor. If both parties are foreign entities, the Vietnamese company in which the foreign entity holds capital is responsible for filing and paying the tax.

Additionally, under the Tax Administration Law 2019, parties must declare and pay CIT within 10 days from the date the tax obligation arises[6]. In practice, tax authorities interpret the tax obligation arising at the effective date of the transfer agreement, rather than the actual payment date.

Thus, CIT is an unavoidable financial obligation in capital transfers involving single-member LLCs owned by organizations. Therefore, involved parties must carefully review all relevant factors to ensure accurate transaction valuation, proper tax declaration, and full compliance with tax regulations.

Double taxation avoidance agreements

Another tax aspect that may benefit foreign transferors but is often overlooked is the application of Double tax avoidance agreements (DTA) to prevent double taxation on profits derived from capital transfers. Depending on the specific DTA, income from capital transfers may be taxed only in the country where the transfer takes place or in the country where the transferor is headquartered, with tax credit mechanisms in place to avoid double taxation.

To apply these tax benefits, businesses must clearly determine the tax residency of the foreign entity and whether a DTA exists between the two countries. Typically, utilizing a DTA requires fulfilling certain administrative procedures, such as providing a tax residency certificate and other supporting documents as required by the tax authorities in the transferor’s home country. Therefore, businesses must carefully assess and prepare all necessary documentation to ensure a smooth and effective application of the DTA.

In conclusion, the transfer of 100% capital in a single-member LLC owned by an organization involves significant tax obligations that businesses must carefully consider. Among them, Corporate Income Tax (CIT) is particularly important, requiring enterprises to properly assess and declare the transfer value in compliance with tax regulations. Additionally, applying DTA can help reduce tax liabilities, mitigate double taxation, and optimize economic benefits for foreign enterprises. For this reason, businesses should proactively understand tax regulations and policies, consult with professional advisors and legal experts specializing in tax matters, and ensure full compliance to minimize risks and safeguard investment and business operations in Vietnam.