Vietnam Tax: Guidance issued on tax treatment of asset revaluation surplus

A recent circular issued by the Vietnamese Ministry of Finance (Circular 40/2010/TT-BTC, dated 23 March 2010) provides detailed guidance on how to determine taxable income on surplus derived from asset revaluations as a result of (1) capital contributions and (2) mergers / demergers, separations / combinations and corporate transformations (i.e. corporate reorganizations).

Circular 40 supplements guidance issued in 2008 (Circular 130), in particular, with respect to the revaluation of land use rights (LURs). However, like Circular 130, Circular 40 only addresses the tax treatment of revaluation surplus (gain) – losses from asset revaluations are not mentioned.


Revaluation of fixed assets

Gain from the revaluation of fixed assets is the surplus of the revalued amount over net book value in the accounting books. In the case of capital contributions, the surplus is treated as income of the investor spread over the remaining useful life of the fixed assets being depreciated by the investee. In the case of corporate reorganizations, however, such gains are taxed in the hands of the transferor immediately (i.e. at the time of the transfer of revalued fixed assets). In respect of wholly state-owned enterprises carrying out privatization operations to convert to joint stock companies, the surplus from the revaluation of fixed assets is not taxed but instead is treated as an increase in the state equity.


Revaluation of land use rights

Circular 40 also provides detailed guidelines on the treatment of differences arising from the revaluation of LURs that have a fixed term and LURS with an indefinite term.

Where the transferee (or investee) of fixed term LURs is able to amortize the LURs, the revaluation surplus is considered "other income" in determining corporate income tax according to the same rules as apply to the revaluation of fixed assets. By contrast, where indefinite term LURs may not be amortized by the transferee (or investee), the transferor/investor is not required to pay corporate income tax on the revaluation surplus of the LURs at the time of the transfer / investment. Special rules apply to LUR revaluation surplus on investments in infrastructure construction for sale projects and houses / buildings: these will be taxed immediately regardless of whether the LURs are fixed or indefinite term.

After receiving the investment or transfer of revalued LURs, if the transferee/investee in turn transfers or invests the LURs to or in another party, it is required to declare and pay corporate income tax. The following costs are deductible in determining taxable income:

- For fixed term LURs, the deductible cost is calculated as the revalued amount (when Company A transfers to / invests in Company B) less the accumulated depreciation charged to Company B's expenses; and
- For indefinite term LURs, the deductible cost is the book value recorded by Company A before transferring to / investing in Company B.


Documentation and accounting

Proper documentation must be available for all investments and transfers of assets, including evidence of an agreement between the parties specifying the net book value of the assets before the revaluation, the revalued amount and the amortizable life of the assets, and the original documents relating to the assets. The transferee / investee that receives the transferred/invested assets may depreciate / amortize the assets based on the revaluation amount (except in the case of nonamortizable LURs).


Effective date

Circular 40 will be effective 23 March 2010 and applies for the calculation of corporate income tax as from tax year 2009 onwards.