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Circular 205 on the implementation of tax treaties

Circular 205/2013/TT-BTC (Circular 205) dated 24 December 2013 has been issued on the implementation of tax treaties. Circular 205 provides rules on the applicability of tax treaty benefits and general anti-abusive provisions (GAAR) and is effective from 6 February 2014. The most salient changes in Circular 205 from the previous circular on the implementation of tax treaties (Circular 133 issued in 2004) are the introduction of GAAR and the beneficial ownership provisions. The key points of Circular 205 are summarized as follows.

Application
- Circular 205 is applicable to tax residents of Vietnam and/or contracting countries.
- Circular 205 also reaffirms that tax treaties will prevail over domestic legislation.
- A 3-year statute of limitation is imposed on claims for refund, substantiation of a tax treaty benefit application or appeals on disputed tax treaty benefits.

GAAR
Generally, the GAAR rules in Circular 205 state that a tax treaty benefit will be denied if the main purpose of a transaction or arrangement is to obtain tax treaty benefits and/or the recipient is not the beneficial owner. However, Circular 205 does not go further to provide guidance as to how such a determination is made and as such, additional guidance on this is likely to be required.

Beneficial ownership
In determining the beneficial owner, the general substance over form principle is to be employed and the following factors are to be considered:
- where the recipient is required to distribute more than 50% of its profit to a resident of a third country within 12 months of receipt of that profit;
- the recipient has little or no substantive business presence;
- the recipient has little or no control over the income received;
- the applicant faces little or no risk in respect of the income received;
- there are back-to-back arrangements;
- the recipient is a resident of a low (i.e. below 10%) or no-tax jurisdiction; or
- the recipient is intermediary or an agent.

Permanent establishments
Circular 205 further provides that a foreign invested enterprise (FIE), i.e. a Vietnamese entity with a foreign shareholder, would create a permanent establishment (PE) for the foreign corporate shareholder if the FIE enters into a contract which is binding on the foreign corporate shareholder or the foreign corporate shareholder's use of the FIE's facilities and resources is not performed at an arm's length.
When determining the profits attributable to a PE, no deduction is allowed for allocations of interest (except for banks), royalties and commission/management/service fees.
Capital gains tax
Most of Vietnam's tax treaties allow Vietnam to tax the capital gains arising from the alienation of shares in a Vietnamese company whose assets primarily consist of immovable property. Circular 205 dictates the method to determine the ratio of immovable property to total assets.

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