Republic of San Marino signs tax treaty with Vietnam

In an effort to avoid the double taxation of international income and thus promote foreign direct investment, Vietnam has concluded double taxation agreements (DTAs) with more than 60 countries to date – the most recent of which was with the Republic of San Marino on February 19 2013, the first of the five smallest jurisdictions in the world to do so. The Vietnam–San Marino DTA is pending ratification, but it is understood that there will not be much benefit for taxpayers, since most of the tax rates under the DTA are equal to or higher than those under Vietnam’s domestic regulations.

Table 1 summarises some notable points and the tax effect under the DTA versus under domestic tax regulations for various income sources from Vietnam:

We note that with the way the taxing rights are allocated under the capital gains clause, capital gains at the holding level can be taxed in Vietnam if more than 30% (in value) of the property owned by the holding (directly or indirectly) consists of immovable property located in Vietnam.

In other words, for example, Company A is a resident of San Marino, and owns 100% of the capital of its subsidiary B in Vietnam. B owns and operates a resort and villas in Vietnam. The value of the vil­las/resort exceeds 30% of the aggregate value of all assets owned by Company A. When the shareholders of Company A transfer shares in Company A to another buyer offshore, Vietnam can tax this gain subject to its domestic regulations. However, Vietnamese law does not provide a clear mechanism for collecting this tax, even though certain official rulings have confirmed the subject-to-tax position of those offshore sales in Vietnam.

This rule does not exist in earlier DTAs signed with other jurisdictions; this could be an indication that Vietnam plans to officially impose capital gains taxation at the offshore holding level soon.