Navigating Fund Repatriation Strategies for Foreign Investors in Vietnam: A Comprehensive Analysis

As we progress through the third quarter of 2024, foreign investors in Vietnam should prioritize strategic planning for fund repatriation ahead of the fiscal year’s end. This article provides an overview of the most common mechanisms available for foreign investors to remit funds from Vietnam to their home countries, while highlighting the potential challenges associated with each process.?

1. Dividend Transfers: A Common Strategy?

Dividend transfers remain one of the most widely used methods for remitting funds abroad. The primary challenge in this process is obtaining a tax clearance certificate from the Vietnamese tax authorities, which is an essential document required by commercial banks to process dividend remittances. Obtaining this certificate often involves engaging tax experts to reconcile the company’s tax declarations, ensure compliance with local tax regulations, and address any outstanding tax liabilities. Additionally, the process may occasionally trigger an on-site tax audit, highlighting the importance of meticulous preparation and accurate record-keeping for investors planning to use this method.?

From a taxation perspective, corporate investors are not subject to withholding tax on dividend transfers, while individual investors are required to pay a 5% withholding tax, deducted at the source.?

2. Share/Capital Contribution Repurchases: The Buyback Option?

This method is primarily favored by joint-stock companies, although the option is also available to Multi-Member Limited Liability Companies (“LLC”). For Single Member LLC, the option to reduce charter capital may be considered under specific conditions, which will be discussed further below.?

Shareholder agreements or company charters (i.e., Articles of Association) often stipulate that a shareholder or company member must first offer their shares for sale to other existing shareholders before seeking external buyers. This provision is commonly referred to as the Right of First Offer (“ROFO”).?

Additionally, shareholders who oppose organizational changes or amendments to the company charter may request the company to buy back their shares. A company is permitted to repurchase up to 30% of its total ordinary shares, or all or part of its participating preference shares, based on approvals by the Board of Directors or the General Meeting of Shareholders.?

While these options are generally more manageable during internal restructuring, it is essential to note that a substantial financial commitment is legally required for share reacquisition. Furthermore, the process necessitates compliance with various licensing formalities.?

From a taxation perspective, the applicable Capital Gains Tax (“CGT”) rate depends on the legal status and tax residency of the selling shareholders.?

3. Remittance Under Service Agreements and Royalties: An Alternative Strategy?

One method of fund repatriation is through inter-company charges between the Vietnamese company (“VietCo”) and the overseas holding company (“Overseas HoldCo”). The scope of services can be broad depending upon the demands of both parties, typically including management consultancy and royalties. Royalties are commonly adopted in group structures when VietCo utilizes the intellectual property (IP) of Overseas HoldCo, such as trademarks or know-how. In this case, the Foreign Contractor Withholding Tax (“FCWT”) rate is 10%, applied to the royalty payment prior to remittance.?

It is important to note that VietCo must withhold FCWT at source, with tax rates depending on the specific nature of the services rendered.?

From a documentation perspective, intercompany service agreements and payments require extensive documentation to ensure compliance with laws and to substantiate deductible expenses reported to tax authorities from VietCo's perspective. These transactions must adhere to transfer pricing regulations, with expenses computed under the appropriate transfer pricing method and industrial benchmarks, depending on the nature the services. Consequently, VietCo must maintain comprehensive transfer pricing documentation to justify these expenses, which must align with market values unless they fall into the exempt category.?

From a legal standpoint, it is essential to consider that if these transactions are deemed artificial, with the intent of disguising other transactions or evading obligations to a third party, they could potentially be rendered void. From a tax perspective, if the tax authority detects any tax non-compliance, the related expenses would be treated as non-deductible, resulting in additional Corporate Income Tax (CIT), penalties, and late payment interest.??

4. Loan Agreements: A Financial Option?

The Overseas HoldCo has the option to extend a loan to VietCo to support the latter's operational requirements. Under this arrangement, VietCo would be obligated to remit loan interest payments to Overseas HoldCo on a regular basis, in accordance with a mutually agreed-upon payment schedule.??

However, it is essential to note that this approach entails specific regulatory compliance requirements. For instance, if the loan term exceeds 12 months, registration with the State Bank of Vietnam becomes mandatory. Additionally, if the loan amount surpasses the "mobilized capital" or "raised capital" stated in VietCo's Investment Registration Certificate (“IRC”), an amendment to the IRC would be required to update the registered threshold.??

From a tax perspective, the loan interest rates must align with market values, as determined through benchmarking against industry standards in Vietnam, and are subject to a cap of 30% of VietCo's Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Furthermore, Overseas HoldCo's FCWT obligations must be fulfilled, which requires VietCo to withhold 5% of loan interest payments at source before remitting them overseas.?

5. Reductions of Charter Capital: A Strategic Option?

Although all enterprise types can register to decrease the charter capital, for foreign investors in Single-Member LLC, the reduction of the company's charter capital presents a viable option. However, this method necessitates adherence to statutory compliance measures, including a minimum period of two years from the company’s incorporation and the fulfillment of financial commitments after the reduction.?

Furthermore, reducing the charter capital requires extensive licensing procedures to update the IRC (if applicable) and the Enterprise Registration Certificate (ERC).??

A significant challenge often lies in demonstrating VietCo's financial capability after the reduction to continue executing the investment project outlined in the IRC. This strategy also requires convincing the Ministry or Department of Planning and Investment, which involves preparing rigorous documentation.?

6. Company Dissolutions: A Potential Exit Strategy?

In the event that a foreign investor considers exiting the Vietnamese market, this option may be explored. Upon completion of the dissolution procedure and fulfillment of all applicable statutory requirements as stipulated by Vietnamese authorities, any remaining funds may be repatriated, subject to certain conditions.?

However, it is essential to note that this option is contingent upon strict adherence to various compliance requirements, such as closing the tax code, settling obligations with social insurance and labor authorities, and obtaining clearance from licensing authorities.??

Finally, we emphasize the importance of strategic planning with respect to Double Taxation Avoidance Agreement (DTAA) for foreign investors in Vietnam seeking to optimize potential exemptions. Fund repatriation involves navigating a complex landscape of legal compliance, taxation, and procedural intricacies. By carefully planning in line with the DTAA, investors may potentially mitigate tax burdens while ensuring compliance with Vietnamese and international regulations.??

It is advisable for foreign investors to conduct thorough due diligence and seek professional guidance to identify the most suitable strategies tailored to their specific circumstances. This proactive approach can help ensure compliance and optimize financial outcomes.?

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Authors:?

• Alexandre Ho Thanh – Head of Advisory Services?

• Dat Bui – Paralegal??