Vietnam is becoming an attractive destination for investment in renewable energy in Southeast Asia due to its low-cost resources and natural advantages while the primary non-renewable energy sources have been struggling to fulfill the power needs of the country.
As high demand of power supply leads to high capital requirements, the government has allowed 100% foreign ownership of Vietnamese companies in the energy sector and offers new tax incentives to attract foreign investment and retain the growth of Vietnam’s green power sector.
Corporate Income Tax Incentives
Under the corporate income tax (CIT) regulations, a business operating in the renewable energy, clean energy, and waste-to-energy sector can enjoy preferential tax rates and tax holidays if it qualifies for the incentive investment sector or encouraged investment location conditions.
Preferential Tax Rates
Income from investment in the production of renewable energy, clean energy and waste-to-energy process is entitled to a preferential tax rate of 10% for 15 years. An extension of the preferential tax rate period can be applied subject to the government’s decision on a case-by-case basis provided that the project is invested on a large scale, high technology or special investment attraction as stipulated by law.
Under Decision No. 693/QD-TTg, an energy production project, including renewable energy from wind power, solar, tides, geothermal, energy, biology and clean energy from the destruction of environmental pollutants, which qualifies for a number of particular conditions in terms of scale, standards of personnel, basis of demand for granted land, requirements for facility, capacity, technology, will be regarded as a socialization project in the field of environment protection. A socialization project in the field of environment protection can enjoy the incentive CIT rate of 10% for the whole lifetime of the project and exemption for four years and 50% reduction from five to nine in the subsequent years depending on the area where the project is implemented.
In addition, if a renewable energy project investment is in an encouraged location, the following tax incentives apply:
- 17% tax rate for 10 years; tax-exempt for two years and the subsequent four years a 50% reduction will be applied for the new investment projects located in difficult socioeconomic areas;.
- 10% tax rate for 15 years; tax-exempt for four years and the subsequent nine years a 50% reduction will be applied for the new investment projects located in extremely difficult socioeconomic areas.
In the same tax year, if a project is entitled to different CIT incentives for qualifying conditions of investment sector and investment location, the most beneficial scheme will be applied.
The current standard tax rate is 20%. The preferential tax rate takes effect from the year of generating revenue, while tax holidays are continuously applied after the company first makes a profit. Where a company has not derived any taxable profit within three years of the commencement of generating revenue, tax holidays will start from the fourth year of operation.
Import Duty Incentives
As renewable energy projects are included in the approved list of sectors or professions qualifying for special investment incentives, these projects will be exempt from import tax for goods forming fixed assets and import tax for domestically unavailable materials and components for the purpose of the project within five years. To benefit from the exemption, the project investor should ensure that imported machinery and equipment are supported by customs declaration forms and relevant payment vouchers for value-added tax (VAT) at import stage.
Land Related incentives
Renewable energy projects eligible for special investment incentives and invested in a difficult/extremely difficult socioeconomic location can enjoy exemption from land lease and land tax for the construction period (up to three years from effective date of land lease contracts) and for a further 11 or 15 years (depending on conditions) after completion of construction. Please note, such land incentives are not automatically applied but are subject to application and approval of the competent authority.
VAT Refund for Construction Stage
Input VAT corresponding to expenses incurred during a construction period of a project can be eligible for a refund prior to its commercial operation. VAT refund of a project must qualify for certain conditions such as method of declaration, the project under investment period and yet to operate, full contribution of capital, and proper documentation, etc.
There are many issues that an investor should consider before making an investment.
The application of incentives requires a thorough review and preparation of relevant legal documents as well as the proper implementation of administrative procedures in accordance with the provisions of tax, investment incentives, land and capital, import and export procedures and tax exemption documents, etc. In other words, tax and investment incentives do not automatically apply. Therefore, businesses should prudently review all legal factors and documents of their projects to properly and fully utilize the existing incentives regime toensure a healthy project financial model.
In the case of a merger and acquisition, the type of applicable incentives and fulfillment of incentive conditions are also important factors requiring in-depth consideration and should be taken into account when setting the final transaction price or inputting appropriate constraints under the terms of the share purchase agreement.
Before and during the operation stage there are certain factors that may have a substantial impact on a project’s tax costs, e.g. “off-the-books expenses” for land clearance, employment cost for the project’s development works; foreign withholding tax liabilities for imports of machinery and equipment and consultancy and construction fees paid to foreign contractors, etc., which should be carefully monitored, updated with the latest tax regulations and addressed with an appropriate action plan.
This article provides general comments and recommendations in accordance with current Vietnamese laws and regulations in effect as of the publication date. For specific circumstances, readers should seek proper advice with respect to the topic discussed herein.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Valerie Teo is a Tax Partner and Nguyen Tan Tai is a Tax Manager at Grant Thornton Vietnam