The new Law on Investment 2020 inherits the spirit of its predecessor and provides additional investment incentives. Article 15 describes new forms of incentives and new types of projects and enterprises entitled to incentives.
Now, projects which encourage development of small and medium-sized enterprises (SMEs) can receive special incentives. For example: (a) SME distribution chains; (b) technical establishments to support SMEs; (c) incubator establishments which support SMEs; and (d) investment in common working space which supports SME start-ups. All are now entitled to incentives.
Incentives for projects which invest in SMEs:
The Law on Investment 2020 grants the following incentives:
- Corporate income tax (CIT) incentives, such as a reduced CIT rate and, in some cases, exemption from CIT;
- Exemption from import duties on imported goods used to form fixed asset; imported raw materials, and supplies and components for manufacturing;
- Exemption or reduction of land rent, land use fees and land use taxes; and
- Accelerated depreciation and more generous inclusion of deductible.
Specific conditions to qualify for these incentives
Although projects which support SMEs, specifically, are entitled to investment incentives, the Law on Investment 2020 does not yet provide specific conditions that an investor must meet. The Government is in the process of drafting a decree with clearer and simple guidelines.
Based on the proposed draft decree, to be entitled to investment incentives, investors must meet specific requirements depending on each type of project:
- For projects to develop distribution chains of SMEs, to enjoy these incentives, the investor should ensure that:
- The distribution chain is comprised of at least 80% SME Rules to determine a qualified SME are based on the SME’s main business operations, total registered capital, number of employees covered by social insurance, and revenue in the preceding year;
- The distribution chain must have at least 10 locations/outlets to distribute products to consumers;
- Revenue of the SME group must reach at least 50% of the total revenue of the distribution chain;
- For investment projects that incubate SMEs and develop common working space to support SMEs, investors must satisfy:
- Requirements regarding location/premises; for example, the working space or conference room must accommodate 25 persons and must be fitted with necessary office/technical;
- There must be a minimum number of management personnel or experts with suitable experience. These management personnel will provide training and advise on investment plans of targeted.
Practical tips for an investor to apply for incentives:
- Ensure the business lines/investment project are compatible with requirements to receive investment incentives
- Identify the appropriate incentives for a specific project
Normally, for projects with an Investment Registration Certificate (IRC), investment incentives are indicated in the IRC. Specifically, the licensing authority indicates the legal grounds for the incentives, but each investor must clearly explain and justify that it meets the conditions applicable to the project in the proposal on implementation of the project. This explanation will be contained in the application to obtain an IRC. After the proposed investment incentives have been included in the IRC, investors may apply these incentives based on the IRC.
With respect to projects which do not require an IRC, investors must self-determine investment incentives and work with the authorities. We refer to local tax, customs or land management authorities. Certainty regarding incentives cannot be demonstrated because confirmation is not contained in a certificate. For this reason, working closely with the authorities and getting some form of confirmation will be important.
- Seek further confirmation from competent authorities
In case of projects where incentives are self-determined, an official letter submitted to the competent authorities to clarify the investor’s understanding that it qualifies for incentives may help to avoid controversy later. A misidentification of tax incentives or land use fees may affect the implementation of a project at a later stage.
- Separation between business lines/projects which are entitled to incentives and those which are not
Generally, investors need to separate incentives if they invest in many projects, but only certain of those projects qualify for incentives. In such a case, in the proposal on implementation, the investor should clearly indicate which projects are entitled to incentives and the rationale for this conclusion. During the operation of mixed projects, if the incentives relate to CIT reduction or CIT exemption, the investor should clearly separate income depending on CIT eligibility and on the type of incentive. Income which is not eligible for CIT incentives should also be separated. Of course, separate tax declaration and payment will be made.
- As projects to encourage development of SMEs have been newly added to the Law of Investment 2020, investors may need to follow up process for issuance of relevant legal regulations to apply incentives (especially tax incentives) will need to be articulated in detail.