The transfer price is an important factor that both the seller and the buyer are particularly concerned about when conducting a partial or full transfer of company ownership. In principle, the parties are free to negotiate the transfer price. However, in practice, the transfer price of contributed capital may be limited by various factors and is subject to scrutiny by relevant state authorities. The following article will provide businesses with some information on legal regulations and practical handling related to the transfer price in capital transfer agreements for foreign investors.
Legal regulations on investment and enterprises
The Law on Investment in 2020, the Law on Enterprises in 2020, and the guiding decrees and circulars do not contain specific provisions on the transfer price, nor any requirements regarding the minimum or maximum transfer prices for the transfer of contributed capital from owners/members of the company to other investors. On the other hand, the Law on Enterprises generally stipulates that owners/members of a company have the right to transfer their contributed capital to other organizations or individuals. Additionally, the investment conditions for capital contribution, share purchase, or capital contribution purchase under Article 24.2 of the Law on Investment in 2020 also do not impose any restrictions on the transfer price in these investment forms.
Therefore, it can be understood that under Vietnamese enterprise and investment regulations, the transfer price of contributed capital is determined by mutual agreement between the owner/member of the company and the investor on a principle of negotiation and consensus.
Legal regulations on taxes
Unlike the investment and enterprise regulations analyzed above, tax regulations have provisions regarding the transfer price in capital transfer agreements between parties. Specifically, the taxation of income from capital transfers is regulated in Point a, Clause 2, Article 14 of Circular No. 78/2014/TT-BTC providing guidance on the implementation of Decree No. 218/2013/NĐ-CP regarding the regulations and guidance on the implementation of the Corporate Income Tax Law. The content of this provision is as follows:
“2. Tax calculation basis:
The transfer price is determined as the actual value that the transferor receives under the capital transfer agreement.
In case the capital transfer agreement does not specify the payment price or the tax authority finds the payment price inappropriate according to the market price, the tax authority has the right to inspect and determine the transfer price. If a company transfers a portion of its contributed capital at a transfer price that is not appropriate according to the market price, the tax authority can re-determine the entire value of the company at the time of transfer to establish the corresponding transfer price based on the proportion of the transferred contributed capital.
The determination of the transfer price is based on the tax authority’s investigation documents or the transfer price of other cases at the same time, with the same economic organization, or similar transfer agreements at the time of transfer. In cases where the tax authority’s determined transfer price is not appropriate, the price assessment by authorized professional valuation organizations shall be used according to regulations.”
According to the above regulations, in cases where the tax authority has a basis to determine that the payment price is not in line with the market price, the tax authority has the right to inspect and determine the transfer price. In doing so, the tax authority can base its own investigation materials, transfer prices of similar cases at the same time, the same economic organization, similar transfer agreements at the time of transfer, or the price assessment by authorized professional valuation organizations. Therefore, the transfer price can be determined by the competent tax authority.
However, it should be noted that the determination of the price by the tax authority, as presented above, is regulated in the section “Tax calculation basis”. Therefore, it can be concluded that the tax authority’s power to inspect and determine the transfer price aims to use that transfer price as a basis for calculating taxes and imposing capital transfer taxes on the business.
Applying this understanding, in cases where a company transfers capital at a transfer price that is not appropriate, the tax authority determines the transfer price based on the market price to calculate the taxes on the capital transfer transaction of that business. In such cases, the issue arises as to whether the agreed price chosen by the parties in the transaction should remain unchanged, and the transferring party would be obligated to pay taxes based on the market price; or the parties shall need to adjust the transfer price in the agreement to match the determined price (by the tax authority) and conduct the transaction, declaration, and tax payment (if applicable) based on that price.
This issue has not been clearly explained within the scope of current legal regulations and requires legislative guidance and clarification in the future.
Practical application of regulations on the transfer price in capital transfer transactions
In practice, during the examination and approval of applications for capital contribution, the investment registration authority examines the suitability of the transfer price stated in the transfer agreement within the company’s submitted dossier. Accordingly, the investment registration authority typically bases its determination of the transfer price on the initial charter capital and the invested capital of the project.
If the value of the company at the time of transfer significantly differs from the origin charter capital or the contributed investment capital, the investment registration authority may request the company to supplement additional documents that prove the suitability of the transfer price. The commonly used documents to determine the suitability of the transfer price in such cases are the company’s financial reports, financial statements, asset valuation reports by professional valuation organizations, and the company’s explanations regarding the reasonableness of the transfer price.
Although according to the legal regulations on investment and enterprises, the investment registration authority does not have the basis to appraise or determine the transfer price in capital transfer transactions between the owners/members of the company and the investors. In practice, the investment registration authority typically only approves the registration dossier for capital contribution, share purchase, or purchase of capital contributed if it deems the transfer price stated in the dossier to be appropriate. If the investment registration authority assesses that the agreed transfer price between the parties is unreasonable from its perspective, it will issue a notice requiring the company to explain the basis for the transfer price calculation and to provide relevant supporting documents.
Thus, it can be seen that in practice, the processing of such applications and the determination of transfer price in capital transfer transactions are based on the agreement and valuation determined by the parties, but the transfer price must be appropriate and reasonable based on the actual value of the contributed capital being transferred in the transaction.
Referenced methods for determining the transfer price of contributed capital
Important factors that influence the determination of the transfer price include market value, book value, the financial situation of the company, and other relevant aspects. When determining the transfer price in a capital transfer agreement, investors can refer to and apply principles and criteria such as market comparison, discounted cash flow, and asset valuation methods. However, when applying these methods, investors should consider the specificities of the capital transfer, including the company’s scale, business sector, and factors related to finances and risk. To ensure fairness and reasonableness in determining the transfer price, investors can also employ measures such as using independent and reliable experts for valuation, thereby increasing transparency and reliability in the executed transaction. Furthermore, implementing an independent verification process and and verifying information related to the value of the capital contribution helps ensure accuracy and objectivity in determining the transfer price, avoiding risks arising from an inappropriate transfer price when dealing with the investment registration authority and tax authority in Vietnam.
Before engaging in any capital transfer transactions, the involved parties should thoroughly understand the current legal regulations and seek additional legal advice from lawyers or legal experts. The above analyses are based on the legal framework concerning investment, enterprises, and taxation related to the determination of transfer prices. Additionally, the parties should also consider the practical implementation by the competent authorities in each locality to ensure the appropriate determination of a transfer price, avoiding any impact on the transfer transaction and adhering to the agreed-upon conditions and timelines.