Vietnam to waive tax for income from capital transfer for Ho Chi Minh City startups

[HO CHI MINH CITY] Vietnam has introduced a new taxation policy that is expected to boost domestic and foreign investment in startups based in Ho Chi Minh City, the country’s key economic centre and most populous city.

This tax-exemption scheme was one of the items specified in the National Assembly’s resolution on special mechanisms and policies for the development of Ho Chi Minh City, to take effect from Aug 1 this year.

While details of the implementation are not yet known, the scheme will see individuals and organisations that have income from the transfer of contributed capital to startups in the city be exempt from both personal income tax (PIT) and corporate income tax (CIT).

For a period of five years, startups in the city are exempt from CIT from the time that payable income tax is due. Certain individuals working at these companies could also enjoy PIT exemption for their income from salaries and wages.

Observers said this tax benefit is similar to the “zero per cent capital gains tax” rule and startup tax-exemption scheme in Thailand and Singapore.

“(The tax exemption) will probably have an effect to some extent, but we need to wait for clearer guidance on how to receive the benefits,” said Bui Thanh Do, founding partner and chief executive of Vietnam-based ThinkZone Ventures. “If the procedures are complicated, it will probably not realise the goal of driving more direct startup investments inside the territory of Vietnam.”

To date, ThinkZone Ventures has contributed capital to about 10 Vietnamese startups since its inception. Its latest US$60 million fund was fully backed by Vietnamese corporations. 

For years, it has been an unwritten rule for Vietnamese startups to incorporate overseas, mainly in Singapore, in order to receive funding from foreign investors and venture capital firms, Do added.

While this was troublesome for some startup founders, the practice was beneficial to investors as they could enjoy attractive tax incentives and clearer capital contribution and divestment procedures in the host country.

SEE ALSO

No longer just a beach town, Vietnam’s Da Nang gaining reputation as a ‘startup hub by the sea’

For foreign investors in Vietnam, it is challenging to deal with the country’s administrative procedures when making a startup investment, even for a relatively small sum of US$5,000. 

“As an international investor, I don’t want to invest my money in Vietnam. I want to invest it elsewhere,” said Maaike Doyer, the founder of Epic Angels, a female-only angel investor community.

Found in 2020, Epic Angels is a network of more than 200 female angels, including 138 Singapore-based individual investors and 11 Vietnam-based angels. To date, it has facilitated cross-border investments into 17 startups in the region.

“When I put my money in Vietnam, if I want to get it out, it’s a nightmare,” she added. “I think the regulations right now are for those who do transactions of millions of dollars. But that paperwork is just too much for small investments.”

After setting up ThinkZone Ventures, Do realised that local funds face uncertainties and obstacles when it comes to making tax declarations and claims with the authorities.

Civil servants are often confused about government incentives for these kinds of businesses due to a lack of clear guidance and precedents, he said.

Vietnam ranked third in South-east Asia in 2022 in terms of startup deals, behind Singapore and Indonesia, according to data compiled by Do Ventures.

Last year, Vietnamese investors led the way in local startup funding, with 30 funds actively making investments, followed by funds from Singapore, North America and South Korea, Do Ventures noted in its report.

That said, analysts noted that international investors remain attracted to Vietnam’s robust economic growth, its young and skilled population, and the growing services industry.

The main challenges facing Vietnam’s tech startup scene are insufficient policies and regulations for a sustainable innovation environment, a lack of successful initial public offerings and exit stories, and a shortage of funding from large corporations.

Do said he believes local corporations would be more willing to invest in startups if they are incentivised properly by the government, citing the preferential policies in countries like South Korea, Japan and Singapore.

“Investing indirectly in Vietnamese startups via Singapore entities is still more preferable for regional investors,” he said. “In the short term, it’s still necessary for the government to make it easier for local investors and founders to set up businesses in Singapore to attract more capital for Vietnam.”