Vietnam and Singapore Amend their Tax Treaty

On 12 September 2012, Vietnam and Singapore signed a second protocol to amend their tax treaty, most significantly with respect to services permanent establishments (PE) and gains on shares of companies holding immovable property. We highlight the following notable points:

Capital gains on shares of companies that hold property

With respect to the capital gains tax on the sale of shares, previously, Vietnam does not have the right to tax on gains of a Singaporean resident seller. Under the second protocol, this rule has been limited and provides that Vietnam may tax in the event that the Vietnamese entity’s value consists of more than 50% of immovable property. The text now reads as follows:

“4. Gains derived by a resident of a Contracting State from the alienation of shares, other than shares of a company quoted on a recognized stock exchange of one or both Contracting States, deriving more than 50% of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.’

We note that other tax treaties normally contain the following text:

“4. Gains from the alienation of shares of a company the property of which consists wholly or principally of immovable property situated in a Contracting State may be taxed in that State.”

There is no interpretation of the term “principally”, though the commentary refers to more than 50%. We note that the commentary is not binding. The Vietnam General Department of Taxation has issued certain rulings indicating “more than 50%” as the threshold for the term “principally”. Therefore, the changes in the second protocol are more clear when indicating ratio of 50% in the text.

183 days Service PE introduced

Permanent establishment (PE) concept: The tax treaty did not provide any particular length of time for which a service would constitute a PE. As such, there have been several different interpretations on service PE, which have been controversial. The second protocol is expected to clear up this issue. In this regard, the added text, reproduced from the UN Model tax treaty, reads as follows:

(b) The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 183 days within any twelve month period;”

Other measures

• Dividends (if taxed under Vietnam domestic law) will not be exempt if paid to the Government of Singapore for commercial activities. Note that this change was already indicated in the first protocol (1994), but we emphasize again here.
• With respect to interests, the source country may tax up to 10% or at a lower rate if there is any agreement with any other state in which a lower rate exists. Note that this change was already indicated in the first protocol (1994), but we emphasize again here.
• With respect to royalties in “all other cases”, the source country can tax up to 10%. This rate has been reduced from the prior rate of 15%.

Note that the second protocol will need to be ratified by both countries before entering into force. We will keep you updated on the ratification and the effective date of the amendment.