21 September 2011
From 1 January 2012 the tax applied to 'non-agricultural' land use in Vietnam will be reformed and new provisions implemented. The tax covers land used for residential and business purposes, including hospitality and leisure use. Investors in hospitality projects should be mindful of the pending changes and seek to make enquiries to determine applicable tax rates from 1 January 2012. Where a resort includes residences designated for private sale, provision should be made in the contractual documentation to clarify which party bears financial reasonability for the tax, particularly if the private sale is structured in a way that does not involve a transfer of the land use right in respect of that residence. The revised land tax will replace the current tax regime set out in the 1992/1994 Ordinances on House and Land Tax. The changes are designed to improve the tax's effectiveness and efficiency and provide a framework that better reflects the changing role of land since the early 1990's in Vietnam's fast-growing transitional economy. A key indicator of this is the move to correlate the value of the non-agricultural land for tax purposes more closely to the open market value of that land, moving away from the previous valuation methodology based on the same criteria used to value agricultural land.
The relevant legislation is Law No. 48/2010/QH12 on Non-agricultural Land Use Tax, passed by the National Assembly on 17 June 2010 and Decree No. 53/2011/ND-CP issued on 1 July 2011 which provides guidance on the implementation of a number of articles of Law No 48. Both will come into effect on 1 January 2012.
In general, the entity responsible for paying the tax is the holder of the land use right certificate (or the legal representative of joint holders of a land use right). Certain land use right holders who were previously exempted from payment of land tax are now liable to pay. For example, foreign invested enterprises that leased land from the State and paid rental in advance previously did not have to pay during the term of the lease but now, under the new non-agricultural land tax, are liable to pay. Where a holder of a land use right leases that land the parties are free to choose in the lease agreement whether the lessor or lessee bears responsibility for payment of the tax. If the agreement is silent on the matter the lessor has responsibility to pay.
As under the current tax regime, the tax liability is on the land itself and not charged on any buildings/residences constructed on the land. The size of the land for the purposes of the tax calculation is defined as the land actually in use. Where there is a mixed-use building and/or multiple occupants each user shall pay a proportionate amount of tax based on the proportion its part of the building bears to the total area of the building.
The standard tax rate is 0.03% of the land value (whether the land use is residential or commercial) and this rate applies to all land in an investment project, even if some of the land is not yet being used because the project is developed in phases. If the area of residential land exceeds the residential quota allocated by the authorities to a household then the area in excess of the quota shall be subject to progressively increased tax rates. The law is also used as an instrument to combat illegal land use and land encroachment with higher rates payable when the land is not used in accordance with the permitted purposes or where land is illegally occupied.
The provincial People's Committee shall determine the land price for categories of land in accordance with price determination methods stipulated by the Government, taking into account factors such as the use of the land and its location. The amounts are determined and fixed for 5-year periods with the first period commencing on 1 January 2012. If during a 5-year period the land user changes, or other factors arise that, had they existed at the time of determination, would have meant the land price was originally determined at a different rate, the tax amount will remain unchanged for the remainder of the 5-year period. If during a 5-year period land is assigned or leased by the State, or where the land use purpose is converted from agricultural to non-agricultural land or from business use to residential use, the tax payable will be based on the land price fixed at the beginning of the relevant 5-year period. This land price will continue to apply until the expiry of that 5-year period.
Further regulations and guidelines for implementation of the law are expected, including in relation to when the tax is payable.
In certain circumstances tax exemptions or reductions may apply in order to promote investment in particular sectors of the economy or particular parts of the country. For example, exemptions will apply to investment projects in sectors in which investment is specifically encouraged or to projects located in regions designated as having difficult socio-economic conditions.
Investors in hospitality projects should be mindful of the pending changes and seek to make enquiries to determine applicable tax rates from 1 January 2012. Where a resort includes residences designated for private sale provision should be made in the contractual documentation to clarify which party bears financial reasonability for the tax, particularly if the private sale is structured in a way that does not involve a transfer of the land use right in respect of that residence.