A draft circular, released by the Ministry of Finance, introduces rules that would enable Vietnamese tax authorities to deny tax treaty benefits. A substance-over-form principle would be used for those transactions concluded solely to achieve a tax benefit (i.e. the main purpose of an agreement is to obtain treaty benefits) and for which the benefit is not received by the beneficial owner.
Beneficial ownership benefits may be challenged if the applicant:
- Has the obligation to distribute more than 50% of the income to another entity,
- Only has business activities consisting of asset ownership or the right to generate income,
- Has an amount of assets, business scale or employees not commensurate with the income received,
- Does not have control or power over the assets of has low risks for such assets or income,
- Has a back-to-back arrangement for lending, royalties or technical services with a third party,
- Is resident of a country which has no, or a low, income tax, or
- Is an intermediary solely for the purpose of accessing treaty benefits.
The Circular is presently in draft form, although the concept of “Beneficial Ownership” should be reviewed in every legal structure to determine potential risks and consequences. This action in Vietnam is also mirrored by efforts of the OECD and other countries to restrict treaty benefits for certain activities. For example, the UK has recently released rules enabling public disclosure of beneficial owners having ultimate ownership of the respective entity (refer to 1 Nov. post).
Note that the proposed tests for beneficial ownership are primarily objective, thus holding company structures, and their respective Articles of Association, should be reviewed in preparation for revised rules of “Beneficial Ownership.”